<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-08328
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
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 520
BOSTON, MA 02110
(617) 951-7690
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
REGISTRANT'S PRINCIPAL 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:
ANNA H. GLICK, ESQ.
CADWALADER, WICKERSHAM & TAFT
NEW YORK, NEW YORK 10038
(212) 504-6309
KEVIN C. BLAUCH, ESQ.
LATHAM & WATKINS
885 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 906-1200
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of this Registration Statement.
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]
- --------------------------------------------------------------------------------
<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 REPRE-
SENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
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>
(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 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.]
<PAGE>
[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.]
ii
<PAGE>
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.
iii
<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 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.
S-1
<PAGE>
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
(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
S-2
<PAGE>
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 (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
S-3
<PAGE>
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.
S-4
<PAGE>
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
S-5
<PAGE>
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 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
S-6
<PAGE>
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), 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 en-
S-7
<PAGE>
hance 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.
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.
S-8
<PAGE>
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,
Cadwalader, Wickersham & Taft or Latham &
Watkins, 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--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or
Exemption of REMIC Income" and "--Tax-Related
Restrictions on Transfer of Residual
Certificates" 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
S-9
<PAGE>
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.
CERTAIN 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 "Certain 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 rating categories by one or more
nationally recognized statistical rating
organizations [and are secured by liens on real
property].
[The Class B Certificates will not constitute
"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.
S-10
<PAGE>
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 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.
S-11
<PAGE>
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 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
S-12
<PAGE>
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
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
S-13
<PAGE>
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.]
S-14
<PAGE>
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.
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 ...................
=========== =================== ==================
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>
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 ..................
=========== =================== ==================
Weighted Average
Gross Margin: %
</TABLE>
S-15
<PAGE>
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 ...................
========== ================ =============
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.
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.
S-16
<PAGE>
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 .................
=========== =================== ==================
Weighted Average Maximum
Annual
Mortgage Rate (ARM Loans):
% per annum (A)
</TABLE>
- ----------
(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 .................
=========== =================== ==================
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.
S-17
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
CUT-OFF DATE MORTGAGE CUT-OFF AGGREGATE CUT-OFF
BALANCE RANGE ($) LOANS DATE BALANCE DATE BALANCE
- ------------------- ----------- -------------- ------------------
<S> <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): $
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE AVERAGE PERCENT BY WEIGHTED
MORTGAGE CUT-OFF CUT-OFF AGGREGATE CUT-OFF AVERAGE
PROPERTY TYPE 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>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE WEIGHTED
MORTGAGE CUT-OFF CUT-OFF AVERAGE
JURISDICTION LOANS DATE BALANCE DATE BALANCE DSC RATIO
- ------------------ ----------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Total .........
</TABLE>
S-18
<PAGE>
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF ORIGINAL MORTGAGE CUT-OFF 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>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING MORTGAGE CUT-OFF 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>
S-19
<PAGE>
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ------------------ ----------- -------------- -------------
<S> <C> <C> <C>
----------- -------------- -------------
Total .........
=========== ============== =============
</TABLE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ------------------ ----------- -------------- -------------
<S> <C> <C> <C>
----------- -------------- -------------
Total .........
=========== ============== =============
</TABLE>
S-20
<PAGE>
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>
PERCENT BY
RANGE OF NUMBER OF AGGREGATE AGGREGATE
DEBT SERVICE MORTGAGE CUT-OFF 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.
S-21
<PAGE>
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 AGGREGATE PERCENT BY
RANGE OF ORIGINAL MORTGAGE 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>
S-22
<PAGE>
LTV RATIOS AT CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
RANGE OF LTV RATIOS(%) MORTGAGE 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>
OCCUPANCY RATES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
RANGE OF MORTGAGE 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.
S-23
<PAGE>
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.
S-24
<PAGE>
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, 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
S-25
<PAGE>
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 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
S-26
<PAGE>
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.
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 .]
S-27
<PAGE>
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.
[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
S-28
<PAGE>
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.
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
S-29
<PAGE>
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.
S-30
<PAGE>
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. 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 "Certain ERISA Considerations" herein), the Class B and Class R
Certificates
S-31
<PAGE>
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
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.
S-32
<PAGE>
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 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
S-33
<PAGE>
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 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;
(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
S-34
<PAGE>
(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,
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
S-35
<PAGE>
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."
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.
S-36
<PAGE>
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.
S-37
<PAGE>
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.
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
S-38
<PAGE>
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.
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
S-39
<PAGE>
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
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
S-40
<PAGE>
(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.
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
S-41
<PAGE>
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).
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
S-42
<PAGE>
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 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.
S-43
<PAGE>
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>
- ----------
(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
S-44
<PAGE>
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 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, Cadwalader, Wickersham &
Taft or Latham & Watkins, 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
S-45
<PAGE>
Tax Consequences--Federal Income Tax Consequences for REMIC Certificates
- --Taxation of 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--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" within the meaning of
Section 856(c)(4)(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 860G(a)(3) of the Code. See
"Certain Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Status of REMIC Certificates" in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" 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--Federal Income Tax Consequences for
REMIC Certificates--Taxation of 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--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income" 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
S-46
<PAGE>
Class R Certificates constitute noneconomic residual interests. See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax Related Restrictions on
Transfer of Residual Certificates" in the Prospectus.
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 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--Federal
Income Tax Consequences for REMIC Certificates--Taxation of 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
S-47
<PAGE>
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 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 Cadwalader, Wickersham & Taft
or Latham & Watkins.
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.
S-48
<PAGE>
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 [and are secured by liens on real property], the Senior
Certificates will constitute "mortgage related securities" within the meaning
of SMMEA.]
[The Class B Certificates will not constitute "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.]
[Except as to the status of the Senior Certificates as "mortgage related
securities," no] [No] representation is made as to the proper characterization
of any class of Offered Certificates for legal investment, financial
institution regulatory 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.
CERTAIN 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 "Certain 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 Ratings Services
("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA, 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 the Class A Certificates. Fifth, the sum of all
S-49
<PAGE>
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.
S-50
<PAGE>
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 "Certain 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 an opinion of counsel which opinion will not be at
the expense of the Depositor, the Trustee or the Master Servicer and which
establishes 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. In lieu of such opinion of counsel, the
transferee may provide a certification substantially to the effect that the
purchase of Certificates by or on behalf of such Plan is permissible under
applicable law, will not constitute or result in any non-exempt prohibited
transaction under ERISA or Section 4975 of the Code, will not subject the
Depositor, the Trustee or the Master Servicer to any obligation in addition to
those undertaken in the Agreement and the following conditions are satisfied:
(i) the transferee is an insurance company and the source of funds used to
purchase such Certificates is an "insurance company general account" (as such
term is defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60
Parts I and III have been satisfied; and (iii) there is no Plan with respect to
which the amount of such general account's reserves and liabilities for
contracts held by or on behalf of such Plan and all other plans maintained by
the same employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by
the same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of the
date of the acquisition of such Certificates. See "Certain 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.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such certificate, shall be deemed to represent that it is not a Plan
or 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. The
Class B Certificates [and Class R Certificates] will contain a legend
describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void.
S-51
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
30/360 basis ........................... S-35
Accrued Certificate Interest ........... S-35
Advance ................................ S-7, S-38
ARM Loans .............................. S-2
Available Distribution Amount .......... S-33
Balloon Payment ........................ S-3
Certain ERISA Considerations ........... S-31
Certificate Balance .................... ii
Certificate Registrar .................. S-32
Certificates ........................... i
Class .................................. i
Class A Certificate Owner .............. S-1
Class B Available Distribution Amount .. S-5
Class S Certificates ................... ii
Code ................................... S-45
Collateral Support Deficit ............. S-8, S-37
Cut-off Date ........................... ii
Cut-off Date Balance ................... S-13
Debt Service Coverage Ratio ............ S-21
Definitive Class A Certificate ......... S-1, S-32
Delivery Date .......................... ii
Determination Date ..................... S-34
Distributable Certificate Interest ..... S-35
Distributable Principal ................ S-36
Distribution Date ...................... ii, S-33
Distribution Date Statement ............ S-38
Due Date ............................... S-2
Due Period ............................. S-33
Duff & Phelps .......................... S-49
ERISA .................................. S-10
Exemption .............................. S-49
Financial Intermediary ................. S-32
Fitch .................................. S-49
Fixed Rate Loans ....................... S-2
Form 8-K ............................... S-26
Gross Margin ........................... S-2
Index .................................. S-2
Initial Pool Balance ................... ii
Interest Rate Adjustment Date .......... S-2
LTV Ratio .............................. S-22
Master Servicing Fee ................... S-28
Monthly Payments ....................... S-2
Mortgage ............................... S-13
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-3, S-35
Net Operating Income ................... S-21
Nonrecoverable Advance ................. S-38
Nonrecoverable Advances ................ S-7
Offered Certificates ................... i, S-31
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Ownership Percentage ................... S-36
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-28
Prepayment Premiums .................... S-14
Purchase Agreement ..................... S-2
Purchase Price ......................... S-25
Reimbursement Rate ..................... S-38
Related Proceeds ....................... S-38
REMIC .................................. S-45
REMIC Provisions ....................... S-45
REMIC Regular Certificates ............. ii
REO Loan ............................... S-36
REO Property ........................... S-27
Risk Factors ........................... S-11
Senior Certificates .................... i, S-31
Servicing Fees ......................... S-28
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
Underwriter ............................ i, S-47
Underwriting Agreement ................. S-47
Voting Rights .......................... S-39
Workout Fee ............................ S-28
Workout Fee Rate ....................... S-28
</TABLE>
S-52
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
<PAGE>
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) Multifamily Properties (as defined herein) units and mobile home
parks; and (ii) commercial properties consisting of office buildings, Retail
Properties (as defined herein), 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. To the extent described in the Prospectus Supplement,
Retail Properties and Multifamily Properties 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 or interest
rate cap or floor 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 9
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.
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 March 16, 1998
<PAGE>
(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.
ii
<PAGE>
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.
