As filed with the Securities and Exchange Commission
on April 20, 1998
Registration No. 333-4598
=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
(Exact name of registrant as specified in governing instruments)
-------------
One International Plaza,
Room 608
Boston, Massachusetts
02110
Delaware (617) 951-7633 04-3310019
(State or other (Address and (I.R.S. Employer
jurisdiction of telephone number Identification
incorporation or of principal Number)
organization) executive offices)
Corporation Service Company
1013 Centre Road
Wilmington, Delaware 19805
(Name, address and telephone number of agent for service)
-------------
Copies to:
Mitchell S. Dupler, Esq.
Cleary, Gottlieb, Steen & Hamilton
2000 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
-------------
APPROXIMATE DATE OF COMMENCEMENT
OF PROPOSED SALE TO PUBLIC:
FROM TIME TO TIME AFTER THIS
REGISTRATION STATEMENT BECOMES
EFFECTIVE.
-------------
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans,
check the following box. |_|
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, other than securities offered
only in connection with dividend or interest reinvestment plans,
check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check
the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering.
|_|_____________________
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and
list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
|_|____
If delivery of the prospectus is expected to be made pursuant
to Rule 434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
=================================================================
Proposed Proposed Amount
Title of Maximum Maximum of
Securities Amount Offering Aggregate Regis-
to be to be Price Per Offering tration
Registered Registered Unit* Price* Fee
- -----------------------------------------------------------------
Pass-Through $500,000,000 100% $500,000,000 **
Certificates
=================================================================
* Estimated solely for purposes of calculating the registration
fee.
** Registration fees of $345 and $151,212.12 were previously paid
in connection with the initial filing of this Registration
Statement and Amendment No. 1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE
DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH
SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
=================================================================
<PAGE>
CROSS REFERENCE SHEET RELATING TO RESIDENTIAL
MORTGAGE PASS-THROUGH CERTIFICATES FURNISHED PURSUANT TO RULE
404(a)
Location in
Item and Location in Prospectus
Caption in Form S-3 Prospectus supplement
------------------- ---------- ----------
1. Forepart of Forepart of Outside Front Cover
Registration Registration Page
Statement and Statement; Outside
Outside Front Front Cover Page
Cover Page of
Prospectus
2. Inside Front and Inside Front Cover Inside Front Cover
Outside Back Cover Page Page; Outside Back
Pages of Cover Page
Prospectus
3. Summary Summary of Summary of Terms;
Information, Risk Prospectus; Risk Factors
Factors and Ratio Incorporation of
of Earnings to Certain Documents by
Fixed Charges Reference; Risk
Factors
4. Use of Proceeds Use of Proceeds Summary of Terms
5. Determination of * *
Offering Price
6. Dilution * *
7. Selling Security * *
Holders
8. Plan of Plan of Distribution Plan of Distribution
Distribution
9. Description of Outside Front Cover Outside Front Cover
Securities to be Page; Description of Page; Description of
Registered the Certificates; the Mortgage Pool
The Trust Fund; and the Mortgaged
Yield, Maturity and Properties;
Weighted Average Description of the
Life Considerations; Certificates; Yield
The Pooling and and Weighted Life
Servicing Agreement; Considerations; The
Federal Income Tax Pooling and
Consequences Servicing Agreement;
Certificate Ratings;
Federal Income Tax
Consequences
10. Interests of * *
Named Experts and
Counsel
11. Material * *
Changes
12. Incorporation Incorporation of *
of Certain Certain Documents by
Information by Reference
Reference
13. Disclosure of The Company *
Commission
Position on
Indemnification
for Securities Act
Liabilities
- -----------------------
* Answer negative or item inapplicable.
<PAGE>
****************************************************************
* Information contained herein is subject to completion or *
* amendment. A registration statement relating to these *
* securities has been filed with the Securities and Exchange *
* Commission. These securities may not be sold nor may offers *
* to buy be accepted prior to the time the registration *
* statement becomes effective. This prospectus shall not *
* constitute an offer to sell or the solicitation of an offer *
* to buy nor shall there be any sale of these securities in *
* any State in which such offer, solicitation or sale would *
* be unlawful prior to registration or qualification under *
* the securities laws of any such State. *
****************************************************************
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS
DATED APRIL __, 1998
PROSPECTUS
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
Company
Pass-Through Certificates (Issuable in Series)
Each of the Certificates offered hereby (each, an "Offered
Certificate") will evidence a beneficial ownership interest in
one of a number of trust funds (each, a "Trust Fund") created by
Deutsche Mortgage & Asset Receiving Corporation (the "Company")
from time to time. As specified in the related Prospectus
Supplement, the assets of a Trust Fund may consist of (i) a pool
of mortgage loans secured by first, second and/or more junior
liens on one- to four-family residential properties or
multifamily residential rental properties or cooperatively-owned
properties containing five or more residential units, or
participation interests or stripped interests in such loans (the
"Mortgage Loans") acquired by the Company, (ii) Mortgage-Backed
Securities (as defined herein) issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") (which Mortgage-Backed Securities
are referred to herein as the "Agency Securities"), Mortgage-
Backed Securities issued by one or more private entities (which
Mortgage-Backed Securities are referred to herein as "Private
Securities"), or by any combination of such Mortgage-Backed
Securities or (iii) conditional sales contracts and installment
sales or loan agreements or participation interests therein
secured by manufactured housing (the "Contracts"). If specified
in the related Prospectus Supplement, all or a portion of the
Mortgage Loans in the Trust Fund may be home equity loans. If
specified in the related Prospectus Supplement, a Trust Fund also
may include one or more of the following: reinvestment income,
reserve accounts and insurance, guarantees or letters of credit.
It is anticipated that the assets conveyed to the Trust Fund by
the Company will have been acquired by the Company from Deutsche
Bank AG or an affiliate thereof (collectively, "Deutsche Bank").
See "The Trust Fund" for a more detailed discussion of the types
of assets that may comprise the Trust Fund. The Company is not an
affiliate of Deutsche Bank.
The Offered Certificates may be sold from time to time as
part of one or more Series (each, a "Series") on terms determined
at the time of sale and specified in the Prospectus Supplement
relating to such Series. Each Series of Certificates will be
issued in a single class or in two or more classes. Each class of
Offered Certificates will evidence beneficial ownership of (i)
any distributions in respect of the assets of the Trust Fund that
are allocable to principal of the Offered Certificates in the
amount of the aggregate original principal balance, if any, of
such class of Offered Certificates as specified in the related
Prospectus Supplement and (ii) any distributions in respect of
the assets of the Trust Fund that are allocable to interest on
the principal balance or notional principal balance of such
Offered Certificates at the interest rate, if any, applicable to
such class of Offered Certificates as specified in the related
Prospectus Supplement. One or more classes of Offered
Certificates (i) may be entitled to receive distributions
allocable to principal, principal prepayments, interest or any
combination thereof prior to one or more other classes of
Certificates of the related Series or after the occurrence of
certain events and (ii) may be subordinated in the right to
receive distributions on such Offered Certificates to one or more
senior classes of Certificates, in each case as specified in the
related Prospectus Supplement. Interest on each class of Offered
Certificates entitled to distributions allocable to interest will
accrue at a fixed rate or at a rate that is subject to change
from time to time as specified in the related Prospectus
Supplement on an actual or notional principal amount, may
represent a specified portion of interest received on some or all
of the assets of the
<PAGE>
Trust Fund or may otherwise be determined as specified in the
related Prospectus Supplement. The Company may retain or hold for
sale from time to time one or more classes of a Series of
Certificates.
Unless otherwise specified in the related Prospectus
Supplement, distributions on the Certificates of a Series will be
made only from the assets of the related Trust Fund, and the
Certificates will not be insured or guaranteed by the Company or
any affiliate thereof or by any governmental entity or by any
other person. The Certificates will not represent an obligation
of or an interest in the Company, Deutsche Bank or any of their
affiliates. Unless otherwise specified in the related Prospectus
Supplement, the Company's only obligations with respect to a
Series of Certificates will consist of its obligations pursuant
to certain representations and warranties, if any, made by it.
Unless otherwise specified in the related Prospectus Supplement,
none of Deutsche Bank or its affiliates or any affiliate of the
Company will have any obligations with respect to the
Certificates or the related Trust Fund.
THE YIELD ON EACH CLASS OF CERTIFICATES OF A SERIES WILL BE
AFFECTED BY THE RATE OF PAYMENT OF PRINCIPAL (INCLUDING
PREPAYMENTS) ON THE ASSETS IN THE RELATED TRUST FUND AND THE
TIMING OF RECEIPT OF SUCH PAYMENTS AS DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT. EACH SERIES OF CERTIFICATES MAY BE
SUBJECT TO EARLY TERMINATION ONLY UNDER THE CIRCUMSTANCES
DESCRIBED HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT.
If specified in a related Prospectus Supplement, an
election will be made to treat the related Trust Fund as a "real
estate mortgage investment conduit" ("REMIC") for federal income
tax purposes, or multiple REMIC elections may be made with
respect to the related Trust Fund. See "Federal Income Tax
Consequences."
For a discussion of material risks in connection with the
purchase of the Classes, see "Risk-Factors" on page 9 of this
Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE OFFERED CERTIFICATES ARE NOT SUITABLE INVESTMENTS FOR
ALL INVESTORS, IN PARTICULAR, NO INVESTOR SHOULD PURCHASE
CERTIFICATES OF ANY CLASS UNLESS THE INVESTOR UNDERSTANDS AND IS
ABLE TO BEAR THE PREPAYMENT, YIELD, LIQUIDITY AND MARKET RISKS
ASSOCIATED WITH THAT CLASS.
The Offered Certificates are complex securities and it is
important that each investor in any Class of Offered Certificates
possess, either alone or together with an investment advisor, the
expertise necessary to evaluate the information contained and
incorporated in this Prospectus and the related Prospectus
Supplement in the context of that investor's financial situation.
The yield of each Class of Certificates will depend upon,
among other things, its purchase price, its sensitivity to the
rate and timing of principal payments (including prepayments,
defaults and liquidations) on the Mortgage Loans and the actual
characteristics of the Mortgage Loans. Mortgage Loan prepayment
rates are likely to fluctuate significantly from time to time.
Investors should consider the associated risks, including:
- Fast Mortgage Loan prepayment rates can reduce
the yields of Classes, including any
interest-only Classes, purchased at a premium
over their principal amounts.
ii
<PAGE>
- Slow Mortgage Loan prepayment rates can reduce
the yields of Classes, including any
principal-only Classes, purchased at a discount
to their principal amounts.
- Small differences in the characteristics of the
Mortgages can affect the weighted average lives
and yields of the Classes.
See "Risk Factors" and "Yield Considerations" in this
Prospectus and "Risk Factors" and "Yield, Maturity and Weighted
Average Life Considerations" in the related Prospectus
Supplement.
Offers of the Offered Certificates may be made through one
or more different methods, including offerings through
underwriters, as more fully described under "Plan of
Distribution" herein and in the related Prospectus Supplement.
See "Index of Principal Definitions" beginning on page 75
for the location of meanings of capitalized terms used herein.
There will have been no public market for any Series of
Offered Certificates prior to the offering thereof. There can be
no assurance that a secondary market will develop for the Offered
Certificates of any Series or, if it does develop, that such
market will continue.
Retain this Prospectus for future reference. This
Prospectus may not be used to consummate sales of Offered
Certificates unless accompanied by a related Prospectus
Supplement.
The date of this Prospectus is ____________, 199_.
iii
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Offered
Certificates of a Series being offered hereby will, among other
things, set forth with respect to such Series: (i) information as
to the assets comprising the Trust Fund, including the
characteristics of any Mortgage Loans, Mortgage-Backed
Securities, Contracts or other assets included therein and, if
applicable, the insurance, guarantees or other instruments or
agreements included in the Trust Fund and the amount and source
of any reserve accounts; (ii) the aggregate original principal
balance of each class of Offered Certificates entitled to
distributions allocable to principal and, if a fixed rate of
interest, the interest rate for each class of such Offered
Certificates entitled to distributions allocable to interest;
(iii) information as to any class of Offered Certificates that
has a rate of interest that is subject to change from time to
time and the basis on which such interest rate will be
determined; (iv) information as to any class of Offered
Certificates on which interest will accrue and be added to the
principal balance or, if applicable, the notional principal
balance thereof; (v) information as to the method used to
calculate the amount of interest to be paid on any class of
Offered Certificates entitled to distributions of interest only;
(vi) information as to the nature and extent of subordination
with respect to any class of Offered Certificates that is
subordinate in right of payment to any other class; (vii) the
circumstances, if any, under which the Trust Fund is subject to
early termination; (viii) if applicable, the final distribution
date and the first mandatory principal distribution date of each
class of Offered Certificates; (ix) the method used to calculate
the aggregate amounts of principal and interest required to be
distributed on each distribution date in respect of each class of
Offered Certificates and, with respect to any Series consisting
of more than one class, the basis on which such amounts will be
allocated among the classes of such Series; (x) the distribution
date for each class of the Offered Certificates, the date on
which payments received in respect of the assets included in the
Trust Fund during the related period will be deposited in the
certificate account and, if applicable, the assumed reinvestment
rate applicable to payments received in respect of such assets
and the date on which such payments are assumed to be received
for such Series; (xi) the name of the trustee of the Trust Fund;
(xii) information with respect to the administrator, if any, of
the Trust Fund; (xiii) whether an election will be made to treat
all or a portion of the Trust Fund as a REMIC or a double REMIC
within the Trust Fund and, if applicable, the designation of the
regular interests and residual interests therein; (xiv)
information with respect to the plan of distribution of such
Offered Certificates; and (xv) additional information with
respect to any Credit Enhancement or cash flow agreement relating
to such Series and, if the Certificateholders of such Series will
be materially dependent upon any provider of credit enhancement
or any cash flow agreement counterparty for timely payment of
interest and/or principal on their Certificates, information
(including financial statements) regarding such provider or
counterparty.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act") with respect to the Offered Certificates offered hereby and
by the related Prospectus Supplement, and in accordance therewith
files reports and other information with the Securities and
Exchange Commission (the "Commission"). Such reports and other
information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's
Regional Offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material can be obtained upon written request addressed to
the Commission, Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site containing reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission at (http://www.sec.gov).
iv
<PAGE>
The Company has filed with the Commission a Registration
Statement (the "Registration Statement") under the Securities Act
of 1933, as amended, (the "Securities Act") with respect to the
Offered Certificates. This Prospectus, which forms a part of the
Registration Statement, omits certain information contained in
the Registration Statement pursuant to the rules and regulations
of the Commission. The Registration Statement can be inspected
and copied at prescribed rates at the public reference facilities
maintained by the Commission as described in the preceding
paragraph.
Copies of the Agreement pursuant to which a Series of
Certificates is issued will be provided to each person to whom a
Prospectus and the related Prospectus Supplement are delivered
upon written request directed to the Company c/o JH Management
Corporation, at One International Place, Suite 520, Boston,
Massachusetts 02110 (telephone: (617) 951-7690, Attention:
Treasurer.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act with respect to a
Series of Certificates subsequent to the date of this Prospectus
and the related Prospectus Supplement and prior to the
termination of the offering of the Offered Certificates of such
Series shall be deemed to be incorporated by reference in this
Prospectus as supplemented by the related Prospectus Supplement.
If specified in any such document, such document shall also be
deemed to be incorporated by reference in the Registration
Statement of which this Prospectus forms a part.
Any statement contained herein or in a related Prospectus
Supplement for the Offered Certificates of a Series or in a
document incorporated or deemed to be incorporated by reference
herein or therein shall be deemed to be modified or superseded
for purposes of this Prospectus and such related Prospectus
Supplement to the extent that a statement contained herein or in
such related Prospectus Supplement or in any subsequently filed
document which also is or is deemed to be incorporated by
reference herein or in such related Prospectus Supplement
modifies or supersedes such statement, except to the extent that
such subsequently filed document expressly states otherwise. Any
such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus or the related Prospectus Supplement or, if
applicable, the Registration Statement.
The Company will provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus
and the related Prospectus Supplement is delivered, on the
written or oral request of any such person, a copy of any and all
of the documents incorporated herein by reference, except the
exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Written requests
for such copies should be directed to the Company c/o JH
Management Corporation, at One International Place, Suite 520,
Boston, Massachusetts 02110, Attention: Treasurer. Telephone
requests for such copies should be directed to (617) 951-7690.
--------
Until 90 days after the date of each related Prospectus
Supplement, all dealers effecting transactions in the Offered
Certificates covered by such related Prospectus Supplement,
whether or not participating in the distribution thereof, may be
required to deliver such related Prospectus Supplement and this
Prospectus. This is in addition to the obligation of dealers to
deliver a related Prospectus Supplement and Prospectus when
acting as underwriters of the Offered Certificates covered by
such related Prospectus Supplement and with respect to their
unsold allotments or subscriptions.
v
<PAGE>
No person has been authorized to give any information or to
make any representations other than those contained in this
Prospectus and any related Prospectus Supplement with respect
hereto and, if given or made, such information or representations
must not be relied upon as having been authorized. This
Prospectus and any related Prospectus Supplement with respect
hereto do not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the Offered Certificates
offered hereby and thereby nor an offer to sell or a solicitation
of an offer to buy the Offered Certificates to any person in any
state or other jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this Prospectus or any
related Prospectus Supplement with respect hereto nor any sale
made hereunder and thereunder shall, under any circumstances,
create any implication that the information herein or therein is
correct as of any time subsequent to the date of such
information.
--------
REPORTS TO CERTIFICATEHOLDERS
The Company will provide to Certificateholders, annually
and with respect to each Distribution Date, reports concerning
the Trust Fund related to such Certificates. See "The Pooling and
Servicing Agreements-Reports to Certificateholders."
--------
vi
<PAGE>
TABLE OF CONTENTS
Caption Page
SUMMARY OF PROSPECTUS...........................................9
RISK FACTORS...................................................11
General Risks of Real Estate Investments....................11
Limited Obligation for Distributions on the Offered
Certificates................................................12
Lack of Established Market..................................12
Limitations on Credit Enhancement Associated with
the Offered Certificates....................................13
Risk of Prepayment of and Defaults on Mortgage Loans........11
Limitations on Real Estate Lenders Imposed by State Laws....13
Risks Associated with Contracts on Manufactured Homes.......14
Environmental Risks Relating to Mortgage Loans..............15
Early Termination of the Trust Fund.........................15
DESCRIPTION OF THE CERTIFICATES................................15
General.....................................................16
Classes of Certificates.....................................18
Distributions of Principal and Interest.....................19
Optional Termination of the Trust Fund......................22
Certificate Ratings.........................................22
THE TRUST FUND.................................................22
The Mortgage Loans..........................................23
Underwriting and Interim Servicing Standards Applicable
to the Mortgage Loans.......................................25
The Agency Securities.......................................26
Private Securities..........................................30
Contracts...................................................30
CREDIT ENHANCEMENT.............................................31
General.....................................................31
Subordination...............................................31
Other Arrangements for Credit Enhancement...................32
CASH FLOW AGREEMENT............................................38
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS..................41
Collection and Other Servicing Procedures...................42
Hazard Insurance............................................45
Advances....................................................47
Loan Payment Record.........................................48
Servicing and Other Compensation and Payment of Expenses....50
THE POOLING AND SERVICING AGREEMENTS...........................51
Assignment of Assets........................................51
Repurchase or Substitution..................................53
Certain Modifications and Refinancings......................55
Evidence as to Compliance...................................55
List of Certificateholders..................................55
The Trustee.................................................55
Administration of the Certificate Account...................56
Reports to Certificateholders...............................57
Events of Default...........................................57
Rights Upon Event of Default................................58
Amendment...................................................59
Termination.................................................59
THE COMPANY....................................................60
DEUTSCHE BANK AG...............................................60
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS......60
vii
<PAGE>
THE MORTGAGE LOANS.............................................60
General.....................................................61
Financial Leases............................................62
Foreclosure.................................................63
Rights of Mortgagees........................................65
Rights of Redemption........................................66
Junior Mortgages; Rights of Senior Mortgagees...............66
Anti-Deficiency Legislation and Other Limitations
on Lenders..................................................67
Enforceability of Certain Provisions........................67
Applicability of Usury Laws.................................68
Soldiers' and Sailors' Civil Relief Act.....................69
Environmental Considerations................................69
THE CONTRACTS..................................................69
General.....................................................69
Security Interests in the Manufactured Homes................70
Enforcement of Security Interests in Manufactured Homes.....72
Consumer Protection Laws....................................72
Transfers of Manufactured Homes; Enforceability of
"Due-on-Sale" Clauses.......................................73
Applicability of Usury Laws.................................73
Soldiers' and Sailors' Civil Relief Act.....................73
LEGAL INVESTMENT MATTERS.......................................74
The Secondary Mortgage Market Enhancement Act...............74
The Appraisal Regulations...................................75
ERISA CONSIDERATIONS...........................................75
FEDERAL INCOME TAX CONSEQUENCES................................77
General.....................................................77
REMIC Elections.............................................77
REMIC Certificates..........................................78
Tax Opinion.................................................78
Status of Certificates......................................78
Income from Regular Certificates............................79
Income from Residual Certificates...........................83
Sale or Exchange of Certificates............................85
Taxation of Certain Foreign Investors.......................86
Transfers of Residual Certificates..........................87
Pending Legislation.........................................88
Servicing Compensation and Other REMIC Pool Expenses........89
Reporting and Administrative Matters........................89
Non-REMIC Certificates......................................89
Trust Fund as Grantor Trust.................................90
Status of the Certificates..................................90
Possible Application of Stripped Bond Rules.................90
Taxation of Certificates if Stripped Bond Rules Do
Not Apply...................................................91
Taxation of Certificates if Stripped Bond Rules Apply.......92
Sales of Certificates.......................................92
Foreign Investors...........................................92
Reporting...................................................93
Backup Withholding..........................................93
STATE TAX CONSIDERATIONS.......................................93
PLAN OF DISTRIBUTION...........................................93
USE OF PROCEEDS................................................94
LEGAL MATTERS..................................................95
FINANCIAL INFORMATION..........................................95
ADDITIONAL INFORMATION.........................................95
viii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by
reference to the detailed information appearing elsewhere in this
Prospectus and by reference to the Prospectus Supplement relating
to the Offered Certificates of a particular Series. See "Index of
Principal Definitions" in the Prospectus for location of meaning
of capitalized terms used herein.
Title of Securities.. Pass-Through Certificates, issuable in
Series, as described in the Prospectus
Supplement.
The Company ......... Deutsche Mortgage Asset & Receiving
Corporation (the "Company"), a Delaware
corporation. The Company will be the
acquiror of the Mortgage Loans,
Mortgage-Backed Securities or Contracts
included in a Trust Fund.
The Servicer ........ The Mortgage Loans or Contracts included in
a Trust Fund will be serviced by the
party or parties identified in the
related Prospectus Supplement (each, a
"Servicer") and, if so indicated in the
related Prospectus Supplement, may be
master serviced by the party identified
therein (the "Master Servicer").
Description of
Securities .......... Each Offered Certificate will represent a
beneficial ownership interest in a Trust
Fund created by the Company from time to
time pursuant to a pooling and servicing
agreement (each, an "Agreement") between
the Company and the commercial bank or
trust company acting as trustee specified
in the related Prospectus Supplement. The
assets of a Trust Fund may consist of (i)
a pool of mortgage loans secured by
first, second and/or more junior liens on
one- to four-family residential
properties or multifamily properties that
are either rental apartment buildings or
projects containing five or more
residential units, or participation
interests or stripped interests in such
loans (the "Mortgage Loans") acquired by
the Company, (ii) Mortgage-Backed
Securities (as defined herein) issued or
guaranteed by the Government National
Mortgage Association ("GNMA"), the
Federal National Mortgage Association
("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC") (which
Mortgage-Backed Securities are referred
to herein as the "Agency Securities"),
Mortgage-Backed Securities issued by one
or more private entities (which
Mortgage-Backed Securities are referred
to herein as "Private Securities"), or by
any combination of such Mortgage- Backed
Securities, or (iii) conditional sales
contracts and installment sales or loan
agreements or participation interests
therein secured by manufactured housing
(the "Contracts"). The portion of any
mortgage pool consisting of Mortgage
Loans may include home equity loans. If
specified in the related Prospectus
Supplement, a Trust Fund may also include
one or more of the following credit
enhancements as described herein:
reinvestment income, reserve accounts and
insurance, guarantees or similar
instruments or agreements intended to
decrease the likelihood that Certificate-
holders will experience delays in
distributions of scheduled payments on,
or losses in respect of, the assets in
<PAGE>
such Trust Fund. The Certificates of any
Series will be entitled to payment only
from the assets of the related Trust
Fund.
The Certificates of any Series may be
issued in a single class or in two or
more classes, as specified in the related
Prospectus Supplement. One or more
classes of Certificates of each Series
(i) may be entitled to receive
distributions allocable only to
principal, only to interest or to any
combination thereof; (ii) may be entitled
to receive distributions only of
prepayments of principal throughout the
lives of the Certificates or during
specified periods; (iii) may be
subordinated in the right to receive
distributions of scheduled payments of
principal, prepayments of principal,
interest or any combination thereof to
one or more other classes of Certificates
of such Series throughout the lives of
the Certificates or during specified
periods; (iv) may be entitled to receive
such distributions only after the
occurrence of events specified in the
related Prospectus Supplement; (v) may be
entitled to receive distributions in
accordance with a schedule or formula or
on the basis of collections from
designated portions of the assets in the
Trust Fund; (vi) as to Certificates
entitled to distributions allocable to
interest, may be entitled to receive
interest at a fixed rate or a rate that
is subject to change from time to time
(each, a "Certificate Interest Rate");
(vii) as to Certificates entitled to
distributions allocable to interest, may
be entitled to distributions allocable to
interest only after the occurrence of
events specified in the related
Prospectus Supplement and may accrue
interest until such events occur, in each
case as specified in the related
Prospectus Supplement or (viii) may
receive payments of principal and
interest in another manner specified in
the related Prospectus Supplement. The
timing and amounts of such distributions
may vary among classes, over time, or
otherwise as specified in the related
Prospectus Supplement.
The Company may retain or hold for sale
from time to time one or more classes of
a Series of Certificates.
The Prospectus Supplement for the Offered
Certificates of a Series will indicate
whether the Offered Certificates will be
offered in fully registered form only or
through the book-entry facilities of the
Depository Trust Company or another
depository or otherwise. The Certificates
will not be guaranteed or insured by any
governmental agency or instrumentality or
any other issuer and, except as described
in the related Prospectus Supplement, the
Mortgage Loans, Mortgage-Backed
Securities or Contracts included in the
related Trust Fund will not be guaranteed
or insured by any governmental agency or
instrumentality or any other person.
Risk to
Certificateholders... The Certificates are not suitable
investments for all investors, in
particular, no investors understands and
is able to bear the prepayment, yield,
liquidity and market risks associated
with that Class. The Securities are
complex securities and it is important
that each investor in any Class possess,
either alone or together
2
<PAGE>
with an investment advisor, the expertise
necessary to evaluate the information
contained and incorporated in this
Prospectus and the related prospectus
Supplement in the context of that
investor's financial situation.
Prospectus and the related Prospectus
Supplement in the context of that
investor's financial situation. See
"Risks Factors" in this Prospectus and in
the related Prospectus Supplement.
Distributions on
the Certificates..... Distributions on the Certificates entitled
thereto will be made monthly, quarterly,
semiannually or at such other intervals
and on the dates specified in the related
Prospectus Supplement solely out of the
payments received in respect of the
assets of the related Trust Fund. The
amount allocable to payments of principal
and interest on any distribution date
will be determined as specified in the
related Prospectus Supplement. Unless
otherwise specified in the related
Prospectus Supplement, all distributions
will be made pro rata to holders of
Certificates ("Certificateholders" or
"Holders") of the class entitled thereto.
The aggregate original principal balance of
the Certificates will equal the aggregate
distributions allocable to principal that
such Certificates will be entitled to
receive. If specified in the related
Prospectus Supplement, the Certificates
will have an aggregate original principal
balance equal to the aggregate unpaid
principal balance of the Mortgage Loans,
Mortgage-Backed Securities or Contracts
as of the first day of the month of
creation of the Trust Fund and will bear
interest in the aggregate at a rate equal
to the interest rate borne by the
underlying Mortgage Loans,
Mortgage-Backed Securities or Contracts,
net of servicing fees payable to the
Servicers of the Mortgage Loans or
Contracts and the Master Servicer and any
other amounts specified in the related
Prospectus Supplement (as to each
Mortgage Loan, the "Remittance Rate"). If
specified in the related Prospectus
Supplement, the aggregate original
principal balance of the Certificates and
interest rates on the classes of
Certificates will be determined based on
the cash flow on the Mortgage Loans,
Mortgage-Backed Securities or Contracts,
as the case may be.
The rate at which interest will be passed
through to Holders of Certificates
entitled thereto may be a fixed rate or a
rate that is subject to change from time
to time from the time and for the
periods, specified in the related
Prospectus Supplement. Any such rate may
be calculated on a loan-by-loan, weighted
average or other basis, in each case as
described in the related Prospectus
Supplement.
Trust Fund Assets.... The Trust Fund for a Series of Certificates
will include the Mortgage Loans,
Mortgage-Backed Securities and Contracts,
as described herein or in the related
Prospectus Supplement, payments in
respect of such assets and certain
accounts, obligations or agreements, in
each case as specified in the related
Prospectus Supplement.
3
<PAGE>
Optional Termination
of the Trust Fund.... If so specified in the related Prospectus
Supplement, the Company, the Servicer,
the Master Servicer or the Holders of one
or more classes of Certificates specified
in the related Prospectus Supplement may,
it its or their option, effect early
termination of the related Trust Fund, on
any Distribution Date after the time
specified in the related Prospectus
Supplement, by purchasing all of the
Certificates or the assets in the Trust
Fund at a price and in accordance with
the procedures specified in the related
Prospectus Supplement. See "Description
of the Certificates -- Optional
Termination of the Trust Fund.
A. The Mortgage
Loans............. Unless otherwise specified in the related
Prospectus Supplement, each pool of
Mortgage Loans will consist of Mortgage
Loans acquired by the Company and secured
by first, second and/or more junior liens
on one- to four-family residential
properties or multifamily residential
rental properties or cooperatively-owned
properties containing five or more
residential units, located in one or more
states, territories or possessions of the
United States or the District of Columbia
(the "Mortgaged Properties"). If
specified in the related Prospectus
Supplement, all or a portion of the
Mortgage Loans in the Trust Fund for a
Series of Certificates may be home equity
loans. If specified in the related
Prospectus Supplement, the Mortgage Loans
may include cooperative apartment loans
secured by security interests in shares
issued by private, non-profit,
cooperative housing corporations
("Cooperatives") and in the related
proprietary leases or occupancy
agreements granting exclusive rights to
occupy specific dwelling units in such
Cooperatives' buildings.
The payment terms of the Mortgage Loans to
be included in a Trust Fund will be
described in the related Prospectus
Supplement and may include any of the
following features or combinations
thereof described in the related
Prospectus Supplement:
(a) Interest may be payable at a fixed
rate, a rate adjustable from time to
time in relation to an index, a rate
that is fixed for a period of time or
under certain circumstances and is
followed by an adjustable rate, a
rate that otherwise varies from time
to time, or a rate that is
convertible from an adjustable rate
to a fixed rate. Changes to an
adjustable rate may be subject to
periodic limitations, maximum rates,
minimum rates or a combination of
such limitations. Accrued interest
may be deferred and added to the
principal of a loan for such periods
and under such circumstances as may
be specified in the related
Prospectus Supplement. Mortgage Loans
may provide for the payment of
interest at a rate lower than the
specified mortgage rate for a period
of time or for the life of the loan
with the amount of any difference
contributed from funds supplied by
the seller of the mortgaged property
or another source.
(b) Principal may be payable on a level
debt service basis to fully amortize
the loan over its term, may be
calculated on the basis
4
<PAGE>
of an assumed amortization schedule
that is significantly longer than the
original term to maturity or on an
interest rate that is different from
the interest rate on the Mortgage
Loan or may not be amortized during
all or a portion of the original
term. Payment of all or a substantial
portion of the principal may be due
on maturity. Principal may include
interest that has been deferred and
added to the principal balance of the
Mortgage Loan. In the case of home
equity loans which may be "simple
interest" loans, payments are applied
first to interest accrued to the date
payment is received, then to
principal.
(c) Payments of principal and interest
may be made monthly or at some other
interval, may be fixed for the life
of the loan, may increase over a
specified period of time or may
change from period to period.
Mortgage Loans may include limits on
periodic increases or decreases in
the amount of monthly payments and
may include maximum or minimum
amounts of monthly payments.
(d) Prepayments of principal may be
subject to a prepayment fee, which
may be fixed for the life of the loan
or may decline over time, and may be
prohibited for the life of the loan
or for certain periods ("lockout
periods"). Certain loans may permit
prepayments after expiration of the
applicable lockout period and may
require the payment of a prepayment
fee in connection with any such
subsequent prepayment. Other loans
may permit prepayments without
payment of any prepayment fee and
others may require the payment of a
fee if the prepayment occurs during
specified time periods. The loans may
include "due-on-sale" clauses which
permit the mortgagee to demand
payment of the entire mortgage loan
in connection with the sale or
certain transfers of the related
mortgaged property. Other loans may
be assumable by persons meeting the
then-applicable underwriting
standards of the Servicer or the
Master Servicer or such other
standards as are set forth in the
related Prospectus Supplement.