iii
<PAGE>
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 520, Boston, Massachusetts 02110, Attention: Secretary, or by
telephone at (617) 951-7690.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT .................................................................. iii
AVAILABLE INFORMATION .................................................................. iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ...................................... iv
SUMMARY OF PROSPECTUS .................................................................. 1
RISK FACTORS ........................................................................... 9
Limited Liquidity of Offered Certificates ............................................. 9
Limited Assets ........................................................................ 10
Credit Support Limitations ............................................................ 10
Effect of Prepayments on Average Life of Certificates ................................. 11
Effect of Prepayments on Yield of Certificates ........................................ 12
Limited Nature of Ratings ............................................................. 12
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans ..... 13
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool ..... 16
Termination ........................................................................... 16
Risks Associated With Multifamily Properties .......................................... 17
Risks Associated With Retail Properties ............................................... 17
DESCRIPTION OF THE TRUST FUNDS ......................................................... 17
General ............................................................................... 17
Mortgage Loans ........................................................................ 18
MBS ................................................................................... 24
Certificate Accounts .................................................................. 25
Credit Support ........................................................................ 25
Cash Flow Agreements .................................................................. 25
YIELD AND MATURITY CONSIDERATIONS ...................................................... 25
General ............................................................................... 25
Pass-Through Rate ..................................................................... 26
Payment Delays ........................................................................ 26
Certain Shortfalls in Collections of Interest ......................................... 26
Yield and Prepayment Considerations ................................................... 26
Weighted Average Life and Maturity .................................................... 28
Other Factors Affecting Yield, Weighted Average Life and Maturity ..................... 29
THE DEPOSITOR .......................................................................... 31
DEUTSCHE BANK AG ....................................................................... 31
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF THE CERTIFICATES .......................................... 31
General ................................................................. 31
Distributions ........................................................... 32
Distributions of Interest on the Certificates ........................... 33
Distributions of Principal of the Certificates .......................... 34
Distributions on the Certificates in Respect of Prepayment Premiums or
in Respect of Equity Participations ................................... 34
Allocation of Losses and Shortfalls ..................................... 35
Advances in Respect of Delinquencies .................................... 35
Reports to Certificateholders ........................................... 36
Voting Rights ........................................................... 37
Termination ............................................................. 37
Book-Entry Registration and Definitive Certificates ..................... 38
DESCRIPTION OF THE POOLING AGREEMENTS .................................... 40
General ................................................................. 40
Assignment of Mortgage Loans; Repurchases ............................... 40
Representations and Warranties; Repurchases ............................. 42
Collection and Other Servicing Procedures ............................... 43
Sub-Servicers ........................................................... 45
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
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DESCRIPTION OF CREDIT SUPPORT ................................... 58
General ........................................................ 58
Subordinate Certificates ....................................... 58
Insurance or Guarantees with Respect to Mortgage Loans ......... 58
Letter of Credit ............................................... 59
Certificate Insurance and Surety Bonds ......................... 59
Reserve Funds .................................................. 59
Credit Support with respect to MBS ............................. 60
Interest Rate Exchange, Cap and Floor Agreements ............... 60
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS ......................... 60
General ........................................................ 60
Types of Mortgage Instruments .................................. 61
Leases and Rents ............................................... 61
Personalty ..................................................... 61
Foreclosure .................................................... 62
Bankruptcy Laws ................................................ 65
Environmental Considerations ................................... 66
Due-on-Sale and Due-on-Encumbrance Provisions .................. 68
Junior Liens; Rights of Holders of Senior Liens ................ 68
Subordinate Financing .......................................... 68
Default Interest and Limitations on Prepayments ................ 69
Applicability of Usury Laws .................................... 69
Certain Laws and Regulations ................................... 69
Americans with Disabilities Act ................................ 69
Soldiers' and Sailors' Civil Relief Act of 1940 ................ 70
Forfeitures in Drug and RICO Proceedings ....................... 70
CERTAIN FEDERAL INCOME TAX CONSEQUENCES ......................... 71
Federal Income Tax Consequences for REMIC Certificates ......... 71
Taxation of Regular Certificates ............................... 74
Taxation of Residual Certificates .............................. 81
Taxes That May Be Imposed on the REMIC Pool .................... 88
Liquidation of the REMIC Pool .................................. 89
Administrative Matters ......................................... 89
Limitations on Deduction of Certain Expenses ................... 90
Taxation of Certain Foreign Investors .......................... 90
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Backup Withholding .......................................... 91
Reporting Requirements ...................................... 92
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS TO WHICH NO
REMIC ELECTION IS MADE ...................................... 92
Standard Certificates ....................................... 92
Stripped Certificates ....................................... 95
Reporting Requirements and Backup Withholding ............... 98
Taxation of Certain Foreign Investors ....................... 99
STATE AND OTHER TAX CONSEQUENCES .............................. 100
CERTAIN ERISA CONSIDERATIONS .................................. 100
General ..................................................... 100
Plan Asset Regulations ...................................... 100
Prohibited Transaction Exemptions ........................... 102
Tax Exempt Investors ........................................ 104
LEGAL INVESTMENT .............................................. 104
USE OF PROCEEDS ............................................... 106
METHOD OF DISTRIBUTION ........................................ 106
LEGAL MATTERS ................................................. 108
FINANCIAL INFORMATION ......................................... 108
RATING ........................................................ 108
INDEX OF PRINCIPAL DEFINITIONS ................................ 109
</TABLE>
viii
<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 "Description
of the Pooling Agreements--Certain Matters
Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the
Depositor".
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
1
<PAGE>
junior liens on, or security interests in, one
or more of the following types of real property:
(i) residential properties (each, a "Multifamily
Property") 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 (each, a
"Retail Property"), 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. To the extent described in the Prospectus
Supplement, Retail Properties and Multifamily
Properties 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
2
<PAGE>
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 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 distribu-
3
<PAGE>
tions 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 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".
4
<PAGE>
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 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,
5
<PAGE>
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 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
6
<PAGE>
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".
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.
7
<PAGE>
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.
8
<PAGE>
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.
9
<PAGE>
LIMITED ASSETS
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.
10
<PAGE>
EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES
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
11
<PAGE>
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 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".
12
<PAGE>
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 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
13
<PAGE>
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 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.
14
<PAGE>
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 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
15
<PAGE>
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 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."
16
<PAGE>
RISKS ASSOCIATED WITH MULTIFAMILY PROPERTIES
Certain states regulate the relationship of an owner and its tenants.
Commonly, these laws require a written lease, good cause for eviction,
disclosure of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. Apartment building owners have been the
subject of suits under state "Unfair and Deceptive Practices Acts" and other
general consumer protection statutes for coercive, abusive or unconscionable
leasing and sales practices. A few states offer more significant protection.
For example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from
terminating a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on apartment
buildings. These ordinances may limit rent increases to fixed percentages, to
percentages of increases in the consumer price index, to increases set or
approved by a governmental agency, or in increases determined through mediation
or binding arbitration. In many cases, the rent control laws do not permit
vacancy decontrol. Local authority to impose rent control is pre-empted by
state law in certain states, and rent control is not imposed at the state level
in those states. In some states, however, local rent control ordinances are not
pre-empted for tenants having short-term or month-to-month leases, and
properties there may be subject to various forms of rent control with respect
to those tenants. Any limitations on a borrower's ability to raise property
rents may impair such borrower's ability to repay its Mortgage Loan from its
net operating income or the proceeds of a sale of refinancing or the related
Mortgaged Property.
RISKS ASSOCIATED WITH RETAIL PROPERTIES
The correlation between the success of tenant businesses and property
value is more direct with respect to Retail Properties than other types of
commercial property because a significant component of the total rent paid by
retail tenants is often tied to a percentage of gross sales. Retail Properties
that are not "anchored" have traditionally been perceived to be more risky than
"anchored" Retail Proeprties. See "Mortgage Loans -- Mortgage Loans Secured by
Retail Properties" herein. Furthermore, there is a greater correlation between
the success of tenant businesses and property value when the property is a
single tenant Retail Property.
Unlike office or hotel properties, Retail Properties also face competition
from sources outside a given real estate market. Catalogue retailers, home
shopping networks, shopping through electronic media, telemarketing and outlet
centers all compete with more traditional Retail Properties for consumer
dollars. Continued growth of these alternative retail outlets (which are often
characterized by lower operating costs) could adversely affect the rents
collectible at the Retail Properties included in the Mortgage Pool.
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
17
<PAGE>
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 (each, a "Mortgaged Property") 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 (each, a "Retail Property"), 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 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 jurisdic-
18
<PAGE>
tions, 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 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
19
<PAGE>
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 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,
20
<PAGE>
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, Lock-out 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
21
<PAGE>
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 Multifamily Properties. Significant factors
determining the value and successful operation of a multifamily property are
the location of the property, the number of competing residential developments
in the local market (such as apartment buildings, manufactured housing
communities and site-built single family homes), the physical attributes of the
multifamily apartment building (such as its age and appearance) and state and
local regulations affecting such property. In addition, the successful
operation of an apartment building will depend upon other factors, such as its
reputation, the ability of management to provide adequate maintenance and
insurance, and the types of services it provides.
Certain states regulate the relationship of an owner and its tenants.
Commonly, these laws require a written lease, good cause for eviction,
disclosures of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. Apartment building owners have been the
subject of suits under state "Unfair and Deceptive Practices Acts" and other
general consumer protection statues for coercive, abusive or unconscionable
leasing and sales practices. A few states offer more significant protection.
For example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from
terminating a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on apartment
buildings. These ordinances may limit rent increases to fixed percentages, to
percentages of increases in the consumer price index, to increases set or
approved by a governmental agency, or to increases determined through mediation
or binding arbitration. In many cases, the rent control laws do not permit
vacancy decontrol. Local authority to impose rent control is pre-empted by
state law in certain states, and rent control is not imposed at the state level
in those states. In some states, however, local rent control ordinances are not
pre-empted for tenants having short-term or month-to-month leases, and
properties there may be subject to various forms of rent control with respect
to those tenants. Any limitations on a borrower's ability to raise property
rents may impair such borrower's ability to repay its Mortgage Loan from its
net operating income or the proceeds of a sale or refinancing of the related
Mortgaged Property.
Adverse economic conditions, either local or national, may limit the
amount of rent that can be charge 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 or
factory 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. The location and construction quality of a particular building may
affect the occupancy level as well as the rents that may be charged for
individual units. The characteristics of a neighborhood may change over time or
in relation to newer developments.
Mortgage Loans Secured by Retail Properties. Significant factors
determining the value of Retail Properties are the quality of the tenants as
well as fundamental aspects of real estate such as location and market
demographics. The correlation between the success of tenant businesses
22
<PAGE>
and property value is more direct with respect to Retail Properties than other
types of commercial property because a significant component of the total rent
paid by retail tenants is often tied to a percentage of gross sales. Whether a
Retail Property is "anchored" or "unanchored" is also an important distinction.
Retail Properties that are anchored have traditionally been perceived to be
less risky. While there is no strict definition of an anchor, it is generally
understood that a retail anchor tenant is proportionately large in size and is
vital in attracting customers to the property. Furthermore, there is a greater
correlation between the success of tenant businesses and property value when
the property is a single tenant Retail Property.
Unlike office or hotel Properties, Retail Properties also face competition
from sources outside a given real estate market. Catalogue retailers, home
shopping networks, shopping through electronic media, telemarketing and outlet
centers all compete with more traditional Retail Properties for consumer
dollars. Continued growth of these alternative retail outlets (which are often
characterized by lower operating costs) could adversely affect the rents
collectible at the Retail Properties included in the Mortgage Pool.
Multifamily Properties. 21.8% of the Mortgage Loans, based on Initial Pool
Balance, are secured by Multifamily Properties. See Annex A hereto for
additional information.
Significant factors determining the value and successful operation of a
Multifamily Property are the location of the property, the number of competing
residential developments in the local market (such as apartment buildings,
manufactured housing communities and site-built single family homes), the
physical attributes of the Multifamily Property (such as its age and
appearance) and state and local regulations affecting such property. In
addition, the successful operation of a Multifamily Property will depend upon
other factors, such as its reputation, the ability of management to provide
adequate maintenance and insurance, and the types of services it provides.
Adverse economic conditions, either local 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.
Certain states regulate the relationship of an owner and its tenants.
Commonly, these laws require a written lease, good cause for eviction,
disclosure of fees, and notification to residents of changed land use, while
prohibiting unreasonable rules, retaliatory evictions, and restrictions on a
resident's choice of unit vendors. Apartment building owners have been the
subject of suits under state "Unfair and Deceptive Practices Acts" and other
general consumer protection statutes for coercive, abusive or unconscionable
leasing and sales practices. A few states offer more significant protection.
For example, there are provisions that limit the basis on which a landlord may
terminate a tenancy or increase its rent or prohibit a landlord from
terminating a tenancy solely by reason of the sale of the owner's building.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on apartment
buildings. These ordinances may limit rent increases to fixed percentages, to
percentages of increases in the consumer price index, to increases set or
approved by a governmental agency, or to increases determined through mediation
or binding arbitration. In many cases, the rent control laws do not permit
vacancy decontrol. Local authority to impose rent control is pre-empted by
state law in certain states, and rent control is not imposed at the state level
in those states. In some states, however, local rent control ordinances are not
pre-empted for tenants having short-term or month-to-month leases, and
properties there may be subject to various forms of rent control with respect
to those tenants. Any limitations on a borrower's ability to raise property
rents may impair such borrower's ability to repay its Multifamily Loan from its
net operating income or the proceeds of a sale or refinancing of the related
Multifamily Property.
The rent limitations imposed on Section 42 Properties (as defined herein)
may adversely affect the ability of the applicable borrowers to increase rents
to maintain such Multifamily Properties in proper condition during periods of
rapid inflation or declining market value of such
23
<PAGE>
Multifamily Properties. In addition, the income restrictions on tenants imposed
by Section 42 of the Code may reduce the number of eligible tenants in such
Multifamily Properties and result in a reduction in occupancy rates applicable
thereto.
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.
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
24
<PAGE>
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.
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.
25
<PAGE>
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 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
26
<PAGE>
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 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
27
<PAGE>
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 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
28
<PAGE>
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 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.
29
<PAGE>
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 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.
30
<PAGE>
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 520, 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.
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
31
<PAGE>
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 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
32
<PAGE>
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 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
33
<PAGE>
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 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.
34
<PAGE>
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.
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.
35
<PAGE>
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;
(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;
36
<PAGE>
(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.
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.
37
<PAGE>
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.
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.
38
<PAGE>
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 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.
39
<PAGE>
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), 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,
40
<PAGE>
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
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
41
<PAGE>
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 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.
42
<PAGE>
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.
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
43
<PAGE>
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 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
44
<PAGE>
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".
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 investment grade obligations that are
acceptable to each Rating Agency that has rated any one or more classes of
Certificates of the related series ("Permitted Investments"). Such Permitted
Investments include federal funds, uncertificated certificates of deposit, time
deposits, bankers' acceptances and repurchase agreements, certain United States
dollar-denominated commercial paper, units of money market funds that maintain
a constant net asset value and any other obligations or security acceptable to
each Rating Agency. 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
45
<PAGE>
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;
(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.
46
<PAGE>
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;
(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";
47
<PAGE>
(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 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
48
<PAGE>
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 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
49
<PAGE>
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 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
50
<PAGE>
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 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
51
<PAGE>
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 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
52
<PAGE>
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, 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
53
<PAGE>
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.
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
54
<PAGE>
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 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
55
<PAGE>
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
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.
56
<PAGE>
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.
57
<PAGE>
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 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.
58
<PAGE>
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.
59
<PAGE>
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.
INTEREST RATE EXCHANGE, CAP AND FLOOR AGREEMENTS
If so specified in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include interest rate exchange agreements or
interest rate cap or floor agreements. These types of agreements may be used to
limit the exposure of the Trust Fund or investors in the Certificates to
fluctuations in interest rates and to situations where interest rates become
higher or lower than specified thresholds. Generally, an interest rate exchange
agreement is a contract between two parties to pay and receive, with a set
frequency, interest payments determined by applying the differential between
two interest rates to an agreed-upon notional principal. Generally, an interest
rate cap agreement is a contract pursuant to which one party agrees to
reimburse another party for a floating rate interest payment obligation, to the
extent that the rate payable at any time exceeds a specified cap. Generally, an
interest rate floor agreement is a contract pursuant to which one party agrees
to reimburse another party in the event that amounts owing to the latter party
under a floating rate interest payment obligation are payable at a rate which
is less than a specified floor. The specific provisions of these types of
agreements will be described in the related Prospectus Supplement.
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 local law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular jurisdiction, or to encompass
the laws of all jurisdictions 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
jurisdictions. 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 jurisdiction, relevant local
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.
60
<PAGE>
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
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
61
<PAGE>
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.
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.
62
<PAGE>
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.
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
63
<PAGE>
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.
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
64
<PAGE>
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, 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
65
<PAGE>
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".
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
66
<PAGE>
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.
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
67
<PAGE>
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 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
68
<PAGE>
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.
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
69
<PAGE>
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 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.
70
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as regulations
(the "REMIC Regulations") promulgated by the U.S. Department of Treasury (the
"Treasury"). Investors should consult their own tax advisors in determining the
federal, state, local and other tax consequences to them of the purchase,
ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of a
Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets therein
as one or more REMICs within the meaning of Code Section 860D. A Trust Fund or
a portion thereof as to which a REMIC election will be made will be referred to
as a "REMIC Pool". For purposes of this discussion, Certificates of a series as
to which one or more REMIC elections are made are referred to as "REMIC
Certificates" and will consist of one or more Classes of "Regular Certificates"
and one Class of "Residual Certificates" in the case of each REMIC Pool.
Qualification as a REMIC requires ongoing compliance with certain conditions.
With respect to each series of REMIC Certificates, Cadwalader, Wickersham &
Taft or Latham & Watkins, counsel to the Depositor, has advised the Depositor
that in the firm's opinion, assuming (i) the making of such an election, (ii)
compliance with the Pooling Agreement and (iii) compliance with any changes in
the law, including any amendments to the Code or applicable Treasury
regulations thereunder, each REMIC Pool will qualify as a REMIC. In such case,
the Regular Certificates will be considered to be "regular interests" in the
REMIC Pool and generally will be treated for federal income tax purposes as if
they were newly originated debt instruments, and the Residual Certificates will
be considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust Fund will be made, in which
event references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to
each such REMIC Pool. If so specified in the applicable Prospectus Supplement,
the portion of a Trust Fund as to which a REMIC election is not made may be
treated as a grantor trust for federal income tax purposes. See "--Federal
Income Tax Consequences for Certificates as to Which No REMIC Election Is
Made".
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" (such as
single family or multifamily properties, but not commercial properties) within
the meaning of Code Section 7701(a)(19)(C)(v) or as other assets described in
Code Section 7701(a)(19)(C), and otherwise will
71
<PAGE>
not qualify for such treatment. REMIC Certificates held by a real estate
investment trust will constitute "real estate assets" within the meaning of
Code Section 856(c)(5)(A), and interest on the Regular Certificates and income
with respect to Residual Certificates will be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. If at all times 95% or more of the assets of the REMIC Pool qualify
for each of the foregoing respective treatments, the REMIC Certificates will
qualify for the corresponding status in their entirety. For purposes of Code
Section 856(c)(5)(A), payments of principal and interest on the Mortgage Loans
that are reinvested pending distribution to holders of REMIC Certificates
qualify for such treatment. Where two REMIC Pools are a part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buy-Down Funds. REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the
"SBJPA of 1996") repealed the reserve method for bad debts of domestic building
and loan associations and mutual savings banks, and thus has eliminated the
asset category of "qualifying real property loans" in former Code Section
593(d) for taxable years beginning after December 31, 1995. The requirement in
the SBJPA of 1996 that such institutions must "recapture" a portion of their
existing bad debt reserves is suspended if a certain portion of their assets
are maintained in "residential loans" under Code Section 7701(a)(19)(C)(v), but
only if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be
made to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the "Startup Day" (which for purposes
of this discussion is the date of issuance of the REMIC Certificates) and at
all times thereafter, may consist of assets other than "qualified mortgages"
and "permitted investments". The REMIC Regulations provide a safe harbor
pursuant to which the de minimis requirement is met if at all times the
aggregate adjusted basis of the nonqualified assets is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets. An entity that fails
to meet the safe harbor may nevertheless demonstrate that it holds no more than
a de minimis amount of nonqualified assets. A REMIC also must provide
"reasonable arrangements" to prevent its residual interest from being held by
"disqualified organizations" and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling Agreement for
each Series will contain a provision designed to meet this requirement. See
"Taxation of Residual Certificates--Tax-Related Restrictions on Transfer of
Residual Certificates--Disqualified Organizations".
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured by
timeshare interests and loans secured by shares held by a tenant stockholder in
a cooperative housing corporation, provided, in general, (i) the fair
72
<PAGE>
market value of the real property security (including buildings and structural
components thereof) is at least 80% of the principal balance of the related
Mortgage Loan or mortgage loan underlying the Mortgage Certificate either at
origination or as of the Startup Day (an original loan-to-value ratio of not
more than 125% with respect to the real property security) or (ii)
substantially all the proceeds of the Mortgage Loan or the underlying mortgage
loan were used to acquire, improve or protect an interest in real property
that, at the origination date, was the only security for the Mortgage Loan or
underlying mortgage loan. If the Mortgage Loan has been substantially modified
other than in connection with a default or reasonably foreseeable default, it
must meet the loan-to-value test in (i) of the preceding sentence as of the
date of the last such modification or at closing. A qualified mortgage includes
a qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on the
Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be
a qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC
Pool. A qualified reserve asset is any intangible property held for investment
that is part of any reasonably required reserve maintained by the REMIC Pool to
provide for payments of expenses of the REMIC Pool or amounts due on the
regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from the
assets in such fund for the year is derived from the sale or other disposition
of property held for less than three months, unless required to prevent a
default on the regular interests caused by a default on one or more qualified
mortgages. A reserve fund must be reduced "promptly and appropriately" as
payments on the Mortgage Loans are received. Foreclosure property is real
property acquired by the REMIC Pool in connection with the default or imminent
default of a qualified mortgage and generally not held beyond the close of the
third calendar year following the acquisition of the property by the REMIC
Pool, with an extension that may be granted by the Internal Revenue Service
(the "Service").
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a REMIC
Pool must be either of the following: (i) one or more classes of regular
interests or (ii) a single class of residual interests on which distributions,
if any, are made pro rata. A regular interest is an interest in a REMIC Pool
that is issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest payments
(or other similar amounts), if any, at or before maturity either are payable
based on a fixed rate or a qualified variable rate, or consist of a specified,
nonvarying portion of the interest payments on qualified mortgages. Such a
specified portion may consist of a fixed number of basis points, a fixed
percentage of the total interest, or a fixed or qualified variable or inverse
variable rate on some or all of the qualified mortgages minus a different fixed
or qualified variable rate. The specified principal amount of a regular
interest that provides for interest payments consisting of a specified,
nonvarying portion of interest payments on qualified mortgages may be zero. A
residual interest is an interest in a REMIC Pool other than a regular interest
that is issued on the Startup Day and that is designated as a residual
interest. An interest
73
<PAGE>
in a REMIC Pool may be treated as a regular interest even if payments of
principal with respect to such interest are subordinated to payments on other
regular interests or the residual interest in the REMIC Pool, and are dependent
on the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that series will constitute a single class of residual interests on
which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury Department
to issue regulations that address situations where failure to meet one or more
of the requirements for REMIC status occurs inadvertently and in good faith,
and disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any Class of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The following discussion is based in part on temporary and final
Treasury regulations issued on February 2, 1994, as amended on June 14, 1996
(the "OID Regulations") under Code Sections 1271 through 1273 and 1275 and in
part on the provisions of the 1986 Act. Regular Certificateholders should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Regular Certificates. To
the extent such issues are not addressed in such regulations, the Depositor
intends to apply the methodology described in the Conference Committee Report
to the 1986 Act. No assurance can be provided that the Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under
the anti-abuse rule in the absence of a substantial effect on the present value
of a taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
74
<PAGE>
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption price
at maturity" of the Regular Certificate over its "issue price". The issue price
of a Class of Regular Certificates offered pursuant to this Prospectus
generally is the first price at which a substantial amount of Regular
Certificates of that Class is sold to the public (excluding bond houses,
brokers and underwriters). Although unclear under the OID Regulations, the
Depositor intends to treat the issue price of a Class as to which there is no
substantial sale as of the issue date or that is retained by the Depositor as
the fair market value of that Class as of the issue date. The issue price of a
Regular Certificate also includes the amount paid by an initial Regular
Certificateholder for accrued interest that relates to a period prior to the
issue date of the Regular Certificate, unless the Regular Certificateholder
elects on its federal income tax return to exclude such amount from the issue
price and to recover it on the first Distribution Date. The stated redemption
price at maturity of a Regular Certificate always includes the original
principal amount of the Regular Certificate, but generally will not include
distributions of stated interest if such interest distributions constitute
"qualified stated interest". Under the OID Regulations, qualified stated
interest generally means interest payable at a single fixed rate or a qualified
variable rate (as described below) provided that such interest payments are
unconditionally payable at intervals of one year or less during the entire term
of the Regular Certificate. Because there is no penalty or default remedy in
the case of nonpayment of interest with respect to a Regular Certificate, it is
possible that no interest on any Class of Regular Certificates will be treated
as qualified stated interest. However, except as provided in the following
three sentences or in the applicable Prospectus Supplement, because the
underlying Mortgage Loans provide for remedies in the event of default, the
Depositor intends to treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on an Accrual Certificate,
or on other Regular Certificates with respect to which deferred interest will
accrue, will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the Depositor
intends to treat an "interest only" class, or a class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" class) as having no qualified stated interest. Where the
interval between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
the interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of full
years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the stated
redemption price at maturity of the Regular Certificate. The Conference
Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates will
be set forth in the related Prospectus Supplement. Holders generally must
report de minimis original issue discount pro rata as principal payments are
received, and such income will be capital gain if the Regular Certificate is
held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium under the constant yield method.