B. The Agency
Securities........ The Agency Securities evidenced by a Series
of Certificates will consist of any
participation certificates, pass-through
certificates or other obligations or
interests backed directly or indirectly
by mortgage loans ("Mortgage-Backed
Securities") issued or guaranteed by
FHLMC ("FHLMC Securities"), FNMA ("FNMA
Securities") or GNMA ("GNMA Securities"),
including any portion, class or
combination of such FHLMC Securities,
FNMA Securities or GNMA Securities.
"FHLMC" is the Federal Home Loan Mortgage
Corporation; "FNMA" is the Federal
National Mortgage Association and "GNMA"
is the Government National Mortgage
Association. Any GNMA Security securing a
Series will be guaranteed as to full and
timely payment of principal and interest
by GNMA, which guarantee is backed by the
full faith and credit of the United
States. Any FHLMC Security or FNMA
Security will not be backed, directly or
indirectly, by the full faith and credit
of the United States. Agency Securities
may be backed by
5
<PAGE>
adjustable, fixed or variable rate mort-
gage loans or graduated payment mortgage
loans.
C. Private
Securities........ "Private Securities" consist of Mortgage-
Backed Securities, including any portion,
class or combination thereof, issued by
one or more private entities, as more
specifically described in the related
Prospectus Supplement.
D. Contracts......... Contracts will consist of conditional sales
contracts and installment sales or loan
agreements or participation interests
therein secured by new or used
Manufactured Homes (as defined herein).
Contracts may be conventional, insured by
the Federal Housing Administration
("FHA") or partially guaranteed by the
Veterans Administration ("VA"), as
specified in the related Prospectus
Supplement. Unless otherwise specified in
the related Prospectus Supplement, each
Contract will be fully amortizing and
will bear interest at a fixed percentage
rate ("APR").
Certificate Account.. With respect to each Trust Fund, the
Servicer or Master Servicer will be
obligated to establish an account or
accounts with the trustee into which it
will be obligated to deposit on the dates
specified in the related Prospectus
Supplement payments received in respect
of the assets in such Trust Fund. If
specified in the related Prospectus
Supplement, such payments will be
invested for the benefit of
Certificateholders for the periods and in
the investments specified in the related
Prospectus Supplement.
Advances............. Unless otherwise specified in the related
Prospectus Supplement, the Servicer or
Master Servicer of the Mortgage Loans or
Contracts will be obligated to advance
delinquent installments of principal and
interest (the latter adjusted as set
forth in the applicable Prospectus
Supplement) on the Mortgage Loans or
Contracts in a Trust Fund. Any such
obligation to make advances may be
limited to amounts due Holders of senior
Certificates of the related Series, to
amounts deemed to be recoverable from
late payments or liquidation proceeds,
for specified periods or any combination
thereof, in each case as specified in the
related Prospectus Supplement. Any such
advance will be recoverable by the
Servicer or Master Servicer as specified
in the related Prospectus Supplement.
Credit Enhancement... If specified in the related Prospectus
Supplement, the Offered Certificates of a
Series, or certain classes of such
Offered Certificates, may have the
benefit of one or more of the following
types of credit enhancement. The
protection against losses afforded by any
such credit enhancement will be limited.
A. Subordination..... A Series of Certificates may include one or
more classes that are subordinate in the
right to receive distributions on such
Certificates to one or more senior
classes of Certificates of the same
Series, but only to the extent described
in the related Prospectus Supplement. If
specified in the related Prospectus
Supplement, subordination may apply only
in the event of certain types of losses
not covered by other forms of credit
6
<PAGE>
enhancement, such as hazard losses not
covered by standard hazard insurance
policies or losses resulting from the
bankruptcy of the borrower.
If specified in the related Prospectus
Supplement, a reserve fund may be
established and maintained by the deposit
therein of distributions allocable to the
Holders of subordinate Certificates or of
any other class of Certificate designated
in the related Prospectus Supplement
until a specified level is reached. The
related Prospectus Supplement will set
forth information concerning the amount
of subordination of a class or classes of
subordinate Certificates in a Series, the
circumstances in which such subordination
will be applicable, the manner, if any,
in which the amount of subordination will
decrease over time, the manner of funding
the reserve fund, if any, and the
conditions under which amounts in any
such reserve fund will be used to make
distributions to Holders of senior
Certificates or released from the related
Trust Fund.
B. Purchase of
Liquidating
Loans............. If specified in the related Prospectus
Supplement, a party identified in such
related Prospectus Supplement (the
"Responsible Party") will have a limited
obligation to cover losses due to
defaults with respect to the Mortgage
Loans by purchasing, on terms described
more fully under "Credit Enhancement --
Purchase of Liquidating Loans" herein and
in the related Prospectus Supplement, any
Mortgage Loan (a "Liquidating Loan") as
to which either (i) liquidation
proceedings have been commenced and any
equitable or statutory right to reinstate
such Mortgage Loan has expired or (ii)
the applicable Servicer or Master
Servicer has agreed to accept a deed in
lieu of foreclosure.
C. Limited
Guarantee......... If specified in the related Prospectus
Supplement, certain deficiencies in
principal or interest payments on the
Mortgage Loans resulting from the
bankruptcy of the related borrower, or
other amounts specified in the related
Agreement, may be covered by a financial
guarantee policy, limited guarantee or
other similar instrument (the "Limited
Guarantee"), limited in scope and amount,
issued by an entity named in the related
Prospectus Supplement (the "Guarantor").
If so specified, the Guarantor may be
obligated to take one or more of the
following actions in the event another
party identified in the Agreement fails
to do so: make deposits to the
Certificate Account; make advances; or
purchase Liquidating Loans. Any such
Limited Guarantee will be limited in
amount and a portion of the coverage of
any such Limited Guarantee may be
separately allocated to certain events.
The scope, amount and, if applicable, the
allocation of any Limited Guarantee will
be described in the related Prospectus
Supplement.
D. Certificate
Guarantee
Insurance......... If specified in the related Prospectus
Supplement, certificate guarantee
insurance, if any, with respect to a
Series of Certificates will be provided
by one or more insurance companies. Such
certificate guarantee insurance will
guarantee, with respect
7
<PAGE>
to one or more classes of Certificates of
the applicable Series, distributions of
principal and/or interest to the extent
and in the manner set forth in the
related Prospectus Supplement. If
specified in the related Prospectus
Supplement, the certificate guarantee
insurance also will guarantee against any
payment made to a Certificateholder which
is subsequently covered as a "voidable
preference" payment under the Bankruptcy
Code.
E. Cross-Support..... If specified in the related Prospectus
Supplement, the beneficial ownership of
related groups of assets included in a
Trust Fund may be evidenced by separate
classes of the related Series of
Certificates. In such case, and if so
specified, credit enhancement may be
provided by a cross-support feature which
requires that distributions be made with
respect to Certificates evidencing
beneficial ownership of one or more asset
groups prior to distributions to
subordinate Certificates evidencing a
beneficial ownership interest in other
asset groups within the same Trust Fund.
If specified in the related Prospectus
Supplement, the coverage provided by one
or more forms of credit enhancement may
apply concurrently to two or more
separate Trust Funds. If applicable, the
related Prospectus Supplement will
identify the Trust Funds to which such
credit enhancement relates and the manner
of determining the amount of the coverage
provided thereby and of the application
of such coverage to the identified Trust
Funds.
F. Pool and Special
Hazard Insurance.. In order to decrease the likelihood that
Certificateholders will experience losses
in respect of the Mortgage Loans or
Contracts, if specified in the related
Prospectus Supplement, the Company may
obtain one or more insurance policies to
cover (i) losses by reason of defaults by
borrowers (a "Mortgage Pool Insurance
Policy") and (ii) losses by reason of
hazards not covered under the standard
form of hazard insurance, in each case up
to the amounts, for the periods and
subject to the conditions specified in
the related Prospectus Supplement. See
"Credit Enhancement-Pool Insurance"
herein.
G. Reserve Accounts,
Other Insurance,
Guarantees and
Similar Instruments
and Agreements.... In order to decrease the likelihood that
Certificateholders will experience delays
in the receipt of scheduled payments on,
and losses in respect of, the assets in a
Trust Fund, if specified in the related
Prospectus Supplement, such Trust Fund
may also include reserve accounts, other
insurance, guarantees and similar
instruments and agreements entered into
with the entities, in the amounts, for
the purposes and subject to the
conditions specified in the related
Prospectus Supplement.
Cash Flow Agreement.. If specified in the related Prospectus
Supplement, the Trust Fund may enter into
or obtain an assignment of a cash flow
agreement or similar agreement pursuant
to which the Trust Fund will have
8
<PAGE>
the right to receive, and may have the
obligation to make, certain payments of
interest (or other payments) as set forth
or determined as described therein.
Federal Income Tax
Consequences......... The federal income tax consequences to
Certificateholders will depend on, among
other factors, whether an election is
made to treat the Trust Fund or specified
portions thereof as a "real estate
mortgage investment conduit" ("REMIC")
under the provisions of the Internal
Revenue Code of 1986, as amended (the
"Code").In general, in the event that an
election is made to treat the Trust Fund
or specified portions thereof as a REMIC,
the Regular Certificates in the REMIC
will be taxed as newly originated debt
instruments for federal income tax
purposes and an Owner (as defined under
"Federal Income Tax Consequences") of a
Residual Certificate in the REMIC must
report ordinary income or loss equal to
its pro rata share (based on the portion
of all Residual Certificates it owns) of
the taxable income and net loss of the
REMIC. In general, if a REMIC election is
not made, the Trust Fund will be
classified as a grantor trust. In such a
case the Owner of a Certificate will be
treated as the owner of an undivided
interest in the Mortgage Loans (and any
related assets) included in the Trust
Fund. See "Federal Income Tax
Consequences."
ERISA
Considerations....... A fiduciary of any employee benefit plan
subject to the Employee Retirement Income
Security Act of 1974, as amended
("ERISA"), or a plan subject to Section
4975 of the Code should carefully review
with its own legal advisors whether the
purchase or holding of Certificates could
give rise to a transaction prohibited or
otherwise impermissible under ERISA or
the Code. See "ERISA Considerations."
Legal Investmen
Matters.............. Unless otherwise specified in the related
Prospectus Supplement, the Offered
Certificates will constitute "mortgage
related securities" under the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA") and, as such, will be legal
investments for certain types of
institutional investors to the extent
provided in SMMEA, subject, in any case,
to any other regulations which may govern
investments by such institutional
investors. If specified in the related
Prospectus Supplement, all or certain
classes of the Offered Certificates may
not constitute "mortgage related
securities" under SMMEA. See "Legal
Investment Matters."
9
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other
things, the following factors in connection with a purchase of
the Offered Certificates:
General Risks of Real Estate Investments
An investment in Offered Certificates evidencing interest
in Mortgage Loans may be affected, among other things, by a
decline in real estate values or a decline in mortgage market
rates. If relevant residential real estate markets should
experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans and any secondary
financing on the Mortgaged Properties in a particular Mortgage
Pool becomes equal to or greater than the value of the Mortgaged
Properties, the actual rates of delinquencies, foreclosures and
losses could be higher than those otherwise generally experienced
in the mortgage lending industry. To the extent that such losses
are not covered by any applicable credit enhancements, Holders of
the Offered Certificates of a Series evidencing interests in such
Mortgage Pool will bear all risk of loss resulting from default
by borrowers and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal
and unpaid interest of the defaulted Mortgage Loans.
An investment in Offered Certificates evidencing interests
in Contracts may be affected by, among other things, a downturn
in regional or local economic conditions. These regional or local
economic conditions are often volatile, and historically have
affected the delinquency, loan loss and repossession experience
of Contracts. To the extent that losses on Contracts are not
covered by any applicable credit enhancements, Holders of the
Offered Certificates of a Series evidencing interests in such
Contracts will bear all risk of loss resulting from default by
obligors and will have to look primarily to the value of the
manufactured homes (which typically decline in value after
original purchase) for recovery of the outstanding principal and
unpaid interest of the defaulted Contracts.
Risk of Prepayment of Mortgage Loans
The prepayment experience on the Mortgage Loans or
Contracts or on the mortgage loans underlying the Mortgage-Backed
Securities will effect the average life of some or all of the
Offered Certificates. Prepayments on mortgage loans may be
influenced by a variety of economic, geographic, social and other
factors, including the difference between the interest rates on
mortgage loans and prevailing mortgage rates. In general, if
mortgage interest rates fall below the interest rates on such
mortgage loans, the rate of prepayment is likely to increase.
Conversely, if mortgage interest rates rise above the interest
rates on such mortgage loans, the rate of prepayment is likely to
decrease. Prepayments on any Contracts may be influenced by a
variety of economic, geographic, social and other factors,
including prepossessions, aging, seasonality and interest rate
fluctuations. Other factors affecting prepayment of mortgage
loans or Contracts include changes in housing needs, job
transfers, unemployment and servicing decisions. The timing of
changes in the rate of prepayments may significantly affect a
Certificateholder's actual yield to maturity, even if the average
rate of principal payments is consistent with a Certificate
holder's expectation. In general, the earlier a prepayment of
principal the greater the effect on a Certificateholder's yield
to maturity. As a result, the effect on a Certificateholder's
yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period
immediately following the issuance of the related Series of
Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal payments. Delays in
liquidations of defaulted Mortgage Loans and modifications
extending the maturity of Mortgage Loans will tend to extend the
payment of principal of the Mortgage Loans. Because the ability
of the Borrower to make a balloon payment typically will
depend upon its ability either to refinance the Mortgage Loan or
to sell the related Mortgaged Property, if a significant number
of the Mortgage Loans underlying a Series of Certificates have
10
<PAGE>
balloon payments due at maturity, there is a risk that a number
of such Mortgage Loans may default at maturity, or that the
Servicer or Servicer, if any, may extend the maturity of a number
of such Mortgage Loans in connection with workouts. No
representation or warranty is made by the Company as to the
ability of any of the related borrowers to make required Mortgage
Loan payments on a full and timely basis, including balloon
payments at the maturity of these Mortgage Loans. 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 Mortgaged Property is located. Shortfalls in
distributions tot he Certificateholders may also result from
losses incurred with respect to Mortgage Loans due to uninsured
risks or insufficient hazard insurance proceeds and from any
indemnification of the Servicer in connection with legal actions
relating to the Agreement or Certificates. See "Yield Maturity
and Weighted Average Life Considerations."
Limited Obligation for Distributions on the Offered Certificates
Offered Certificates will not represent an interest in or
obligation of the Company, Deutsche Bank, any person that has
made representations and warranties regarding the Mortgage Loans,
the Mortgage-Backed Securities or the Contracts, the Trustee, the
Servicer or Master Servicer or any other person or any of its
affiliates. Unless otherwise specified in the related Prospectus
Supplement, distributions on the Offered Certificates of a Series
will be made only from the assets of the related Trust Fund, and
the Offered Certificates will not be insured or guaranteed by the
Company or any affiliate thereof, any government agency or
instrumentality or any other person. Unless otherwise specified
in the related Prospectus Supplement, all of the Mortgage Loans
will be "non-recourse" loans, as to which the Trustee may look
only to the related Mortgaged Properties for satisfaction of
amounts due under the related Mortgage. The only obligations of
the Company with respect to the Certificates of any Series will
be pursuant to certain representations and warranties, if any, in
the related Pooling and Servicing Agreement. See "The Pooling and
Servicing Agreements--Assignment of Assets" herein. The Company
does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to
repurchase Mortgage Assets with respect to which there has been a
breach of any representation or warranty. If, for example, the
Company were required to repurchase a Loan which constitutes a
Mortgage Asset, its only sources of funds to make such repurchase
would be from funds obtained from the enforcement of a
corresponding obligation, if any, on the part of the mortgage
loan seller or the Servicer, as the case may be, or from a
reserve fund established to provide funds for such repurchases.
See "The Company."
Lack of Established Market
There can be no assurance that a secondary market will
develop for the Offered Certificates of any Series, or, if it
does develop, that it will provide the Holders of Offered
Certificates of such Series with liquidity of investment or that
it will continue for the term of such Series of Certificates.
Consequently, investors may not be able to sell their
Certificates readily or at prices that will enable them to
realize their desired yield. The market value of the Certificates
are likely to fluctuate; such fluctuations may be significant and
could result in significant losses to investors.
Risk of Defaults on Mortgage Loans
Delays in liquidation's of defaulted Mortgage Loans and
modifications extending the maturity of Mortgage Loans will tend
to extend the payment of principal of the Mortgage Loans. Because
the ability of the Borrower to make a balloon payment typically
will depend upon its ability either to refinance the Mortgage
Loan or to sell the related Mortgaged Property, if a significant
number of the Mortgage Loans underlying a Series of Certificates
have balloon payments due at maturity, there is a risk that a
number of such Mortgage Loans may default at maturity, or that
the Servicer or Servicer, if any, may extend the maturity of a
number of such Mortgage Loans in connection with workouts. No
representation or warranty is made by the Company as to the
ability of any of the related
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borrowers to make required Mortgage Loans on a full and timely
basis, including balloon payments at the maturity of these
Mortgage Loans. 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 Mortgaged Property is
located. Shortfalls in distributions to Certificateholders also
may result from losses incurred with respect to Mortgage Loans
due to uninsured risks or insufficient hazard insurance proceeds
and from any indemnification of the Servicer in connection with
legal actions relating to the Agreement or Certificates. See
"Yield, Maturity and Weighted Average Life Considerations."
Limitations on Credit Enhancement Associated with the Offered
Certificates
If credit enhancements are provided with respect to a
Series of Certificates, the credit enhancements will not cover
all contingencies and will cover certain contingencies only to a
limited extent. If losses occur which exceed the amount covered
by credit enhancement or which are not covered by the credit
enhancement, Certificateholders will bear their allocable share
of deficiencies as described below and in more detail under
"Credit Enhancement."
For example, the aggregate distributions in respect of
delinquent payments on the Mortgage Loans or Contracts over the
lives of the Certificates or, at any time, the types of losses
and/or the aggregate amount of losses in respect of defaulted
Mortgage Loans or Contracts which must be borne by any
Subordinated Certificates by virtue of subordination and,
therefore, the amount of the distributions otherwise
distributable to such Subordinated Certificateholders that will
be distributable to Senior Certificateholders on any Distribution
Date may be limited as specified in the related Prospectus
Supplement. If types of losses occur which are not covered by
subordination, or if aggregate distributions in respect of
delinquent payments on the Mortgage Loans or Contracts or
aggregate losses in respect of such Mortgage Loans or Contracts
were to exceed the total amounts payable and available for
distribution to Holders of Subordinated Certificates or, if
applicable, were to exceed the specified maximum amount, Holders
of Senior Certificates could experience losses on the
Certificates. Any obligation of a Responsible Party to purchase
Liquidating Loans may be limited to aggregate losses (measured as
the difference between the aggregate payments made by the
Responsible Party into the Certificate Account in respect of
Liquidating Loans and the aggregate net proceeds received by the
Responsible Party from the disposition of such Loans) in an
amount specified in the related Prospectus Supplement. After this
amount is exhausted, no further Liquidating Loans will be
purchased by the Responsible Party, unless such amount has been
restored as described under "Credit Enhancement -- Other
Arrangements for Credit Enhancement -- Purchase of Liquidating
Loans." Any obligation of a Guarantor to make deposits to the
Certificate Account, make advances or purchase Liquidating Loans
under a Limited Guarantee will be limited in amount, and a
portion of the coverage of any such Limited Guarantee may be
separately allocated to certain events such as Liquidating Loans
due to special hazards not covered by standard hazard insurance
policies, Liquidating Loans due to the bankruptcy of a borrower,
and other Liquidating Loans. Similarly, any certificate guarantee
insurance policies, pool insurance policies and special hazard
insurance policies will be subject to certain limitations and
conditions described herein and in the related Prospectus
Supplement, which may limit the amounts received by
Certificateholders in case of losses.
Limitations on Real Estate Lenders Imposed by State Laws
Many other legal aspects of the Mortgage Loans are governed
by applicable state laws (which may vary substantially). These
laws may affect the ability to foreclose on, and the value of,
the Mortgaged Properties securing the Mortgage Loans. For
example, state law determines what proceedings are required for
foreclosure, whether the borrower and any foreclosed junior
lienors may redeem the property, whether and to what extent
recourse to the borrower is permitted, what rights junior
mortgages have and whether the amount of fees and interest that
lenders may charge is limited. In addition, the laws of some
states may render certain provisions of the Mortgage Loans
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unenforceable, such as prepayment provisions, due-on-sale and
acceleration provisions. Installment Contracts and Financial
Leases also may be subject to similar state law requirements. See
"Certain Legal Aspects of the Mortgage Loans and Contracts."
Delays in liquidations of defaulted Mortgage Loans and shortfalls
in amounts realized upon liquidation as a result of the
application of such laws may result in delays and shortfalls in
payments to Certificateholders.
No Requirement to Record Assignments of Mortgages
Unless otherwise specified in the related Prospectus
Supplement, the Company may refrain from recording the
assignments of the Mortgage Loans prior to the occurrence of
certain events set forth in the related Agreements. Although such
recordation is not necessary to make the assignment of the
Mortgage Loans to the Trustee effective, if the Company were to
make a sale, assignment or discharge of any Mortgage Loan prior
to recording or filing the assignments to the Trustee, the other
parties of such sale, assignment, satisfaction or discharge might
have rights superior to those of the Trustee. If the Company were
to do so without authority under the Agreement, it would be
liable to the related Certificateholders. Moreover, if insolvency
proceedings relating to the Company were commenced prior to such
recordings or filings, creditors of the Company may be able to
assert rights in the affected Mortgage Loans superior to those of
the Trustee.
Risks Associated with Contracts on Manufactured Homes
Each Contract is secured by a security interest in a
Manufactured Home. Perfection of security interests in
Manufactured Homes and enforcement of rights to realize upon the
value of Manufactured Homes as collateral for Contracts are
subject to a number of Federal and state laws, including the
Uniform Commercial Code as adopted in each state and each state's
certificate of title statutes. The steps necessary to perfect the
security interest in a Manufactured Home vary from state to
state. In addition, numerous Federal and state consumer
protection laws impose requirements on lending under conditional
sales contracts and installment loan agreements such as
manufactured housing contracts, and the failure by the lender or
seller of goods to comply with such requirements could give rise
to liabilities of assignees for amounts due under such
agreements. In addition, claims by such assignees may be subject
to set-off as a result of such lender's or seller's
noncompliance. These laws would apply to the Trustee as assignee
of the Contracts. Unless otherwise provided in the related
Prospectus Supplement, the seller of Contracts to the Company
will warrant that each Contract complies with all requirements of
law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in
each Manufactured Home securing a Contract. A breach of any such
warranty that materially adversely affects any Contract would
create an obligation of such seller to repurchase such Contract
unless such breach is cured. If the recovery of amounts due on
Contracts is dependent on repossession and resale of Manufactured
Homes securing Contracts that are in default, certain other
factors may limit the ability of the Certificateholders to
realize upon the Manufactured Homes or may limit the amount
realized to less than the amount due.
Environmental Risks Relating to Mortgage Loans
Under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and under state law
in certain states, a secured party which takes a deed in lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale
or operates a mortgaged property may become liable in certain
circumstances for the costs of remedial action ("Cleanup Costs")
if hazardous wastes or hazardous substances have been released or
disposed of on the property. It is possible that such Cleanup
Costs could reduce the amounts otherwise distributable to the
Certificateholders if the related Trust Fund were deemed to be
liable for such Cleanup Costs and if such Cleanup Costs were
incurred. Moreover, under federal law and the law of certain
states, a lien may be imposed for any Cleanup Costs incurred by
federal or state authorities on the property that is the subject
of such Cleanup Costs. In the latter states, the security
interest of the Trustee in a
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Mortgaged Property that is subject to such a lien could be
adversely affected. See "Certain Legal Aspects of the Mortgage
Loans and Contracts -- The Mortgage Loans --Environmental
Considerations."
Early Termination of the Trust Fund
The Trust Fund for a Series of Certificates may be subject
to optional termination by the Company, the Servicer, or Holders
of certain Classes of Certificates under certain circumstances.
In the event of such termination, Holders of the Offered
Certificates would receive some principal payments earlier than
otherwise, which could adversely affect their anticipated yield
to maturity. See "The Pooling and Servicing Agreements --
Termination".
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to a
separate pooling and servicing agreement (each, an "Agreement")
entered into between the Company, as seller, one or more
Servicers or the Master Servicer of the Mortgage Loans or
Contracts included in the related Trust Fund, if any (each, a
"Servicer"), and a commercial bank or trust company named in the
related Prospectus Supplement, as trustee (the "Trustee") for the
benefit of Holders of Certificates of that Series. The provisions
of each Agreement will vary depending upon the nature of the
Certificates to be issued thereunder and the nature of the
related Trust Fund. The Agreement will be substantially in the
form filed as an exhibit to the Registration Statement of which
this Prospectus is a part, or in such similar form as will
reflect the terms of the Offered Certificates described in the
related Prospectus Supplement. The following are descriptions of
certain provisions which may appear in each Agreement. The
related Prospectus Supplement for the Offered Certificates of a
Series will describe any additional provisions of the Agreement
relating to such Certificates.
Unless otherwise specified in the related Prospectus
Supplement, the Certificates of a Series will be entitled to
payment only from the assets included in the Trust Fund related
to such Series and will not be entitled to payments in respect of
the assets included in any other trust fund established by the
Company. The Certificates will not represent obligations of the
Company, Deutsche Bank or any of their affiliates and will not be
guaranteed by any governmental agency or any other person. Unless
otherwise specified in the related Prospectus Supplement, the
Company's only obligations with respect to the Certificates will
consist of its obligations pursuant to any representations and
warranties, if any, made by it. Unless otherwise specified in the
related Prospectus Supplement, none of Deutsche Bank or its
affiliates or any affiliate of the Company will have any
obligations with respect to the Certificates or the related Trust
Fund.
The Mortgage Loans will not be, and the Contracts may not
be, insured or guaranteed by any governmental entity or, except
as specified in the related Prospectus Supplement, by any other
person. To the extent that delinquent payments on or losses in
respect of defaulted Mortgage Loans or Contracts are not advanced
by the Servicer or Master Servicer or any other entity or paid
from any applicable credit enhancement arrangement, such
delinquencies may result in delays in the distribution of
payments to the Holders of one or more classes of Certificates,
and such losses will be borne by the Holders of one or more
classes of Certificates.
General
The Certificates of each Series will be issued in
registered or book-entry form. The minimum original Certificate
Principal Balance or Notional Principal Balance that may be
represented by each Offered Certificate (the "denomination") will
be specified in the related Prospectus Supplement. The original
Certificate Principal Balance of each Certificate will equal the
aggregate distributions allocable to principal to which such
Certificate is entitled. Unless otherwise specified in the
Prospectus Supplement, distributions allocable to interest on
each Certificate that is not entitled to
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distributions allocable to principal will be calculated based on
the Notional Principal Balance of such Certificate. The Notional
Principal Balance of a Certificate will not evidence an interest
in or entitlement to distributions allocable to principal but
will be used solely for convenience in expressing the calculation
of interest and for certain other purposes.
The Certificates of each Series issued in physical form
("Definitive Certificates") will be transferable and exchangeable
on a certificate register (the "Certificate Register") to be
maintained at the corporate trust office of the Trustee or such
other office or agency maintained for such purposes by the
Trustee in New York City. Unless otherwise specified in the
related Prospectus Supplement, under each Agreement, the Trustee
will initially be appointed as the certificate registrar.
Unless otherwise specified in the related Prospectus Supplement,
no service charge will be made for any registration of transfer
or exchange of Certificates, but payment of a sum sufficient to
cover any tax or other governmental charge may be required.
If specified in the related Prospectus Supplement, the
Certificates may be transferable only in book-entry form through
the facilities of The Depository Trust Company or another
depository identified in such Prospectus Supplement. If specified
in the related Prospectus Supplement, arrangements may be made
for clearance and settlement through the Euroclear System and
CEDEL, S.A., if they are participants of the depository.
If the Certificates of a Class are transferable only on the
books of The Depository Trust Company (together with any
successor depository selected by the Company, the "Depository"),
no person acquiring a Certificate that is in book-entry form
(each, a "beneficial owner") will be entitled to receive a
physical certificate representing such Certificate. Instead, the
Certificates will be registered in the name of a nominee of the
Depository, and beneficial interests therein will be held by
investors through the book-entry facilities of the Depository, as
described herein. The Company has been informed by the Depository
that its nominee will be Cede & Co. Accordingly, Cede & Co. is
expected to be the Holder of record of any Certificates that are
in book-entry form.
If the Certificates of a Class are transferable only on the
books of the Depository, each beneficial owner's ownership of 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 beneficial
owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Certificate will be recorded on
the records of the Depository (or of a participating firm that
acts as agent for the Financial Intermediary, whose interest will
in turn be recorded on the records of the Depository, if the
beneficial owner's Financial Intermediary is not a Depository
participant). Therefore, the beneficial owner must rely on the
foregoing procedures to evidence its beneficial ownership of such
a Certificate. Beneficial ownership of a Certificate may be
transferred only in compliance with the procedures of such
Financial Intermediaries and Depository participants.
The Depository, which is a New York-chartered limited
purpose trust company, performs services for its participants,
some of whom (and/or their representatives) own the Depository.
In accordance with its normal procedure, the Depository is
expected to record the positions held by each Depository
participant in the Certificates, whether held for its own account
or as a nominee for another person. In general, beneficial
ownership of Certificates will be subject to the rules,
regulations and procedures governing the Depository and
Depository participants as are in effect from time to time.
If the Certificates are transferable only on the books of
the Depository, the Depository, or its nominee as record Holder
of the Certificates, will be recognized by the Company and the
Trustee as the owner of the Certificates for all purposes,
including notices and consents. In the event of any solicitation
of consents from or voting by Certificateholders pursuant to the
Agreement, the Trustee may establish a reasonable record date and
give notice of such record date to the Depository. In turn, the
Depository will solicit votes from the beneficial owners in
accordance with its normal
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procedures, and the beneficial owners will be required to comply
with such procedures in order to exercise their voting rights
through the Depository.
Distributions of principal of and interest on the
Certificates will be made on each Distribution Date to the
Depository or its nominee. The Depository will be responsible for
crediting the amount of such payments to the accounts of the
applicable Depository participants in accordance with the
Depository's normal procedures. Each Depository participant will
be responsible for disbursing such payments to the beneficial
owners for which it is holding Certificates and to each Financial
Intermediary for which it acts as agent. Each such Financial
Intermediary will be responsible for disbursing funds to the
beneficial owners of the offered Certificates that it represents.
UNDER A BOOK-ENTRY FORMAT, BENEFICIAL OWNERS OF THE
CERTIFICATES MAY EXPERIENCE SOME DELAY IN THEIR RECEIPT OF
PAYMENTS, SINCE SUCH PAYMENTS WILL BE FORWARDED BY THE TRUSTEE TO
THE DEPOSITORY. BECAUSE THE DEPOSITORY CAN ACT ONLY ON BEHALF OF
FINANCIAL INTERMEDIARIES, THE ABILITY OF A BENEFICIAL OWNER TO
PLEDGE CERTIFICATES TO PERSONS OR ENTITIES THAT DO NOT
PARTICIPATE IN THE DEPOSITORY SYSTEM, OR OTHERWISE TAKE ACTIONS
IN RESPECT OF SUCH CERTIFICATES, MAY BE LIMITED DUE TO THE LACK
OF PHYSICAL CERTIFICATES FOR SUCH CERTIFICATES. IN ADDITION,
ISSUANCE OF THE 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.
The Depository has advised the Company and the Trustee
that, unless and until Definitive Certificates are issued, the
Depository will take any action permitted to be taken by a
Certificateholder under the Agreement only at the direction of
one or more Financial Intermediaries to whose Depository accounts
the Certificates are credited. The Depository may take
conflicting actions with respect to other Certificates to the
extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Certificates.
Definitive Certificates will be issued to beneficial owners
of the related Certificates, or their nominees, rather than to
the Depository, only if (a) the Depository or the Company advises
the Trustee in writing that the Depository is no longer willing,
qualified or able to discharge properly its responsibilities as
nominee and depository with respect to the Certificates and the
Company or the Trustee is unable to locate a qualified successor;
(b) the Company, at its sole option, elects to terminate the
book-entry system through the Depository; or (c) after the
occurrence of an Event of Default (as defined below) beneficial
owners of the Certificates aggregating not less than 51% of the
aggregate voting rights allocated thereto advise the Trustee and
the Depository through the Financial Intermediaries in writing
that the continuation of a book-entry system through the
Depository (or a successor thereto) is no longer in the best
interests of beneficial owners of the Certificates.
Upon the occurrence of any of the events described in the
immediately preceding paragraph, the Trustee will be required to
notify all beneficial owners of the occurrence of such event and
the availability through the Depository of Definitive
Certificates. Upon surrender by the Depository of the global
certificate or certificates representing the Certificates and
instructions for re-registration, the Trustee will be required to
issue the Definitive Certificates, and thereafter the Trustee
will be required to recognize the holders of such Definitive
Certificates as Certificateholders under the Agreement. Following
the issuance of Definitive Certificates, distribution of
principal and interest on the Certificates will be required to be
made by the Trustee directly to holders of Definitive
Certificates in accordance with the procedures set forth in the
Agreement.
The information herein concerning the Depository and its
book-entry system has been obtained from sources believed to be
reliable, but the Company takes no responsibility for the
accuracy of completeness thereof.