See "Election to Treat All Interest Under the Constant Yield Method".
75
<PAGE>
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Depositor will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Random Lot Certificate, the original issue
discount accruing in a full accrual period would be the excess, if any, of (i)
the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period that are
included in the Regular Certificate's stated redemption price at maturity and
(b) the distributions made on the Regular Certificate during the accrual period
that are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Certificate at the beginning of any accrual
period equals the issue price of the Regular Certificate, increased by the
aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods.
The original issue discount accruing during any accrual period (as determined
in this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Random Lot
Certificate in a full accrual period would be its allocable share of the
original issue discount with respect to the entire Class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Random Lot
Certificate (or portion of such unpaid principal balance), (a) the remaining
unaccrued original issue discount allocable to such Certificate (or to such
portion) will accrue at the time of such distribution, and (b) the accrual of
original issue discount allocable to each remaining Certificate of such Class
(or the remaining unpaid principal balance of a partially redeemed Random Lot
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent
76
<PAGE>
with the "pro rata prepayment" rules of the OID Regulations, but with the rate
of accrual of original issue discount determined based on the Prepayment
Assumption for the Class as a whole. Investors are advised to consult their tax
advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under
the constant yield method, as described below under the heading "Election to
Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate", or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate". A floating rate is
a qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65, but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate (other than a qualified floating rate) is a
rate that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified floating rate
may nevertheless be an objective rate. A Class of Regular Certificates may be
issued under this Prospectus that does not have a variable rate under the OID
Regulations, for example, a Class that bears different rates at different times
during the period it is outstanding such that it is considered significantly
"front-loaded" or "back-loaded" within the meaning of the OID Regulations. It
is possible that such a Class may be considered to bear "contingent interest"
within the meaning of the OID Regulations. The OID Regulations, as they relate
to the treatment of contingent interest, are by their terms not applicable to
Regular Certificates. However, if final regulations dealing with contingent
interest with respect to Regular Certificates apply the same principles as the
OID Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate treatment
of any Regular Certificate that does not pay interest at a fixed rate or
variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates), including a rate based on the average cost of funds of one or
more financial institutions, or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods or one or more
77
<PAGE>
fixed rates for one or more periods, and a different variable rate or fixed
rate for other periods qualifies as a regular interest in a REMIC. Accordingly,
unless otherwise indicated in the applicable Prospectus Supplement, the
Depositor intends to treat Regular Certificates that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity and
future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular Certificate
based on the initial rate (or, if different, the value of the applicable
variable rate as of the pricing date) for the relevant Class. Unless otherwise
specified in the applicable Prospectus Supplement, the Depositor intends to
treat such variable interest as qualified stated interest, other than variable
interest on an interest-only or super-premium Class, which will be treated as
non-qualified stated interest includible in the stated redemption price at
maturity. Ordinary income reportable for any period will be adjusted based on
subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to create
more than de minimis original issue discount. The yield on such Regular
Certificates for purposes of accruing original issue discount will be a
hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues with
respect to a Class of Regular Certificates may constitute income to the holders
of such Regular Certificates prior to the time distributions of cash with
respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated
redemption price at maturity thereof are received, in an amount not exceeding
any such distribution. Such market discount would accrue in a manner to be
provided in Treasury regulations and should take into account the Prepayment
Assumption. The Conference Committee Report to the 1986 Act provides that until
such regulations are issued, such market discount would accrue either (i) on
the basis of a constant interest rate or (ii) in the ratio of stated interest
allocable to the relevant period to the sum of the interest for such period
plus the remaining
78
<PAGE>
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the
end of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Certificate as
ordinary income to the extent of the market discount accrued to the date of
disposition under one of the foregoing methods, less any accrued market
discount previously reported as ordinary income as partial distributions in
reduction of the stated redemption price at maturity were received. Such
purchaser will be required to defer deduction of a portion of the excess of the
interest paid or accrued on indebtedness incurred to purchase or carry a
Regular Certificate over the interest distributable thereon. The deferred
portion of such interest expense in any taxable year generally will not exceed
the accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later than
the year in which the related market discount income is recognized or the
Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular Certificateholder
may elect to include market discount in income currently as it accrues on all
market discount instruments acquired by such Regular Certificateholder in that
taxable year or thereafter, in which case the interest deferral rule will not
apply. See "Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which such election may be deemed to
be made.
Market discount with respect to a Regular Certificate will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should consult
their own tax advisors regarding the application of these rules. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at
a premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Treasury Regulatons issued under Code Section
171 do not, by their terms, apply to REMIC Regular Certificates, which are
prepayable based on prepayments on the underlying Mortgage Loans. However, the
Conference Committee Report to the 1986 Act indicates a Congressional intent
that the same rules that will apply to the accrual of market discount on
installment obligations will also apply to amortizing bond premium under Code
Section 171 on installment obligations such as the Regular Certificates,
although it is unclear whether the alternatives to the constant yield method
described above under "Market Discount" are available. Amortizable bond premium
will be treated as an offset to interest income on a Regular Certificate rather
than as a separate deduction item. See "Election to Treat All Interest Under
the Constant Yield Method" below regarding an alternative manner in which the
Code Section 171 election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being
79
<PAGE>
treated as qualified stated interest. For purposes of applying the constant
yield method to a debt instrument subject to such an election, (i) "interest"
includes stated interest, original issue discount, de minimis original issue
discount, market discount and de minimis market discount, as adjusted by any
amortizable bond premium or acquisition premium and (ii) the debt instrument is
treated as if the instrument were issued on the holder's acquisition date in
the amount of the holder's adjusted basis immediately after acquisition. It is
unclear whether, for this purpose, the initial Prepayment Assumption would
continue to apply or if a new prepayment assumption as of the date of the
holder's acquisition would apply. A holder generally may make such an election
on an instrument by instrument basis or for a class or group of debt
instruments. However, if the holder makes such an election with respect to a
debt instrument with amortizable bond premium or with market discount, the
holder is deemed to have made elections to amortize bond premium or to report
market discount income currently as it accrues under the constant yield method,
respectively, for all debt instruments acquired by the holder in the same
taxable year or thereafter. The election is made on the holder's federal income
tax return for the year in which the debt instrument is acquired and is
irrevocable except with the approval of the Service. Investors should consult
their own tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally will
equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by
previously recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such gain
will be treated as ordinary income (i) if a Regular Certificate is held as part
of a "conversion transaction" as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Regular Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior distribution of property that was
held as a part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
rates, or (iii) to the extent that such gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross income of
the holder if its yield on such Regular Certificate were 110% of the applicable
Federal rate as of the date of purchase, over (b) the amount of income actually
includible in the gross income of such holder with respect to the Regular
Certificate. In addition, gain or loss recognized from the sale of a Regular
Certificate by certain banks or thrift institutions will be treated as ordinary
income or loss pursuant to Code Section 582(c). Capital gains of certain
non-corporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income of such taxpayers (39.6%) for property held for more than
one year. The maximum tax rate for corporations is the same with respect to
both ordinary income and capital gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in
80
<PAGE>
distributions attributable to defaults or delinquencies on the Mortgage Loans
allocable to a particular class of Regular Certificates, except to the extent
it can be established that such losses are uncollectible. Accordingly, the
holder of a Regular Certificate may have income, or may incur a diminution in
cash flow as a result of a default or delinquency, but may not be able to take
a deduction (subject to the discussion below) for the corresponding loss until
a subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may take
the position that original issue discount must continue to be accrued in spite
of its uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection with
a trade or business should in general be allowed to deduct as an ordinary loss
any such loss sustained during the taxable year on account of any such Regular
Certificates becoming wholly or partially worthless, and that, in general,
holders of Regular Certificates that are not corporations and do not hold the
Regular Certificates in connection with a trade or business will be allowed to
deduct as a short-term capital loss any loss with respect to principal
sustained during the taxable year on account of a portion of any class or
subclass of such Regular Certificates becoming wholly worthless. Although the
matter is not free from doubt, non-corporate holders of Regular Certificates
should be allowed a bad debt deduction at such time as the principal balance of
any class or subclass of such Regular Certificates is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect such losses only after all Mortgage Loans remaining in the Trust Fund
have been liquidated or such class of Regular Certificates has been otherwise
retired. The Service could also assert that losses on the Regular Certificates
are deductible based on some other method that may defer such deductions for
all holders, such as reducing future cash flow for purposes of computing
original issue discount. This may have the effect of creating "negative"
original issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders of
Regular Certificates are urged to consult their own tax advisors regarding the
appropriate timing, amount and character of any loss sustained with respect to
such Regular Certificates. While losses attributable to interest previously
reported as income should be deductible as ordinary losses by both corporate
and non-corporate holders, the Internal Revenue Service may take the position
that losses attributable to accrued original issue discount may only be
deducted as short-term capital losses by non-corporate holders not engaged in a
trade or business. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Certificates.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"), and
will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Certificateholder are determined by
allocating the REMIC Pool's taxable income or net loss for each calendar
quarter ratably to each day in such quarter and by allocating such daily
portion among the Residual Certificateholders in proportion to their respective
holdings of Residual Certificates in the REMIC Pool on such day. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii) all bad loans will be deductible as
business bad debts and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply.
81
<PAGE>
The REMIC Pool's gross income includes interest, original issue discount income
and market discount income, if any, on the Mortgage Loans, reduced by
amortization of any premium on the Mortgage Loans, plus income from
amortization of issue premium, if any, on the Regular Certificates, plus income
on reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Certificates of any class of the related series
outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates or income from amortization of
issue premium on the Regular Certificates, on the other hand. In the event that
an interest in the Mortgage Loans is acquired by the REMIC Pool at a discount,
and one or more of such Mortgage Loans is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to
receive a corresponding amount of cash because (i) the prepayment may be used
in whole or in part to make distributions in reduction of principal on the
Regular Certificates and (ii) the discount on the Mortgage Loans which is
includible in income may exceed the deduction allowed upon such distributions
on those Regular Certificates on account of any unaccrued original issue
discount relating to those Regular Certificates. When there is more than one
class of Regular Certificates that distribute principal sequentially, this
mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Certificates when distributions
in reduction of principal are being made in respect of earlier classes of
Regular Certificates to the extent that such classes are not issued with
substantial discount. If taxable income attributable to such a mismatching is
realized, in general, losses would be allowed in later years as distributions
on the later classes of Regular Certificates are made. Taxable income may also
be greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
classes of Regular Certificates, whereas to the extent that the REMIC Pool
includes fixed rate Mortgage Loans, interest income with respect to any given
Mortgage Loan will remain constant over time as a percentage of the outstanding
principal amount of that loan. Consequently, Residual Certificateholders must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income, subject to the discussion of "excess inclusions" below
under "Limitations on Offset or Exemption of REMIC Income". The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse effect
upon the Residual Certificateholder's after-tax rate of return. In addition, a
Residual Certificateholder's taxable income during certain periods may exceed
the income reflected by such Residual Certificateholder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own accountants concerning the accounting treatment of their
investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of disposition
of the Residual Certificate if earlier), determined without taking into account
the net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder
82
<PAGE>
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Certificateholder. Any loss that is disallowed on account of
this limitation may be carried over indefinitely with respect to the Residual
Certificateholder as to whom such loss was disallowed and may be used by such
Residual Certificateholder only to offset any income generated by the same
REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not include
cash received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Certificateholders described above under "Taxation of REMIC Income",
the period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Service may provide future guidance on the proper tax treatment
of payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Certificateholders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not so
provide. See "Treatment of Certain Items of REMIC Income and Expense--Market
Discount" below regarding the basis of Mortgage Loans to the REMIC Pool and
"Sale or Exchange of a Residual Certificate" below regarding possible treatment
of a loss upon termination of the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates, and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Certificateholders or differences in capital
gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as original issue discount income
on Regular Certificates as described above under "Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates", without regard to the de minimis rule described therein, and
"--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income to
the REMIC Pool and will be treated in a manner similar to the Deferred Interest
that accrues with respect to Regular Certificates as described above under
"Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool allocable
to such Mortgage Loans is exceeded by their unpaid principal balances. The
REMIC Pool's basis in such Mortgage Loans is generally the fair market value of
the Mortgage Loans immediately after the transfer thereof to the REMIC Pool.
83
<PAGE>
The REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool (or the
fair market value thereof at the Closing Date, in the case of a retained
Class). In respect of Mortgage Loans that have market discount to which Code
Section 1276 applies, the accrued portion of such market discount would be
recognized currently as an item of ordinary income in a manner similar to
original issue discount. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Certificates--Market
Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate of
the issue prices (or the fair market value of retained Classes) of the regular
and residual interests in the REMIC Pool immediately after the transfer thereof
to the REMIC Pool. In a manner analogous to the discussion above under
"Taxation of Regular Certificates--Premium", a REMIC Pool that holds a Mortgage
Loan as a capital asset under Code Section 1221 may elect under Code Section
171 to amortize premium on whole mortgage loans or mortgage loans underlying
MBS that were originated after September 27, 1985 or MBS that are REMIC regular
interests under the constant yield method. Amortizable bond premium will be
treated as an offset to interest income on the Mortgage Loans, rather than as a
separate deduction item. To the extent that the mortgagors with respect to the
Mortgage Loans are individuals, Code Section 171 will not be available for
premium on Mortgage Loans (including underlying mortgage loans) originated on
or prior to September 27, 1985. Premium with respect to such Mortgage Loans may
be deductible in accordance with a reasonable method regularly employed by the
holder thereof. The allocation of such premium pro rata among principal
payments should be considered a reasonable method; however, the Service may
argue that such premium should be allocated in a different manner, such as
allocating such premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject to
special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter allocable
to a Residual Certificate over the daily accruals for such quarterly period of
(i) 120% of the long-term applicable Federal rate that would have applied to
the Residual Certificate (if it were a debt instrument) on the Startup Day
under Code Section 1274(d), multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning of
a quarter is the issue price of the Residual Certificate, plus the amount of
such daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to such Residual
Certificate prior to the beginning of such quarterly period. Accordingly, the
portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of such income as the adjusted issue price
of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on such Residual
Certificateholder's return. However, net operating loss carryovers are
determined without regard to excess inclusion income. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Certificateholder's excess
inclusions will be treated as unrelated business taxable income of such
Residual Certificateholder for purposes of Code Section 511. In addition, REMIC
taxable income is subject to 30% withholding tax with respect to certain
persons who are not U.S. Persons (as defined below under "Tax-Related
Restrictions on Transfer of Residual Certificates--Foreign Investors"), and the
portion thereof attributable to excess inclusions is not eligible for any
reduction in the rate of withholding tax (by treaty or otherwise). See
"Taxation of Certain Foreign Investors--Residual Certificates" below. Finally,
if a real estate
84
<PAGE>
investment trust or a regulated investment company owns a Residual Certificate,
a portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or a regulated investment company
could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are not
U.S. Persons. The SBJPA of 1996 has eliminated the special rule permitting
Section 593 institutions ("thrift institutions") to use net operating losses
and other allowable deductions to offset their excess inclusion income from
Residual Certificates that have "significant value" within the meaning of the
REMIC Regulations, effective for taxable years beginning after December 31,
1995, except with respect to Residual Certificates continuously held by thrift
institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for a
taxable year cannot be less than the excess inclusions for the year. Third, the
amount of any alternative minimum tax net operating loss deduction must be
computed without regard to any excess inclusions. These rules are effective for
taxable years beginning after December 31, 1996, unless a Residual
Certificateholder elects to have such rules apply only to taxable years
beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
Federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such a tax generally would be imposed on the transferor of
the Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if
the Disqualified Organization promptly disposes of the residual interest and
the transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary gross
income of the Pass-Through Entity for the taxable year. The Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization or stating such
holder's taxpayer identification number and, during the period such person is
the record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
85
<PAGE>
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis (except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity) and (iii) an "electing large partnership" means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elect to apply
simplified reporting provisions under the Code.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these transfer
restrictions will be null and void and will vest no rights in any purported
transferee. Each Residual Certificate with respect to a series will bear a
legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under the
Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must be
furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a "noneconomic residual
interest" (as defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
"Foreign Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a "noneconomic residual interest" unless, at the
time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive
distributions from the REMIC at or after the time at which taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy
86
<PAGE>
the accrued taxes. The anticipated excess inclusions and the present value rate
are determined in the same manner as set forth above under "Disqualified
Organizations". The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the
time of the transfer, either knew or should have known that the transferee
would be unwilling or unable to pay taxes due on its share of the taxable
income of the REMIC. A safe harbor is provided if (i) the transferor conducted,
at the time of the transfer, a reasonable investigation of the financial
condition of the transferee and found that the transferee historically had paid
its debts as they came due and found no significant evidence to indicate that
the transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of cash flows generated by the
interest and that the transferee intends to pay taxes associated with holding
the residual interest as they become due. The Pooling Agreement with respect to
each series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of the
affidavit described above under the heading "Disqualified Organizations". The
transferor must have no actual knowledge or reason to know that such statements
are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a "U.S. Person" (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Certificate is deemed to have
tax avoidance potential unless, at the time of the transfer, (i) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and prior to the end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Certificate back to a
U.S. Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury regulations)
or other entity created or organized in or under the laws of the United States
or any political subdivision thereof, an estate that is subject to United
States federal income tax regardless of the source of its income or a trust if
a court within the United States is able to exercise primary supervision over
the administration of such trust, and one or more United States persons have
the authority to control all substantial decisions of such trust (or, to the
extent provided in applicable Treasury regulations, certain trusts in existence
on August 20, 1996 which are eligible to elect to be treated as U.S. Persons if
such election has been made).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under "Taxation
of Residual Certificates--Basis and Losses") of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition
to reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to it from
the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Certificate. It is possible that the termination of the REMIC Pool may be
treated as a sale or exchange of a Residual Certificateholder's Residual
Certificate, in which case,
87
<PAGE>
if the Residual Certificateholder has an adjusted basis in such Residual
Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Certificateholders, but rather
will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions generally include (i) the disposition of a qualified mortgage
other than for (a) substitution within two years of the Startup Day for a
defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time) or
for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is
88
<PAGE>
outstanding). The REMIC Regulations indicate that the modification of a
Mortgage Loan generally will not be treated as a disposition if it is
occasioned by a default or reasonably foreseeable default, an assumption of the
Mortgage Loan, the waiver of a due-on-sale or due-on-encumbrance clause or the
conversion of an interest rate by a mortgagor pursuant to the terms of a
convertible adjustable rate Mortgage Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund
by a Residual Certificateholder, (iii) in the nature of a guarantee, (iv) made
to facilitate a qualified liquidation or clean-up call and (v) as otherwise
permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period ending with the third calendar year
following the year of acquisition of such property, with a possible extension.
Net income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of its
assets, provided that the REMIC Pool credits or distributes in liquidation all
of the sale proceeds plus its cash (other than amounts retained to meet claims)
to holders of Regular Certificates and Residual Certificateholders within the
90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Service of any adjustments to, among other things, items
of REMIC income, gain, loss, deduction or credit in a unified administrative
proceeding. The Residual Certificateholder owning the largest percentage
interest in the Residual Certificates will be obligated to act as "tax matters
person", as defined in applicable Treasury regulations, with respect to the
REMIC Pool. Each Residual Certificateholder
89
<PAGE>
will be deemed, by acceptance of such Residual Certificates, to have agreed (i)
to the appointment of the tax matters person as provided in the preceding
sentence and (ii) to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000 ($50,000 in the case of
a married individual filing a separate return) (subject to adjustments for
inflation) or (ii) 80% of the amount of itemized deductions otherwise allowable
for such year. In the case of a REMIC Pool, such deductions may include
deductions under Code Section 212 for the servicing fee and all administrative
and other expenses relating to the REMIC Pool, or any similar expenses
allocated to the REMIC Pool with respect to a regular interest it holds in
another REMIC. Such investors who hold REMIC Certificates either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and
may cause such investors to be subject to significant additional tax liability.
Temporary Treasury regulations provide that the additional gross income and
corresponding amount of expenses generally are to be allocated entirely to the
holders of Residual Certificates in the case of a REMIC Pool that would not
qualify as a fixed investment trust in the absence of a REMIC election.
However, such additional gross income and limitation on deductions will apply
to the allocable portion of such expenses to holders of Regular Certificates,
as well as holders of Residual Certificates, where such Regular Certificates
are issued in a manner that is similar to pass-through certificates in a fixed
investment trust. In general, such allocable portion will be determined based
on the ratio that a REMIC Certificateholder's income, determined on a daily
basis, bears to the income of all holders of Regular Certificates and Residual
Certificates with respect to a REMIC Pool. As a result, individuals, estates or
trusts holding REMIC Certificates (either directly or indirectly through a
grantor trust, partnership, S corporation, REMIC, or certain other pass-through
entities described in the foregoing temporary Treasury regulations) may have
taxable income in excess of the interest income at the pass-through rate on
Regular Certificates that are issued in a single Class or otherwise
consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Certificates. Unless otherwise
indicated in the applicable Prospectus Supplement, all such expenses will be
allocable to the Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Certificate is a Non-U.S. Person. If such statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular
90
<PAGE>
Certificate is effectively connected with the conduct of a trade or business
within the United States by such Non-U.S. Person. In the latter case, such
Non-U.S. Person will be subject to United States federal income tax at regular
rates. Prepayment Premiums distributable to Regular Certificateholders who are
Non-U.S. Persons may be subject to 30% United States withholding tax. Investors
who are Non-U.S. Persons should consult their own tax advisors regarding the
specific tax consequences to them of owning a Regular Certificate. The term
"Non-U.S. Person" means any person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 2000, although valid withholding certificates that are held on
December 31, 1999, remain valid until the earlier of December 31, 2000 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular Certificates
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain information, including a United States taxpayer
identification number. A look-through rule would apply in the case of tiered
partnerships. Non-U.S. Persons should consult their own tax advisors concerning
the application of the certification requirements in the New Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans (including mortgage loans underlying MBS) were
issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in "registered
form" within the meaning of Code Section 163(f)(1). Generally, whole mortgage
loans will not be, but MBS and regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual
Certificateholder will not be entitled to any exemption from the 30%
withholding tax (or lower treaty rate) to the extent of that portion of REMIC
taxable income that constitutes an "excess inclusion". See "Taxation of
Residual Certificates--Limitations on Offset or Exemption of REMIC Income". If
the amounts paid to Residual Certificateholders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding will
not apply. Instead, the amounts paid to such Non-U.S. Persons will be subject
to United States federal income tax at regular rates. If 30% (or lower treaty
rate) withholding is applicable, such amounts generally will be taken into
account for purposes of withholding only when paid or otherwise distributed (or
when the Residual Certificate is disposed of) under rules similar to
withholding upon disposition of debt instruments that have original issue
discount. See "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors" above concerning the disregard of certain
transfers having "tax avoidance potential". Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences
to them of owning Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the
91
<PAGE>
provision of its taxpayer identification number to the Trustee, its agent or
the broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Service or allowed as a credit against
the Regular Certificateholder's federal income tax liability. The New
Regulations change certain of the rules relating to certain presumptions
currently available relating to information reporting and backup withholding.