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In the event a depository other than The Depository Trust
Company is identified in a Prospectus Supplement, information
similar to that set forth above will be provided with respect to
such depository and its book-entry facilities in such Prospectus
Supplement.
Classes of Certificates
Each Series of Certificates will be issued in a single
class or in two or more classes. Each class of Offered
Certificates will evidence beneficial ownership of (i) any
distributions in respect of the assets of the Trust Fund that are
allocable to principal, in the aggregate amount of the original
Certificate Principal Balance, if any, of such class of Offered
Certificates as specified in the related Prospectus Supplement
and (ii) any distributions in respect of the assets of the Trust
Fund that are allocable to interest on the Certificate Principal
Balance or Notional Principal Balance of such Offered
Certificates from time to time at the Certificate Interest Rate
(as defined below), if any, applicable to such class of Offered
Certificates as specified in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or more
classes of a Series of Certificates may evidence beneficial
ownership interests in separate groups of assets included in the
related Trust Fund.
If specified in the related Prospectus Supplement, the
Certificates will have an aggregate original Certificate
Principal Balance equal to the aggregate unpaid principal balance
of the Mortgage Loans, Mortgage-Backed Securities or Contracts as
of the close of business on the first day of the month of
creation of the Trust Fund (the "Cut-off Date") after deducting
payments of principal due on or before, and prepayments of
principal received before, the Cut-off Date and will bear
interest equal to the weighted average of the Remittance Rates.
The Remittance Rate will equal the rate of interest payable on
each Mortgage Loan or Contract minus the servicing fee of any
third party servicer of the Mortgage Loans or Contracts and such
other amounts (including fees payable to the Servicer and/or
Master Servicer, if applicable) as are specified in the related
Prospectus Supplement. If specified in the related Prospectus
Supplement, the original Certificate Principal Balances of the
Certificates and the Certificate Interest Rates on the classes of
Certificates will be determined based on the cash flow on the
Mortgage Loans, Mortgage-Backed Securities or Contracts, as the
case may be. The Certificates may have original Certificate
Principal Balances as determined in the manner specified in the
related Prospectus Supplement.
Each class of Offered Certificates that is entitled to
distributions allocable to interest will bear interest at a fixed
rate or a rate that is subject to change from time to time (a) in
accordance with a schedule, (b) in reference to an index, or (c)
otherwise (each, a "Certificate Interest Rate"), in each case as
specified in the related Prospectus Supplement. One or more
classes of Certificates may provide for interest that accrues,
but is not currently payable ("Accrual Certificates"). With
respect to any class of Accrual Certificates, if specified in the
related Prospectus Supplement, any interest that has accrued but
is not paid on a given Distribution Date (as defined below under
"Distributions of Principal and Interest") will be added to the
aggregate Certificate Principal Balance of such class of
Certificates on that Distribution Date.
A Series of Certificates may include one or more classes
entitled only to distributions (i) allocable to interest, (ii)
allocable to principal (and/or allocable as between scheduled
payments of principal and Principal Prepayments, as defined
below) or (iii) allocable to both principal (and/or allocable as
between scheduled payments of principal and Principal
Prepayments) and interest. A Series of Certificates may consist
of one or more classes as to which distributions will be
allocated (i) on the basis of collections from designated
portions of the assets of the Trust Fund, (ii) in accordance with
a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the
related Prospectus Supplement. The timing and amounts of such
distributions may vary among classes, over time or otherwise, in
each case as specified in the related Prospectus Supplement.
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The taking of action with respect to certain matters under
the Agreement, including certain amendments thereto, will require
the consent of the Holders of the Certificates. The voting rights
allocated to each class of Certificates will be specified in the
related Prospectus Supplement. Votes may be allocated in
different proportions among classes of Certificates.
Distributions of Principal and Interest
General. Distributions of principal and/or interest at the
applicable Certificate Interest Rate, if any, on the Offered
Certificates will be made by the Trustee to the extent of funds
available on the dates specified and calculated as described in
the related Prospectus Supplement (each, a "Distribution Date")
or otherwise in accordance with the procedures described in the
related Prospectus Supplement, and may be made monthly,
quarterly, semiannually or at such other intervals as are
specified in the related Prospectus Supplement. Distributions
will be made to the persons in whose names the Certificates are
registered at the close of business on the dates specified in the
related Prospectus Supplement (each, a "Record Date").
Distributions will be made by check or money order mailed to the
person entitled thereto at the address appearing in the
Certificate Register or, if specified in the related Prospectus
Supplement, in the case of Certificates that are of a certain
minimum denomination as specified in the related Prospectus
Supplement, upon written request by the Certificateholder, by
wire transfer or by such other means as are agreed upon with the
person entitled thereto; provided, however, that the final
distribution in retirement of the Certificates will be made only
upon presentation and surrender of the Certificates at the office
or agency of the Trustee specified in the notice to
Certificateholders of such final distribution.
Distributions allocable to principal and interest on the
Certificates will be made by the Trustee out of, and only to the
extent of, funds in a separate account established and maintained
under the Agreement for the benefit of Holders of the
Certificates of the related Series (the "Certificate Account"),
including any funds transferred from any Reserve Account. As
between Certificates of different classes and as between
distributions of principal (and, if applicable, between
distributions of Principal Prepayments and scheduled payments of
principal) and interest, distributions made on any Distribution
Date will be applied as specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, distributions to any class of Offered Certificates
will be made pro rata to all Certificateholders of that class. If
specified in the related Prospectus Supplement, the amounts
received by the Trustee as described below under "The Trust Fund"
will be invested in Eligible Investments and income or other gain
from such investments will be deposited in the Certificate
Account and will be available to make payments on the
Certificates on the next succeeding Distribution Date in the
manner specified in the related Prospectus Supplement. "Eligible
Investments" are those investments acceptable to each Rating
Agency rating such Series, which may include, without limitation,
(i) direct obligations of, or obligations fully guaranteed as to
principal and interest by, the United States of America or any
agency or instrumentality thereof, provided that such obligations
are backed by the full faith and credit of the United States of
America; (ii) commercial paper (having original maturities of not
more than nine months) of any corporation incorporated under the
laws of the United States or any state thereof or the District of
Columbia which on the date of acquisition has been rated by each
Rating Agency in its highest short-term rating, or such lower
category as will not result in the downgrading or withdrawal of
the ratings then assigned to the Certificates by each Rating
Agency; (iii) certificates of deposit, demand or time deposits,
federal funds or bankers' acceptances issued by any bank or trust
company incorporated under the laws of the United States of
America or of any state thereof or the District of Columbia,
provided that the short-term commercial paper of such bank or
trust company (or in the case of the principal depository
institution in a depository institution holding company, the
long-term unsecured debt obligations of such holding company) at
the date of acquisition thereof has been rated by each Rating
Agency in its highest short-term rating; (iv) money market funds
or mutual funds organized under the Investment Company Act of
1940 rated in the highest rating category by each Rating Agency;
(v) repurchase obligations (the collateral of which is held by a
third party or the Trustee) with respect of any security
described in (i) above, provided that
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the long-term unsecured obligations of the party agreeing to
repurchase such obligations are at the time rated by each Rating
Agency in one of its two highest long-term rating categories; and
(vi) such other investments which do not adversely affect the
rating on the Certificates of such Series as confirmed in writing
by each Rating Agency.
Eligible Investments with respect to a Series will include
only obligations or securities that mature on or before the date
on which the amounts in the Certificate Account for such Series
are required or may be anticipated to be required to be applied
for the benefit of Certificateholders of such Series.
Distributions of Interest. Unless otherwise specified in
the related Prospectus Supplement, interest will accrue on the
aggregate Certificate Principal Balance (or, in the case of
Certificates entitled only to distributions allocable to
interest, the aggregate Notional Principal Balance) of each class
of Offered Certificates entitled to interest from the date, at
the Certificate Interest Rate and for the periods (each, an
"Interest Accrual Period") specified in the related Prospectus
Supplement. To the extent funds are available therefor, interest
accrued during each Interest Accrual Period on each class of
Certificates entitled to interest (other than a class of Accrual
Certificates) will be distributable on the Distribution Dates
specified in the related Prospectus Supplement until such class
has been retired or otherwise in accordance with the procedures
described in the related Prospectus Supplement. In the case of
Offered Certificates entitled only to distributions allocable to
interest, interest will be distributable thereon until the
aggregate Notional Principal Balance of such Certificates is
reduced to zero or for the period of time determined as specified
in the related Prospectus Supplement. Unless otherwise specified
in the Prospectus Supplement, distributions of interest on each
class of Accrual Certificates will commence only after the
occurrence of the events specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus
Supplement, prior to such time, the aggregate Certificate
Principal Balance of each such class of Accrual Certificates will
increase on each Distribution Date by the amount of interest that
accrued on such class of Accrual Certificates during the
preceding Interest Accrual Period net of the amount of any
principal and interest required to be distributed to such class
on such Distribution Date. Any such class of Accrual Certificates
will thereafter accrue interest on its outstanding Certificate
Principal Balance as so adjusted.
When a Mortgage Loan or Contract prepays in full, the
borrower generally will be required to pay interest on the amount
of prepayment only to the date of prepayment. When a partial
prepayment of principal is made on a Mortgage Loan (other than a
simple interest home equity loan), the borrower generally will
not be required to pay interest on the amount of the partial
prepayment during the month in which such prepayment is made. If
specified in the related Prospectus Supplement, the Servicer will
be obligated to offset any such prepayment interest shortfalls
attributable to full or partial prepayments on Mortgage Loans by
the borrowers to the extent of its servicing compensation for the
related Distribution Date. In addition, unless otherwise
specified in the related Prospectus Supplement, a full or partial
prepayment will not be required to be passed through to
Certificateholders until the month following receipt.
Accordingly, the effect of any principal prepayments, to the
extent that any resulting shortfall exceeds any payments made by
the Servicer from its own funds, will be to reduce or delay the
aggregate amount of interest collected that is available for
distribution to Certificateholders. Any such shortfalls will be
allocated among the Certificates as provided in the related
Prospectus Supplement.
Distributions of Principal. Unless otherwise specified in
the related Prospectus Supplement, the aggregate Certificate
Principal Balance of any class of Certificates entitled to
distributions of principal will be the aggregate original
Certificate Principal Balance of such class of Certificates
specified in the related Prospectus Supplement, reduced by all
distributions to the Holders of such Certificates allocable to
principal, and, in the case of Accrual Certificates, unless
otherwise specified in the related Prospectus Supplement,
increased by all interest accrued but not then distributable on
such Accrual Certificates. The related Prospectus Supplement will
specify the method by which the
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amount of principal to be distributed on the Offered Certificates
on each Distribution Date will be calculated and the manner in
which such amount will be allocated among the classes of Offered
Certificates entitled to distributions of principal.
THE RELATED PROSPECTUS SUPPLEMENT FOR ANY SERIES OF
CERTIFICATES WILL SPECIFY, FOR ANY DISTRIBUTION DATE ON WHICH THE
PRINCIPAL BALANCE OF THE MORTGAGE LOANS IS REDUCED DUE TO LOSSES,
THE PRIORITY AND MANNER IN WHICH SUCH LOSSES WILL BE ALLOCATED.
LOSSES ON MORTGAGE LOANS GENERALLY WILL BE ALLOCATED AFTER ALL
PROCEEDS OF A DEFAULTED MORTGAGE LOANS HAVE BEEN RECEIVED, BY
REDUCING THE OUTSTANDING CERTIFICATE PRINCIPAL BALANCE OF THE
MOST SUBORDINATE OUTSTANDING CLASS OF CERTIFICATES.
If so provided in the related Prospectus Supplement, one or
more classes of senior Certificates will be entitled to receive
all or a disproportionate percentage of the payments or other
recoveries of principal on a Mortgage Loan or Contract or on the
mortgage loans underlying any Mortgage-Backed Security which are
received in advance of their scheduled due dates and not
accompanied by amounts of interest representing scheduled
interest due after the month of such payments ("Principal
Prepayments") in the percentages and under the circumstances or
for the periods specified in the related Prospectus Supplement.
Any such allocation of Principal Prepayments to such class or
classes of Certificateholders will have the effect of
accelerating the amortization of such senior Certificates while
increasing the percentage interests evidenced by the subordinated
Certificates in the Trust Fund. Increasing the interests of the
subordinated Certificates relative to that of the senior
Certificates is intended to preserve the availability of the
subordination provided by the subordinated Certificates. See
"Credit Enhancement - Subordination" herein.
Unscheduled Distributions. If specified in the related
Prospectus Supplement, the Certificates will be subject to
receipt of distributions before the next scheduled Distribution
Date under the circumstances and in the manner described below
and in the related Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions
on the day and in the amount specified in the related Prospectus
Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the Mortgage Loans,
Mortgage-Backed Securities or Contracts, low rates then available
for reinvestment of such payments or both, the Trustee
determines, based on the assumptions specified in the Agreement,
that the amount anticipated to be on deposit in the Certificate
Account on the next Distribution Date, together with, if
applicable, any amounts available to be withdrawn from any
Reserve Account, may be insufficient to make required
distributions on the Certificates on such Distribution Date.
Unless otherwise specified in the related Prospectus Supplement,
the amount of any such unscheduled distribution that is allocable
to principal will not exceed the amount that would otherwise have
been required to be distributed as principal on the Certificates
on the next Distribution Date. Unless otherwise specified in the
related Prospectus Supplement, all unscheduled distributions will
include interest at the applicable Certificate Interest Rate (if
any) on the amount of the unscheduled distribution allocable to
principal for the period and to the date specified in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, all distributions allocable to principal in any
unscheduled distribution will be made in the same priority and
manner as distributions of principal on the Certificates would
have been made on the next Distribution Date, and with respect to
Certificates of the same class, unscheduled distributions of
principal will be made on a pro rata basis. Notice of any
unscheduled distribution will be given by the Trustee prior to
the date of such distribution.
Optional Termination of the Trust Fund
If specified in the related Prospectus Supplement, the
Company, the Servicer, the Master Servicer or the Holders of one
or more classes of Certificates specified in the related
Prospectus Supplement may, at its or their option, effect early
termination of the Trust Fund, on any Distribution Date after the
time specified in the related Prospectus Supplement, by
purchasing all of the
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Certificates or the assets in the Trust Fund at a price and in
accordance with the procedures specified in the related
Prospectus Supplement. The proceeds of such sale will be applied
on such Distribution Date to the distribution in full of the
Certificate Principal Balance of each outstanding Certificate
entitled to distributions allocable to principal and to accrued
interest at the applicable Certificate Interest Rate to the date
specified in the related Prospectus Supplement on each
Certificate entitled to distributions allocable to interest, or
to such other amount as is specified in the related Prospectus
Supplement. Notice of such optional termination will be given by
the Trustee prior to such Distribution Date.
Certificate Ratings
At the time of issuance, it is anticipated that the Offered
Certificates of each Series will be rated "investment grade,"
typically one of the four highest generic rating categories, by
at least one nationally recognized statistical rating
organization at the request of the Company. Each of such rating
organizations specified in the related Prospectus Supplement as
rating the Offered Certificates of the related Series at the
request of the Company is hereinafter referred to as a "Rating
Agency." 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. There can be no
assurance as to whether any rating agency not requested to rate
the Offered Certificates will nonetheless issue a rating and, if
so, what such rating would be. A rating assigned to the Offered
Certificates by a Rating Agency that has not been requested by
the Company to do so may be lower than the rating assigned by a
rating agency pursuant to the Company's request.
THE TRUST FUND
The Trust Fund for a Series of Certificates may consist of
(i) the Mortgage Loans, Mortgage-Backed Securities or Contracts
as described herein or in the related Prospectus Supplement, as
the case may be, subject to the Agreement from time to time (and
subject, if specified in the related Prospectus Supplement, to
certain exclusions); (ii) all payments (subject, if specified in
the related Prospectus Supplement, to certain exclusions) in
respect of such assets adjusted, in the case of interest
payments, to the applicable Remittance Rates; (iii) if specified
in the related Prospectus Supplement, reinvestment income on such
payments; (iv) all property acquired by foreclosure or deed in
lieu of foreclosure with respect to any Mortgage Loan or by
repossession with respect to any Contract; (v) all rights under
any private mortgage insurance policies and any other insurance
policies required to be maintained in respect of the Mortgage
Loans or Contracts; and (vi) if so specified in the related
Prospectus Supplement, one or more of the following: (1) any
Reserve Accounts; (2) any Limited Guarantees (as defined herein);
and (3) any pool insurance, special hazard insurance or other
insurance, guarantee or similar instruments or agreements.
Unless otherwise specified in the related Prospectus
Supplement, the Certificates will be entitled to payment only
from the assets of the Trust Fund and will not be entitled to
payments in respect of the assets of any other trust fund
established by the Company. Unless otherwise specified in the
related Prospectus Supplement, the primary assets of any Trust
Fund will consist of Mortgage Loans, Mortgage-Backed Securities
or Contracts.
The Mortgage Loans, Mortgage-Backed Securities and
Contracts to be included in the Trust Funds will be acquired by
the Company. The following is a brief description of the Mortgage
Loans, Mortgage-Backed Securities, Contracts or other assets
expected to be included in the Trust Funds. If specific
information respecting the Mortgage Loans, Mortgage-Backed
Securities, Contracts and other assets is not known at the time
the related Offered Certificates initially are offered, more
general information of the nature described below will be
provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed
with the Securities and Exchange Commission within fifteen days
after the initial issuance of such Certificates (the "Detailed
Description"). A copy of the Agreement with respect to each
Series of Certificates
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will be attached to the Form 8-K and will be available as
described under "Available Information." A schedule of the
Mortgage-Backed Securities, Mortgage Loans or Contracts, as
appropriate, relating to such Series, will be attached to the
Agreement delivered to the Trustee upon delivery of the
Certificates.
The Mortgage Loans
Description of the Mortgage Loans. The Mortgage Loans will
be evidenced by promissory notes (the "Mortgage Notes") secured
by mortgages or deeds of trust (the "Mortgages") creating first,
second or more junior liens on residential properties, or
participation interests or stripped (principal-only or
interest-only) interests in such loans. Such Mortgage Loans will
be within the broad classification of one- to four-family
mortgage loans, defined generally as loans on residences
containing one to four dwelling units, loans on condominium
units, and multifamily residential loans on rental apartment
buildings or cooperatively-owned properties containing more than
five residential units. If the Mortgage Pools include
participation interests or striped interests, references herein
to payments on Mortgage Loans underlying such participations or
striped interests will mean payments thereon allocable to such
participation interests or stripped interest, and the meaning of
other terms relating to Mortgage Loans will be similarly
adjusted. The Mortgage Loans may include cooperative apartment
loans ("Cooperative Loans") secured by security interests in
shares issued by private, non-profit, cooperative housing
corporations ("Cooperatives") and in the related proprietary
leases or occupancy agreements granting exclusive rights to
occupy specific dwelling units in such Cooperatives' buildings.
The Mortgaged Properties securing the Mortgage Loans will be
located in one or more states, territories or possessions of the
United States or the District of Columbia and may include
investment properties and vacation and second homes.
If specified in the related Prospectus Supplement, all or a
portion of the Mortgage Loans included in a Trust Fund may be
home equity loans secured by first, second and/or more junior
liens on Mortgaged Properties. Interest on home equity loans will
be calculated on the basis of either a 360-day year or 365-day
year, depending on applicable state law. Unless otherwise
specified in the related Prospectus Supplement, interest with
respect to home equity loans will accrue on a simple interest
basis. Under the simple interest method, regularly scheduled
payments (which are based on the amortization of the loan over a
series of equal monthly payments) and other payments are applied
first to interest accrued to the date payment is received, then
to principal. See "Yield, Maturity and Weighted Average Life
Considerations."
Unless otherwise specified in the related Prospectus
Supplement, principal and interest on the Mortgage Loans (other
than home equity loans that employ the simple interest method)
will be payable on the first day of each month, and interest will
be calculated based on a 360-day year of twelve 30-day months.
When a full payment of principal is made on a Mortgage Loan
during a month, the borrower is charged interest only on the days
of the month actually elapsed up to the date of such prepayment,
at a daily interest rate that is applied to the principal amount
of the loan so prepaid. When a partial prepayment of principal is
made on a Mortgage Loan (other than a home equity loan) during a
month, the borrower generally will not be charged interest on the
amount of the partial prepayment during the month in which such
prepayment is made.
The Company also may acquire "balloon loans." If specified
in the related Prospectus Supplement, the home equity loans may
include balloon loans. Notwithstanding the actual maturity of a
balloon loan, level monthly payments on such a balloon loan would
typically be calculated on an amortization schedule based on a
longer maturity. As a result, upon the maturity of a balloon
loan, the borrower will be required to make a "balloon" payment,
which will be significantly larger than such borrower's previous
monthly payments. The ability of such borrower to repay the
balloon loan at maturity frequently will depend on such
borrower's ability to refinance the loan.
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The payment terms of the Mortgage Loans to be included in a
Trust Fund will be described in the related Prospectus Supplement
and may include any of the following features or combinations
thereof or other features described in the related Prospectus
Supplement:
(a) Interest may be payable at a fixed rate, a rate
adjustable from time to time in relation to an index, a rate that
is fixed for a period of time or under certain circumstances and
is followed by an adjustable rate, a rate that otherwise varies
from time to time, or a rate that is convertible from an
adjustable rate to a fixed rate. Changes to an adjustable rate
may be subject to periodic limitations, maximum rates, minimum
rates or a combination of such limitations. Accrued interest may
be deferred and added to the principal of a loan for such periods
and under such circumstances as may be specified in the related
Prospectus Supplement. Mortgage Loans may provide for the payment
of interest at a rate lower than the specified mortgage rate for
a period of time or for the life of the loan with the amount of
any difference contributed from funds supplied by the seller of
the mortgaged property or another source.
(b) Principal may be payable on a level debt service basis
to fully amortize the loan over its term, may be calculated on
the basis of an amortization schedule that is significantly
longer than the original term to maturity or on an interest rate
that is different from the interest rate on the Mortgage Loan or
may not be amortized during all or a portion of the original
term. Payment of all or a substantial portion of the principal
may be due on maturity. Principal may include interest that has
been deferred and added to the principal balance of the Mortgage
Loan. In the case of home equity loans, which may be "simple
interest" loans, payments are applied first to interest accrued
to the date payment is received, then to principal.
(c) Payments of principal and interest may be made monthly
or at some other interval, may be fixed for the life of the loan,
may increase over a specified period of time or may change from
period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may
include maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the loan or may decline
over time, and may be prohibited for the life of the loan or for
certain periods ("lockout periods"). Certain loans may permit
prepayments after expiration of the applicable lockout period and
may require the payment of a prepayment fee in connection with
any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The loans may include
"due-on-sale" clauses which permit the mortgagee to demand
payment of the entire mortgage loan in connection with the sale
or certain transfers of the related mortgaged property. Other
Mortgage Loans may be assumable by persons meeting the then-
applicable underwriting standards of the Servicer or the Master
Servicer or such other standards as are set forth in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, the
Mortgage Loans will consist primarily of Mortgage Loans secured
by Mortgaged Properties determined by the originator to be the
primary residences of the borrowers. The basis for such
determination will be the making of a representation at
origination by the borrower that the borrower intends to use the
underlying property as the borrower's primary residence.
The related Prospectus Supplement will contain information
regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance of the
Mortgage Loans as of the related Cut-off Date, the years of
origination and original principal balances and the original
loan-to-value ratios of the Mortgage Loans. The "Principal
Balance" of any Mortgage Loan will be the unpaid principal
balance of such Mortgage Loan as of the Cut-off Date, after
deducting any principal payments due on or before the Cut-off
Date, reduced by all principal payments, including principal
payments advanced pursuant to the Agreement, previously
distributed to Certificateholders with respect to such Mortgage
Loan and reported to them as allocable to
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principal. The related Prospectus Supplement will also contain
information regarding the geographic distribution and nature of
the Mortgaged Properties securing the Mortgage Loans.
The loan-to-value ratio of any Mortgage Loan will be
determined as specified in the related Prospectus Supplement. The
"Combined Loan-to-Value Ratio" of a Mortgage Loan is calculated
taking into account the amounts of any related senior mortgage
loans.
There can be no assurance that the original Principal
Balance will reflect actual real estate values during the term of
a Mortgage Loan. If the residential real estate market should
experience an overall decline in property values such that the
outstanding Principal Balances of the Mortgage Loans become equal
to or greater than the values of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be
significantly higher than those now generally experienced in the
mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may
affect the timely and ultimate payment by borrowers of scheduled
payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Mortgage Loans.
Underwriting and Interim Servicing Standards Applicable to the
Mortgage Loans
The Mortgage Loans underlying the Certificates of a Series
will be acquired, generally by Deutsche Bank, from third parties
and may be newly-originated or seasoned Mortgage Loans. The
origination standards and procedures applicable to such Mortgage
Loans may differ from Series to Series or among the Mortgage
Loans in a given Trust Fund, depending on the identity of the
originator or originators. In the case of seasoned Mortgage
Loans, the procedures by which such Mortgage Loans have been
serviced from their origination to the time of their inclusion in
the related Trust Fund may also differ from Series to Series or
among the Mortgage Loans in a given Trust Fund.
The related Prospectus Supplement for each Series will
provide information as to the origination standards and
procedures applicable to the Mortgage Loans in the related Trust
Fund and, to the extent applicable and material, will provide
information as to the servicing of such Mortgage Loans prior to
their inclusion in the Trust Fund.
The Agency Securities
The Agency Securities generally will be securities
guaranteed by GNMA or issued by FHLMC or FNMA and based on pools
of residential mortgage loans.
Government National Mortgage Association. GNMA is a
wholly-owned corporate instrumentality of the United States
within the United States Department of Housing and Urban
Development ("HUD"). Section 306(g) of Title III of the National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to guarantee the timely payment of the principal of and
interest on certificates which represent an interest in a pool of
mortgage loans insured by FHA under the Housing Act, or Title V
of the Housing Act of 1949 ("FHA Loans"), or partially guaranteed
by the VA under the Servicemen's Readjustment Act of 1944, as
amended, or Chapter 37 of Title 38, United States Code ("VA
Loans").
Section 306(g) of the Housing Act provides that "the full
faith and credit of the United States is pledged to the payment
of all amounts which may be required to be paid under any
guarantee under this subsection." In order to meet its
obligations under any such guarantee, GNMA may, under Section
306(d) of the Housing Act, borrow from the United States Treasury
in an amount which is at any time sufficient to enable GNMA, with
no limitations as to amount, to perform its obligations under its
guarantee.
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GNMA Securities. In general, a GNMA Security relating to a
Series (which may be issued under either the GNMA I program or
the GNMA II program) will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by a mortgage
banking company or other financial concern ("GNMA Issuer")
approved by GNMA or approved by FNMA as a seller-servicer of FHA
Loans and/or VA Loans. The mortgage loans underlying the GNMA
Securities will consist of FHA Loans and/or VA Loans. GNMA will
approve the issuance of each such GNMA Security in accordance
with a guarantee agreement (a "Guaranty Agreement") between GNMA
and the GNMA Issuer. Pursuant to its Guaranty Agreement, a GNMA
Issuer will be required to advance its own funds in order to make
timely payments of all amounts due on each such GNMA Security,
even if the payments received by the GNMA Issuer on the FHA Loans
or VA Loans underlying each such GNMA Security are less than the
amounts due on each such GNMA Security.
The full and timely payment of principal of and interest on
each GNMA Security will be guaranteed by GNMA, which obligation
is backed by the full faith and credit of the United States. Each
such GNMA Security will have an original maturity of not more
than 30 years (but may have original maturities of substantially
less than 30 years). Each such GNMA Security will be based on and
backed by a pool of FHA Loans or VA Loans secured by one- to
four-family residential property and will provide for the payment
by or on behalf of the GNMA Issuer to the registered holder of
such GNMA Security of scheduled monthly payments of principal and
interest equal to the registered holder's proportionate interest
in the aggregate amount of the monthly principal and interest
payment on each FHA Loan or VA Loan underlying such GNMA
Security, less the applicable servicing and guarantee fee which
together equal the difference between the interest on the FHA
Loan or VA Loan and the pass-through rate on the GNMA Security.
In addition, each payment will include proportionate pass-through
payments of any prepayments of principal on the FHA Loans or VA
Loans underlying such GNMA Security and liquidation proceeds in
the event of a foreclosure or other disposition of any such FHA
Loans or VA Loans.
If a GNMA Issuer is unable to make the payments on a GNMA
Security as it becomes due, it must promptly notify GNMA and
request GNMA to make such payment. Upon notification and request,
GNMA will make such payments directly to the registered holder of
such GNMA Security. In the event no payment is made by a GNMA
Issuer and the GNMA Issuer fails to notify and request GNMA to
make such payment, the holder of such GNMA Security will have
recourse only against GNMA to obtain such payment. The Trustee or
its nominee, as registered holder of the GNMA Securities relating
to a Series, will have the right to proceed directly against GNMA
under the terms of the Guaranty Agreements relating to such GNMA
Security for any amounts that are not paid when due.
Regular monthly installment payments on each GNMA Security
relating to a Series will be comprised of interest due as
specified on such GNMA Security plus the scheduled principal
payments on the FHA Loans or VA Loans underlying such GNMA
Security due on the first day of the month in which the scheduled
monthly installment on such GNMA Security is due. Such regular
monthly installments on each such GNMA Security are required to
be paid to the Trustee as registered holder by the 15th day of
each month in the case of a GNMA I Security and are required to
be mailed to the Trustee by the 20th day of each month in the
case of a GNMA II Security. Any principal prepayments on any FHA
Loans or VA Loans underlying a GNMA Security relating to a Series
or any other early recovery of principal on such loan will be
passed through to the Trustee as the registered holder of such
GNMA Security.
If specified in the related Prospectus Supplement, GNMA
Securities also may include Mortgage-Backed Securities
representing beneficial ownership interests in REMICs that are
guaranteed as to full and timely payment of principal and
interest by GNMA.
Federal Home Loan Mortgage Corporation. FHLMC is a
corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as
amended
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(the "FHLMC Act"). FHLMC's statutory mission is (i) to provide
stability in the secondary market for residential mortgages, (ii)
to respond appropriately to the private capital market and (iii)
to provide ongoing assistance to the secondary market for
residential mortgages (including activities relating to mortgages
on housing for low- and moderate-income families involving a
reasonable economic return that may be less than the return
earned on other activities) and to promote access to mortgage
credit throughout the United States (including central cities,
rural areas and other underserved areas) by increasing the
liquidity of mortgage investments and improving the distribution
of investment capital available for residential mortgage
financing.
The principal activity of FHLMC consists of the purchase of
first lien, conventional, residential mortgages or participation
interests in such mortgages, and the resale of the mortgages so
purchased in the form of single-class guaranteed mortgaged-
related securities, primarily various types of mortgage
participation certificates ("PCs"). PCs, which represent
undivided interests in pools of mortgages purchased by FHLMC,
provide for monthly payment of interest and pass-through of
principal on the underlying mortgages. FHLMC guarantees to PC
holders payment of interest on and principal of the mortgages.
FHLMC purchases a variety of single-family, fixed-rate and
adjustable-rate mortgages primarily through its Guarantor and
Cash Programs. Under the Guarantor Program, FHLMC purchases
mortgages from sellers in exchange for PCs representing interests
in the mortgages so purchased. Under the Cash Program, FHLMC
purchases mortgages for cash, assembles mortgages purchased from
a number of sellers into pools that are typically larger and more
geographically diverse than those formed under the Guarantor
Program, and sells PCs representing interests in such pools. In
addition, FHLMC issues Giant Mortgage Participation Certificates
("Giant PCs"), which are derivative securities that generally
represent interests in pools consisting of two or more PCs and/or
other Giant PCs.
Multiple class derivative securities issued by FHLMC
consist primarily of Multiclass Mortgage Participation
Certificates ("Multiclass PCs"). The Multiclass PCs are issued in
Series, with each Series consisting of two or more classes. Each
Series of Multiclass PCs represents an interest in a pool of
mortgages or mortgage-related assets, typically PCs and Giant
PCs. Treatment as a REMIC under the Internal Revenue Code of 1986
has been elected for each Multiclass PC pool formed to date by
FHLMC.
FHLMC Securities. In general, a FHLMC Security will
represent (i) an undivided interest in a pool of mortgage loans
(which may consist of FHA Loans, VA Loans or loans neither
insured nor guaranteed by any governmental agency ("Conventional
Loans")); (ii) a beneficial ownership interest in one or more
pools of mortgage-backed securities issued by FHLMC, including
but not limited to: Giant PCs, Freddie Mac Gold Mortgage
Participation Securities ("Gold PCs"), Freddie Mac Gold Giant
Mortgage Participation Securities ("Gold Giant PCs") and Freddie
Mac Stripped Giant Mortgage Participation Securities ("Stripped
Giant PCs"); (iii) a beneficial ownership interest in one or more
pools of GNMA Securities or Freddie Mac Giant GNMA-Backed
Securities ("Giant Securities"); or (iv) a beneficial ownership
interest in a REMIC backed by other FHLMC Securities or GNMA
Securities. A Giant PC, Gold PC or Gold Giant PC represents
either an undivided interest in a group of residential mortgages
purchased by FHLMC or a participation therein. A Stripped Giant
PC represents a beneficial ownership interest in the principal
distributions or interest distributions on a newly formed
"Standard Giant PC," which in turn represents a beneficial
ownership interest in one or more pools of Gold PCs and/or Gold
Giant PCs. A Giant Security represents a beneficial ownership
interest in discrete pools of (i) GNMA Securities and/or (ii)
other Giant Securities. Principal and interest on the FHLMC
Securities are distributed on the 15th day of each month or, if
such day is not a business day, on the next succeeding business
day.