Non-U.S. Persons are urged to contact their own tax advisors regarding the
application to them of backup withholding and information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders
of record of Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Service Publication 938 with respect to a particular series of Regular
Certificates. Holders through nominees must request such information from the
nominee.
The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Certificateholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service concerning
the percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS
TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), in the opinion of Cadwalader, Wickersham & Taft or Latham &
Watkins, counsel to the Depositor, the Trust Fund will be classified as a
grantor trust under subpart E, Part 1 of subchapter J of the Code and not as an
association taxable as a corporation or a "taxable mortgage pool" within the
meaning of Code Section 7701(i). Where there is no fixed retained yield with
respect to the Mortgage Loans underlying the Standard Certificates, the holder
of each such Standard Certificate (a "Standard Certificateholder") in such
series will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the Trust Fund represented by its
Standard Certificate and will be considered the beneficial owner of a pro rata
92
<PAGE>
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees". Accordingly, the holder of
a Standard Certificate of a particular series will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented by its Standard Certificate, including interest at
the coupon rate on such Mortgage Loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
Master Servicer, in accordance with such Standard Certificateholder's method of
accounting. A Standard Certificateholder generally will be able to deduct its
share of the servicing fee and all administrative and other expenses of the
Trust Fund in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Trust Fund.
However, investors who are individuals, estates or trusts who own Standard
Certificates, either directly or indirectly through certain pass-through
entities, will be subject to limitation with respect to certain itemized
deductions described in Code Section 67, including deductions under Code
Section 212 for the servicing fee and all such administrative and other
expenses of the Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $100,000 ($50,000
in the case of a married individual filing a separate return) (subject to
adjustments for inflation), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding Standard
Certificates, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard Certificates with respect to interest at the pass-through rate on
such Standard Certificates. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax, and may cause such
investors to be subject to significant additional tax liability. Moreover,
where there is fixed retained yield with respect to the Mortgage Loans
underlying a series of Standard Certificates or where the servicing fee is in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "Stripped Certificates" and "Recharacterization of
Servicing Fees", respectively.
Tax Status
Standard Certificates will have the following status for federal income
tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be considered
to represent "loans . . . secured by an interest in real property which is . .
. residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage Loans
represented by that Standard Certificate is of the type described in such
section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code Section
856(c)(5)(A) to the extent that the assets of the related Trust Fund consist of
qualified assets, and interest income on such assets will be considered
"interest on obligations secured by mortgages on real property" to such extent
within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
93
<PAGE>
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and Expense--Premium".
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans
as to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than a statutory de
minimis exception, including a payment of points currently deductible by the
borrower under applicable Code provisions or, under certain circumstances, by
the presence of "teaser rates" on the Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Standard Certificateholder are purchased at a price equal to the then
unpaid principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply and it is unclear
whether a Prepayment Assumption would apply. Rather, the holder will accrue
market discount pro rata over the life of the Mortgage Loans, unless the
constant yield method is elected. Unless indicated otherwise in the applicable
Prospectus Supplement, no prepayment assumption will be assumed for purposes of
such accrual.
Recharacterization of Servicing Fees
If the servicing fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there are
no authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Standard Certificate, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that
the value of servicing fees in excess of such amounts is not greater than the
value of the services provided.
94
<PAGE>
Accordingly, if the Service's approach is upheld, a servicer who receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as "stripped coupons" and "stripped bonds".
Subject to the de minimis rule discussed below under "--Stripped Certificates",
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Certificates, and the original issue discount rules of the Code would apply to
the holder thereof. While Standard Certificateholders would still be treated as
owners of beneficial interests in a grantor trust for federal income tax
purposes, the corpus of such trust could be viewed as excluding the portion of
the Mortgage Loans the ownership of which is attributed to the Master Servicer,
or as including such portion as a second class of equitable interest.
Applicable Treasury regulations treat such an arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as
merely facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Standard Certificateholder, except
that the income reported by a cash method holder may be slightly accelerated.
See "Stripped Certificates" below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and the other assets represented by the Standard Certificate. In
general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the amount
of any income previously reported with respect to the Standard Certificate and
decreased by the amount of any losses previously reported with respect to the
Standard Certificate and the amount of any distributions received thereon.
Except as provided above with respect to market discount on any Mortgage Loans,
and except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Standard Certificate was held as a capital asset. However, gain on the sale of
a Standard Certificate will be treated as ordinary income (i) if a Standard
Certificate is held as part of a "conversion transaction" as defined in Code
Section 1258(c), up to the amount of interest that would have accrued on the
Standard Certificateholder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4)
to have net capital gains taxed as investment income at ordinary income rates.
Capital gains of certain non-corporate taxpayers generally are subject to a
lower maximum tax rate (20%) than ordinary income of such taxpayers (39.6%) for
property held for more than one year. The maximum tax rate for corporations is
the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this
95
<PAGE>
discussion, Certificates that are subject to those rules will be referred to as
"Stripped Certificates". Stripped Certificates include "Stripped Interest
Certificates" and "Stripped Principal Certificates" (as defined in this
Prospectus) as to which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor or
any of its affiliates retains (for its own account or for purposes of resale),
in the form of fixed retained yield or otherwise, an ownership interest in a
portion of the payments on the Mortgage Loans, (ii) the Master Servicer is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the Mortgage Loans (see "Standard
Certificates--Recharacterization of Servicing Fees" above) and (iii)
Certificates are issued in two or more classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped Certificateholders,
the servicing fees will be allocated to the Stripped Certificates in proportion
to the respective entitlements to distributions of each class (or subclass) of
Stripped Certificates for the related period or periods. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under "Standard
Certificates--General", subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing variable-rate Mortgage Loans, the Depositor has been
advised by counsel that (i) the Trust Fund will be treated as a grantor trust
under subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i), and (ii) each Stripped Certificate should be treated as a
single installment obligation for purposes of calculating original issue
discount and gain or loss on disposition. This treatment is based on the
interrelationship of Code Section 1286, Code Sections 1272 through 1275, and
the OID Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below under "Taxation of Stripped Certificates--Possible Alternative
Characterizations," the OID Regulations state, in general, that two or more
debt instruments issued by a single issuer to a single investor in a single
transaction should be treated as a single debt instrument for original issue
discount purposes. The Pooling Agreement requires that the Trustee make and
report all computations described below using this aggregate approach, unless
substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
suggests that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations. Further, these
final regulations provide that the purchaser of such a Stripped Certificate
will be required to account for any discount as market discount rather than
original issue discount if either (i) the initial discount with respect to the
Stripped Certificate was treated as zero under the de minimis rule, or (ii) no
more than 100 basis points in excess of reasonable
96
<PAGE>
servicing is stripped off the related Mortgage Loans. Any such market discount
would be reportable as described under "Certain Federal Income Tax Consequences
for REMIC Certificates--Taxation of Regular Certificates--Market Discount,"
without regard to the de minimis rule therein, assuming that a prepayment
assumption is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Depositor that Stripped Certificates owned by applicable
holders should be considered to represent "real estate assets" within the
meaning of Code Section 856(c)(5)(A), "obligation[s] principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property which is . . .
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion as
a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates". However, with the apparent exception of
a Stripped Certificate qualifying as a market discount obligation, as described
above under "General", the issue price of a Stripped Certificate will be the
purchase price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize an ordinary loss equal to such
portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as
the Stripped Certificates. However, if final regulations dealing with
contingent interest with respect to the Stripped Certificates apply the same
principles as the OID Regulations, such regulations may lead
97
<PAGE>
to different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to accrue
and report such excess as if it were original issue discount in the manner
described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped Certificateholder
other than an original Stripped Certificateholder should be the Prepayment
Assumption or a new rate based on the circumstances at the date of subsequent
purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of
such Stripped Certificate's pro rata share of the payments attributable to
principal on each Mortgage Loan and a second installment obligation consisting
of such Stripped Certificate's pro rata share of the payments attributable to
interest on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons
as there are scheduled payments of principal and/or interest on each Mortgage
Loan or (iii) a separate installment obligation for each Mortgage Loan,
representing the Stripped Certificate's pro rata share of payments of principal
and/or interest to be made with respect thereto. Alternatively, the holder of
one or more classes of Stripped Certificates may be treated as the owner of a
pro rata fractional undivided interest in each Mortgage Loan to the extent that
such Stripped Certificate, or classes of Stripped Certificates in the
aggregate, represent the same pro rata portion of principal and interest on
each such Mortgage Loan, and a stripped bond or stripped coupon (as the case
may be), treated as an installment obligation or contingent payment obligation,
as to the remainder. Final regulations issued on December 28, 1992 regarding
original issue discount on stripped obligations make the foregoing
interpretations less likely to be applicable. The preamble to those regulations
states that they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped bond
or stripped coupon is de minimis, and solicits comments on appropriate rules
for aggregating stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts
98
<PAGE>
required to be reported by the Trustee may not be equal to the proper amount of
original issue discount required to be reported as taxable income by a
Certificateholder, other than an original Certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Service. If a Certificateholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Certificateholder has not reported all interest and dividend
income required to be shown on his federal income tax return, 31% backup
withholding may be required in respect of any reportable payments, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Standard Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Standard
Certificateholder or Stripped Certificateholders on the sale or exchange of
such a Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
99
<PAGE>
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.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities, Keogh
plans and bank collective investment funds and insurance company general and
separate accounts in which such ERISA Plans are invested. Section 4975 of the
Code imposes essentially the same prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code and on
Individual Retirement Accounts described in Section 408 of the Code
(collectively, "Tax Favored Plans").
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 with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in Interest
to a prohibited transaction may be subject to a nondeductible 15% per annum
excise tax on the amount involved in such transaction, which excise tax
increases to 100% if the Party in Interest involved in the transaction does not
correct such transaction during the taxable period. In addition, such Party in
Interest may be subject to a penalty imposed pursuant to Section 502(i) of
ERISA. The United States Department of Labor ("DOL") and participants,
beneficiaries and fiduciaries of ERISA Plans may generally enforce violations
of ERISA, including the prohibited transaction provisions. If the prohibited
transaction amounts to a breach of fiduciary responsibility under ERISA, a 20%
civil penalty may be imposed on the fiduciary or other person participating in
the breach.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund, including a Plan's
investment in Offered Certificates, might be deemed to constitute prohibited
transactions under ERISA and the Code if the underlying Mortgage Assets and
other assets included in a related Trust Fund are deemed to be assets of such
Plan. Section 2510.3-101 of the DOL regulations (the "Plan Asset Regulations")
defines the term "Plan Assets" for purposes of applying the general fiduciary
responsibility
100
<PAGE>
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code. Under the Plan Asset Regulations, generally, 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 Plan 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.