FHLMC Guarantees. FHLMC guarantees to each holder of a
FHLMC Security the payment of interest and principal; however,
the specifics of the guarantee differ from program to program.
For example, FHLMC guarantees to each holder of a PC the timely
payment of interest and the ultimate collection of all principal,
without offset or deduction.
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FHLMC Securities are not guaranteed by the United States
and do not constitute debts or obligations of the United States.
The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States.
The FHLMC Securities included in the Trust Fund for a
Series of the Certificates may have characteristics and terms
different from those described above. Any such FHLMC Securities
and the underlying mortgage loans will be described in the
related Prospectus Supplement.
See "Additional Information" herein for the availability of
further information respecting FHLMC and FHLMC Securities.
Federal National Mortgage Association. FNMA is a federally-
chartered and privately-owned corporation organized and existing
under the Federal National Mortgage Association Charter Act, as
amended (the "Charter Act"). FNMA was originally established in
1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a
stockholder-owned and privately-managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by
purchasing mortgage loans from lenders, thereby replenishing
their funds for additional lending. FNMA acquires funds to
purchase mortgage loans from many capital market investors that
may not ordinarily invest in mortgages, thereby expanding the
total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from
capital-surplus to capital-short areas.
FNMA Securities. In general, a FNMA Security will be backed
by a pool of mortgage loans which may consist of FHA Loans, VA
Loans or Conventional Loans and may include Fannie Mae Guaranteed
Mortgage Pass-Through Securities ("MBS Securities"), MBS
Securities held in the form of Fannie Mae MBS Pass-Through
Securities ("Mega Securities"), Fannie Mae Stripped
Mortgage-Backed Securities ("SMBS Securities") or Fannie Mae
Guaranteed REMIC Pass-Through Securities ("REMIC Securities"). An
MBS Security represents a beneficial ownership interest in one or
more pools of residential mortgage loans. A Mega Security
represents the beneficial ownership interest in one or more pools
of MBS Securities or GNMA Securities. An SMBS Security represents
the beneficial ownership interest in certain distributions of
principal and/or interest made in respect of certain MBS
Securities or GNMA Securities. A REMIC Security represents a
beneficial ownership interest in a Fannie Mae REMIC, backed by
other FNMA Securities or GNMA Securities.
FNMA Guaranty. FNMA guarantees to each holder of a FNMA
Security the payment of interest and principal; however, the
application of this guaranty differs from program to program. For
example, FNMA guarantees to the holder of an MBS Security the
timely payment of scheduled installments of principal of and
interest on the underlying mortgage loans, whether or not
received, together with the full principal balance of any
foreclosed mortgage loan, whether or not such balance is actually
recovered.
Mortgage Loans. Certain of the mortgage loans underlying
any FHLMC, FNMA or GNMA Security will provide for monthly
payments of principal and interest on a level debt service basis
(that is, equal monthly payments consisting, over the term of
such loans, of decreasing amounts of interest and increasing
amounts of principal), except for (i) graduated payment mortgage
loans (described below), (ii) "buydown" mortgage loans, for which
funds will have been provided (and deposited into escrow
accounts) for application to the payment of a portion of the
borrower's monthly payments during the early years of such
mortgage loan and (iii) certain Agency Securities secured by
multifamily mortgage loans, the amortization characteristics of
which will be described in each Prospectus Supplement relating to
a Series of Certificates backed by such Agency Securities.
Payments due the registered holders of Agency Securities backed
by pools containing "buydown" mortgage loans will be computed in
the same manner as payments derived from non-"buydown"
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Agency Securities and will include amounts to be collected from
both the borrower and the related escrow account. Graduated
payment mortgage loans provide for graduated interest payments
which, during the early years of such mortgage loans, will be
less than the amount of stated interest on such mortgage loans.
The portion of the stated interest not paid will be added to the
principal of such graduated payment mortgage loans and, together
with interest thereon, will be paid in subsequent years. Thus,
payments due to registered holders of Agency Securities backed by
pools containing graduated payment mortgage loans ("GPM
Securities") will, in the absence of repayments, increase during
the early years of the underlying graduated payment mortgage
loans. The obligations of FHLMC, FNMA, GNMA and the servicer of a
GNMA Security will be the same irrespective of whether the Agency
Securities backing a Series of Certificates include GPM or
"buydown" Securities.
The related Prospectus Supplement for a Series of
Certificates including FHLMC, FNMA or GNMA Securities will
include information, as of the date of such related Prospectus
Supplement as to (i) the approximate aggregate amount of the
Agency Securities securing such Series consisting of FHLMC, FNMA,
GNMA and GPM Securities, (ii) the approximate weighted average
remaining term to maturity of such Agency Securities and (iii)
the approximate principal amount and the approximate weighted
average remaining term to maturity of the Agency Securities
backing such Series of Certificates that have similar pass-
through rates. The characteristics of the Agency Securities
actually included in the Trust Fund for any such Series of
Certificates will not differ materially from the approximation
set forth in the related Prospectus Supplement.
Private Securities
If specified in the related Prospectus Supplement, the
Trust Fund for a Series of Certificates may include
Mortgage-Backed Securities of one or more private issuers (the
"Private Securities") as described in the related Prospectus
Supplement. To the extent that a Trust Fund consists of Private
Securities of one issuer or related issuers, such Private
Securities (i) will be acquired in bona fide secondary market
transactions not from the Registrant or an affiliate thereof and
(ii) (a) if the primary distribution involved an exempt security,
such security will have been held for at least the holding period
provided for pursuant to Rule 144(k) under the Securities Act or
(b) the security will have been registered under the Securities
Act. The related Prospectus Supplement for each such Series of
Certificates will describe such Private Securities and the
material characteristics of the mortgage loans directly or
indirectly backing such Private Securities, which may include but
are not limited to: the principal balances of, pass-through rates
on and credit-support arrangements for such Private Securities;
the type and geographic distribution of the properties securing
the mortgage loans; and the loan-to-value ratio ranges of,
interest rates on and original and remaining terms to maturity of
the mortgage loans.
Contracts
Each pool of Contracts with respect to a Series of
Certificates (the "Contract Pool") will consist of manufactured
housing conditional sales contracts and installment loan
agreements or participation interests therein (collectively, the
"Contracts") acquired directly or indirectly from one or more
manufactured housing dealers. The Contracts may be conventional
manufactured housing contracts or contracts insured by the FHA or
partially guaranteed by the VA. Each Contract is secured by a
Manufactured Home (as defined below). Unless otherwise specified
in the related Prospectus Supplement, the Contracts will be fully
amortizing and will bear interest at a fixed annual percentage
rate ("APR").
The Manufactured Homes securing the Contracts consist of
manufactured homes within the meaning of 42 United States Code,
Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which, in the
traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three
hundred twenty
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or more square feet, and which is built on a permanent chassis
and designed to be used as a dwelling with or without a permanent
foundation when connected to the required utilities, and includes
the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any
structure which meets all the requirements of this paragraph
except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the
Secretary of Housing and Urban Development and complies with the
standards established under this chapter." Moreover, if an
election is made to treat the Trust Fund as a REMIC as described
in "Federal Income Tax Consequences-REMIC Certificates",
Manufactured Homes will have a minimum of 400 square feet of
living space and a minimum width in excess of 102 inches.
Unless otherwise specified in the related Prospectus
Supplement, for purposes of calculating the loan-to-value ratio
of a Contract relating to a new Manufactured Home, the
"Collateral Value" is the sum of (i) a fixed percentage of the
list price of the unit actually billed by the manufacturer to the
dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's
Invoice Price"), (ii) the actual cost of any accessories
purchased from the dealer, (iii) a delivery and set-up allowance
depending on the size of the unit and (iv) the cost of state and
local taxes, filing fees and up to three years prepaid hazard
insurance premiums. Unless otherwise specified in the related
Prospectus Supplement, the "Collateral Value" of a used
Manufactured Home is the least of the sales price, the appraised
value, and the National Automobile Dealer's Association book
value, plus prepaid taxes and hazard insurance premiums. The
appraised value of a Manufactured Home is based upon the age and
condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if
applicable.
The related Prospectus Supplement will specify for the
Contracts contained in the related Contract Pool, among other
things, the date of origination of the Contracts; the APRs on the
Contracts; the Contract loan-to-value ratios; the minimum and
maximum outstanding principal balances as of the Cut-off Date and
the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the Contract
Pool; and the original maturities of the Contracts and the last
maturity date of any Contract.
CREDIT ENHANCEMENT
General
Credit enhancement may be provided with respect to one or
more classes of a Series of Certificates or with respect to the
assets in the related Trust Fund. Credit enhancement may be in
the form of the subordination of one or more classes of the
Certificates of such Series or other credit enhancement
arrangement or any combination of such arrangements. Unless
otherwise specified in the related Prospectus Supplement, any
credit enhancement will not provide protection against all risks
of loss and will not guarantee repayment of the entire principal
balance of the Offered Certificates and interest thereon. If
losses occur which exceed the amount covered by credit
enhancement or which are not covered by the credit enhancement,
Certificate- holders will bear their allocable share of
deficiencies. In addition, if the Certificateholders of such
Series will be materially dependent upon any provider of Credit
Enhancement for timely payment of interest and/or principal on
their Certificates, the related Prospectus Supplement will
include audited financial statements on a comparative basis for
at least the last two years and any other appropriate financial
information regarding such provider.
Subordination
If specified in the related Prospectus Supplement,
distributions in respect of scheduled principal, Principal
Prepayments, interest or any combination thereof that otherwise
would have been payable to one or more classes of Certificates of
a Series (the "Subordinated Certificates") will instead be
payable to Holders of one or more other classes of such Series
(the "Senior Certificates")
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under the circumstances and to the extent specified in the
related Prospectus Supplement. If specified in the related
Prospectus Supplement, delays in receipt of scheduled payments on
the Mortgage Loans or Contracts and losses on defaulted Mortgage
Loans or Contracts will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes
of Senior Certificates, in each case under the circumstances and
subject to the limitations specified in the related Prospectus
Supplement. The aggregate distributions in respect of delinquent
payments on the Mortgage Loans or Contracts over the lives of the
Certificates or at any time, the aggregate losses in respect of
defaulted Mortgage Loans or Contracts which must be borne by the
Subordinated Certificates by virtue of subordination and the
amount of the distributions otherwise distributable to the
Subordinated Certificateholders that will be distributable to
Senior Certificateholders on any Distribution Date may be limited
as specified in the related Prospectus Supplement. If aggregate
distributions in respect of delinquent payments on the Mortgage
Loans or Contracts or aggregate losses in respect of such
Mortgage Loans or Contracts were to exceed the total amounts
payable and available for distribution to Holders of Subordinated
Certificates or, if applicable, were to exceed the specified
maximum amount, Holders of Senior Certificates could experience
losses on the Certificates.
In addition to or in lieu of the foregoing, if specified in
the related Prospectus Supplement, all or any portion of
distributions otherwise payable to Holders of Subordinated
Certificates or Certificates of another class on any Distribution
Date may instead be deposited into one or more reserve accounts
(a "Reserve Account") established by the Trustee. If specified in
the related Prospectus Supplement, such deposits may be made on
each Distribution Date, on each Distribution Date for specified
periods or until the balance in the Reserve Account has reached a
specified amount and, following payments from the Reserve Account
to Holders of Senior Certificates or otherwise, thereafter to the
extent necessary to restore the balance in the Reserve Account to
required levels, in each case as specified in the related
Prospectus Supplement. If specified in the related Prospectus
Supplement, amounts on deposit in the Reserve Account may be
released at the times and under the circumstances specified in
the related Prospectus Supplement.
If specified in the related Prospectus Supplement, one or
more classes of Certificates may bear the risk of certain losses
on defaulted Mortgage Loans not covered by other forms of credit
enhancement prior to other classes of Certificates. If specified
in the related Prospectus Supplement, the subordination of a
Class may apply only in the event of (or may be limited to)
certain types of losses not covered by insurance policies or
other credit enhancement, such as losses arising from damage to
property securing a Mortgage Loan not covered by standard hazard
insurance policies. Such subordination may be effected by
reducing the Certificate Principal Balance of the subordinated
Certificates on account of such losses, thereby decreasing the
proportionate share of distributions allocable to such
Certificates, or by another means specified in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, various
classes of Senior Certificates and Subordinated Certificates may
themselves be subordinate in their right to receive certain
distributions to other classes of Senior and Subordinated
Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and classes of
Subordinated Certificates, distributions may be allocated among
such classes (i) in the order of their scheduled final
distribution dates, (ii) in accordance with a schedule or
formula, (iii) in relation to the occurrence of events, or (iv)
otherwise, in each case as specified in the related Prospectus
Supplement. As between classes of Subordinated Certificates,
payments to Holders of Senior Certificates on account of
delinquencies or losses and payments to any Reserve Account will
be allocated as specified in the related Prospectus Supplement.
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Other Arrangements for Credit Enhancement
Purchase of Liquidating Loans. The Servicer of a Mortgage
Loan, the Master Servicer or another party designated in the
related Prospectus Supplement (the "Responsible Party") may be
obligated, if and to the extent described in the related
Prospectus Supplement, to purchase any Mortgage Loan (a
"Liquidating Loan") as to which either (i) liquidation
proceedings have been commenced and any equitable or statutory
right to reinstate such Mortgage Loan has expired or (ii) the
Servicer of such Mortgage Loan or Master Servicer has agreed to
accept a deed in lieu of foreclosure, in each case for a price
equal to 100% of the Principal Balance of such Mortgage Loan
plus, unless otherwise specified in the related Prospectus
Supplement, one month's interest thereon at the applicable
Remittance Rate.
If specified in the related Prospectus Supplement, the
Responsible Party will have the option (but not the obligation)
to purchase any Mortgage Loan as to which the borrower has failed
to make unexcused payment in full of three or more scheduled
payments of principal and interest (a "Delinquent Mortgage
Loan"). Unless otherwise specified in the related Prospectus
Supplement, any such purchase will be for a price equal to 100%
of the Principal Balance of such Mortgage Loan plus interest
thereon at the applicable Remittance Rate from the date on which
interest was last paid to the first day of the month in which
such purchase price is to be distributed, net of any unreimbursed
advances of principal and interest thereon made by the applicable
Servicer or the Master Servicer. The purchase price for any
Delinquent Mortgage Loan will be deposited in the Certificate
Account on the next Deposit Date (as defined under "Servicing of
the Mortgage Loans and Contracts-Loan Payment Record").
The purchase by the Responsible Party of a Delinquent
Mortgage Loan may result in the diminution of the amount of its
obligations to purchase Liquidating Loans, to the extent that net
recoveries upon the liquidation of such Delinquent Mortgage Loan
are, or are estimated by the Responsible Party on the date of
such purchase to be, less than the sum of the purchase price for
such Delinquent Mortgage Loan and any previous unreimbursed
advances of delinquent installments of principal and interest
(adjusted to the related Remittance Rate) made by the Responsible
Party with respect thereto. To the extent that actual recoveries,
net of related expenses, upon the final liquidation of such
Delinquent Mortgage Loan differ from the estimated amount
thereof, the amount of the Responsible Party's remaining
obligation to purchase Liquidating Loans will be adjusted up or
down accordingly. If a Delinquent Mortgage Loan becomes current
after its purchase by the Responsible Party, any related decrease
in the amount of the Responsible Party's obligation to purchase
Liquidating Loans will be reversed in its entirety. Liquidation
proceeds in connection with the liquidation of any Mortgaged
Property may not be deemed for this purpose to include the entire
principal balance of any mortgage loan made by the Responsible
Party to facilitate such sale at a rate less than then prevailing
market rates. In estimating the net amount of proceeds
recoverable upon the liquidation of any Delinquent Mortgage Loan,
the Responsible Party may treat as related liquidation expenses
certain costs associated with the protection of the Mortgaged
Property, property sale expenses and foreclosure or other similar
costs.
Following the purchase by the Responsible Party of any
Liquidating Loan or Delinquent Mortgage Loan as described above,
and the payment by the Responsible Party of the purchase price
therefor, the Responsible Party will be entitled to receive an
assignment by the Trustee of such Mortgage Loan, and the
Responsible Party will thereafter own such Mortgage Loan free of
any further obligation to the Trustee or the Certificateholders
with respect thereto.
Limited Guarantee of the Guarantor. If specified in the
related Prospectus Supplement, certain amounts under the related
Agreement may be covered by a Limited Guarantee, limited in scope
and amount, issued by the Guarantor. If so specified, the
Guarantor may be obligated to take one or more of the following
actions in the event such actions are not taken by another
person: make deposits to the Certificate Account; make advances;
or purchase Liquidating Loans. The
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scope, amount and, if applicable, the allocation of any Limited
Guarantee and additional information about the Guarantor will be
described in the related Prospectus Supplement.
If and to the extent that the Guarantor is required to make
payments under any such Limited Guarantee, unless otherwise
specified in the related Prospectus Supplement, the Guarantor,
upon notice from the Trustee, will be obligated to deposit the
amount of such payments in same-day funds in the Certificate
Account on the day after the Deposit Date, all as set forth more
specifically in such Limited Guarantee. If the Guarantor is
required to make any payment under a Limited Guarantee, the
Guarantor will be subrogated, to the extent of such payment, to
the rights of Holders of the Certificates and shall have all
rights of the Company under the related Agreement as described
herein. Any Limited Guarantee issued by the Guarantor will be
limited in amount or duration as specified in the related
Prospectus Supplement and may not guarantee the full extent of
the Company's obligations with respect to which such Limited
Guarantee was issued. As described in the related Prospectus
Supplement, if applicable, the amount of any Limited Guarantee
will be reduced by amounts distributed by the Guarantor, and not
recovered by it, under all Limited Guarantees issued by the
Guarantor with respect to the same Series of Certificates and by
any reduction in the Company's obligations with respect to which
such Limited Guarantee was issued.
Certificate Guarantee Insurance. If specified in the
related Prospectus Supplement, certificate guarantee insurance,
if any, with respect to a Series of Certificates will be provided
by one or more insurance companies. Such certificate guarantee
insurance will guarantee, with respect to one or more Classes of
Certificates of the applicable Series, distributions of principal
and/or interest to the extent and in the manner set forth in the
related Prospectus Supplement. If specified in the related
Prospectus Supplement, the certificate guarantee insurance will
also guarantee against any payment made to a Certificateholder
which is subsequently covered as a "voidable preference" payment
under the Bankruptcy Code. A copy of the certificate guarantee
insurance policy for a Series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be
filed with the Commission within 15 days of issuance of the
Certificates of the applicable Series.
Cross-Support. If specified in the related Prospectus
Supplement, the beneficial ownership of separate groups of assets
included in a Trust Fund may be evidenced by separate classes of
the related Series of Certificates. In such case, credit
enhancement may be provided by a cross-support feature which may
require that distributions be made with respect to Certificates
evidencing beneficial ownership of one or more asset groups prior
to distributions to subordinated Certificates evidencing a
beneficial ownership interest in other asset groups within the
same Trust Fund. The related Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner
and conditions for applying such cross-support feature.
If specified in the related Prospectus Supplement, the
coverage provided by one or more forms of credit enhancement may
apply concurrently to two or more separate Trust Funds. If
applicable, the related Prospectus Supplement will identify the
Trust Funds to which such credit enhancement relates and the
manner of determining the amount of the coverage provided thereby
and of the application of such coverage to the identified Trust
Funds.
Pool Insurance. In order to decrease the likelihood that
Certificateholders will experience losses in respect of the
Mortgage Loans, if specified in the related Prospectus
Supplement, the Company will obtain one or more pool insurance
policies. Such pool insurance policy will, subject to the
limitations described below and in the related Prospectus
Supplement, cover losses by reason of default in payments on the
Mortgage Loans up to the amounts specified in the related
Prospectus Supplement or the Detailed Description and for the
periods specified in the related Prospectus Supplement. Each
Servicer or Master Servicer will agree to use its best reasonable
efforts to maintain in effect any such pool insurance policy and
to present claims thereunder to the pool insurer on behalf of
itself, the Trustee and the Certificateholders. The pool
insurance policy, however, is not a blanket policy against loss,
since claims thereunder may only be made respecting particular
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defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below. The pool insurance policy,
if any, will not cover losses due to a failure to pay or denial
of a claim under a primary mortgage insurance policy,
irrespective of the reason therefor. The related Prospectus
Supplement will describe any provisions of a pool insurance
policy that are materially different from those described below.
Any pool insurance policy may provide that no claims may be
validly presented thereunder unless (i) any required primary
mortgage insurance policy is in effect for the defaulted Mortgage
Loan and a claim thereunder has been submitted and settled; (ii)
hazard insurance on the related Mortgaged Property has been kept
in force and real estate taxes and other protection and
preservation expenses have been paid; (iii) if there has been
physical loss or damage to the Mortgaged Property, it has been
restored to its condition (reasonable wear and tear excepted) at
the Cut-off Date; (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of
liens, except certain permitted encumbrances; and (v) the
applicable Servicer or Master Servicer has advanced foreclosure
costs. Upon satisfaction of these conditions, the pool insurer
will have the option either (a) to purchase the Mortgaged
Property at a price equal to the Principal Balance thereof plus
accrued and unpaid interest at the mortgage interest rate to the
date of purchase and certain expenses incurred by the applicable
Servicer or Master Servicer on behalf of the Trustee and the
Certificateholders, or (b) to pay the amount by which the sum of
the Principal Balance of the defaulted Mortgage Loan plus accrued
and unpaid interest at the mortgage interest rate to the date of
payment of the claim and the aforementioned expenses exceeds the
proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed
to have been paid under any related primary mortgage insurance
policy. If any property securing a defaulted Mortgage Loan is
damaged and proceeds, if any, from the related hazard insurance
policy or any applicable special hazard insurance policy are
insufficient to restore the damaged property to a condition
sufficient to permit recovery under the pool insurance policy,
the applicable Servicer or Master Servicer will not be required
to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds
to Certificateholders on liquidation of the Mortgage Loan after
reimbursement of the applicable Servicer or the Master Servicer,
as the case may be, for its expenses, and (ii) that such expenses
will be recoverable by it through proceeds of the sale of the
property or proceeds of the pool insurance policy or any primary
mortgage insurance policy.
In general, no pool insurance policy will insure (and many
primary mortgage insurance policies may not insure) against loss
sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing
of a Mortgage Loan, including misrepresentation by the Borrower
or persons involved in the origination thereof, or (ii) failure
to construct a Mortgaged Property in accordance with plans and
specifications. If specified in the related Prospectus
Supplement, a failure of coverage attributable to one of the
foregoing events may result in a breach of a representation of
the Company or another party identified therein and in such event
might give rise to an obligation on the part of such party to
purchase the defaulted Mortgage Loan if the breach materially and
adversely affects the interests of Certificateholders and cannot
be cured by such party.
Unless otherwise specified in the related Prospectus
Supplement, the original amount of coverage under any pool
insurance policy will be reduced over the life of the related
Series of Certificates by the aggregate dollar amount of claims
paid less the aggregate of the net amounts realized by the pool
insurer upon disposition of all foreclosed properties. The amount
of claims paid will include certain expenses incurred by the
applicable Servicer or Master Servicer as well as accrued
interest on delinquent Mortgage Loans to the date of payment of
the claim. See "Certain Legal Aspects of the Mortgage Loans-
Foreclosure." Accordingly, if aggregate net claims paid under any
pool insurance policy reach the original policy limit, coverage
under that pool insurance policy will be exhausted and any
further losses will be borne by one or more classes of
Certificateholders unless assumed by the Responsible Party or the
Guarantor under any obligations they may have in
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respect of Liquidating Loans or by some other entity, if and to
the extent specified in the related Prospectus Supplement.
Since any mortgage pool insurance policy may require that
the property subject to a defaulted Mortgage Loan be restored to
its original condition prior to claiming against the pool
insurer, such policy may not provide coverage against hazard
losses. As described under "Servicing of the Mortgage Loans and
Contracts-Hazard Insurance," the hazard policies concerning the
Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is
covered, may afford recoveries which are significantly less than
the full replacement cost of such losses. Even if special hazard
insurance is applicable as specified in the related Prospectus
Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be
limited. See "Special Hazard Insurance" below. As a result,
certain hazard risks will not be insured against and will
therefore be borne by Certificateholders, unless otherwise
assumed by the Responsible Party or the Guarantor under any
obligations they may have in respect of Liquidating Loans or by
some other entity, as specified in the related Prospectus
Supplement.
The terms of any pool insurance policy relating to a pool
of Contracts will be described in the related Prospectus
Supplement.
Special Hazard Insurance. In order to decrease the
likelihood that Certificateholders will experience losses in
respect of the Mortgage Loans, if specified in the related
Prospectus Supplement, the Company, each Servicer or the Master
Servicer will obtain one or more special hazard insurance
policies with respect to each of the Mortgage Loans. Any such
policies may be in lieu of or in addition to any obligations of
the applicable Servicer or Master Servicer to advance delinquent
payments in respect of the Mortgage Loans. Such a special hazard
insurance policy will, subject to limitations described below and
in the related Prospectus Supplement, protect Holders of
Certificates from (i) loss by reason of damage to Mortgaged
Properties caused by certain hazards (including earthquakes and,
to a limited extent, tidal waves and related water damage) not
covered by the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located
or under flood insurance policies, if any, covering the Mortgaged
Properties and (ii) loss from partial damage caused by reason of
the application of the co-insurance clause contained in hazard
insurance policies. Any special hazard insurance policy may not
cover losses occasioned by war, civil insurrection, certain
governmental actions, errors in design, faulty workmanship or
materials (except under certain circumstances), nuclear reaction,
flood (if the Mortgaged Property is located in a federally
designated flood area), chemical contamination and certain other
risks. Aggregate claims under each special hazard insurance
policy may be limited to a specified percentage of the aggregate
Principal Balance of the Mortgage Loans as of the Cut-off Date.
Any special hazard insurance policy may also provide that no
claim may be paid unless hazard and, if applicable, flood
insurance on the Mortgaged Property has been kept in force and
other protection and preservation expenses have been paid by the
applicable Servicer or Master Servicer.
Subject to the foregoing limitations, any special hazard
insurance policy may provide that, where there has been damage to
property securing a foreclosed Mortgage Loan (title to which has
been acquired by the insured) and to the extent such damage is
not covered by the hazard insurance policy or flood insurance
policy, if any, maintained by the borrower, the applicable
Servicer or the Master Servicer, the special hazard insurer will
pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the property to the special
hazard insurer, the unpaid principal balance of such Mortgage
Loan at the time of acquisition of such property by foreclosure
or deed in lieu of foreclosure, plus accrued interest to the date
of claim settlement and certain expenses incurred by the
applicable Servicer or Master Servicer with respect to such
property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the insurer, the amount of
further coverage under the related special hazard insurance
policy will be reduced by such amount less any net proceeds from
the sale of the property. Any amount paid as the cost of repair
or
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replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described
under clause (i) above will satisfy the condition under any pool
insurance policy that the property be restored before a claim
under such pool insurance policy may be validly presented with
respect to the defaulted Mortgage Loan secured by such property.
The payment described under clause (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage
Loan under the related pool insurance policy. Therefore, so long
as a pool insurance policy remains in effect, the payment by the
insurer under a special hazard insurance policy of the cost of
repair or replacement or the unpaid principal balance of the
Mortgage Loan plus accrued interest and certain expenses will not
affect the total insurance proceeds paid to Certificateholders,
but will affect the relative amounts of coverage remaining under
the related special hazard insurance policy and pool insurance
policy.
The terms of any special hazard policy relating to a pool
of Contracts will be described in the related Prospectus
Supplement.
Bankruptcy Bond. In the event of a bankruptcy of a
borrower, the bankruptcy court may establish the value of the
Mortgaged Property securing the related Mortgage Loan at an
amount less than the then outstanding principal balance of such
Mortgage Loan secured by such Mortgaged Property and could reduce
the secured debt to such value. In such case, the holder of such
Mortgage Loan would become an unsecured creditor to the extent of
the difference between the outstanding principal balance of such
Mortgage Loan and such reduced secured debt. In addition, certain
other modifications of the terms of a Mortgage Loan can result
from a bankruptcy proceeding, including the reduction in monthly
payments required to be made by the borrower. See "Certain Legal
Aspects of the Mortgage Loans and Contracts-The Mortgage
Loans-Enforceability of Certain Provisions." If so provided in
the related Prospectus Supplement, the applicable Servicer or
Master Servicer will obtain a bankruptcy bond or similar
insurance contract (a "bankruptcy bond") for proceedings with
respect to borrowers under the Bankruptcy Code. A bankruptcy bond
will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and
interest on a Mortgage Loan or a reduction by such court of the
principal amount of a Mortgage Loan and will cover certain unpaid
interest on the amount of such a principal reduction from the
date of the filing of a bankruptcy petition.
A bankruptcy bond will provide coverage in the aggregate
amount specified in the related Prospectus Supplement. Such
amount will be reduced by payments made under such bankruptcy
bond in respect of the related Mortgage Loans, unless otherwise
specified in the related Prospectus Supplement, and will not be
restored.
In lieu of a bankruptcy bond, subordination or another
credit enhancement technique may be used or the Servicer or
Master Servicer may obtain a Limited Guarantee to cover such
bankruptcy-related losses.
The terms of any bankruptcy bond (or subordination or other
credit enhancement technique in lieu thereof) relating to a pool
of Contracts will be described in the related Prospectus
Supplement.
Repurchase Bond. If specified in the related Prospectus
Supplement, a party designated therein will be obligated to
repurchase any Mortgage Loan or Contract (up to an aggregate
dollar amount specified in the related Prospectus Supplement) for
which insurance coverage is denied due to dishonesty,
misrepresentation or fraud in connection with the origination or
sale of such Mortgage Loan or Contract. Such obligation may be
secured by a surety bond or other instrument or mechanism
guaranteeing payment of the amount to be paid by such party.
Guaranteed Investment Contracts. If specified in the
related Prospectus Supplement, on or prior to the date of
issuance of a Series of Certificates, the Trustee will enter into
a guaranteed investment contract (a "GIC") pursuant to which all
amounts deposited in the Certificate Account
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and, if so specified, the Reserve Accounts, will be invested by
the Trustee and under which the issuer of the GIC will pay to the
Trustee interest at an agreed rate per annum with respect to the
amounts so invested.
Reserve Accounts. If specified in the related Prospectus
Supplement, cash, U.S. Treasury securities, instruments
evidencing ownership of principal or interest payments thereon,
letters of credit, demand notes, certificates of deposit, other
instruments or obligations or a combination thereof in the
aggregate amount specified in the related Prospectus Supplement
will be deposited by the Company on the Closing Date in one or
more accounts (each, a "Reserve Account") established by the
Trustee. Such cash and the principal and interest payments on
such other instruments will be used to enhance the likelihood of
timely payment of principal of, and interest on, or, if so
specified in the related Prospectus Supplement, to provide
additional protection against losses in respect of, the assets in
the related Trust Fund, to pay the expenses of the Trust Fund or
for such other purposes specified in the related Prospectus
Supplement. Whether or not the Company has any obligation to make
such a deposit, certain amounts to which the Subordinated
Certificateholders, if any, or another class of
Certificateholders would otherwise be entitled may instead be
deposited into the Reserve Account from time to time and in the
amounts as specified in the related Prospectus Supplement. Any
cash in the Reserve Account and the proceeds of any other
instrument upon maturity will be invested in Eligible Reserve
Fund Investments. "Eligible Reserve Fund Investments" may include
Eligible Investments, mortgage pass-through or participation
securities, mortgage-backed bonds or notes or other investments,
to the extent specified in the related Prospectus Supplement.
Eligible Reserve Fund Investments with respect to a Series will
include only obligations or securities that mature on or before
the date on which the amounts in the Reserve Fund for such Series
are required or may be anticipated to be required to be applied
for the benefit of Certificate holders of such Series. If a
letter of credit is deposited with the Trustee, such letter of
credit will be irrevocable. Unless otherwise specified in the
related Prospectus Supplement, any instrument deposited therein
will name the Trustee, in its capacity as trustee for the Holders
of the Offered Certificates, as beneficiary and will be issued by
an entity acceptable to each Rating Agency. Additional
information with respect to such instruments deposited in the
Reserve Accounts will be set forth in the related Prospectus
Supplement.
Any amounts so deposited and payments on instruments so
deposited will be available for withdrawal from the Reserve
Accounts for distribution to the Holders of the Offered
Certificates for the purposes, in the manner and at the times
specified in the related Prospectus Supplement.
Other Insurance, Guarantees and Letters of Credit. If
specified in the related Prospectus Supplement, a Trust Fund may
also include insurance, guarantees or letters of credit for the
purpose of (i) maintaining timely payments or providing
additional protection against losses on the assets included in
such Trust Fund, (ii) paying administrative expenses or (iii)
establishing a minimum reinvestment rate on the payments made in
respect of such assets or principal payment rate on such assets.
Such arrangements may include agreements under which
Certificateholders are entitled to receive amounts deposited in
various accounts held by the Trustee upon the terms specified in
the related Prospectus Supplement. Such arrangements may be in
lieu of any obligation of the applicable Servicer or Master
Servicer to advance delinquent installments in respect of the
Mortgage Loans or Contracts. See "Servicing of Mortgage Loans and
Contracts-Advances."
CASH FLOW AGREEMENT
If specified in the related Prospectus Supplement, the
Trust Fund for a Series of Certificates will enter into or obtain
an assignment of a cash flow agreement pursuant to which the
Trust Fund will have the right to receive, and may have the
obligation to make, certain payments of interest (or other
payments) as set forth or determined as described therein. The
Prospectus Supplement relating to a Series of Certificates having
the benefit of a cash flow agreement will describe the material
terms of such agreement and the particular risks associated with
the cash flow agreement,
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including market and credit risk, the effect of counterparty
defaults and other risks, if any, addressed by the rating. The
Prospectus Supplement relating to such Series of Certificates
also will set forth certain information relating to the corporate
status, ownership and credit quality of the counterparty or
counterparties to such cash flow agreement. In addition, if the
Certificateholders of such series will be materially dependent
upon any counterparty for timely payment of interest and/or
principal on their Certificates, the related Prospectus
Supplement will include audited financial statements on a
comparative basis for at least the last two years and any other
appropriate financial information (including, if appropriate,
additional financial information and/or narrative explanations of
financial data) regarding such counterparty. A cash flow
agreement may include one or more of the following types of
arrangements, or another arrangement described in the related
Prospectus Supplement:
Interest Rate Swap. In an interest rate swap, the Trust
Fund will exchange the stream of interest payments on the
Mortgage Loans for another stream of interest payments based on a
notional amount, which may be equal to the principal amount of
the Mortgage Loans as it declines over time.
Interest Rate Caps. In an interest rate cap, the Trust Fund
or the counterparty, in exchange for a fee, will agree to
compensate the other if a particular interest rate index rises
above a rate specified in the agreement. The fee for the cap may
be a single up-front payment to or from the Trust Fund, or a
series of payments over time.
Interest Rate Floors. In an interest rate floor, the Trust
Fund or the counterparty, in exchange for a fee, will agree to
compensate the other if a particular interest rate index falls
below a rate specified in the agreement. As with interest rate
caps, the fee may be a single up-front payment or it may be paid
periodically. Interest Rate Collars. An interest rate collar is a
combination of an interest rate cap and an interest rate floor.
One party agrees to compensate the other if a particular interest
rate index rises above the cap and, in exchange, will be
compensated if the interest rate index falls below the floor.
YIELD, MATURITY AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
The yields to maturity and weighted average lives of the
Offered Certificates will be affected primarily by, among other
things, the rate and timing of principal payments received on or
in respect of the Mortgage Loans, Mortgage-Backed Securities or
Contracts included in the related Trust Fund.
Such principal payments will include scheduled payments as well
as Principal Prepayments (including refinancings) and prepayments
resulting from foreclosure, condemnation and other dispositions
of the Mortgaged Properties or Manufactured Homes (including
amounts paid by insurers under applicable insurance policies),
from repurchase by the party responsible therefor of any
Mortgage Loan or Contract as to which there has been a material
breach of warranty or defect in documentation (or deposit of
certain amounts in respect of delivery of a substitute Mortgage
Loan), repurchase by the Responsible Party, the Guarantor or any
other entity of any Liquidating Loan or Delinquent Mortgage Loan,
if applicable, and from the repurchase by the party entitled to
effect such repurchase of all of the Certificates or all of the
Mortgage Loans, Mortgage-Backed Securities or Contracts in
certain circumstances and will have the effect of making
available for distribution to Certificateholders amounts of
principal which otherwise would be passed through in amortized
increments over the remaining term of such Mortgage Loan or
mortgage loan, thus shortening the life of the Holder's
Certificate as described more fully below. See "Description of
the Certificates-Optional Termination of Trust Fund." The yield
to maturity and weighted average lives of the Offered
Certificates may also be affected by the amount and timing of
delinquencies and losses on or in respect of the Mortgage Loans,
Mortgage-Backed Securities or Contracts.
A number of social, economic, tax, geographic, demographic,
legal and other factors may influence prepayments, delinquencies
and losses. For a Trust Fund comprised of Mortgage Loans, these
factors may include the age of the Mortgage Loans, the geographic
distribution of the
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Mortgaged Properties, the payment terms of the Mortgages, the
characteristics of the borrowers, homeowner mobility, economic
conditions generally and in the geographic area in which the
Mortgaged Properties are located, enforceability of due-on-sale
clauses, servicing decisions, prevailing mortgage market interest
rates in relation to the interest rates on the Mortgage Loans,
the availability of mortgage funds, the use of second or "home
equity" mortgage loans by borrowers, the availability of
refinancing opportunities, the use of the properties as second or
vacation homes, the extent of the borrowers' net equity in the
Mortgaged Properties and, where investment properties are
securing the Mortgage Loans, tax-related considerations and the
availability of other investments. The rate of principal payment
may also be subject to seasonal variations. The prepayment
experience on home equity loans may differ from those of other
Mortgage Loans. Similar types of factors may affect the rate of
prepayments, delinquencies and losses on Contracts.
The rate of principal prepayments on pools of housing loans
has been subject to significant fluctuation over time. Generally,
if prevailing interest rates were to fall significantly below the
interest rates on the Mortgage Loans, the Mortgage Loans would be
expected to prepay at higher rates than if prevailing rates were
to remain at or above the interest rates on the Mortgage Loans.
Conversely, if interest rates were to rise above the interest
rates on the Mortgage Loans, the Mortgage Loans would be expected
to prepay at lower rates than if prevailing rates were to remain
at or below interest rates on the Mortgage Loans. The timing of
changes in the rate of prepayments may significantly affect a
Certificateholder's actual yield to maturity, even if the average
rate of principal payments is consistent with a
Certificateholder's expectation. In general, the earlier a
prepayment of principal the greater the effect on a
Certificateholder's yield to maturity. As a result, the effect on
a Certificateholder's yield of principal payments occurring at a
rate higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the
related Series of Certificates will not be offset by a subsequent
like reduction (or increase) in the rate of principal payments.
When a Mortgage Loan or Contract prepays in full, the
borrower generally will be required to pay interest on the amount
of prepayment only to the prepayment date. When a partial
prepayment of principal is made on a Mortgage Loan (other than a
simple interest home equity loan), the borrower generally will
not be required to pay interest on the amount of the partial
prepayment during the month in which such prepayment is made. If
specified in the related Prospectus Supplement, the applicable
Servicer or Master Servicer will be obligated to offset any such
prepayment interest shortfalls attributable to full and partial
prepayments on Mortgage Loans by the borrowers to the extent of
its servicing compensation for the related Distribution Date. In
addition, unless otherwise specified in the related Prospectus
Supplement, a full or partial prepayment will not be required to
be passed through to Certificateholders until the month following
receipt. Accordingly, the effect of any principal prepayments, to
the extent that any resulting shortfall exceeds any payments made
by a Servicer from its own funds, will be to reduce or delay the
aggregate amount of distributions to Certificateholders. Any such
shortfalls will be allocated among the Certificates as provided
in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus
Supplement, interest with respect to home equity loans accrues on
a simple interest basis. Under the simple interest method,
regularly scheduled payments (which are based on the amortization
of the loan over a Series of equal monthly payments) and other
payments are applied first to interest accrued to the date
payment is received and then to reduce the unpaid principal
balance of the related loan. Each regularly scheduled monthly
interest payment is calculated by multiplying the outstanding
principal balance of the loan by the stated interest rate. Such
product is then multiplied by a fraction, the numerator of which
is the number of days elapsed since the preceding payment of
interest was made and the denominator of which is either 365 or
360, depending on applicable state law.
As a result of the payment terms of simple interest home
equity loans, the making of a scheduled payment on, or the
prepayment of, such a home equity loan prior to its scheduled due
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date may result in the collection of less than one month's
interest on such home equity loan for the period since the
preceding payment was made. Conversely, if the scheduled payment
on such a home equity loan is made after its scheduled payment
date or the home equity loan is prepaid after the scheduled due
date, the collection of interest on such home equity loan for
such period may be greater than one month's interest on such home
equity loan. In addition, the extent to which simple interest
home equity loans experience early payment or late payment of
scheduled payments will correspondingly change the amount of
principal received during a monthly period and, accordingly, the
amount of principal to be distributed on the related Distribution
Date and the amount of unpaid principal due at the stated
maturity of such home equity loans. To the extent shortfalls
attributable to prepayments or the early receipt of a scheduled
payment on home equity loans are not compensated for by any forms
of credit enhancement described in the related Prospectus
Supplement, the Certificateholders will experience delays or
losses in amounts due them.
If a Borrower pays more than one scheduled installment on a
simple interest home equity loan at a time, the entire amount of
the additional installment will be treated as a principal
prepayment and passed through to Certificateholders in the month
following the month of receipt. In such case, although the
Borrower will not be required to make the next regularly
scheduled installment, interest will continue to accrue on the
Principal Balance of the home equity loan, as reduced by the
application of the early installment. As a result, when the
Borrower pays the next required installment, the installment so
paid may be insufficient to cover the interest that has accrued
since the last payment by the Borrower. Notwithstanding such
insufficiency, the Borrower's home equity loan would be
considered to be current. If specified in the related Prospectus
Supplement, a party specified therein will be required to advance
the amount of such insufficiency. This insufficiency will
continue until the installment payments received are once again
sufficient to cover all accrued interest and to reduce the
Principal Balance of the home equity loan. Depending on the
Principal Balance and interest rate of the related home equity
loan and on the number of installments that were paid early,
there may be extended periods of time during which home equity
loans that are current are not amortizing.
Factors other than those identified herein and in the
related Prospectus Supplement could significantly affect
Principal Prepayments at any time and over the lives of the
Offered Certificates. The relative contribution of the various
factors affecting prepayment may also vary from time to time.
There can be no assurance as to the rate of payment of principal
of the Mortgage Loans, Mortgage-Backed Securities or Contracts at
any time or over the lives of the Offered Certificates.
The Prospectus Supplement relating to the Offered
Certificates of a Series will discuss in greater detail the
effect of the rate and timing of principal payments (including
prepayments), delinquencies and losses on the yield, weighted
average lives and maturities of such Offered Certificates. If a
Series of Certificates is backed by a pool of Mortgage Loans that
includes home equity loans providing for balloon payments at
maturity, the related Prospectus Supplement will contain
information regarding the potential effect of such Mortgage Loans
on the weighted average lives of such Offered Certificates.
SERVICING OF THE MORTGAGE LOANS AND CONTRACTS
Unless otherwise specified in the related Prospectus
Supplement, with respect to each Series of Certificates, the
related Mortgage Loans will be serviced either (i) by an
institution or institutions identified in the related Prospectus
Supplement as servicer or servicers (each, a "Servicer") or (ii)
by another institution identified in the related Prospectus
Supplement as master servicer (the "Master Servicer"). If an
institution acts as Master Servicer with respect to a Series, the
related Agreement may provide either (i) that the Master Servicer
may delegate all or a portion of the servicing duties described
below to other Servicers but shall remain directly liable for all
such servicing duties (a "Direct Master Servicing Arrangement")
or (ii) that certain of the servicing duties described below may
be performed directly by other Servicers, pursuant to servicing
agreements entered into
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between such Servicers and the Company, as seller, and assigned
to the Trustee, in which event the Master Servicer will be
obligated to supervise such Servicers' performance but will not
itself be obligated to perform such duties (a "Supervisory Master
Servicing Arrangement"). Each Master Servicer will have the
ability to terminate any such other Servicer upon terms that will
be agreed to at or before the time the related Series of
Certificates is issued. Unless otherwise specified in the related
Prospectus Supplement, in the event that the Master Servicer is
no longer acting as such for the Series, the Trustee or a
successor Master Servicer shall succeed to the Master Servicer's
rights under the servicing agreement with the primary Servicer.
The related Prospectus Supplement for each Series will
identify the institution or institutions that will act as
Servicers or Master Servicer for such Series, and if there is a
Master Servicer, whether the master servicing arrangement is a
Direct Master Servicing Arrangement or a Supervisory Master
Servicing Arrangement. If an institution acts as Servicer for a
Series, or acts as Master Servicer under a Direct Master
Servicing Arrangement, all references in this Section to the
Servicer should be read to refer to each such institution as
Servicer or Master Servicer, as appropriate. If an institution
acts as Master Servicer with respect to a Series under a
Supervisory Master Servicing Arrangement, such references should
be read to refer to the direct Servicers of such Series, acting
under the supervision of such institution as Master Servicer.
Collection and Other Servicing Procedures
Mortgage Loans. The Servicer will be responsible for making
reasonable efforts to collect all payments called for under the
Mortgage Loans and shall, consistent with each Agreement, follow
such collection procedures as it follows with respect to mortgage
loans in its servicing portfolio which are comparable to the
Mortgage Loans. Consistent with the above, the Servicer may, in
its discretion, (i) waive any late payment charge and (ii) if a
default on the related Mortgage Loan has occurred or is
reasonably foreseeable, arrange with the borrower a schedule for
the liquidation of a delinquency in accordance with provisions
described in the related Prospectus Supplement.
The Servicer will be obligated to follow such normal
practices and procedures as it deems necessary or advisable to
realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the
borrower for a deed in lieu of foreclosure or, in the event a
deficiency judgment is available against the borrower or other
person (see "Certain Legal Aspects of the Mortgage Loans and
Contracts-Anti-Deficiency Legislation and Other Limitations on
Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and
proceed for the deficiency against the appropriate person. The
amount of the ultimate net recovery (including the proceeds of
any pool insurance or other guarantee), after reimbursement to
the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior
unreimbursed advances of principal and interest with respect
thereto, will be credited to the Loan Payment Record when
realized, and will be distributed to Certificateholders on the
next Distribution Date following the month of receipt. The
Servicer will not be required to expend its own funds in
connection with any foreclosure or towards the restoration of any
Mortgaged Property unless it determines (i) that such restoration
or foreclosure will increase the proceeds of liquidation of the
Mortgaged Loan to Certificateholders after reimbursement to
itself for such expenses and (ii) that such expenses will be
recoverable to it either through liquidation proceeds or
insurance proceeds in respect of the related Mortgage Loan.
If a Mortgage Loan contains a "due-on-sale" clause and the
related Mortgaged Property has been or is about to be conveyed by
the borrower, the Servicer will be obligated to accelerate the
maturity of the Mortgage Loan, unless it reasonably believes it
is unable to enforce the "due-on-sale" clause under applicable
law or such enforcement would adversely affect or jeopardize
coverage under any related primary mortgage insurance policy or
pool insurance policy. If it reasonably believes it may be
restricted by law, for any reason, from enforcing such a
"due-on-sale" clause, the
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Servicer may enter into an assumption and modification agreement
with the person to whom such property has been or is about to be
conveyed, pursuant to which such person becomes liable under the
Mortgage Note. Any fee collected by the Servicer for entering
into an assumption agreement will be retained by the Servicer as
additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce
"due-on-sale" clauses, see "Certain Legal Aspects of the Mortgage
Loans and Contracts-The Mortgage Loans- Enforceability of Certain
Provisions." In connection with any such assumption, the mortgage
interest rate borne under the related Mortgage Note may not be
decreased.
The Servicer will be required to maintain with one or more
depository institutions one or more accounts into which it will
be required to deposit all payments of taxes, insurance premiums,
assessments or comparable items received for the account of the
borrowers. Withdrawals from such account or accounts may be made
only to effect payment of taxes, insurance premiums, assessments
or comparable items, to reimburse the Servicer out of related
collections for any cost incurred in paying taxes, insurance
premiums and assessments or otherwise preserving or protecting
the value of the Mortgages, to refund to borrowers any amounts
determined to be overages and to pay interest to borrowers on
balances in such account or accounts to the extent required by
law.
Unless otherwise specified in the related Prospectus
Supplement, so long as it acts as servicer of the Mortgage Loans,
the Servicer, and any successor to the Servicer appointed
following an Event of Default, will be required to maintain
certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity
bond coverage ensuring against losses through wrongdoing of its
officers, employees and agents.
FHA Insurance and VA Guarantees. The Servicer, on behalf of
the Trustee and the Certificateholders, will be required to
present or cause to be presented claims to the FHA and the VA, if
applicable in respect of any FHA insurance or VA guarantee
respecting defaulted Mortgage Loans.
The FHA is responsible for administering various federal
programs, including mortgage insurance, authorized under the
Housing Act, as amended, and the United States Housing Act of
1937, as amended.
The insurance premiums for FHA Loans will be collected by
HUD-approved lenders or by the Servicer and paid to the FHA. The
regulations governing FHA single-family mortgage insurance
programs provide that insurance benefits are payable either upon
foreclosure (or other acquisition of possession) and conveyance
of the mortgaged premises to HUD or upon assignment of the
defaulted Mortgage Loan to HUD. With respect to a defaulted FHA
Loan, the Servicer is limited in its ability to initiate
foreclosure proceedings. When it is determined, by the Servicer
or HUD, that default was caused by circumstances beyond the
mortgagor's control, the Servicer is expected to make an effort
to avoid foreclosure by entering, if feasible, into one of a
number of available forms of forbearance plans with the
mortgagor. Such plans may involve the reduction or suspension of
scheduled payments for a specified period, with such payments to
be made up on or before the maturity date of the Mortgage Note,
or the rescheduling or other adjustment of payments due under the
Mortgage Note up to or beyond the scheduled maturity date. In
addition, when a default caused by such circumstances is
accompanied by certain other criteria, HUD may provide relief by
making payments to the Servicer in partial or full satisfaction
of amounts due under the Mortgage Loan (which payments are to be
repaid by the borrower to HUD) or by accepting assignment of the
Mortgage Loan from the Servicer. With certain exceptions, at
least three full installments must be due and unpaid under the
Mortgage Loan, and HUD must have rejected any request for relief
from the mortgagor before the Servicer may initiate foreclosure
proceedings.
HUD has the option, in most cases, to pay insurance claims
in cash or in debentures issued by HUD. Presently, claims are
being paid in cash, and claims have not been paid in debentures
since
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1965. HUD debentures issued in satisfaction of FHA insurance
claims bear interest at the applicable HUD debenture interest
rate. The Servicer of each FHA Loan will be obligated to purchase
any such debenture issued in satisfaction of a defaulted FHA Loan
serviced by it for an amount equal to the unpaid principal
balance of the FHA Loan.
The amount of insurance benefits generally paid by the FHA
is equal to the entire unpaid principal amount of the defaulted
Mortgage Loan adjusted to reimburse the Servicer for certain
costs and expenses and to deduct certain amounts received or
retained by the Servicer after default. When entitlement to
insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Servicer is compensated
for no more than two-thirds of its foreclosure costs, and is
compensated for interest accrued and unpaid prior to such date
but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance
benefits results from assignment of the Mortgage Loan to HUD, the
insurance payment includes full compensation for interest accrued
and unpaid to the assignment date. The insurance payment itself,
upon foreclosure of an FHA Loan, bears interest from a date 30
days after the borrower's first uncorrected failure to perform
any obligation or make any payment due under the Mortgage Loan
and, upon assignment, from the date of assignment, to the date of
payment of the claim, in each case at the same mortgage rate as
the applicable HUD debenture interest rate as described above.
With respect to a defaulted VA Loan, the Servicer is,
absent exceptional circumstances, authorized to announce its
intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted
after liquidation of the mortgaged property.
The amount payable under the guarantee will be the
percentage of the VA Loan originally guaranteed applied to
indebtedness outstanding as of the applicable date of computation
as specified in the VA regulations. Payments under the guarantee
will equal the unpaid principal amount of the VA Loan, interest
accrued on the unpaid balance of the VA Loan to the appropriate
date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been
recovered through liquidation of the Mortgaged Property. The
amount payable under the guarantee may in no event exceed the
amount of the original guarantee.
The maximum guarantee that may be issued by the VA under a
VA Loan as of July 14, 1993 is the lesser of 40% of the original
principal amount of the VA Loan or $20,000. The liability on the
guarantee is reduced or increased pro rata with any reduction or
increased in the amount of indebtedness, but in no event will the
amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the
guarantee, make full payment to a mortgagee of unsatisfied
indebtedness on a mortgage upon its assignment to VA.
Contracts. Pursuant to the Agreement relating to any Trust
Fund containing Contracts, the Servicer will be required to
service and administer the Contracts assigned to the Trustee as
more fully set forth below. The Servicer will be required to
perform diligently all services and duties specified in each
Agreement, in the same manner as prudent lending institutions
servicing manufactured housing installment sales contracts of the
same type as the Contracts in those jurisdictions where the
related Manufactured Homes are located.
The Agreement will provide that, when any Manufactured Home
securing a Contract is about to be conveyed by the borrower, the
Servicer, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such
conveyance, may exercise its rights to accelerate the maturity of
such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce
such "due-on-sale" clause under applicable law. In such case, the
Servicer is authorized to take or enter into an assumption
agreement from or
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with the person to whom such Manufactured Home has been or is
about to be conveyed, pursuant to which such person becomes
liable under the Contract.
Under the Agreement, the Servicer will be required to
repossess or otherwise comparably convert the ownership of
properties securing such of the related Contracts as come into
and continue in default and as to which no satisfactory
arrangements can be made for collection of delinquent payments.
In connection with such repossession or other conversion, the
Servicer will be required to follow such practices and procedures
as it deems necessary or advisable and as shall be normal and
usual in its general servicing activities. The Servicer, however,
will not be required to expend its own funds in connection with
any repossession or towards the restoration of any property
unless it determines (i) that such restoration or repossession
will increase the proceeds of liquidation of the related Contract
to the Certificateholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it
either through liquidation proceeds or through insurance
proceeds.
Hazard Insurance
Mortgage Loans. The Servicer will be required to cause to
be maintained for each Mortgaged Property a hazard insurance
policy. The coverage of such policy is required to be in an
amount not less than the maximum insurable value of the
improvements securing the related Mortgage Loan from time to time
or the Principal Balance owing on such Mortgage Loan from time to
time, whichever is less. All amounts collected by the Servicer
under any hazard policy (except for amounts to be applied to the
restoration or repair of property subject to the related Mortgage
or property acquired by foreclosure or amounts released to the
related borrower in accordance with the Servicer's normal
servicing procedures) will be credited to the related Loan
Payment Record and deposited in the applicable Certificate
Account at the times and in the manner described under "Loan
Payment Record" below.
In general, the standard form of fire and extended coverage
policy covers physical damage to or destruction of the
improvements on the property by fire, lightning, explosion,
smoke, windstorm and hail, riot, strike and civil commotion,
subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will
be underwritten by different insurers and, therefore, will not
contain identical terms and conditions, the basic terms thereof
are dictated by state law. Such policies typically do not cover
any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud
flow), nuclear reactions, pollution, wet or dry rot, vermin,
rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be
all-inclusive. If the property securing a Mortgage Loan is
located in a federally designated flood area, the Agreement will
require that flood insurance be maintained in such amounts as
would be required by the Federal National Mortgage Association in
connection with its mortgage loan purchase program. The Company
may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement-Special
Hazard Insurance."
Most of the properties securing the Mortgage Loans will be
covered by homeowners' insurance policies, which, in addition to
the standard form of fire and extended coverage, provide coverage
for certain other risks. These homeowners' policies typically
contain a "coinsurance" clause which in effect requires the
insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the
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, then the insurer's liability in the event
of partial loss will not exceed the lesser of (i) the actual cash
value (generally defined as replacement cost at the time and
place of loss, less physical depreciation) of the improvements
damaged or destroyed, or (ii) such proportion of the loss as the
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amount of insurance carried bears to the specified percentage of
the full replacement cost of such improvements.
Since the amount of hazard insurance the Servicer is
required to cause to be maintained on the improvements securing
the Mortgage Loans declines as the Principal Balances owing
thereon decrease, if the residential properties securing the
Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard
insurance proceeds will be insufficient to restore fully the
damaged property.
The Servicer on behalf of the Trustee will be required to
cause to be maintained on any Mortgaged Property acquired upon
foreclosure, or by deed in lieu of foreclosure, hazard insurance
with extended coverage in an amount which is at least equal to
the lesser of (i) the maximum insurable value from time to time
of the improvements which are a part of such property or (ii) the
unpaid Principal Balance of the related Mortgage Loan at the time
of such foreclosure or deed in lieu of foreclosure, plus accrued
interest and the good-faith estimate by the Servicer of related
liquidation expenses to be incurred in connection therewith.
The Servicer may maintain, in lieu of causing individual
hazard insurance policies to be maintained with respect to each
Mortgage Loan, one or more blanket insurance policies covering
hazard losses on the Mortgage Loans. The Servicer will be
required to pay the premium for such policy on the basis
described therein and will be required to pay any deductible
amount with respect to claims under such policy relating to the
Mortgage Loans.
The Servicer will not require that a standard hazard or
flood insurance policy be maintained on the cooperative dwelling
relating to any Cooperative Loan. Generally, the Cooperative
itself is responsible for maintenance of hazard insurance for the
property owned by the Cooperative and the tenant-stockholders of
that Cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a Cooperative and the
related borrower on a Cooperative Loan do not maintain such
insurance or do not maintain adequate coverage or any insurance
proceeds are not applied to the restoration of damaged property,
any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not
covered by other credit enhancement.
Contracts. The terms of the Agreement will require the
Servicer to cause to be maintained with respect to each Contract
one or more hazard insurance policies which provide, at a
minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured
housing, issued by a company authorized to issue such policies in
the state in which the Manufactured Home is located, and in an
amount which is not less than the maximum insurable value of such
Manufactured Home or the principal balance due from the borrower
on the related Contract, whichever is less. Unless otherwise
indicated in the related Prospectus Supplement, when a
Manufactured Home's location was, at the time of origination of
the related Contract, within a federally designated special flood
hazard area, the Servicer also will be required to cause such
flood insurance to be maintained in an amount at least equal to
the minimum amount specified in the preceding sentence or such
lesser amount as may be available under the federal flood
insurance program.
The Servicer may maintain, in lieu of causing individual
hazard insurance policies to be maintained with respect to each
Manufactured Home, and shall maintain, to the extent that the
related Contract does not require the borrower to maintain a
hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on
the borrowers' interests in the Contracts resulting from the
absence or insufficiency of individual hazard insurance policies.
The Servicer will be required to pay the premium for such policy
on the basis described therein and will be required to pay any
deductible amount with respect to claims under such policy
relating to the Contracts.
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The Servicer, to the extent practicable, will be required
to cause the borrowers to pay all taxes and similar governmental
charges when and as due. If specified in the related Prospectus
Supplement, to the extent that nonpayment of any taxes or charges
would result in the creation of a lien upon any Manufactured Home
having a priority equal or senior to the lien of the related
Contract, the Servicer will be required to pay any such
delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf
of the Trustee, the Servicer will be required to either (i)
maintain at its expense hazard insurance with respect to such
Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other
disposition.
Advances
Unless otherwise specified in the related Prospectus
Supplement, in the event that any borrower fails to make any
payment of principal or interest required under the terms of a
Mortgage Loan or Contract, the Servicer or another party
designated in the related Prospectus Supplement will be obligated
to advance the entire amount of such payment adjusted, in the
case of any delinquent interest payment, to the applicable
Remittance Rate. Unless otherwise specified in the related
Prospectus Supplement and except as described above under "Credit
Enhancement-Purchases of Liquidating Loans," this obligation to
advance will be limited to amounts which the Servicer reasonably
believes will be recoverable by it out of liquidation proceeds or
otherwise in respect of such Mortgage Loan or Contract. The
Servicer or other party obligated to make advances will be
entitled to reimbursement for any such advance from related late
payments on the Mortgage Loan or Contract as to which such
advance was made. Furthermore, unless otherwise specified in the
related Prospectus Supplement, the Servicer or other party
obligated to make advances will be entitled to reimbursement for
any such advance (i) from liquidation proceeds or insurance
proceeds received if such Manufactured Home is repossessed or
such Mortgage Loan is foreclosed (and is not purchased by the
Servicer pursuant to any obligation it may have to purchase
Liquidating Loans) prior to any payment to Certificateholders in
respect of the repossession or foreclosure and (ii) from receipts
or recoveries on all other Mortgage Loans or Contracts or from
any other assets of the Trust Fund, for all or any portion of
such advance which the Servicer determines, in good faith, may
not be ultimately recoverable from such liquidation or insurance
proceeds (a "Nonrecoverable Advance").
Any Nonrecoverable Advance will be reimbursable out of the
assets of the Trust Fund. The amount of any scheduled payment
required to be advanced by the Servicer will not be affected by
any agreement between the Servicer and a borrower providing for
the postponement or modification of the due date or amount of
such scheduled payment. If specified in the related Prospectus
Supplement, the Trustee for the related Series will make advances
of delinquent payments of principal and interest in the event of
a failure by the Servicer to perform such obligation.
If specified in the related Prospectus Supplement, until
any obligation of the Responsible Party to purchase Liquidating
Loans is exhausted, the Responsible Party will advance delinquent
installments of principal and interest (adjusted to the
applicable Remittance Rate) on the Mortgage Loans as described
above in an aggregate amount up to the amount of its remaining
purchase obligation, irrespective of whether the Responsible
Party believes any such advance will be recoverable. The
Servicer's obligation to advance delinquent installments of
principal and interest (adjusted to the applicable Remittance
Rate) on the Mortgage Loans which it deems recoverable will be
unaffected by the exhaustion of any obligation of the Responsible
Party to purchase Liquidating Loans. In the event that the
Servicer has an obligation to purchase Liquidating Loans, any
outstanding unreimbursed advances may be charged against the
amount of such obligation, subject to reinstatement on account of
net recoveries on such Mortgage Loan.
Any such obligation to make advances may be limited to
amounts due Holders of senior Certificates of the related Series
or may be limited to specified periods or otherwise as specified
in the related Prospectus Supplement.
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If a Borrower makes a full or partial principal prepayment,
the Borrower generally will be required to pay interest on the
prepayment amount only to the date of prepayment. If and to the
extent described in the related Prospectus Supplement, the
Servicer's servicing fee may be reduced or the Servicer may be
otherwise obligated to advance funds to the extent necessary to
remit interest on any such full or partial prepayment received
from the date of receipt thereof to the next succeeding scheduled
payment date. See "Yield, Maturity and Weighted Average Life
Considerations."
Loan Payment Record
The Agreement will require that the Servicer establish and
maintain a Loan Payment Record to which will be credited the
following payments received by the Servicer with respect to the
Mortgage Loans or Contracts included in the related Trust Fund:
(i) All payments on account of principal, including
Principal Prepayments (other than principal payments due and
payable on or before, and Principal Prepayments received before,
the Cut-off Date), received from borrowers (excluding any amounts
specified in the related Prospectus Supplement);
(ii) All payments (other than those due and payable on or
before the Cut-off Date) on account of interest received from
borrowers (adjusted to the applicable Remittance Rate) and
excluding any other amounts specified in the related Prospectus
Supplement;
(iii) All amounts received by the Servicer in connection
with the liquidation of any Mortgaged Property or Manufactured
Home, and the purchase price including applicable interest
thereon, of any Mortgage Loan or Contract purchased by any person
pursuant to the applicable Agreement or any amount paid in
connection with the substitution of a Mortgage Loan;
(iv) All proceeds received by the Servicer under any
private mortgage insurance or any title, hazard, special hazard,
pool or other insurance policy covering any Mortgage Loan or
Contract, other than proceeds to be applied to the restoration or
repair of the property subject to the related Mortgage or
Contract or released to the borrower in accordance with the
normal servicing procedures of the Servicer; and
(v) All proceeds received in respect of any Mortgaged
Property acquired on behalf of the Trustee.
The Servicer will not be required to credit to the Loan
Payment Record payments on any Mortgage Loan or Contract that has
been previously released from the Trust Fund, amounts
representing fees or late charge penalties payable by borrowers
or amounts received by the Servicer for the account of borrowers
for application towards the payment of taxes, insurance premiums,
assessments and similar items.
Unless otherwise specified in the related Prospectus
Supplement, the Servicer may, from time to time, make debits to
the Loan Payment Record for the following purposes:
(i) To reimburse the Servicer for expenses incurred by it
in connection with the liquidation of any Mortgage Loan or
Manufactured Home, in an amount not to exceed the amount of the
proceeds of any such liquidation credited to the Loan Payment
Record;
(ii) To reimburse the Servicer for certain expenses
relating to the Agreement as to which the Servicer is entitled to
indemnification or reimbursement pursuant to the Agreement;
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(iii) To pay to any person amounts received in respect of
any Mortgage Loan or Contract purchased by such person as
required by the Agreement to the extent that the distribution of
any such amounts on the Distribution Date upon which the proceeds
of such purchase are distributed would make the total amount
distributed in respect thereof greater than the Principal Balance
thereof plus, unless otherwise specified in the related
Prospectus Supplement, one month's interest thereon at the
applicable Remittance Rate;
(iv) To reimburse the Servicer (or, if applicable, the
Guarantor or any other entity) for any previous advance of
delinquent installments of principal and interest (adjusted to
the applicable Remittance Rate) in respect of any Mortgage Loan
or Contract to the extent of recoveries, including late payments
and liquidation proceeds, on such Mortgage Loan or Contract;
(v) To make deposits into the Certificate Account;
(vi) To reimburse the Servicer from any borrower payment of
interest or other recovery with respect to a particular Mortgage
Loan, to the extent not previously retained by the Servicer, for
unpaid servicing fees with respect to such Mortgage Loan, subject
to certain limitations; and
(vii) To reimburse the Servicer (or, if applicable, the
Trustee, the Guarantor or any other entity) for any
Nonrecoverable Advance.