101
<PAGE>
PROHIBITED TRANSACTION EXEMPTIONS
The DOL granted an individual exemption, DOL exemption application number
E-0003 (the "Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and
Deutsche Morgan Grenfell Inc. ("DMG") 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
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through 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) DBNY
and DMG, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with DBNY
and DMG 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 a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan or
with Plan Assets 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 Exemption only applies to Certificates evidencing rights and interests that
are not subordinated to the rights and interests evidenced by other
Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc., Moody's Investors Service, Inc., Duff
& Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the "Exemption
Rating Agencies"). Fourth, the Trustee cannot be an affiliate of any member of
the "Restricted Group" which consists of any Underwriter, the Depositor, the
Trustee, the Master Servicer, any Sub-Servicer and any obligor with respect to
assets included in the Trust Fund constituting more than 5% of the aggregate
unamortized principal balance of the assets in the Trust Fund as of the date of
initial issuance of the Certificates. Fifth, the sum of all payments made to
and retained by the Underwriter(s) must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made to
and retained by the Depositor pursuant to the assignment of the assets to the
related 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 and any Sub-Servicer must represent not more than reasonable
compensation for such person's services under the related Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the Exemption states that the investing Plan or Plan Asset investor must
be an accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Commission under the Securities Act of 1933, as amended.
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 evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Certificates by or on behalf of a Plan or
with Plan Assets; and (iii) Certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Certificates by or on behalf of a
Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets intending to
purchase a Certificate must make its own determination that the conditions set
forth above will be satisfied with respect to such Certificate.
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, and the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A)
102
<PAGE>
through (D) of the Code, in connection with the direct or indirect sale,
exchange, transfer, holding or the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan or with Plan
Assets. 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
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 of the Certificates, 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 excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code, in
connection with (1) the direct or indirect sale, exchange or transfer of
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 the
Certificates is (a) a mortgagor with respect to 5% or less of the fair market
value of the Trust Fund Assets or (b) an affiliate of such a person, (2) the
direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan or with
Plan Assets.
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 of ERISA, and the excise 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 Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Certificates so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the excise
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 Trust Fund, provided that the general
conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by Section
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 Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three
highest generic rating categories by the Exemption Rating Agencies, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf
of any Plan, or to any other person investing Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion of
counsel satisfactory to the Depositor, the Trustee and the Master Servicer,
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer, that the purchase of such Certificates by or on behalf of such
Plan is permissible under applicable law, will not constitute or result in any
non-exempt prohibited transaction under ERISA or Section 4975 of the Code and
will not subject the Depositor, the Trustee or the Master Servicer to any
obligation in addition to those undertaken in the Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates by
or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are
103
<PAGE>
satisfied: (i) the transferee is an insurance company and the source of funds
used to purchase such Certificates is an "insurance company general account"
(as such term is defined in PTCE 95-60); (ii) the conditions set forth in PTCE
95-60 Part I and III have been satisfied; and (iii) there is no Plan with
respect to which the amount of such general account's reserves and liabilities
for contracts held by or on behalf of such Plan and all other Plans maintained
by the same employer (or any "affiliate" thereof, as defined in PTCE 95-60) or
by the same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of the
date of the acquisition of such Certificates.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a Plan
or 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. The
Class B Certificates [and Class R Certificates] will contain a legend
describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation of
these transfer restrictions will be null and void.
There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would
apply to all transactions involving the Trust Fund. Prospective Plan investors
should consult with their legal counsel concerning the impact of ERISA and the
Code and the potential consequences to their specific circumstances prior to
making an investment in the Certificates. Neither the Depositor, the Trustee,
the Master Servicer nor any of their respective affiliates will make any
representation to the effect that the Certificates satisfy all legal
requirements with respect to the investment therein by Plans generally or any
particular Plan or to the effect that the Certificates are an appropriate
investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE (OTHER THAN A SUBORDINATE CERTIFICATE,
RESIDUAL CERTIFICATE OR ANY CERTIFICATE WHICH IS NOT RATED IN ONE OF THE THREE
HIGHEST GENERIC RATING CATEGORIES BY THE EXEMPTION RATING AGENCIES), A
FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND GENERAL
CONDITIONS SET FORTH IN THE EXEMPTION OR ONE OF THE CLASS EXEMPTIONS WOULD BE
SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE EXEMPTION,
THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE EXEMPTION. IN
ADDITION, A PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL FIDUCIARY OBLIGATIONS
UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A CERTIFICATE ON BEHALF OF A
PLAN.
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--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income".
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 first liens on real property and originated by certain types
of Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal investments for persons, trusts, corporations,
104
<PAGE>
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
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to state regulation, to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, a number of
states enacted legislation, on or before the October 3, 1991 cutoff for such
enactments, limiting to varying extents the ability of certain entities (in
particular, insurance companies) to invest in "mortgage related securities"
secured by liens on residential, or mixed residential and commercial
properties, in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. Pursuant to Section 347 of the Riegle
Community Development and Regulatory Improvement Act of 1994, which amended the
definition of "mortgage related security" to include, in relevant part, Offered
Certificates satisfying the rating and qualified Originator requirements for
"mortgage related securities," but evidencing interests in a Trust Fund
consisting, in whole or in part, of first liens on one or more parcels of real
estate upon which are located one or more commercial structures, states were
authorized to enact legislation, on or before September 23, 2001, specifically
referring to Section 347 and prohibiting or restricting the purchase, holding
or investment by state-regulated entities in such types of Offered
Certificates. Accordingly, the investors affected by any such state
legislation, when and if enacted, will be authorized to invest in Offered
Certificates qualifying as "mortgage related securities" 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 in "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. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC") has
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. Section 1.5), certain "Type IV securities," defined in 12 C.F.R.
Section 1.2(1) to include certain "commercial mortgage-related securities" and
"residential mortgage-related securities." As so defined, "commercial
mortgage-related security" and "residential mortgage-related security" mean, in
relevant part, "mortgage related security" within the meaning of SMMEA,
provided that, in the case of a "commercial mortgage-related security," it
"represents ownership of a promissory note or certificate of interest or
participation that is directly secured by a first lien on one or more parcels
of real estate upon which one or more commercial structures are located and
that is fully secured by interests in a pool of loans to numerous obligors." In
the absence of any rule or administrative interpretation by the OCC defining
the term "numerous obligors," no representation is made as to whether any class
of Offered Certificates will qualify as "commercial mortgage-related
securities," and thus as "Type IV securities," for investment by national
banks. Federal credit unions should review National Credit Union Administration
("NCUA") Letter to Credit Unions No. 96, as modified by Letter to Credit Unions
No. 108, which includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities. The NCUA has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in "mortgage related securities" under certain limited circumstances,
other than stripped mortgage related securities, residual interests in mortgage
related securities, and commercial mortgage related securities, unless the
credit union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as
105
<PAGE>
revised April 15, 1994 (the "Policy Statement") of the Federal Financial
Institutions Examination Council (the "FFIEC"). The Policy Statement, which has
been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the OCC and the Office of Thrift
Supervision, and by the NCUA (with certain modifications), prohibits depository
institutions from investing in certain "high-risk mortgage securities"
(including securities such as certain series or classes of the Offered
Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. On
September 29, 1997, the FFIEC released for public comment a proposed
"Supervisory Policy Statement on Investment Securities and End-User Derivatives
Activities" (the "1997 Statement"), which would replace the Policy Statement.
As proposed, the 1997 Statement would delete the specific "high-risk mortgage
securities" tests, and substitute general guidelines which depository
institutions should follow in managing risks (including market, credit,
liquidity, operational (transactional), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," and, with regard to any Offered Certificates
issued in book-entry form, provisions which may restrict or prohibit
investments in securities which are issued in book-entry form.
Except as to the status of certain classes of Offered Certificates as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the 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 and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
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.
106
<PAGE>
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.
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.
If and to the extent required by applicable law or regulation, this
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 sales.
107
<PAGE>
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 Cadwalader, Wickersham & Taft or Latham & Watkins.
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.
108
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1986 Act .............................. 74
Act ................................... 66
ADA ................................... 69
ARM Loans ............................. 21
Book-Entry Certificates ............... 32
capital asset ......................... 79
CERCLA ................................ 66
Certificate Account ................... 25
Certificate Owner ..................... 38
Code .................................. 71
Commercial Properties ................. 18
Commission ............................ 3
Companion Class ....................... 34
Condemnation Proceeds ................. 46
Controlled Amortization Class ......... 34
Cooperatives .......................... 18
CPR ................................... 28
Crime Control Act ..................... 70
Cut-off Date .......................... 34
DBNY .................................. 102
Definitive Certificates ............... 32
Depositor ............................. 1
Determination Date .................... 26, 32
Deutsche Bank Group ................... 31
Disqualified Organization ............. 86
Disqualified Organizations ............ 87
Distribution Date Statement ........... 36
DMARC Trust ........................... 31
DMG ................................... 102
DOL ................................... 100
DTC ................................... 4, 38
DTC Participants ...................... 38
Due Dates ............................. 20
Equity Participation .................. 21
ERISA ................................. 100
ERISA Plans ........................... 100
Exchange Act .......................... 4
Exemption ............................. 102
Exemption Rating Agencies ............. 102
FAMC .................................. 24
FHLMC ................................. 24
Financial Intermediary ................ 38
FNMA .................................. 24
Foreign Investors ..................... 86
Garn Act .............................. 68
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
GNMA .................................. 24
Insurance Proceeds .................... 46
IRS ................................... 49
Letter of Credit Bank ................. 59
Lock-out Date ......................... 21
Lock-out Period ....................... 21
Mark to Market Regulations ............ 88
Market Discount ....................... 78, 79
MBS ................................... 1, 17
MBS Agreement ......................... 24
MBS Issuer ............................ 24
MBS Servicer .......................... 24
MBS Trustee ........................... 24
Mortgage Asset Pool ................... 1
Mortgage Asset Seller ................. 17
Mortgage Assets ....................... 1, 17
Mortgage Loans ........................ 1, 17
Mortgage Notes ........................ 18
Mortgaged Property .................... 18
Mortgages ............................. 18
Multifamily Properties ................ 18
Multifamily Property .................. 2
Net Leases ............................ 20
Nonrecoverable Advance ................ 35
Non-U.S. Person ....................... 91
Offered Certificates .................. 1
OID Regulations ....................... 74
original issue discount ............... 74
Original Issue Discount ............... 78, 79
Originator ............................ 18
Parties in Interest ................... 100
Pass-Through Entity ................... 85, 86
Percentage Interest ................... 33
Permitted Investments ................. 45
Plan Asset Regulations ................ 100
Prepayment Assumption ................. 75
Prepayment Interest Shortfall ......... 26
Prepayment Premium .................... 21
Prospectus Supplement ................. 1
Purchase Price ........................ 41
Random Lot Certificates ............... 75
Rating Agency ......................... 8
Record Date ........................... 32
Regular Certificateholder ............. 74
Regular Certificates .................. 71, 91
</TABLE>
109
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Related Proceeds ........................ 35
Relief Act .............................. 70
REMIC ................................... 2, 71
REMIC Administrator ..................... 3
REMIC Certificates ...................... 71
REMIC Pool .............................. 71
REMIC Regulations ....................... 71
REO Property ............................ 43
Residual Certificateholders ............. 81
Residual Certificates ................... 71
Retail Property ......................... 2, 18
RICO .................................... 70
Senior Liens ............................ 18
Service ................................. 73
SMMEA ................................... 8
SPA ..................................... 28
Standard Certificateholder .............. 92
Startup Day ............................. 72
stripped bond ........................... 94
stripped bonds .......................... 95
Stripped Certificateholder .............. 97
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
92, 93,
Stripped Certificates ................... 95, 96
stripped coupons ........................ 95
Stripped Interest Certificates .......... 96
Stripped Principal Certificates ......... 96
Sub-Servicer ............................ 45
Sub-Servicing Agreement ................. 45
Tax Exempt Investor ..................... 104
Tax Favored Plans ....................... 100
Title V ................................. 69
Treasury ................................ 71
Trust Assets ............................ 3
Trust Fund .............................. 1
UBTI .................................... 104
UCC ..................................... 61
U.S. Person ............................. 87
Voting Rights ........................... 37
Warranting Party ........................ 42
</TABLE>
110
<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
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary ......................................... S-1
Risk Factors .................................... S-11
Description of the Mortgage Pool ................ S-13
Servicing of the Mortgage Loans ................. S-26
Description of the Certificates ................. S-31
Yield and Maturity Considerations ............... S-40
Certain Federal Income Tax Consequences ......... S-45
Method of Distribution .......................... S-47
Legal Matters ................................... S-48
Rating .......................................... S-48
Legal Investment ................................ S-49
Certain ERISA Considerations .................... S-49
Index of Principal Definitions .................. S-52
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 ..............