On the date or dates specified in the related Prospectus
Supplement (each, a "Deposit Date") prior to each Distribution
Date, unless otherwise specified in the related Prospectus
Supplement, the Servicer will be required to deposit into the
Certificate Account the payments in respect of the Mortgage Loans
or Contracts described above, net of any debits made thereto as
described above, which were received by it after the Cut-off Date
and before the fifth business day next preceding such
Distribution Date (the "Determination Date"), together with any
required advances of delinquent principal and interest payments
to be made by it, except (i) Principal Prepayments received
during the month of such deposit and all related payments of
interest representing interest for the month of deposit or any
portion thereof and (ii) payments which represent early receipt
of scheduled payments of principal and interest due on a date or
dates subsequent to the first day of the month of deposit (such
net amount, the "Available Funds"). Unless otherwise specified in
the related Prospectus Supplement, all deposits by the Servicer
into the Certificate Account will be made in next-day funds.
Unless otherwise specified in the related Prospectus Supplement,
prior to depositing such funds, the Servicer may commingle
payments received in respect of the Mortgage Loans or Contracts
and may invest such payments for its own account. Income realized
on the investment of such payments pending deposit into the
Certificate Account will be retained by the Servicer as
additional servicing compensation.
If specified in the related Prospectus Supplement, the
Servicer may establish, or provide for the establishment of, an
account (the "Collection Account") in lieu of the Loan Payment
Record described above. If so specified, all amounts to be
credited or debited to the Loan Payment Record will instead be
deposited in or withdrawn from the Collection Account.
Servicing and Other Compensation and Payment of Expenses
Unless otherwise specified in the related Prospectus
Supplement, the Servicer's primary compensation for its servicing
activities will come from the payment to it, with respect to each
interest payment on a Mortgage Loan or Contract, of all or a
portion of the difference between the Mortgage Rate for such
Mortgage Loan or Contract and the related Remittance Rate. In
addition to the primary compensation, the Servicer will retain
all assumption fees, late payment charges and other miscellaneous
charges, all to the extent collected from borrowers and, unless
otherwise specified in the related Prospectus Supplement, the
investment income described in the second preceding paragraph. In
the event another institution is acting as Master Servicer under
an
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Agreement, the Master Servicer will receive compensation with
respect to the performance of its activities as Master Servicer.
Unless otherwise specified in the related Prospectus
Supplement, the Servicer will be responsible for paying all
expenses incurred in connection with the servicing of the
Mortgage Loans or Contracts (subject to limited reimbursement as
described in "Loan Payment Record" above), including, without
limitation, payment of any premium for any Limited Guarantee,
pool insurance policy, special hazard policy, bankruptcy bond,
repurchase bond or other guarantee or surety, payment of the fees
and the disbursements of the Trustee, the Administrator (if any)
and the independent accountants, payment of the compensation of
any direct servicers of the Mortgage Loans, payment of all fees
and expenses in connection with the realization upon defaulted
Mortgage Loans or Contracts and payment of expenses incurred in
connection with distributions and reports to Certificateholders.
Unless otherwise specified in the related Prospectus Supplement,
the Servicer may assign any of its primary servicing compensation
in excess of that amount customarily retained as servicing
compensation for similar assets. Resignation, Succession and
Indemnification of the Servicer and the Master Servicer
The Agreement will provide that neither the Servicer nor
Master Servicer may resign from its obligations and duties as
servicer or master servicer thereunder, except upon determination
that the Servicer's or Master Servicer's performance of such
duties is no longer permissible under applicable law or as
provided in the last paragraph under this heading. No such
resignation will become effective until the Trustee or a
successor has assumed the Servicer's or Master Servicer's
servicing obligations and duties under such Agreement. The
Guarantor's obligations under any Limited Guarantee will, upon
issuance thereof, be irrevocable, subject to certain limited
rights of assignment as described in the related Prospectus
Supplement, if applicable.
The Agreement will provide that neither the Servicer or
Master Servicer nor, if applicable, the Guarantor, nor any of
their respective directors, officers, employees or agents, shall
be under any liability to the Trust Fund or the
Certificateholders of the related Series for taking any action or
for refraining from taking any action pursuant to such Agreement,
or for errors in judgment; provided, however, that neither the
Servicer or Master Servicer nor, if applicable, the Guarantor,
nor any such person, will be protected against any liability
which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of
duties or by reason of reckless disregard of obligations and
duties thereunder. The Agreement will also provide that the
Servicer or Master Servicer and, if applicable, the Guarantor and
their respective directors, officers, employees and agents are
entitled to indemnification by the related Trust Fund and will be
held harmless against any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the
Certificates, other than any loss, liability or expense related
to any specific Mortgage Loan or Contract (except as otherwise
reimbursable under the Agreement) or incurred by reason of
willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, each
Agreement will provide that neither the Servicer or Master
Servicer nor, if applicable, the Guarantor is under any
obligation to appear in, prosecute or defend any legal action
which is not incidental to the Servicer's or Master Servicer's
servicing responsibilities under such Agreement or the
Guarantor's payment obligations under any Limited Guarantee,
respectively, and which in its respective opinion may involve it
in any expense or liability. Each of the Servicer or Master
Servicer and, if applicable, the Guarantor may, however, in its
respective discretion undertake any such action which it may deem
necessary or desirable in respect of such Agreement and the
rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses
and costs of such action and any liability resulting therefrom
will be expenses, costs and liabilities of the Trust Fund, and
the Servicer or Master Servicer and, if applicable, the
Guarantor, will be entitled to be reimbursed therefor from
amounts credited to the Loan Payment Record.
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Any corporation into which the Servicer or Master Servicer
may be merged or consolidated or any corporation resulting from
any merger, conversion or consolidation to which the Servicer or
Master Servicer is a party, or any corporation succeeding to the
business of the Servicer or Master Servicer, or any corporation
more than 50% of the voting stock of which is owned, directly or
indirectly, by Deutsche Bank, or any limited partnership, the
sole general partner of which is either the Servicer or Master
Servicer or a corporation more than 50% of the voting stock of
which is owned, directly or indirectly, by Deutsche Bank, which
assumes the obligations of the Servicer or Master Servicer, will
be the successor of the Servicer or Master Servicer, as servicer
or master servicer, under each Agreement.
THE POOLING AND SERVICING AGREEMENTS
The following are descriptions of certain provisions of the
Pooling and Servicing Agreements expected to be common to the
Agreements with respect to each Series. However, the Prospectus
Supplement for each Series will describe more fully any
additional characteristics of the Offered Certificates and any
additional provisions of the related Agreement.
Assignment of Assets
Assignment of the Mortgage Loans. At the time of issuance
of a Series of Certificates, the Company, as seller, will assign
the related Mortgage Loans to the Trustee, together with all
principal and interest, subject to exclusions specified in the
related Prospectus Supplement, received on or with respect to
such Mortgage Loans on or after the Cut-off Date other than
principal and interest due and payable on or before, and
Principal Prepayments received before, the Cut-off Date. The
Trustee will, concurrently with such assignment, execute,
countersign and deliver the Certificates to the Company in
exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the
Agreement. Such schedule will include information as to the
Principal Balance of each Mortgage Loan as of the Cut-off Date,
as well as information respecting the mortgage interest rate, the
scheduled monthly payment of principal and interest as of the
Cut-off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Company, as
seller, will deliver to the Trustee, unless otherwise specified
in the related Prospectus Supplement, the Mortgage Note and
Mortgage, any assumption and modification agreement, an
assignment of the Mortgage in recordable form, evidence of title
insurance and, if applicable, the certificate of private mortgage
insurance (or copy thereof). In instances where recorded
documents cannot be delivered due to delays in connection with
recording, the Company may deliver copies thereof and deliver the
original recorded documents promptly upon receipt.
Unless otherwise specified in the related Prospectus
Supplement, the Company may refrain from recording the
assignments of the Mortgage Loans prior to the occurrence of
certain events set forth in the related Agreement. Although such
recordation is not necessary to make the assignment of the
Mortgage Loans to the Trustee effective, if the Company were to
make a sale, assignment, satisfaction or discharge of any
Mortgage Loan prior to recording or filing the assignments to the
Trustee, the other parties to such sale, assignment, satisfaction
or discharge might have rights superior to those of the Trustee.
If the Company were to do so without authority under the
Agreement, it would be liable to the related Certificateholders.
Moreover, if insolvency proceedings relating to the Company were
commenced prior to such recording or filing, creditors of the
Company may be able to assert rights in the affected Mortgage
Loans superior to those of the Trustee.
With respect to any Mortgage Loans which are Cooperative
Loans, the Company, as seller, will cause to be delivered to the
Trustee the related original cooperative note endorsed to the
order of the Trustee, the original security agreement, the
proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock
certificate and
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related blank stock powers. The Company will file in the
appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each Cooperative
Loan.
With respect to any Mortgage Loans which are financial
leases, the Company, as seller, will cause to be delivered to the
Trustee the related original executed lease agreement and an
assignment of the lease in recordable form. The Company will file
in the appropriate office an assignment and a financing statement
evidencing the Trustee's security interest in each financial
lease.
Unless otherwise specified in the related Prospectus
Supplement, in the Agreement the Company, as seller, or another
person identified in the related Prospectus Supplement generally
will represent and warrant to the Trustee, among other things,
that (i) the information set forth in the schedule of Mortgage
Loans attached thereto is correct in all material respects at the
date or dates respecting which such information is furnished;
(ii) a lender's title insurance policy or binder, or other
assurance of title insurance customary in the relevant
jurisdiction therefor, for each Mortgage Loan subject to the
Agreement was issued on the date of origination thereof and each
such policy or binder assurance is valid and remains in full
force and effect; (iii) at the date of initial issuance of the
Certificates, the Company has good title to the Mortgage Loans
and the Mortgage Loans are free of offsets, defenses or
counterclaims; (iv) at the date of initial issuance of the
Certificates, each Mortgage is a valid first lien on the property
securing the Mortgage Note (subject only to (a) the lien of
current real property taxes and assessments, (b) covenants,
conditions, and restrictions, rights of way, easements and other
matters of public record as of the date of the recording of such
Mortgage, such exceptions appearing of record being acceptable to
mortgage lending institutions generally in the area wherein the
property subject to the Mortgage is located or specifically
reflected in the appraisal obtained by the Company, and (c) other
matters to which like properties are commonly subject which do
not materially interfere with the benefits of the security
intended to be provided by such Mortgage) and such property is
free of material damage and is in good repair; (v) at the date of
initial issuance of the Certificates, no Mortgage Loan is 30 or
more days delinquent and there are no delinquent tax or
assessment liens against the property covered by the related
Mortgage; and (vi) each Mortgage Loan at the time it was made
complied in all material respects with applicable state and
federal laws, including, without limitation, usury, equal credit
opportunity and disclosure laws.
The Company may, in lieu of making the representations
described in the preceding paragraph, cause the originator or
other entity from which the Company acquired such Mortgage Loans
to make such representations (other than those regarding the
Company's title to the Mortgage Loans, which will in all events
be made by the Company) in the sales agreement pursuant to which
such Mortgage Loans are acquired or, if such entity is acting as
a servicer, in its servicing agreement. In such event such
representations, and the Company's rights against such entity in
the event of a breach thereof, will be assigned to the Trustee
for the benefit of the Holders of the Certificates of such
Series.
Assignment of Mortgage-Backed Securities. The Company, as
seller, will cause the Mortgage-Backed Securities to be
registered in the name of the Trustee or its nominee, and the
Trustee concurrently will execute, countersign and deliver the
Certificates. Each Mortgage-Backed Security will be identified in
a schedule appearing as an exhibit to the Agreement, which will
specify as to each Mortgage-Backed Security the original
principal amount and outstanding principal balance as of the
Cut-off Date, the annual pass-through rate (if any) and the
maturity date. The Company or another person identified in the
related Prospectus Supplement will represent and warrant to the
Trustee, among other things, that the information contained in
the Mortgage-Backed Securities schedule is true and correct and
that immediately prior to the transfer of the Mortgage-Backed
Securities to the Trustee, the Company had good title to, and was
the sole owner of, each Mortgage-Backed Security.
Assignment of Contracts. The Company, as seller, will cause
the Contracts to be assigned to the Trustee, together with
principal and interest due on or with respect to the Contracts
after the
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Cut-off Date specified in the related Prospectus Supplement. Each
Contract will be identified in a loan schedule appearing as an
exhibit to the related Agreement. Such loan schedule will
specify, with respect to each Contract, among other things: the
original principal balance and the outstanding principal balance
as of the close of business on the Cut-off Date; the interest
rate; the current scheduled payment of principal and interest;
and the maturity date.
In addition, with respect to each Contract, the Company
will be required to deliver or cause to be delivered to the
Trustee, the original Contract and copies of documents and
instruments related to each Contract and the security interest in
the Manufactured Home securing each Contract. To give notice of
the right, title and interest of the Certificateholders to the
Contracts, the Company will be required to cause a UCC-1
financing statement to be filed identifying the Trustee as the
secured party and identifying all Contracts as collateral. Unless
otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect
their assignment from the Company to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the
Certificateholders in the Contracts could be defeated. See
"Certain Legal Aspects of the Mortgage Loans and Contracts."
The Company, as seller, or another person identified in the
related Prospectus Supplement will provide limited
representations and warranties to the Trustee concerning the
Contracts. Such representations and warranties will include: (i)
that the information contained in the loan schedule provides an
accurate listing of the Contracts and that the information
respecting such Contracts set forth in such loan schedule is true
and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that,
immediately prior to the conveyance of the Contracts, the Company
had good title to, and was sole owner of, each such Contract; and
(iii) that there has been no other sale by it of such Contract
and that the Contract is not subject to any lien, charge,
security interest or other encumbrance.
Repurchase or Substitution
The Trustee will review the documents delivered to it with
respect to the assets of the related Trust Fund. Unless otherwise
specified in the related Prospectus Supplement, if any document
is not delivered or is found to be defective in any material
respect and the Company cannot deliver such document or cure such
defect within 60 days after notice thereof (which the Trustee
will undertake to give within 45 days of the delivery of such
documents), the Company will, not later than the first
Distribution Date which is more than ten days after such 60-day
period, (a) remove the affected Mortgage Loan or Contract from
the Trust Fund and substitute one or more other mortgage loans or
contracts therefor or (b) repurchase the Mortgage Loan or
Contract from the Trustee for a price equal to 100% of its
Principal Balance, plus interest thereon at the applicable
Remittance Rate from the date on which interest was last paid to
the first day of the month in which such purchase price is to be
distributed, net of any unreimbursed advances of principal and
interest thereon made by the Servicer or Master Servicer. Such
purchase price will be deposited in the Certificate Account on
the business day preceding such Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, this
repurchase and substitution obligation constitutes the sole
remedy available to Certificateholders or the Trustee on behalf
of Certificateholders against the Company for a material defect
in a document relating to a Mortgage Loan or Contract.
Unless otherwise specified in the related Prospectus
Supplement, the Company will agree to either (a) cure in all
material respects any breach of any representation or warranty
set forth in the related Agreement that materially and adversely
affects the interests of the Certificateholders in a Mortgage
Loan (such Mortgage Loan, a "Defective Mortgage Loan") or
Contract within 60 days of its discovery by the Company or its
receipt of notice thereof from the Trustee, (b) repurchase such
Defective Mortgage Loan or Contract not later than the first
Distribution Date which is more than ten
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days after such 60-day period for a price equal to 100% of its
Principal Balance, plus interest thereon at the applicable
Remittance Rate from the date on which interest was last paid to
the first day of the month in which such purchase price is to be
distributed, net of any unreimbursed advances of principal and
interest thereon made by the Servicer or Master Servicer, or (c)
remove the affected Mortgage Loan or Contract from the Trust Fund
and substitute one or more other mortgage loans or contracts
therefor. Such purchase price will be deposited in the
Certificate Account on the business day preceding such
Distribution Date. This repurchase or substitution obligation
constitutes the sole remedy available to Certificateholders or
the Trustee on behalf of Certificateholders for any such breach.
If specified in the related Prospectus Supplement, in lieu
of agreeing to repurchase or substitute Mortgage Loans as
described above, the Company may obtain such an agreement from
the entity which originated or sold such mortgage loans, which
agreement will be assigned to the Trustee for the benefit of the
Holders of the Certificates of such Series. In such event, unless
otherwise specified in the related Prospectus Supplement, the
Company will have no obligation to repurchase or substitute
mortgage loans if such entity defaults in its obligation to do
so.
If a mortgage loan or contract is substituted for another
Mortgage Loan or Contract as described above, the new mortgage
loan or contract will, unless otherwise specified in the related
Prospectus Supplement, (i) have a Principal Balance (together
with any other new mortgage loan or contract so substituted), as
of the first Distribution Date following the month of
substitution, after deduction of all payments due in the month of
substitution, not in excess of the Principal Balance of the
removed Mortgage Loan or Contract as of such Distribution Date
(the amount of any shortfall, plus one month's interest thereon
at the applicable Remittance Rate, to be deposited in the
Certificate Account on the business day prior to the applicable
Distribution Date), (ii) have a mortgage interest rate not less
than, and not more than one percentage point greater than, that
of the removed Mortgage Loan or Contract, (iii) have a Remittance
Rate equal to that of the removed Mortgage Loan or Contract, (iv)
have a remaining term to stated maturity not later than, and not
more than one year less than, the remaining term to stated
maturity of the removed Mortgage Loan or Contract, (v) have a
current loan-to-value ratio not greater than that of the removed
Mortgage Loan or Contract, and (vi) in the reasonable
determination of the Company, be of the same type, quality and
character as the removed Mortgage Loan or Contract (as if the
defect or breach giving rise to the substitution had not
occurred) and be, as of the substitution date, in compliance with
the representations and warranties contained in the Agreement.
If a REMIC election is to be made with respect to all or a
portion of a Trust Fund, any such substitution will occur within
two years after the initial issuance of the related Certificates.
If no REMIC election is made, any substitution will be made
within 90 days after the initial issuance of the related
Certificates.
Certain Modifications and Refinancings
Unless otherwise specified in the related Prospectus
Supplement, the Agreement will permit the applicable Servicer to
modify any Mortgage Loan upon the request of the related
Borrower, provided that such Servicer purchases such Mortgage
Loan from the Trust Fund immediately following such modification.
Any such modification may not be made unless the modification
includes a change in the interest rate on the related Mortgage
Loan to approximately a prevailing market rate. Any such purchase
will be for a price equal to 100% of the Principal Balance of
such Mortgage Loan, plus accrued and unpaid interest thereon to
the date of purchase at the applicable Remittance Rate, net of
any unreimbursed advances of principal and interest thereon made
by the Servicer. The applicable Servicer will be required to
deposit the purchase price in the Certificate Account on the
related Deposit Date. Such purchases may occur when prevailing
interest rates are below the interest rates on the Mortgage Loans
and Borrowers request modifications as an alternative to
refinancings. If a REMIC election is made with respect to all or
a portion of the related
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Trust Fund, the applicable Servicer will be required to indemnify
the REMIC against liability for any prohibited transactions taxes
and any related interest, additions or penalties imposed on the
REMIC as a result of any such modification or purchase.
Evidence as to Compliance
The Agreement will provide that a firm of independent
public accountants will furnish to the Trustee on or before
[March 31] of each year, beginning with [March 31] in the year
which begins not less than three months after the date of the
initial issue of Certificates, a statement as to compliance by
the Servicer with certain standards relating to the servicing of
the Mortgage Loans, Mortgage-Backed Securities or Contracts.
The Agreement will also provide for delivery to the Trustee
on or before [March 31] of each year, beginning with [March 31]
in the year which begins not less than three months after the
date of the initial issue of the Certificates, a statement signed
by an officer of each Servicer to the effect that such Servicer
has fulfilled its obligations under the Agreement throughout the
preceding year or, if there has been a default in the fulfillment
of any such obligation, describing each such default.
List of Certificateholders
Upon written request of the Trustee, the certificate
registrar will provide to the Trustee, within fifteen days after
receipt of such request, a list of the names and addresses of all
Certificateholders of record of a particular Series as of the
most recent Record Date for payment of distributions to
Certificateholders of that Series. Upon written request of three
or more Certificateholders of record of a Series of Certificates
for purposes of communicating with other Certificateholders with
respect to their rights under the Agreement for such Series, the
Trustee will be required to afford, within five business days
after the receipt of such request, such Certificateholders access
during business hours to the most recent list of
Certificateholders of that Series held by the Trustee. If such
list is as of a date more than 90 days prior to the date of
receipt of a request from such Certificateholders, the Trustee
shall promptly request from the certificate registrar a current
list and will be required to afford such requesting
Certificateholders access to such list promptly upon receipt.
The Agreement will not provide for the holding of any
annual or other meetings of Certificateholders.
The Trustee
Any commercial bank or trust company serving as Trustee may
have normal banking relationships with the Company. In addition,
the Company and the Trustee acting jointly will have the power
and the responsibility for appointing co-trustees or separate
trustees of all or any part of the Trust Fund relating to a
particular Series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred
or imposed upon the Trustee by the Agreement shall be conferred
or imposed upon the Trustee and such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations
solely at the direction of the Trustee.
The Trustee will make no representations as to the validity
or sufficiency of the Agreement, the Certificates (other than the
signature and countersignature of the Trustee on the
Certificates) or of any Mortgage Loan, Agency Security, Contract
or related document, and will not be accountable for the use or
application by the Company of any funds paid to the Company in
respect of the Certificates or the related assets, or amounts
credited to the Loan Payment Record or deposited into the
Certificate Account. If no Event of Default has occurred, the
Trustee will be required to perform
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only those duties specifically required of it under the
Agreement. However, upon receipt of the various certificates,
reports or other instruments required to be furnished to it, the
Trustee will be required to examine them to determine whether
they conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Company may
remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement, if the Trustee becomes
insolvent or in such other instances, if any, as are set forth in
the Agreement. Following any resignation or removal of the
Trustee, the Company will be obligated to appoint a successor
Trustee, any such successor to be approved by the Guarantor if so
specified in the related Prospectus Supplement in the event that
the Guarantor has issued any Limited Guarantee with respect to
the Certificates. Any resignation or removal of the Trustee and
appointment of a successor Trustee does not become effective
until acceptance of the appointment by the successor Trustee.
Administration of the Certificate Account
The Agreement will require that the Certificate Account be
either (i) maintained with a depository institution the debt
obligations of which are, at the time of any deposit therein,
rated at least "AA" (or the equivalent) by each nationally
recognized statistical rating organization that rated the
Certificates, (ii) an account or accounts the deposits in which
are fully insured by either the Bank Insurance Fund (the "BIF")
of the Federal Deposit Insurance Corporation (the "FDIC") or the
Savings Association Insurance Fund (as successor to the Federal
Savings and Loan Insurance Corporation) ("SAIF") of the FDIC,
(iii) an account or accounts with a depository institution, the
insured deposits in which are insured by the BIF or SAIF (to the
limits established by the FDIC), and the uninsured deposits in
which are invested in United States government securities or
other high quality investments, or are otherwise secured to the
extent required by each Rating Agency that rates the Certificates
such that, as evidenced by an opinion of counsel, the Holders of
the Certificates have a claim with respect to the funds in the
account or a perfected first security interest against any
collateral securing such funds that is superior to claims of any
other depositors or creditors of the depository institution with
which the account is maintained, (iv) a trust account maintained
with the corporate trust department of a federal or state
chartered depository institution or trust company with trust
powers and acting in its fiduciary capacity for the benefit of
the Trustee or (v) such other account the investment in which
will not, as evidenced by a letter from each Rating Agency,
result in the downgrading or withdrawal of the then-current
rating assigned to the Certificates by any of the Rating Agencies
that then rates the Certificates.
Not later than the second business day prior to each
Distribution Date, the Servicer will furnish a separate statement
to the Trustee for the Certificates setting forth, among other
things, the amount to be distributed with respect to the
Certificates on the next succeeding Distribution Date to
Certificateholders, with amounts allocable to principal and to
interest stated separately and, if applicable, information
relating to the amount available for the purchase of Liquidating
Loans.
Reports to Certificateholders
At least two business days before each Distribution Date,
unless otherwise specified in the related Prospectus Supplement,
the Servicer or Master Servicer will be required to furnish to
the Trustee for mailing to Certificateholders on such
Distribution Date, a statement generally setting forth, to the
extent applicable to any Series, among other things:
(i) The aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each
class;
(ii) The amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
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(iii) The amount of servicing compensation received by the
Servicer in respect of the Mortgage Loans during the month
preceding the month of the Distribution Date, and such other
customary information as the Servicer deems necessary or
desirable to enable Certificateholders to prepare their tax
returns;
(iv) The aggregate Certificate Principal Balance (or
Notional Principal Balance) of each class of Certificates after
giving effect to distributions and allocations, if any, of losses
on the Mortgage Loans on such Distribution Date;
(v) The aggregate Certificate Principal Balance of any
class of Accrual Certificates after giving effect to any increase
in such Certificate Principal Balance that results from the
accrual of interest that is not yet distributable thereon;
(vi) If applicable, the amount of the Responsible Party's
remaining obligations with respect to the purchase of Liquidating
Loans, after giving effect to any charges or adjustments thereto
in respect of the Distribution Date, expressed as a percentage of
the amount reported pursuant to clause (iv) and, if applicable,
(v) above;
(vii) If any class of Certificates has priority in the
right to receive Principal Prepayments, the amount of Principal
Prepayments in respect of the Mortgage Loans; and
(viii) The aggregate Principal Balance of Mortgage Loans
which were delinquent as to a total of one, two or three or more
installments of principal and interest or were in foreclosure.
The Servicer or Master Servicer will also be required to
furnish annually customary information deemed necessary for
Certificateholders to prepare their tax returns.
The Servicer or Master Servicer will be required to provide
Certificateholders which are federally insured savings and loan
associations with certain reports and with access to information
and documentation regarding the Mortgage Loans included in the
Trust Fund sufficient to permit such associations to comply with
applicable regulations of the Office of Thrift Supervision.
Events of Default
Events of Default under the Agreement will consist of: (i)
any failure by the Servicer or Master Servicer to deposit into
the Certificate Account any required payment, which failure
continues unremedied for three business days after the giving of
written notice of such failure to the Servicer or Master Servicer
by the Trustee, or to the Servicer or Master Servicer and the
Trustee by the Holders of Certificates evidencing interests
aggregating not less than 25% of each affected class; (ii) any
failure by the Servicer or Master Servicer duly to observe or
perform in any material respect any other of its covenants or
agreements in such Agreement materially affecting the rights of
Certificateholders which continues unremedied for 60 days after
the giving of written notice of such failure to the Servicer or
Master Servicer by the Trustee, or to the Servicer or Master
Servicer and the Trustee by the Holders of Certificates
evidencing interests aggregating not less than 25% of each
affected class; (iii) any failure by the Servicer or Master
Servicer to effect timely payment of the premium for a pool
insurance policy or a special hazard insurance policy or Limited
Guarantee, if any, which continues unremedied for 10 business
days after the giving of written notice of such failure by the
Trustee, or to the Servicer or Master Servicer and the Trustee by
the Holders of Certificates evidencing interests aggregating not
less than 25% of each affected class; and (iv) certain events of
insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings and certain actions by the
Servicer or Master Servicer indicating its insolvency,
reorganization or inability to pay its obligations.
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Rights Upon Event of Default
As long as an Event of Default under the Agreement remains
unremedied or under certain other circumstances, if any,
described in the related Prospectus Supplement by the Servicer or
Master Servicer, the Trustee or Holders of Certificates
evidencing interests aggregating not less than 51% of each
affected class, may terminate all of the rights and obligations
of the Servicer or Master Servicer under the Agreement, whereupon
the Trustee will succeed to all the responsibilities, duties and
liabilities of the Servicer or Master Servicer under the
Agreement and will be entitled to similar compensation
arrangements; provided that if the Trustee had no obligation
under the Agreement to make advances of delinquent principal and
interest on the Mortgage Loans upon the failure of the Servicer
or Master Servicer to do so, or if the Trustee had such
obligation but is prohibited by law or regulation from making
such advances, the Trustee will not be required to assume such
obligation of the Servicer or Master Servicer. No such
termination will affect in any manner the Guarantor's obligations
under any Limited Guarantee, except that the obligation of the
Servicer or Master Servicer to make advances of delinquent
payments of principal and interest (adjusted to the applicable
Remittance Rate) and, if applicable, to purchase any Liquidating
Loan will become the direct obligations of the Guarantor under
the Limited Guarantee, if applicable, until a new Servicer or
Master Servicer is appointed. In the event that the Trustee is
unwilling or unable so to act, it may appoint, or petition a
court of competent jurisdiction for the appointment of, a housing
and home finance institution with a net worth of at least
$10,000,000 (or an institution meeting such other requirements as
set forth in the related Prospectus Supplement) and, if the
Guarantor has issued any Limited Guarantee with respect to the
Certificates, approved by the Guarantor, to act as successor to
the Servicer or Master Servicer under such Agreement. The Trustee
and such successor may agree upon the servicing compensation to
be paid, which in no event may be greater than the compensation
to the Servicer or Master Servicer under such Agreement.
No Holder of Certificates will have any right under the
Agreement to institute any proceeding with respect to the
Agreement, unless such Holder previously has given to the Trustee
written notice of default and unless the Holders of Certificates
of each affected class evidencing, in the aggregate, 25% or more
of the interests in such class have made written request to the
Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity
and the Trustee for 60 days after receipt of such notice, request
and offer of indemnity has neglected or refused to institute any
such proceedings. However, the Trustee is under no obligation to
exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or
direction of any of the Certificateholders, 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
The Agreement may be amended by the Company, as seller, the
Servicer or Master Servicer and the Trustee without
Certificateholder consent, to cure any ambiguity, to correct or
supplement any provision therein which may be inconsistent with
any other provision therein, to take any action necessary to
maintain REMIC status of any Trust Fund as to which a REMIC
election has been made, to avoid or minimize the risk of the
imposition of any tax on the Trust Fund pursuant to the Code or
to make any other provisions with respect to matters or questions
arising under the Agreement which are not materially inconsistent
with the provisions of the Agreement; provided that such action
will not, as evidenced by an opinion of counsel satisfactory to
the Trustee, adversely affect in any material respect the
interests of any Certificateholders of that Series. Unless
otherwise specified in the related Prospectus Supplement, the
Agreement may also be amended by the Company, as seller, the
Servicer or Master Servicer and the Trustee with the consent of
Holders of Certificates evidencing interests aggregating either
not less than 66% of all interests in the related Trust Fund or
not less than 66% of all interests of each Class affected by such
amendment, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of
such Agreement or of modifying in any manner the rights of
Certificateholders of that Series;
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provided, however, 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 in respect
of any Certificate without the consent of the Holder of such
Certificate, (ii) adversely affect in any material respect the
interests of the Holders of any class of Certificates in any
manner other than as described in (i), without the consent of the
Holders of Certificates of such class evidencing at least 66% of
the interests of such class or (iii) reduce the aforesaid
percentage of Certificates, the Holders of which are required to
consent to any such amendment, without the consent of the Holders
of all Certificates of such affected class then outstanding.
Termination
The obligations of the Company, as seller, the Servicer or
Master Servicer and the Trustee created by the Agreement will
terminate upon the last action required to be taken by the
Trustee on the final Distribution Date pursuant to the Agreement
after the earlier of (i) the maturity or other liquidation of the
last Mortgage Loan, Mortgage-Backed Security or Contract subject
thereto or the disposition of all property acquired upon
foreclosure of any such Mortgage Loan or Contract or (ii) the
repurchase by the party entitled to effect such repurchase from
the Trust Fund of all the outstanding Certificates or all
remaining assets in the Trust Fund. The Agreement will establish
the repurchase price for the assets in the Trust Fund and the
allocation of such purchase price among the classes of
Certificates. The exercise of such right will effect early
retirement of the Certificates of that Series, but the right of
the party entitled to effect such repurchase will be subject to
the conditions set forth in the related Prospectus Supplement. If
a REMIC election is to be made with respect to all or a portion
of a Trust Fund, there may be additional conditions to the
termination of such Trust Fund which will be described in the
related Prospectus Supplement. In no event, however, will the
trust created by the Agreement continue beyond the expiration of
21 years from the death of the survivor of certain persons named
in the Agreement. The Trustee will be required to give written
notice of termination of the Agreement to each Certificateholder,
and the final distribution will be made only upon surrender and
cancellation of the Certificates at an office or agency of the
Trustee specified in such notice of termination.
If specified in the related Prospectus Supplement, the
Agreement will permit the Trustee to sell the Mortgage Loans,
Mortgage-Backed Securities or Contracts and the other assets of
the Trust Fund in the event that payments in respect thereto are
insufficient to make payments required in the Agreement. The
assets of the Trust Fund will be sold only under the
circumstances and in the manner specified in the related
Prospectus Supplement.
THE COMPANY
The Company 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 trusts in exchange for certificates
evidencing interests in such trusts and selling or otherwise
distributing such certificates. The Company is not an affiliate
of Deutsche Bank AG. The principal executive offices of the
Company are located at One International Place, Room 608, Boston,
Massachusetts 02110. Its telephone number is (617) 951-7690. The
Company's capitalization is nominal. All of the shares of capital
stock of the Company 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
Company. 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.
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None of the Company, J H Management, Deutsche Bank AG nor
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 Company will have been acquired by the Company 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 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.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion describes certain legal aspects of
mortgage loans and manufactured housing contracts which are
general in nature. Because many of the legal aspects of mortgage
loans and manufactured housing contracts are governed by
applicable state law (which may vary substantially), the
following descriptions do not purport to reflect the laws of any
particular state, to reflect all the laws applicable to any
particular Mortgage Loan or Contract or to encompass the laws of
all states in which the security for the Mortgage Loans or
Contracts is situated. In the event that the Trust Fund for a
given Series includes Mortgage Loans or Contracts having material
characteristics other than as described below, the related
Prospectus Supplement will set forth additional legal aspects
relating thereto.
THE MORTGAGE LOANS
General
Mortgages. The Mortgages will be either first, second or
more junior deeds of trust or mortgages. A mortgage creates a
lien upon the real property encumbered by the mortgage. It is not
prior to the lien for real estate taxes and assessments. Priority
between mortgages depends on their terms and generally on the
order of filing with a state or county office. There are two
parties to a mortgage: the borrower, who is the borrower and
homeowner or the land trustee or the trustee of an inter vivos
revocable trust (as described below), and the mortgagee, who is
the lender. Under the mortgage instrument, the borrower delivers
to the mortgagee a note or bond and the mortgage. In the case of
a land trust, there are three parties because title to the
property is held by a land trustee under a land trust agreement
of which the borrower/homeowner is the beneficiary; at
origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. In the case of
an inter vivos revocable trust, there are three parties because
title to the property is held by the trustee under the trust
instrument of which the home occupant is the primary beneficiary;
at origination of a mortgage loan, the primary beneficiary and
the trustee execute a mortgage note and the trustee executes a
mortgage or deed of trust, with the primary beneficiary agreeing
to be bound by its terms. Although a deed of trust is similar to
a mortgage, a deed of trust formally has three parties, the
borrower-homeowner called the trustor (similar to a borrower), a
lender (similar to a mortgagee) called the beneficiary, and a
third-party grantee called the trustee. Under a deed of trust,
the borrower grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee
to secure payment of the obligation. The trustee's authority
under a deed of trust and the mortgagee's authority under a
mortgage are governed by law, the express provisions of the deed
of trust or mortgage and, in some cases, the directions of the
beneficiary.
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Cooperatives. Certain of the Mortgage Loans may be
Cooperative Loans. The private, non-profit, cooperative apartment
corporation owns all the real property that comprises the
project, including the land, separate dwelling units and all
common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and
hazard and liability insurance. If there is a blanket mortgage on
the cooperative apartment building and/or underlying land, as is
generally the case, the cooperative, as project borrower, is also
responsible for meeting these mortgage obligations. A blanket
mortgage is ordinarily incurred by the cooperative in connection
with the construction or purchase of the cooperative's apartment
building. The interest of the occupant under proprietary leases
or occupancy agreements to which that cooperative is a party are
generally subordinate to the interest of the holder of the
blanket mortgage in that building. If the cooperative is unable
to meet the payment obligations arising under its blanket
mortgage, the mortgagee holding the blanket mortgage could
foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the
form of a mortgage that does not fully amortize with a
significant portion of principal being due in one lump sum at
final maturity. The inability of the cooperative to refinance
this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the
blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed the
purchase by an individual tenant-stockholder of cooperative
shares or, in the case of a Trust Fund including Cooperative
Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who,
through ownership of stock shares or membership certificates in
the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a cooperative must make
a monthly payment to the cooperative representing such
tenant-stockholder's pro rata share of the cooperative's payments
for its blanket mortgage, real property taxes, maintenance
expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights is
financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the
occupancy agreement or proprietary lease and in the related
cooperative shares. The lender takes possession of the share
certificate and a counterpart of the proprietary lease or
occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative
shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the
promissory note, dispose of the collateral at a public or private
sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security
agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
With respect to Cooperative Loans, any prospective
purchaser will generally have to obtain the approval of the board
of directors of the relevant Cooperative before purchasing the
shares and acquiring rights under the related proprietary lease
or occupancy agreement. This approval is usually based on the
purchaser's income and net worth and numerous other factors.
Although the Cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those
shares and otherwise limit the Trust Fund's ability to sell and
realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code
Section 216(b)(2)) of a corporation that qualifies as a
"cooperative housing corporation" within the meaning of Code
Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain
real estate taxes allowable as a deduction under Code Section
216(a) to the corporation under Code Sections 163 and 164. In
order for a corporation to qualify under Code Section 216(b)(1)
for its taxable year in which
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such items are allowable as a deduction to the corporation, such
Section requires, among other things, that at least 80% of the
gross income of the corporation be derived from its
tenant-stockholders (as defined in Code Section 216(b)(2)). By
virtue of this requirement, the status of a corporation for
purposes of Code Section 216(b)(1) must be determined on a
year-to-year basis. Consequently, there can be no assurance that
Cooperatives relating to the Cooperative Loans will qualify under
such Section for any particular year. In the event that such a
Cooperative fails to qualify for one or more years, the value of
the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to
tenant-stockholders under Code Section 216(a) with respect to
those years. In view of the significance of the tax benefits
accorded tenant-stockholders of a corporation that qualifies
under Code Section 216(b)(1), the likelihood that such a failure
would be permitted to continue over a period of years appears
remote.
Financial Leases
The Mortgage Loans included in the Mortgage Pool for a
Series also may consist of financial leases the cash flows from
which would be sufficient to meet all payment obligations on the
related classes of Certificates. Under a financial lease on real
property, the lessor retains legal title to the leased property
and enters into an agreement with the lessee (hereinafter
referred to in this Section as the "lessee") under which the
lessee makes lease payments approximately equal to the principal
and interest payments that would be required on a mortgage note
for a loan covering the same property. Title to the real estate
typically is conveyed to the lessee at the end of the lease term
for a price approximately equal to the remaining unfinanced
equity, determined by reference to the unpaid principal amount,
market value, or another method specified in the related
agreement. The lessee generally is responsible for maintaining
the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the
property during the lease term. The method of enforcing the
rights of the lessor under a financial lease varies on a
state-by-state basis depending upon the extent to which state
courts are willing, or able pursuant to state statute, to enforce
the contract strictly according to its terms. The terms of
financial leases generally provide that upon a default by the
borrower, the lessee loses his or her right to occupy the
property and the lessee's equitable interest in the property is
forfeited. The lessor in such a situation does not have to
foreclose although in some cases an ejectment action may be
necessary to recover possession. In a few states, particularly in
cases of default during the early years of a financial lease, the
courts will permit ejection of the buyer and a forfeiture of his
or her interest in the property. However, most state legislatures
have enacted provisions by analogy to mortgage law protecting
borrowers under financial leases from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial
foreclosure may be required, the lessor may be required to give
notice of default and the lessee may be granted some grace period
during which the contract may be reinstated upon full payment of
the default amount and the lessor may have post-foreclosure
statutory redemption right. In other states, courts in equity may
permit a borrower with significant investment in the property
under a financial lease for the sale of real estate to share in
the proceeds of the property after the indebtedness is repaid or
may otherwise refuse to enforce the forfeiture clause.
Nevertheless, generally speaking, the lessor procedures for
obtaining possession and clear title under a financial lease for
the sale of real estate in a given state are simpler and less
time-consuming and costly than are the procedures for foreclosing
and obtaining clear title to a mortgage property. The related
Prospectus Supplement will describe the specific legal incidents
of any financial leases that are included in the Mortgage Pool
for a Series.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally
accomplished by a non-judicial trustee's sale under a specific
provision in the deed of trust that authorizes the trustee to
sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In some
states, the trustee must record a notice of default and send a
copy to the borrower-
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trustor and any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee
must provide notice in some states to any other individual having
an interest in the real property, including any junior lien
holders. The borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement
period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses
and costs, including attorney's fees, which may be recovered by a
lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published
for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an
interest in the real property.
Foreclosure of a mortgage is generally accomplished by
judicial action. The action is initiated by the service of legal
pleadings upon all parties having an interest in the real
property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating such necessary
parties. Judicial foreclosure proceedings are often not protested
by any of the defendants. However, when the mortgagee's right to
foreclose is contested, the legal proceedings necessary to
resolve the issue can be time consuming. After the completion of
judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to
conduct the sale of the property.
A sale conducted in accordance with the terms of the power
of sale contained in a mortgage or deed of trust is generally
presumed to be conducted regularly and fairly, and a conveyance
of the real property by the referee confers absolute legal title
to the real property to the purchaser, free of all junior
mortgages and free of all other liens and claims subordinate to
the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens and any redemption
rights that may be granted to borrowers pursuant to applicable
state law). The purchaser's title is, however, subject to all
senior liens, encumbrances and mortgages. Thus, if the mortgage
or deed of trust being foreclosed is a junior mortgage or deed of
trust, the referee or trustee will convey title to the property
to the purchaser, subject to the underlying first mortgage or
deed of trust and any other prior liens and claims. A foreclosure
under a junior mortgage or deed of trust generally will have no
effect on any senior mortgage or deed of trust, with the possible
exception of triggering the right of a senior mortgagee or
beneficiary to accelerate its indebtedness under a "due-on-sale"
clause or "due on further encumbrance" clause contained in the
senior mortgage.
In case of foreclosure under either a mortgage or a deed of
trust, the sale by the referee or other designated officer or by
the trustee is a public sale. However, because of the difficulty
a potential buyer at the sale would have in determining the exact
status of title and because the physical condition of the
property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the
property at the foreclosure sale. Rather, it is common for the
lender to purchase the property from the trustee or referee for
an amount equal to the principal amount of the mortgage or deed
of trust, accrued and unpaid interest and expenses of
foreclosure. Thereafter, the lender will assume the burdens of
ownership, including obtaining casualty insurance and making such
repairs at its own expense as are necessary to render the
property suitable for sale. The lender will commonly obtain the
services of a real estate broker and pay the broker's commission
in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
Some courts have been faced with the issue of whether or
not federal or state constitutional provisions reflecting due
process concerns for adequate notice require that borrowers under
deeds of trust or mortgages receive notices in addition to the
statutorily prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have
found that the sale
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by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford
constitutional protections to the borrower.
Cooperative Loans. The cooperative shares owned by the
tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the
cooperative's certificate of incorporation and bylaws, as well as
the proprietary lease or occupancy agreement, and may be canceled
by the cooperative for failure by the tenant-stockholder to pay
rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the
cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement
generally permits the cooperative to terminate such lease or
agreement in the event an obligor fails to make payments or
defaults in the performance of covenants required thereunder.
Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and
obligations of both parties in the event of a default by the
tenant-stockholder on its obligations under the proprietary lease
or occupancy agreement. A default by the tenant-stockholder under
the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the
event that the tenant-stockholder has defaulted under the
proprietary lease or occupancy agreement, the cooperative will
take no action to terminate such lease or agreement until the
lender has been provided with an opportunity to cure the default.
The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the
cooperative will recognize the lender's lien against proceeds
from a sale of the cooperative apartment, subject, however, to
the cooperative's right to sums due under such proprietary lease
or occupancy agreement. The total amount owed to the cooperative
by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the
collateral below the outstanding principal balance of the
cooperative loan and accrued and unpaid interest thereon.
Recognition agreements also provide that in the event of a
foreclosure on a cooperative loan, the lender must obtain the
approval or consent of the cooperative as required by the
proprietary lease before transferring the cooperative shares or
assigning the proprietary lease. Generally, the lender is not
limited in any rights it may have to dispossess the
tenant-stockholders.
In some states, foreclosure on the cooperative shares is
accomplished by a sale in accordance with the provisions of
Article 9 of the Uniform Commercial Code (the "UCC") and the
security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each
case. In determining commercial reasonableness, a court will look
to the notice given the debtor and the method, manner, time,
place and terms of the foreclosure. Generally, a sale conducted
according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale
will be applied first to pay the costs and expenses of the sale
and then to satisfy the indebtedness secured by the lender's
security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to
the right of the cooperative corporation to receive sums due
under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of
the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
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Rights of Mortgagees
The standard form of the mortgage or deed of trust used by
most institutional lenders confers on the mortgagee or
beneficiary the right under some circumstances both to receive
all proceeds collected under any hazard insurance policy and all
awards made in connection with any condemnation proceedings, and
to apply such proceeds and awards to any indebtedness secured by
the mortgage or deed of trust in such order as the mortgagee or
beneficiary may determine. Thus, in the event improvements on the
property are damaged or destroyed by fire or other casualty, or
in the event the property is taken by condemnation, the mortgagee
or beneficiary under any underlying senior mortgages may have the
prior right to collect any insurance proceeds payable under a
hazard insurance policy and any award of damages in connection
with the condemnation and to apply the same to the indebtedness
secured by the senior mortgages or deeds of trust. In most cases,
proceeds in excess of the amount of senior mortgage indebtedness
will be applied to the indebtedness of a junior mortgage or trust
deed.
A common form of mortgage or deed of trust used by
institutional lenders typically contains a "future advance"
clause which provides, in essence, that additional amounts
advanced to or on behalf of the borrower or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or
deed of trust. While such a clause is valid under the laws of
most states, the priority of any advance made under the clause
depends, in some states, on whether the advance was an
"obligatory" or "optional" advance. If the mortgagee or
beneficiary is obligated to advance the additional amounts, the
advance is entitled to receive the same priority as amounts
initially loaned under the mortgage or deed of trust,
notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the
additional amounts (and, in some jurisdictions, has actual
knowledge of the intervening junior mortgages or deeds of trust
and other liens), the advance will be subordinate to such
intervening junior mortgages or deeds of trust and other liens.
Priority of advances under the clause rests, in many other
states, on state statutes giving priority to all advances made
under the loan agreement to a "credit limit" amount stated in the
recorded mortgage.
Other provisions sometimes included in the form of the
mortgage or deed of trust used by institutional lenders obligate
the borrower or trustor to pay, before delinquency, all taxes and
assessments on the property and, when due, all encumbrances,
charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance
on the property, to maintain and repair the property and not to
commit or permit any waste thereof, and to appear in and defend
any action or proceeding purporting to affect the property or the
rights of the mortgagee or beneficiary under the mortgage or deed
of trust. Upon a failure of the borrower or trustor to perform
any of these obligations, the mortgagee or beneficiary is given
the right under certain mortgages or deeds of trust to perform
the obligation itself, at its election, with the borrower or
trustor agreeing to reimburse the mortgagee or beneficiary for
any sums expended by the mortgagee or beneficiary on behalf of
the borrower or trustor. All sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the
mortgage or deed of trust. See "Servicing of the Mortgage Loans
and Contracts-Collection and Other Servicing Procedures" herein.
Rights of Redemption
In approximately one-third of the states, after sale
pursuant to a deed of trust or foreclosure of a mortgage, the
borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale.
In some states, redemption may occur only upon payment of the
entire principal balance of the loan, accrued interest and
expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums
due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The
rights of redemption would defeat the title of any purchaser from
the lender subsequent to foreclosure or sale under a deed of
trust. Consequently, the practical effect of the post-
foreclosure redemption right is to force the lender to retain the
property and pay the expenses
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of ownership until the redemption period has run. Whether the
lender has any rights to recover these expenses from a borrower
who redeems the property depends on the applicable state statute.
The related Prospectus Supplement will contain a description of
any statutes that prohibit recovery of such expenses from a
borrower in states where a substantial number of the Mortgaged
Properties for a particular Series is located.
Junior Mortgages; Rights of Senior Mortgagees
The mortgage pool for a Series may include Mortgage Loans
secured by mortgages or deeds of trust some of which are junior
to other mortgages or deeds of trust, some of which may be held
by other lenders or institutional investors. The rights of the
Trust (and therefore the Certificateholders), as mortgagee under
a junior mortgage or beneficiary under a junior deed of trust,
are subordinate to those of the mortgagee under the senior
mortgage or beneficiary under the senior deed of trust, including
the prior rights of the senior mortgagee to receive hazard
insurance and condemnation proceeds and to cause the property
securing the Mortgage Loan to be sold upon default of the
borrower or trustor, thereby extinguishing the junior mortgagee's
or junior beneficiary's lien unless the junior mortgagee or
junior beneficiary asserts its subordinate interest in the
property in foreclosure litigation and, possibly, satisfies the
defaulted senior mortgage or deed of trust. As discussed more
fully below, a junior mortgagee or junior beneficiary may satisfy
a defaulted senior loan in full and, in some states, may cure
such default and loan. In most states, no notice of default is
required to be given to a junior mortgagee or junior beneficiary
and junior mortgagees or junior beneficiaries are seldom given
notice of defaults on senior mortgages. In order for a
foreclosure action in some states to be effective against a
junior mortgagee or junior beneficiary, the junior mortgagee or
junior beneficiary must be named in any foreclosure action, thus
giving notice to junior lienors.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions that
limit the remedies of a beneficiary under a deed of trust or a
mortgagee under a mortgage. In some states, statutes limit the
right of the beneficiary or mortgagee to obtain a deficiency
judgment against the borrower following foreclosure or sale under
a deed of trust. A deficiency judgment would be a personal
judgment against the former borrower equal in most cases 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 require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is
generally to prevent a beneficiary or a mortgagee from obtaining
a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including the
federal bankruptcy laws and state laws affording relief to
debtors, may interfere with or affect the ability of the secured
mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal
bankruptcy law, a court with federal bankruptcy jurisdiction may
permit a debtor through his or her Chapter 11 or Chapter 13
rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the
mortgage loan and final judgment of foreclosure had been entered
in state court (provided no sale of the residence had yet
occurred) prior to the filing of the debtor's petition. Some
courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying
arrearages over a number of years.
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Courts with federal bankruptcy jurisdiction have also
indicated that the terms of a mortgage loan secured by property
of the debtor may be modified. These courts have suggested that
such modifications may include reducing the amount of each
monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to
the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan.
The Code provides priority to certain tax liens over the
lien of the mortgage. In addition, substantive requirements are
imposed upon mortgage lenders in connection with the origination
and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. These laws include the federal
Truth-in-Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act, their related regulations and related
statutes. These federal laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who
fail to comply with the provisions of the law. In some cases,
this liability may affect assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on
cooperative shares and the related proprietary lease or occupancy
agreement. Some courts have interpreted section 9-504 of the UCC
to prohibit a deficiency award unless the creditor establishes
that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the
related proprietary lease or occupancy agreement) was conducted
in a commercially reasonable manner.
Enforceability of Certain Provisions
Unless the related Prospectus Supplement indicates
otherwise, all of the Mortgage Loans will contain due-on-sale
clauses. These clauses permit the lender to accelerate the
maturity of a loan if the borrower sells, transfers, or conveys
the property. The enforceability of these clauses was the subject
of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied.
However, the Garn-St Germain Depository Institutions Act of 1982
(the "Garn-St Germain Act") preempts state constitutional,
statutory and case law prohibiting the enforcement of due-on-sale
clauses and permits lenders to enforce these clauses in
accordance with their terms, subject to certain limited
exceptions. The Garn-St Germain Act does "encourage" lenders to
permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and
the market rate.
Due-on-sale clauses contained in mortgage loans originated
by federal savings and loan associations or federal savings banks
are fully enforceable pursuant to regulations of the Office of
Thrift Supervision (the "OTS"), as successor to the Federal Home
Loan Bank Board, which preempt state law restrictions on the
enforcement of due-on-sale clauses.
The Garn-St Germain Act also sets forth nine specific
instances in which a mortgage lender covered by the Garn-St
Germain Act (including federal savings and loan associations and
federal savings banks) may not exercise a due-on-sale clause,
notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers
by operation of law, leases of fewer than three years and the
creation of a junior encumbrance. Regulations promulgated under
the Garn-St Germain Act by the Federal Home Loan Bank Board as
succeeded by the OTS also prohibit the imposition of a prepayment
penalty upon the acceleration of a loan pursuant to a due-on-sale
clause. If interest rates were to rise above the interest rates
on the Mortgage Loans, then any inability of the Servicer or
Master Servicer to enforce due-on-sale clauses may result in the
Trust Fund including a greater number of loans bearing
below-market interest rates than would otherwise be the case,
since a transferee of the property underlying a Mortgage Loan
would have a greater incentive in such circumstances to assume
the transferor's Mortgage Loan. Any inability of the Servicer or
Master Servicer to enforce due-on-sale clauses may affect the
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average life of the Mortgage Loans and the number of Mortgage
Loans that may be outstanding until maturity. See "Yield,
Maturity and Weighted Average Life Considerations."
Upon foreclosure, courts have imposed general equitable
principles. These equitable principles are generally designed to
relieve the borrower from the legal effect of his defaults under
the loan documents. Examples of judicial remedies that have been
fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be
able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules
in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under
the mortgage instrument is not monetary, such as the borrower
failing to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the
property.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and
Monetary Control Act of 1980, enacted in March 1980 ("Title V"),
provides that state usury limitations shall not apply to certain
types of residential first mortgage loans originated by certain
lenders after March 31, 1980. The OTS, as successor to the
Federal Home Loan Bank Board, is authorized to issue rules and
regulations and to publish interpretations governing
implementation of Title V. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983,
a law or constitutional provision which expressly rejects
application of the federal law. 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.
The Company or another party designated in the related
Prospectus Supplement will represent and warrant to the Trustee
that the Mortgage Loans have been originated in compliance in all
material respects with applicable state laws, including usury
laws.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Soldiers' and Sailors'
Civil Relief Act of 1940, as amended (the "Relief Act"), a
borrower who enters military service after the origination of
such borrower's Mortgage Loan (including a borrower who is a
member of the National Guard or is in reserve status at the time
of the origination of the Mortgage Loan and is later called to
active duty) may not be charged interest above an annual rate of
6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender.
It is possible that such interest rate limitation could have an
effect, for an indeterminate period of time, on the ability of
the Servicer to collect full amounts of interest on certain of
the Mortgage Loans. In addition, the Relief Act imposes
limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower's
period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default there may be delays and losses
occasioned by the inability to realize upon the Mortgaged
Property in a timely fashion. Under the applicable Agreement, the
Servicer will not be required to make deposits to the Certificate
Account for a Series of Certificates in respect of any Mortgage
Loan as to which the Relief Act has limited the amount of
interest the related borrower is required to pay each month, and
Certificateholders will bear such loss.
Environmental Considerations
Under the federal Comprehensive Environmental Response
Compensation and Liability Act, as amended, and under state law
in certain states, a secured party which takes a deed in lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale
or operates a mortgaged property
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may become liable in certain circumstances for the costs of
remedial action ("Cleanup Costs") if hazardous wastes or
hazardous substances have been released or disposed of on the
property. Such Cleanup Costs may be substantial. It is possible
that such Cleanup Costs could reduce the amounts otherwise
distributable to the Certificateholders if the related Trust Fund
were deemed to be liable for such Cleanup Costs and if such
Cleanup Costs were incurred. Moreover, under federal law and the
law of certain states, a lien may be imposed for any Cleanup
Costs incurred by federal or state authorities on the property
that is the subject of such Cleanup Costs. All subsequent liens
on such property are subordinated to such lien and, in several
states, even prior recorded liens, including those of existing
mortgages, are subordinated to such liens (a "Superlien"). In the
latter states, the security interest of the Trustee in a property
that is subject to such a Superlien could be adversely affected.
Traditionally, residential mortgage lenders have not taken
steps to evaluate whether hazardous wastes or hazardous
substances are present with respect to any mortgaged property
prior to the origination of the mortgage loan or prior to
foreclosure or accepting a deed in lieu of foreclosure. The
Company does not make any representation or warranty or assume
any liability with respect to the absence or effect of hazardous
wastes or hazardous substances on any Mortgaged Property or any
casualty resulting from the presence or effect of hazardous
wastes or hazardous substances.
THE CONTRACTS
General
As a result of the Company's assignment of the Contracts to
the Trustee, the Certificateholders will succeed collectively to
all of the rights (including the right to receive payment on the
Contracts) and will assume certain obligations of the Company or
the originator of such Contracts (the "Originator"). Each
Contract evidences both (a) the obligation of the obligor to
repay the loan evidenced thereby, and (b) the grant of a security
interest in the Manufactured Home to secure repayment of such
loan. Certain aspects of both features of the Contracts are
described more fully below.
The Contracts generally are "chattel paper" as defined in
the UCC in effect in the states in which the Manufactured Homes
initially were registered. Pursuant to the UCC, the sale of
chattel paper is treated in a manner similar to perfection of a
security interest in chattel paper. Under the Agreement, the
Company will be required to transfer physical possession of the
Contracts to the Trustee or its custodian. In addition, the
Company will be required to make an appropriate filing of a UCC-1
financing statement in the appropriate states to give notice of
the Trustee's ownership of the Contracts. Unless otherwise
specified in the related Prospectus Supplement, the Contracts
will not be stamped or marked otherwise to reflect their
assignment from the Company to the Trustee. Therefore, if a
subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the Trustee's
interest in the Contracts could be defeated.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the Contracts may be
located in all 50 states and the District of Columbia. Security
interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title
or by delivery of the required documents and payment of a fee to
the state motor vehicle authority, depending on state law. In
some nontitle states, perfection pursuant to the provisions of
the UCC is required. The Company or the Originator may effect
such notation or delivery of the required documents and fees, and
obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home
securing a manufactured housing conditional sales contract is
registered. In the event the Company or the Originator fails, due
to clerical errors, to effect such notation or delivery, or files
the security
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interest under the wrong law (for example, under a motor vehicle
title statute rather than under the UCC, in a few states), the
Certificateholders may not have a first priority security
interest in the Manufactured Home securing a contract. As
manufactured homes have become larger and often have been
attached to their sites without any apparent intention to move
them, courts in many states have held that manufactured homes,
under certain circumstances, may become subject to real estate
title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests
of other parties claiming an interest in the home under
applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the
holder of the security interest must file either a "fixture
filing" under the provisions of the UCC or a real estate mortgage
under the real estate laws of the state where the home is
located. These filings must be made in the real estate records
office of the county where the home is located. Unless otherwise
indicated in the related Prospectus Supplement, substantially all
of the Contracts will contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So
long as the borrower does not violate this agreement, a security
interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a
UCC financing statement will be effective to maintain the
priority of the security interest in the Manufactured Home. If,
however, a Manufactured Home is permanently attached to this
site, other parties could obtain an interest in the Manufactured
Home which is prior to the security interest transferred to the
Trustee. With respect to a Series of Certificates and as
described in the related Prospectus Supplement, the Company or
the Originator may be required to perfect a security interest in
the Manufactured Home under applicable real estate laws. If such
real estate filings are not required and if any of the foregoing
events were to occur, the only recourse of the Certificateholders
would be against the Company or the Originator pursuant to its
repurchase obligation for breach of warranties.
The Originator will assign its security interest in the
Manufactured Homes to the Company, and the Company will assign
its security interest in the Manufactured Homes to the Trustee on
behalf of the Certificateholders. Unless otherwise specified in
the related Prospectus Supplement, neither the Originator, the
Company nor the Trustee will amend the certificates of title to
identify the Company or the Trust Fund as the new secured party.
Accordingly, the Originator or the Company will continue to be
named as the secured party on the certificates of title relating
to the Manufactured Homes. In most states, such assignment is an
effective conveyance of such security interest without amendment
of any lien noted on the related certificate of title and the new
secured party succeeds to the Originator's or the Company's
rights as the secured party. However, in some states there exists
a risk that, in the absence of an amendment to the certificate of
title, such assignment of the security interest might not be held
effective against creditors of the Company or the Originator.
In the absence of fraud, forgery or permanent affixation of
the Manufactured Home to its site by the Manufactured Home owner,
or administrative error by state recording officials, the
notation of the lien of the Company on the certificate of title
or delivery of the required documents and fees will be sufficient
to protect the Certificateholders against the rights of
subsequent purchasers of a Manufactured Home or subsequent
lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the security
interest assigned to the Company and the Certificateholders is
not perfected, such security interest would be subordinate to,
among others, subsequent purchasers for value of Manufactured
Homes and holders of perfected security interests. There also
exists a risk in not identifying the Certificateholders as the
new secured party on the certificate of title that, through fraud
or negligence, the security interest of the Certificateholders
could be released.
In the event that the owner of a Manufactured Home moves it
to a state other than the state in which such Manufactured Home
initially is registered under the laws of most states the
perfected security interest in the Manufactured Home would
continue for four months after such relocation and
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thereafter only if and after the owner re-registers the
Manufactured Home in such state. If the owner were to relocate a
Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to
re-perfect the Trustee's security interest in such state, the
security interest in the Manufactured Home would cease to be
perfected. A majority of states generally require surrender of a
certificate of title to re-register a Manufactured Home;
accordingly, the Trustee must surrender possession if it holds
the certificate of title to such Manufactured Home or, in the
case of Manufactured Homes registered in states which provide for
notation of lien, the Trustee would receive notice of surrender
if the security interest of the Trust Fund in the Manufactured
Home is noted on the certificate of title or if the Originator or
the Company gives notice to the Trustee that it has received a
notice of surrender. In such case, the Trustee would have the
opportunity to re-perfect its security interest in the
Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a
manufactured home, re-registration could defeat perfection. In
the ordinary course of servicing the manufactured housing
conditional sales contracts, the Servicer will be required to
take steps to effect such re-perfection upon receipt of notice of
re-registration or information from the obligor as to relocation.
Similarly, when an obligor under a manufactured housing
conditional sales contract sells a manufactured home, the Trustee
must surrender possession of the certificate of title or will
receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of
the related manufactured housing conditional sales contract
before release of the lien. Under the Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are
necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed
on a Manufactured Home take priority even over a perfected
security interest. The Company or the Originator may represent to
the Trustee that it has no knowledge of any such liens with
respect to any Manufactured Home securing payment on any
Contract. However, such liens could arise at any time during the
term of a Contract. No notice will be given to the Trustee or
Certificateholders in the event such a lien arises.
Enforcement of Security Interests in Manufactured Homes
The Servicer on behalf of the Trustee, to the extent
required by the related Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default
by repossession and resale of the Manufactured Homes securing
such Contracts in default. So long as the Manufactured Home has
not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Contract by voluntary
surrender, by "self-help" repossession that is "peaceful" (i.e.,
without breach of the peace) or, in the absence of voluntary
surrender and the ability to repossess without breach of the
peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, which varies from 10 to 30
days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states
place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that
the debtor be given notice of any sale prior to resale of the
unit so that the debtor may redeem at or before such resale. In
the event of such repossession and resale of a Manufactured Home,
the Trustee would be entitled to be paid out of the sale proceeds
before such proceeds could be applied to the payment of the
claims of unsecured creditors or the holders of subsequently
perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is
entitled to obtain a deficiency judgment from a debtor for any
deficiency on repossession and resale of the manufactured home
securing such debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgments.
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Certain other statutory provisions, including federal and
state bankruptcy and insolvency laws and general equitable
principles, may limit or delay the ability of a lender to
repossess and resell collateral or enforce a deficiency judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal
Trade Commission is intended to defeat the ability of the
transferor of a consumer credit contract which is the seller of
goods which gave rise to the transaction (and certain related
lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to
subject the assignee of such a contract to all claims and
defenses which the debtor could assert against the seller of
goods. Liability under this rule is limited to amounts paid under
a Contract; however, the obligor also may be able to assert the
rule to set off remaining amounts due as a defense against a
claim brought by the Trust Fund against such obligor. Numerous
other federal and state consumer protection laws impose
requirements applicable to the origination of and lending
pursuant to the Contracts, including the Truth-in-Lending Act,
the Federal Trade Commission Act, the Fair Credit Billing Act,
the Fair Credit Reporting Act, the Equal Credit Opportunity Act,
the Fair Debt Collection Practices Act and the Uniform Consumer
Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the
related Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses
The Contracts, in general, prohibit the sale or transfer of
the related Manufactured Homes without the consent of the
Originator and permit the acceleration of the maturity of the
Contracts by the Originator upon any such sale or transfer that
is not consented to. Unless otherwise specified in the related
Prospectus Supplement, the Company expects that the Originator
will permit most transfers of Manufactured Homes and not
accelerate the maturity of the related Contracts. In certain
cases, the transfer may be made by a delinquent obligor in order
to avoid a repossession proceeding with respect to a Manufactured
Home.
In the case of a transfer of a Manufactured Home after
which the Servicer desires to accelerate the maturity of the
related Contract, the Servicer's ability to do so will depend on
the enforceability under state law of the "due-on-sale" clause.
The Garn-St Germain Act preempts, subject to certain exceptions
and conditions, state laws prohibiting enforcement of
"due-on-sale" clauses applicable to the Manufactured Homes.
Consequently, in some states the Servicer may be prohibited from
enforcing a "due-on-sale" clause in respect of certain
Manufactured Homes.
Applicability of Usury Laws
Title V provides that, subject to the following conditions,
state usury limitations shall not apply to any loan which is
secured by a first lien on certain kinds of manufactured housing.
The Contracts would be covered if they satisfy certain
conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a
30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on
interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law
prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law
to adopt a provision limiting discount points or other charges on
loans covered by Title V. In any state in which application of
Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no Contract which
imposes finance charges or provides for discount points or
charges in excess of permitted levels will be included in a Trust
Fund. The Company, or another
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person identified in the related Prospectus Supplement, will
represent that all of the Contracts comply with applicable usury
law.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower
who enters military service after the origination of such
borrower's Contract (including a borrower who is a member of the
National Guard or is in reserve status at the time of the
origination of the Contract and is later called to active duty)
may not be charged interest above an annual rate of 6% during the
period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible
that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Contracts. In
addition, the Relief Act imposes limitations which would impair
the ability of the Servicer to enforce the lien with respect to
an affected Contract during the borrower's period of active duty
status. Thus, in the event that such a Contract goes into
default, there may be delays and losses occasioned by the
inability to enforce the lien with respect to the Manufactured
Home in a timely fashion.