Certain ERISA Considerations ....................
Legal Investment ................................
Use of Proceeds .................................
Method of Distribution ..........................
Legal Matters ...................................
Financial Information ...........................
Rating ..........................................
Index of Principal Definitions ..................
</TABLE>
<PAGE>
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>
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.
<TABLE>
<CAPTION>
<S> <C>
Filing Fee for Registration Statement ........................ $ 1,770,000.00
Legal Fees and Expenses ...................................... 400,000.00
Accounting Fees and Expenses ................................. 130,000.00
Trustee's Fees and Expenses (including counsel fees) ......... 100,000.00
Blue Sky Fees and Expenses ................................... 60,000.00
Printing and Engraving Fees .................................. 70,000.00
Rating Agency Fees ........................................... 160,000.00
Miscellaneous ................................................ 40,000.00
---------------
Total ........................................................ $ 2,730,000.00
===============
</TABLE>
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 Deutsche 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 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
II-1
<PAGE>
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.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
<TABLE>
<CAPTION>
<S> <C>
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 Cadwalader, Wickersham & Taft with respect to legality of the Certificates.
5.2 -- Opinion of Latham & Watkins with respect to legality of the Certificates.
8.1* -- Opinion of Cadwalader, Wickersham & Taft with respect to certain tax matters (included
in Exhibit 5.1).
8.2 -- Opinion of Latham & Watkins with respect to certain tax matters.
23.1* -- Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
23.2 -- Consent of Latham & Watkins (included in Exhibit 5.2 and Exhibit 8.2).
24.1** -- Power of Attorney.
</TABLE>
- ----------
* Previously filed with Registration Statement No. 333-4272 and incorporated
by reference herein.
** Previously filed.
II-2
<PAGE>
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 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.
(c) 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.
II-3
<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 and has duly caused this Post-effective
Amendment No. 1 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 29th day of September 1998.
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
Post-effective Amendment No. 1 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 and Chief September 29, 1998
- -------------------------------
Executive Officer)
Nancy D. Smith
* (Treasurer and Chief Financial September 29, 1998
- -------------------------------
Officer)
R. Douglas Donaldson
* Director September 29, 1998
- -------------------------------
Louise E. Colby
* By: /s/ Nancy D. Smith
-------------------------
Name: Nancy D. Smith
Attorney-in-Fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of the Company*
3.2 By-laws of the Company*
4.1 Form of Pooling and Servicing Agreement*
5.1 Opinion of Cadwalader, Wickersham & Taft with respect to legality of the
Certificates**
5.2 Opinion of Latham & Watkins with respect to legality of the Certificates
8.1 Opinion of Cadwalader, Wickersham & Taft as to certain tax matters (included in
Exhibit 5.1)*
8.2 Opinion of Latham & Watkins with respect to certain tax matters
23.1 Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1)*
23.2 Consent of Latham & Watkins (included in Exhitibts 5.2 and 8.2 hereto)
24.1 Power of Attorney**
</TABLE>
- ----------
* Previously filed with Registration Statement No. 333-4272 and
incorporated by reference herein.
** Previously filed.
<PAGE>
[LATHAM & WATKINS LETTERHEAD]
September 28, 1998
Deutsche Mortgage & Asset Receiving Corporation
One International Place
Boston, Massachusetts 02110
Re: Deutsche Mortgage & Asset Receiving Corporation
Registration Statement on Form S-3
Registration No. 333-08328
-----------------------------------------------
Ladies and Gentlemen:
We have acted as counsel for Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation (the "Company"), in connection with the
preparation of a registration statement on Form S-3 (the "Registration
Statement") which has been filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the "Act"),
for the registration under the Act of Mortgage Pass-Through Certificates (the
"Certificaties"), issuable in series (each, a "Series"). As set forth in the
Registration Statement, each Series will be issued under and pursuant to the
conditions of a separate pooling and servicing agreement (each, an "Agreement")
among the Company, a trustee (the "Trustee") and, where appropriate, a master
servicer (the "Master Servicer") and a special servicer (the "Special
Servicer"), each to be identified (together with any other relevant parties) in
the prospectus supplement for such Series.
We are familiar with the proceedings taken and proposed to be taken by the
Company in connection with the authorization and issuance of the Certificates,
and for the purposes of this opinion, have assumed such proceedings will be
completed in the manner presently proposed by the Registration Statement. In
addition, we have made such legal and factual examinations and inquires,
including an examination of originals or copies certified or otherwise
identified to our satisfaction of such documents, corporate records and
instruments, as we have deemed necessary or appropriate for purposes of this
opinion.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, and the conformity
to authentic original documents of all documents submitted to us as copies.
<PAGE>
Deutsche Mortgage & Asset Receiving Corporation
September 28, 1998
Page 2
We are opining only as to the effect of the Federal laws of the United
States, the internal laws of the State of New York and the General Corporation
Law of the State of Delaware, and we express no opinion with respect to the
applicability or the effect of the laws of any other jurisdiction or, in the
case of Delaware, any other laws, or as to any matters of municipal law or the
laws of any other local agencies within any state.
Subject to the foregoing and the other matters set forth herein, we are of
the opinion that:
1. When an Agreement relating to a Series has been duly and validly
authorized, executed and delivered by the Company, the Master Servicer and the
Special Servicer, if any, the Trustee and any other party thereto, such
Agreement will constitute a valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
2. When a Series has been duly authorized by all necessary action on the
part of the Company (subject to the terms thereof being otherwise in compliance
with applicable law at such time) and has been duly executed, authenticated and
delivered by the Trustee against payment in accordance with the terms of the
related underwriting agreement, such Series will be validly issued, fully paid
and nonassessable, and the holders thereof will be entitled to the benefits of
the related Agreement.
The opinions rendered above are subject to the following exceptions,
limitations and qualifications: (i) the effect of bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance or other similar laws
relating to or affecting the rights and remedies of creditors, (ii) the effect
of general principles of equity, whether enforcement is considered in a
proceeding in equity or law, and the discretion of the court before which any
proceeding therefor may be brought, (iii) the unenforceability under certain
circumstances under law or court decisions of provisions providing for the
indemnification of or contribution to a party with respect to a liability where
such indemnification or contribution is contrary to public policy, and (iv)
possible limitations arising from applicable laws other than those referred to
in the preceding clause (i) upon the remedial provisions contained in any
Agreement, but such limitations do not in our opinion of themselves make the
remedies afforded inadequate for the practical realization of the benefits
purported to be provided thereby.
We hereby consent to the filing of this letter as Exhibit 5-2 to the
Registration Statement and to the references to this firm under the caption
"Legal Matters" in the prospectus forming a part of the Registration Statement,
without admitting that we are "experts" within the meaning of the Act or the
Rules and Regulations of the Commission issued thereunder with respect to any
part of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Latham & Watkins
--------------------------
LATHAM & WATKINS
<PAGE>
[LATHAM & WATKINS LETTERHEAD]
September 28, 1998
Deutsche Mortgage & Asset Receiving Corporation
One International Place
Boston, Massachusetts 02110
Re: Deutsche Mortgage & Asset Receiving Corporation
Registration Statement on Form S-3
(File No. 333-08328)
-----------------------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation (the "Registrant"), in connection with the
preparation of an amendment to the registration statement on Form S-3
(Registration No. 333-08328) (the "Registration Statement"), which has been
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act"), as amended on the date hereof, for the
registration under the Act of Mortgage Pass-Through Certificates (the
"Certificates") issuable in series (the "Series") and evidencing interests in
certain pools of various types of multi-family and commercial mortgage loans,
mortgage-backed securities that evidence interests in, or are secured by
pledges of, one or more of such types of mortgage loans, or a combination of
mortgage loans and mortgage-backed securities. As described in the Registration
Statement, each Series of Certificates will be issued under and pursuant to the
terms of a separate (i) Pooling and Servicing Agreement between the Registrant,
a trustee and a master servicer, each to be specified in the prospectus
supplement for such series of Certificates or (ii) trust agreement (the "Trust
Agreement") between the Registrant and a trustee named in the related
prospectus supplement.
In rendering our opinion, we have examined and are familiar with originals
or copies, certified or otherwise identified to our satisfaction, of the
Registration Statement, the prospectus (the "Prospectus") and the form of
prospectus supplement (the "Prospectus Supplement") included therein,
<PAGE>
Deutsche Mortgage & Asset Receiving Corporation
September 28, 1998
Page 2
and such other documents as we have deemed necessary or appropriate as a basis
for the opinion set forth below. In rendering our opinion, we have examined the
Internal Revenue Code of 1986, as amended as of the date hereof, the Treasury
Regulations promulgated thereunder, judicial decisions, legislative history and
such other authorities as we have deemed appropriate to our analysis. The
statutory provisions, regulations, interpretations and other authorities upon
which our opinion is based are subject to change, and such changes could apply
retroactively.
We express no opinion as to any laws other than the federal laws of the
United States of America as of the date hereof.
Based upon and subject to the foregoing, we confirm that it is our opinion
that the information in the Prospectus under the captions "Summary of
Prospectus--Certain Federal Income Tax Consequences" and "Certain Federal
Income Tax Consequences," to the extent it constitutes matters of law or legal
conclusions, is correct in all material respects, based on existing law and the
assumptions stated therein.
The foregoing opinion and the discussions contained in the Prospectus
under the captions "Summary of Prospectus--Certain Federal Income Tax
Consequences" and "Certain Federal Income Tax Consequences" represent our
conclusions as to the application of existing law. No assurance can be given
that the Internal Revenue Service will not assert contrary positions or that
the law (including interpretations thereof) will not change. We note that the
Prospectus and Prospectus Supplement filed with the Registration Statement do
not relate to any specific transaction. Accordingly, the above referenced
descriptions of federal income tax consequences may require modifications in
the context of an actual transaction. We further note that the summaries under
the above referenced captions do not purport to discuss all possible federal
income tax ramifications of any proposed issuance. We express no opinion as to
any matter not specifically covered by the foregoing opinion.
Any change in applicable law, which may change at any time or a change in
the facts or documents on which our opinion is based may affect the validity of
the foregoing opinion. This firm undertakes no obligation to update this
opinion in the event that there is a change either in the legal authorities or
in the facts or documents on which this opinion is based.
We hereby consent to the filing of this letter as Exhibit 8.2 to the
Registration Statement and to the references to Latham & Watkins under the
captions "Summary of Prospectus--Certain Federal Income Tax Consequences" and
"Certain Federal Income Tax Consequences" in the Prospectus, without implying
or admitting that we are "experts" within the meaning of the Act or the rules
and regulations of the Commission issued thereunder, with respect to any part
of the Registration Statement, including this exhibit.
Very truly yours,
/s/ Latham & Watkins
-----------------------------
LATHAM & WATKINS