Under the applicable Agreement, the Servicer will not be
required to make deposits to the Certificate Account for a Series
of Certificates in respect of any Contract as to which the Relief
Act has limited the amount of interest the related borrower is
required to pay each month, and Certificateholders will bear such
loss.
LEGAL INVESTMENT MATTERS
The Secondary Mortgage Market Enhancement Act
Unless otherwise specified in the related Prospectus
Supplement, all of the classes of Offered Certificates of a
Series offered thereby will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), so long as they are rated in
one of the two highest rating categories by one or more
nationally recognized statistical rating organizations, and, as
such, are legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities
(including, but not limited to, state-chartered savings banks,
commercial banks, savings and loan associations and insurance
companies, as well as trustees and state government employee
retirement systems) created pursuant to or existing under the
laws of the United States or of any state (including the District
of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cut-off for such
enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in
"mortgage related securities," in most cases by requiring the
affected investors to rely solely upon existing state law and not
SMMEA. Accordingly, the investors affected by such legislation
will be authorized to invest in the Offered Certificates only to
the extent provided in such legislation and other applicable law.
SMMEA also amended the legal investment authority of
federally chartered depository institutions as follows: federal
savings and loan associations and federal savings banks may
invest in, sell or otherwise deal with mortgage related
securities without limitation as to the percentage of their
assets represented thereby; federal credit unions may invest in
mortgage related securities; and national banks may purchase
mortgage related securities for their own account without regard
to the limitations generally applicable to investment securities
set forth in 12 U.S.C. Section 24 (Seventh), subject in each case
to such regulations as the applicable federal regulatory
authority may prescribe. In this connection, federal credit
unions should review National Credit Union Administration (the
"NCUA") Letter to Credit Unions No. 96, as modified by Letter to
Credit Unions No. 108, which
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includes guidelines to assist federal credit unions in making
investment decisions for mortgage related securities. The NCUA
has adopted rules, effective December 2, 1991, which prohibit
federal credit unions from investing in certain mortgage related
securities, possibly including certain classes of Offered
Certificates, except under limited circumstances.
If specified in the related Prospectus Supplement, one or
more classes of Offered Certificates of a Series will not
constitute "mortgage related securities" for purposes of SMMEA.
In such event, persons whose investments are subject to state or
federal regulation may not be legally authorized to invest in
such classes of Offered Certificates.
All depository institutions considering an investment in
the Offered Certificates should review the "Supervisory Policy
Statement on Securities Activities" dated January 28, 1992 (the
"Policy Statement") of the Federal Financial Institutions
Examination Council. The Policy Statement, which has been adopted
by the Board of Governors of the Federal Reserve System, the
FDIC, the Comptroller of the Currency and the Office of Thrift
Supervision, effective February 10, 1992, and by the NCUA (with
certain modifications) effective June 26, 1992, prohibits
depository institutions from investing in certain "high-risk
mortgage securities" (including securities such as certain Series
and classes of the Offered Certificates), except under limited
circumstances, and sets forth certain investment practices deemed
to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to
regulation by federal or state authorities should review rules,
policies and guidelines adopted from time to time by such
authorities before purchasing the Certificates, as certain Series
or classes thereof 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 investments 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.
The Appraisal Regulations
Pursuant to Title XI of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), the Board of
Governors of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation and the OTS have adopted regulations (the "Appraisal
Regulations") applicable to bank holding companies and their non-
bank subsidiaries, state-chartered banks that are members of the
Federal Reserve System, national banks, state-chartered banks
that are not members of the Federal Reserve System and savings
associations, respectively. The Appraisal Regulations, which are
substantially similar, although not identical, for each agency,
generally require the affected institutions and entities to
obtain appraisals performed by state-certified or state-licensed
appraisers (each, a "FIRREA Appraisal") in connection with a wide
range of real estate-related transactions, including the purchase
of interests in loans secured by real estate in the form of
mortgage-backed securities, unless an exemption applies. With
respect to purchases of mortgage-backed securities, the Appraisal
Regulations provide for an exemption from the requirement of
obtaining new FIRREA Appraisals for the properties securing the
underlying loans so long as at the time of origination each such
loan was the subject of either a FIRREA Appraisal, or, if a
FIRREA Appraisal was not required, met the appraisal requirements
of the appropriate regulator.
No assurance can be given that each of the underlying
Mortgage Loans or Contracts in a Trust Fund will have been the
subject of a FIRREA Appraisal or, if a FIRREA Appraisal was not
required, an appraisal that conformed to the requirements of the
appropriate regulator at origination.
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To the extent available, information will be provided in the
related Prospectus Supplement with respect to appraisals on the
Mortgage Loans or Contracts underlying each Series of
Certificates. However, such information may not be available on
every Mortgage Loan or Contract. Prospective investors that may
be subject to the Appraisal Regulations are advised to consult
with their legal advisors and/or the appropriate regulators with
respect to the effect of such regulations on their ability to
invest in particular Offered Certificates.
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS IN
DETERMINING WHETHER AND TO WHAT EXTENT THE OFFERED CERTIFICATES
CONSTITUTE LEGAL INVESTMENTS FOR SUCH INVESTORS.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as
amended, ("ERISA") and the Code impose requirements on employee
benefit plans (and on certain other retirement plans and
arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and
separate accounts in which such plans, accounts or arrangements
are invested) subject to ERISA or the Code (collectively,
"Plans") and on persons who are fiduciaries with respect to such
Plans. Among other things, ERISA requires that the assets of a
Plan subject to ERISA be held in trust and that the trustee, or
other duly authorized fiduciary, have exclusive authority and
discretion to manage and control the assets of such Plan. ERISA
also imposes certain duties on persons who are fiduciaries with
respect to a Plan. Under ERISA, any person who exercises any
authority or control respecting the management or disposition of
the assets of a Plan generally is considered to be a fiduciary of
such Plan. In addition to the imposition by ERISA of general
fiduciary standards of investment prudence and diversification,
ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving Plan assets and persons ("Parties in
Interest") having certain specified relationships to a Plan and
impose additional prohibitions where Parties in Interest are
fiduciaries with respect to such Plan.
The United States Department of Labor (the "DOL") has
issued regulations concerning the definition of what constitutes
the assets of a Plan (DOL Reg. Section 2510.3-101). Under this
regulation, the underlying assets and properties of corporations,
partnerships and certain other entities in which a Plan makes an
"equity" investment could be deemed for purposes of ERISA and
Section 4975 of the Code to be assets of the investing Plan in
certain circumstances. In such a case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his
or her asset management responsibility, the underlying assets and
properties could be subject to ERISA's reporting and disclosure
requirements, and transactions involving the underlying assets
and properties could be subject to the fiduciary responsibility
requirements of ERISA and Section 4975 of the Code. Certain
exceptions to the regulation may apply in the case of a Plan's
investment in the Offered Certificates, but the Company cannot
predict in advance whether such exceptions will apply due to the
factual nature of the conditions to be met. Accordingly, because
the Mortgage Loans, Mortgage-Backed Securities or Contracts may
be deemed Plan assets of each Plan that purchases Offered
Certificates, an investment in the Offered Certificates by a Plan
might give rise to a prohibited transaction under ERISA Sections
406 or 407 and be subject to an excise tax under Code Section
4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTE
83-1") exempts from the prohibited transaction rules of ERISA and
Section 4975 of the Code certain transactions relating to the
operation of residential mortgage pool investment trusts and the
purchase, sale and holding of "mortgage pool pass-through
certificates" in the initial issuance of such certificates. PTE
83-1 permits, subject to certain conditions, transactions which
might otherwise be prohibited between Plans and Parties in
Interest with respect to those Plans involving the origination,
maintenance and termination of mortgage pools consisting of
mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition
and holding of certain mortgage pool pass-through certificates
representing an interest in such mortgage pools by Plans.
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PTE 83-1 sets forth three general conditions which must be
satisfied for any transaction to be eligible for exemption: (i)
the maintenance of a system of insurance or other protection for
the pooled mortgage loans and property securing such loans, and
for indemnifying certificateholders against reductions in
pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of
the aggregate principal balance of all covered pooled mortgage
loans or the principal balance of the largest covered pooled
mortgage loan; (ii) the existence of a pool trustee who is not an
affiliate of the pool sponsor; and (iii) a limitation on the
amount of the payments retained by the pool sponsor, together
with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor
to the mortgage pool.
Although the Trustee for any Series of Certificates will be
unaffiliated with the Company, there can be no assurance that the
system of insurance or subordination will meet the general or
specific conditions referred to above. In addition, the nature of
a Trust Fund's assets or the characteristics of one or more
classes of Offered Certificates may not be included within the
scope of PTE 83-1 or any other class exemption under ERISA. The
related Prospectus Supplement will provide additional information
with respect to the application of ERISA and the Code to the
related Offered Certificates.
Several underwriters of mortgage-backed securities have
applied for and obtained individual prohibited transaction
exemptions which are in some respects broader than PTE 83-1. Such
exemptions only apply to mortgage-backed securities which, in
addition to satisfying other conditions, are sold in an offering
with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If such
an exemption might be applicable to the Offered Certificates of a
Series, the related Prospectus Supplement will refer to such
possibility.
Each Plan fiduciary who is responsible for making the
investment decisions whether to purchase or commit to purchase
and to hold Offered Certificates must make its own determination
as to whether the general and the specific conditions of PTE 83-1
have been satisfied, or as to the availability of any other
prohibited transaction exemptions. Each Plan fiduciary should
also determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in the
Offered Certificates is appropriate for the Plan, taking into
account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Unless otherwise specified in the related Prospectus
Supplement, the Agreement will provide that the Residual
Certificates of any Series of Certificates with respect to which
a REMIC election has been made may not be acquired by a Plan.
Any Plan proposing to invest in the Offered Certificates
should consult with its counsel to confirm that such investment
will not result in a prohibited transaction and will satisfy the
other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
General
The following generally describes the anticipated material
federal income tax consequences of purchasing, owning and
disposing of the Offered Certificates. It does not address
special rules which may apply to particular types of investors.
The authorities on which this discussion is based are subject to
change or differing interpretations, and any such change or
interpretation could apply retroactively. Investors should
consult their own tax advisors regarding the specific tax
consequences to such investors of owning Offered Certificates.
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For purposes of this discussion, unless otherwise
specified, the term "Mortgage Loans" will be used to refer to
Mortgage Loans, Mortgaged-Backed Securities and Contracts, and
the term "Owner" will refer to the beneficial owner of an Offered
Certificate.
REMIC Elections
Under the Internal Revenue Code of 1986 (the "Code"), an
election may be made to treat the Trust Fund related to each
Series of Certificates (or segregated pools of assets within the
Trust Fund) as a "real estate mortgage investment conduit"
("REMIC") within the meaning of Section 860D(a) of the Code. If
one or more REMIC elections are made, the Certificates of any
Class will be either "regular interests" in a REMIC within the
meaning of Section 860G(a)(1) of the Code ("Regular
Certificates") or "residual interests" in a REMIC within the
meaning of Section 860G(a)(2) of the Code ("Residual
Certificates"). The related Prospectus Supplement for each Series
of Certificates will indicate whether an election will be made to
treat the Trust Fund as one or more REMICs, and if so, which
Certificates will be Regular Certificates and which will be
Residual Certificates.
If a REMIC election is made, the Trust Fund, or each
portion thereof that is treated as a separate REMIC, will be
referred to as a "REMIC Pool". If the Trust Fund is comprised of
two REMIC Pools, one will be an "Upper-Tier REMIC" and one a
"Lower-Tier REMIC". The assets of the Lower-Tier REMIC will
consist of the Mortgage Loans and related Trust Fund assets. The
assets of the Upper-Tier REMIC will consist of all of the regular
interests issued by the Lower-Tier REMIC.
The discussion below under the heading "REMIC Certificates"
considers Series for which a REMIC election will be made. Series
for which no such election will be made are addressed under
"Non-REMIC Certificates".
REMIC Certificates
The discussion in this section applies only to a Series of
Certificates for which a REMIC election is made.
Tax Opinion.
Qualification as a REMIC requires ongoing compliance with
certain conditions. Upon the issuance of each Series of
Certificates for which a REMIC election is made, Cleary,
Gottlieb, Steen & Hamilton or another law firm identified in the
related Prospectus Supplement, counsel to the Company, will
deliver its opinion generally to the effect that, with respect to
each such Series of Certificates, under then existing law and
assuming compliance by the Company, the Servicer or Master
Servicer and the Trustee for such Series with all of the
provisions of the related Agreement (and such other agreements
and representations as may be referred to in such opinion), each
REMIC Pool will be a REMIC, and the Certificates of such Series
will be treated as either Regular Certificates or Residual
Certificates. This opinion will be filed as an Exhibit to the
Form 8-K relating to such Series of Certificates.
Status of Certificates.
The Certificates will be:
- "qualifying real property loans" under Code
Section 593(d)(1);
- assets described in Code Section 7701(a)(19)(C);
and
- "real estate assets" under Code Section
856(c)(5)(A),
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to the extent the assets of the related REMIC Pool are so
treated. Interest on the Regular Certificates will be "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 the income of the REMIC
Pool is so treated. If at all times 95% or more of the assets or
income of the REMIC Pool qualifies under the foregoing Code
sections, the Certificates (and income thereon) will so qualify
in their entirety.
In the event the assets of the related REMIC Pool include
buy-down Mortgage Loans, it is unclear whether the related
buy-down funds would qualify under the foregoing Code sections.
Also, Contracts may be considered to qualify under the foregoing
sections only if the Manufactured Homes securing such Contracts
are considered to be "permanently fixed" or "permanently
installed". Contracts may limit the ability of a borrower to
permanently attach a Manufactured Home to its site.
The rules described in the two preceding paragraphs will be
applied to a Trust Fund consisting of two REMIC Pools as if the
Trust Fund were a single REMIC holding the assets of the
Lower-Tier REMIC.
Income from Regular Certificates.
General. Except as otherwise provided in this tax
discussion, Regular Certificates will be taxed as newly
originated debt instruments for federal income tax purposes.
Interest, original issue discount and market discount accrued on
a Regular Certificate will be ordinary income to the Owner.
All Owners must account for interest income under the accrual
method of accounting, which may result in the inclusion of
amounts in income that are not currently distributed in cash.
Original Issue Discount. Certain Regular Certificates may
have "original issue discount." An Owner must include original
issue discount in income as it accrues, without regard to the
timing of payments.
The total amount of original issue discount on a Regular
Certificate is the excess of its "stated redemption price at
maturity" over its "issue price." The issue price for any Regular
Certificate is the price (including any accrued interest) at
which a substantial portion of the Class of Certificates
including such Regular Certificate are first sold to the public.
In general, the stated redemption price at maturity is the sum of
all payments made on the Regular Certificate, other than payments
of interest that (i) are actually payable at least annually over
the entire life of the Certificates and (ii) are based on a
single fixed rate or variable rate (or certain combinations of
fixed and variable rates). The stated redemption price at
maturity of a Regular Certificate always includes its original
principal amount, but generally does not include distributions of
stated interest, except in the case of Accrual Certificates, and,
as discussed below, Interest Only Certificates. An "Interest Only
Certificate" is a Certificate entitled to receive distributions
of some or all of the interest on the Mortgage Loans or other
assets in a REMIC Pool and that has either a notional or nominal
principal amount. Special rules for Regular Certificates that
provide for interest based on a variable rate are discussed below
in "Income from Regular Certificates-Variable Rate Regular
Certificates".
With respect to an Interest Only Certificate, the stated
redemption price at maturity is likely to be the sum of all
payments thereon, determined in accordance with the Prepayment
Assumption (as defined below). In that event, Interest Only
Certificates would always have original issue discount.
Alternatively, in the case of an Interest Only Certificate with
some principal amount, the stated redemption price at maturity
might be determined under the general rules described in the
preceding paragraph. If, applying those rules, the stated
redemption price at maturity were considered to equal the
principal amount of such Certificate, then the rules described
below under "Premium" would apply. The Prepayment Assumption is
the assumed rate of prepayment of the Mortgage Loans used in
pricing the Regular Certificates. The Prepayment Assumption will
be set forth in the related Supplement.
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Under a de minimis rule, original issue discount on a
Regular Certificate will be considered zero if it is less than
0.25% of the Certificate's stated redemption price at maturity
multiplied by the Certificate's weighted average maturity. The
weighted average maturity of a Regular Certificate is computed
based on the number of full years (i.e., rounding down partial
years) each distribution of principal (or other amount included
in the stated redemption price at maturity) is scheduled to be
outstanding. The schedule of such distributions likely should be
determined in accordance with the Prepayment Assumption.
The Owner of a Regular Certificate generally must include
in income the original issue discount that accrues for each day
on which the Owner holds such Certificate, including the date of
purchase, but excluding the date of disposition. The original
issue discount accruing in any period equals:
PV End + Dist = PV Beg
Where:
PV End = present value of all remaining distributions to be made
as of the end of the period;
Dist = distributions made during the period includible in the
stated redemption price at maturity; and
PV Be = present value of all remaining distributions as of the
beginning of the period.
The present value of the remaining distributions is
calculated based on (i) the original yield to maturity of the
Regular Certificate, (ii) events (including actual prepayments)
that have occurred prior to the end of the period and (iii) the
Prepayment Assumption. For these purposes, the original yield to
maturity of a Regular Certificate will be calculated based on its
issue price, assuming that the Certificate will be prepaid in all
periods in accordance with the Prepayment Assumption, and with
compounding at the end of each accrual period used in the
formula.
Assuming the Regular Certificates have monthly
Distribution Dates, discount would be computed under the formula
generally for the one-month periods (or shorter initial period)
ending on each Distribution Date. The original issue discount
accruing during any accrual period is divided by the number of
days in the period to determine the daily portion of original
issue discount for each day.
The daily portions of original issue discount generally
will increase if prepayments on the underlying Mortgage Loans
exceed the Prepayment Assumption and decrease if prepayments are
slower than the Prepayment Assumption (changes in the rate of
prepayments having the opposite effect in the case of an Interest
Only Certificate). If the relative principal payment priorities
of the Classes of Regular Certificates of a Series change, any
increase or decrease in the present value of the remaining
payments to be made on any such Class will affect the computation
of original issue discount for the period in which the change in
payment priority occurs.
If original issue discount computed as described above is
negative for any period, the Owner generally will not be allowed
a current deduction for the negative amount but instead will be
entitled to offset such amount only against future positive
original issue discount from such Certificate. However, while not
free from doubt, such an Owner may be entitled to deduct
"negative original issue discount" to the extent the Owner's
adjusted basis (as defined in "Sale or Exchange of Certificates"
below) in the Certificate remaining after such deduction is not
less than the principal amount of the Certificate.
Acquisition Premium. If an Owner of a Regular Certificate
acquires such Certificate at a price greater than its "adjusted
issue price," but less than its remaining stated redemption price
at maturity, the daily portion for any day (as computed above) is
reduced by an amount equal to the
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product of (i) such daily portion and (ii) a fraction, the
numerator of which is the amount by which the price exceeds the
adjusted issue price and the denominator of which is the sum of
the daily portions for such Regular Certificate for all days on
and after the date of purchase. The adjusted issue price of a
Regular Certificate on any given day is its issue price,
increased by all original issue discount that has accrued on such
Certificate and reduced by the amount of all previous
distributions on such Certificate of amounts included in its
stated redemption price at maturity.
Market Discount. A Regular Certificate may have market
discount (as defined in the Code). Market discount equals the
excess of the adjusted issue price of a Certificate over the
Owner's adjusted basis in the Certificate. The Owner of a
Certificate with market discount must report ordinary interest
income, as the Owner receives distributions on the Certificate of
principal or other amounts included in its stated redemption
price at maturity, equal to the lesser of (a) the excess of the
amount of those distributions over the amount, if any, of accrued
original issue discount on the Certificate or (b) the portion of
the market discount that has accrued and not previously been
included in income. Also, such Owner must treat gain from the
disposition of the Certificate as ordinary income to the extent
of any accrued, but unrecognized, market discount. Alternatively,
an Owner may elect in any taxable year to include market discount
in income currently as it accrues on all market discount
instruments acquired by the Owner in that year or thereafter. An
Owner may revoke such an election only with the consent of the
Internal Revenue Service.
In general terms, market discount on a Regular Certificate
may be treated, at the Owner's election, as accruing either (a)
on the basis of a constant yield (similar to the method described
above for accruing original issue discount) or (b) alternatively,
either (i) in the case of a Regular Certificate issued without
original issue discount, in the ratio of stated interest
distributable in the relevant period to the total stated interest
remaining to be distributed from the beginning of such period
(computed taking into account the Prepayment Assumption) or (ii)
in the case of a Regular Certificate issued with original issue
discount, in the ratio of the amount of original issue discount
accruing in the relevant period to the total remaining original
issue discount at the beginning of such period. An election to
accrue market discount on a Regular Certificate on a constant
yield basis is irrevocable with respect to that Certificate.
An Owner may be required to defer a portion of the
deduction for interest expense on any indebtedness that the Owner
incurs or maintains in order to purchase or carry a Regular
Certificate that has market discount. The deferred amount would
not exceed the market discount that has accrued but not been
taken into income. 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.
Market discount with respect to a Regular Certificate will
be considered to be zero if such market discount is de minimis
under a rule similar to that described above in the fourth
paragraph under "Original Issue Discount". Owners should consult
their own tax advisors regarding the application of the market
discount rules as well as the advisability of making any election
with respect to market discount.
Discount on a Regular Certificate that is neither original
issue discount nor market discount, as defined above, must be
allocated ratably among the principal payments on the Certificate
and included in income (as gain from the sale or exchange of the
Certificate) as the related principal payments are made (whether
as scheduled payments or prepayments).
Premium. A Regular Certificate, other than an Accrual
Certificate or, as discussed above under "Original Issue
Discount", an Interest Only Certificate, purchased at a cost (net
of accrued interest) greater than its principal amount generally
is considered to be purchased at a premium. The Owner may elect
under Code Section 171 to amortize such premium under the
constant yield method, using the Prepayment Assumption. To the
extent the amortized premium is allocable to interest income from
the Regular Certificate, it is treated as an offset to such
interest rather than as
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a separate deduction. An election made by an Owner would
generally apply to all its debt instruments and may not be
revoked without the consent of the Internal Revenue Service.
Special Election to Apply OID Rules. In lieu of the rules
described above with respect to de minimis discount, acquisition
premium, market discount and premium, an Owner of a Regular
Certificate may elect to accrue such discount, or adjust for such
premium, by applying the principles of the OID rules described
above. The election is only available for debt instruments
acquired on or after April 4, 1994. An election made by a
taxpayer with respect to one obligation can affect other
obligations it holds. Owners should consult with their tax
advisors regarding the merits of making this election.
Retail Regular Certificates. For purposes of the original
issue and market discount rules, a repayment in full of a Retail
Certificate that is subject to payment in units or other
increments, rather than on a pro rata basis with other Retail
Certificates, will be treated in the same manner as any other
prepayment.
Variable Rate Regular Certificates. The Regular
Certificates may provide for interest that varies based on an
interest rate index. The OID Regulations provide special rules
for calculating income from certain "variable rate debt
instruments" or "VRDIs." A debt instrument must meet certain
technical requirements to qualify as a VRDI, which are outlined
in the next paragraph. Under the regulations, income on a VRDI is
calculated by (1) creating a hypothetical debt instrument that
pays fixed interest at rates equivalent to the variable interest,
(2) applying the original issue discount rules of the Code to
that fixed rate instrument, and (3) adjusting the income accruing
in any accrual period by the difference between the assumed fixed
interest amount and the actual amount for the period. In general,
where a variable rate on a debt instrument is based on an
interest rate index (such as LIBOR), a fixed rate equivalent to a
variable rate is determined based on the value of the index as of
the issue date of the debt instrument. In cases where rates are
reset at different intervals over the life of a VRDI, adjustments
are made to ensure that the equivalent fixed rate for each
accrual period is based on the same reset interval.
A debt instrument must meet a number of requirements in
order to qualify as a VRDI. A VRDI cannot be issued at a premium
above its principal amount that exceeds a specified percentage of
its principal amount (15%, or if less 1.5% times its weighted
average life). As a result, Interest Only Certificates will never
be VRDIs. Also, a debt instrument that pays interest based on a
multiple of an interest rate index is not a VRDI if the multiple
is less than zero or greater than 1.35, unless, in general,
interest is paid based on a single formula that lasts over the
life of the instrument. A debt instrument is not a VRDI if it is
subject to caps and floors, unless they remain the same over the
life of the instrument or are not expected to change
significantly the yield on the instrument. Variable rate Regular
Certificates other than Interest Only Certificates may or may not
qualify as VRDIs depending on their terms.
In a case where a variable rate Regular Certificate does
not qualify as a VRDI, it will be treated under the OID
Regulations as a contingent payment debt instrument. Proposed
regulations addressing contingent payment debt instruments were
issued on December 16, 1994, but such regulations are not
applicable by their terms to Regular Certificates. Until further
guidance is forthcoming, one method of calculating income on such
a Regular Certificate that appears to be reasonable would be to
apply the principles governing VRDIs outlined above.
Subordinated Certificates. Certain Series of Certificates
may contain one or more Classes of subordinated Certificates. In
the event there are defaults or delinquencies on the related
Mortgage Loans, amounts that otherwise would be distributed on a
Class of subordinated Certificates may instead be distributed on
other more senior Classes of Certificates. Since Owners of
Regular Certificates are required to report income under an
accrual method, Owners of subordinated Certificates will be
required to report income without giving effect to delays and
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reductions in distributions on such Certificates attributable to
defaults or delinquencies on the Mortgage Loans, except to the
extent that it can be established that amounts are uncollectible.
As a result, the amount of income reported by an Owner of a
subordinated Certificate in any period could significantly exceed
the amount of cash distributed to such Owner in that period. The
Owner will eventually be allowed a loss (or be allowed to report
a lesser amount of income) to the extent that the aggregate
amount of distributions on the subordinated Certificate is
reduced as a result of defaults and delinquencies on the Mortgage
Loans. Such a loss could in some circumstances be a capital loss.
Also, the timing and amount of such losses or reductions in
income are uncertain. Owners of subordinated Certificates should
consult their tax advisors on these points.
Income from Residual Certificates.
Taxation of REMIC Income. Generally, Owners of Residual
Certificates in a REMIC Pool ("Residual Owners") must report
ordinary income or loss equal to their pro rata shares (based on
the portion of all Residual Certificates they own) of the taxable
income or net loss of the REMIC. Such income must be reported
regardless of the timing or amounts of distributions on the
Residual Certificates.
The taxable income of a REMIC Pool is generally determined
under the accrual method of accounting in the same manner as the
taxable income of an individual taxpayer. Taxable income is
generally gross income, including interest and original issue
discount income, if any, on the assets of the REMIC Pool and
income from the amortization of any premium on Regular
Certificates, minus deductions. Market discount (as defined in
the Code) with respect to Mortgage Loans held by a REMIC Pool is
recognized in the same fashion as if it were original issue
discount. Deductions include interest and original issue discount
expense on the Regular Certificates, reasonable servicing fees
attributable to the REMIC Pool, other administrative expenses and
amortization of any premium on assets of the REMIC Pool. As
previously discussed, the timing of recognition of "negative
original issue discount," if any, on a Regular Certificate is
uncertain; as a result, the timing of recognition of the
corresponding income to the REMIC Pool is also uncertain.
If the Trust Fund consists of an Upper-Tier REMIC and a
Lower-Tier REMIC, the regular interests issued by the Lower-Tier
REMIC to the Upper- Tier REMIC will be treated as a single debt
instrument for purposes of the original issue discount
provisions.
A Residual Owner may not amortize the cost of its Residual
Certificate. Taxable income of the REMIC Pool, however, will not
include cash received by the REMIC Pool that represents a
recovery of the REMIC Pool's initial basis in its assets, and
such basis will include the issue price of the Residual
Certificates (assuming the issue price is positive). Such
recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificate over
its life. The period of time over which such issue price is
effectively amortized, however, may be longer than the economic
life of the Residual Certificate. The issue price of a Residual
Certificate is the price at which a substantial portion of the
Class of Certificates including the Residual Certificate are
first sold to the public (or if the Residual Certificate is not
publicly offered, the price paid by the first buyer).
A subsequent Residual Owner must report the same amounts
of taxable income or net loss attributable to the REMIC Pool as
an original Owner. No adjustments are made to reflect the
purchase price.
Losses. A Residual Owner that is allocated a net loss of
the REMIC Pool may not deduct such loss currently to the extent
it exceeds the Owner's adjusted basis (as defined in "Sale or
Exchange of Certificates" below) in its Residual Certificate. A
Residual Owner that is a U.S. person (as defined below in
"Taxation of Certain Foreign Investors"), however, may carry over
any disallowed loss to offset any taxable income generated by the
same REMIC Pool.
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Excess Inclusions. A portion of the taxable income
allocated to a Residual Certificate is subject to special tax
rules. That portion, referred to as an "excess inclusion," is
calculated for each calendar quarter and equals the excess of
such taxable income for the quarter over the daily accruals for
the quarter. The daily accruals equal the product of (i) 120% of
the federal long-term rate under Code Section 1274(d) for the
month which includes the Closing Date (determined on the basis of
quarterly compounding and properly adjusted for the length of the
quarter) and (ii) the adjusted issue price of the Certificate at
the beginning of such quarter. The adjusted issue price of a
Residual Certificate at the beginning of a quarter is the issue
price of the Certificate, plus the amount of daily accruals on
the Certificate for all prior quarters, decreased (but not below
zero) by any prior distributions on the Certificate. If the
aggregate value of the Residual Certificates is not considered to
be "significant," then to the extent provided in Treasury
regulations, a Residual Owner's entire share of REMIC taxable
income will be treated as an excess inclusion. The regulations
that have been adopted under Code Sections 860A through 86OG (the
"REMIC Regulations") do not contain such a rule.
Excess inclusions generally may not be offset by unrelated
losses or loss carryforwards or carrybacks of a Residual Owner.
An Owner that is a thrift institution, however, is generally
permitted to use losses to offset excess inclusions from a
Residual Certificate if such Certificate has "significant value."
The REMIC Regulations provide that a REMIC residual interest has
significant value if (i) the issue price of such interest equals
at least 2% of the aggregate of the issue prices of all interests
in the REMIC and (ii) the anticipated weighted average life of
such REMIC residual interest is at least 20% of the anticipated
weighted average life of the REMIC.
Excess inclusions are treated as unrelated business
taxable income for an organization subject to the tax on
unrelated business income. In addition, under Treasury
regulations yet to be issued, if a real estate investment trust,
regulated investment company or certain other pass-through
entities are Residual Owners, a portion of the distributions made
by such entities may be treated as excess inclusions.
Distributions. Distributions on a Residual Certificate
(whether at their scheduled times or as a result of prepayments)
generally will not result in any taxable income or loss to the
Residual Owner. If the amount of any distribution exceeds a
Residual Owner's adjusted basis in its Residual Certificate,
however, the Residual Owner will recognize gain (treated as gain
from the sale or exchange of its Residual Certificate) to the
extent of such excess. See "Sale or Exchange of Certificates"
below.
Prohibited Transactions; Special Taxes. Net income
recognized by a REMIC Pool from "prohibited transactions" is
subject to a 100% tax and is disregarded in calculating the REMIC
Pool's taxable income. In addition, a REMIC Pool is subject to
federal income tax at the highest corporate rate on "net income
from foreclosure property" (which has a technical definition). A
100% tax also applies to certain contributions to a REMIC Pool
made after it is formed. It is not anticipated that any REMIC
Pool will (i) engage in prohibited transactions in which it
recognizes a significant amount of net income, (ii) receive
contributions of property that are subject to tax, or (iii)
derive a significant amount of net income from foreclosure
property that is subject to tax.
Negative Value Residual Certificates. The federal income
tax treatment of any consideration paid to a transferee on a
transfer of a Residual Certificate is unclear. Such a transferee
should consult its tax advisor. The preamble to the REMIC
Regulations indicates that the Internal Revenue Service may issue
future guidance on the tax treatment of such payments.
Securities Dealers. On December 28, 1993, the Internal
Revenue Service released temporary regulations under Code Section
475 (the "Temporary Section 475 Regulations") relating to the
requirement that a dealer in securities mark certain securities
to market. On January 3, 1995,
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the Internal Revenue Service released proposed regulations
containing additional guidance on section 475 (the "Proposed
Section 475 Regulations").
In general, the Temporary Section 475 Regulations provide
that a REMIC residual interest that has negative value when
acquired is not a "security" for purposes of Code Section 475.
Whether a residual interest has negative value is determined
under a present value formula described in the Temporary Section
475 Regulations. The Temporary Section 475 Regulations apply to
taxable years ending on or after December 31, 1993. Furthermore,
the Temporary Section 475 Regulations provide the Internal
Revenue Service with the authority to treat any interest or
arrangement having substantially the same economic effect as a
"negative value" residual interest as a "negative value" residual
interest.
The Proposed Section 475 Regulations provide that any
residual interest (regardless of whether it has negative value as
described in the preceding paragraph), and any arrangement having
substantially the same economic effect, that is acquired on or
after January 4, 1995 is not a "security" for the purposes of
Code Section 475. Under the Proposed Section 475 Regulations,
residual interests acquired before January 4, 1995 would be
subject to the rules in the Temporary Section 475 Regulations
relating to negative value residual interests.
Prospective purchasers of a Residual Certificate should
consult their tax advisors regarding the possible application of
the Temporary Section 475 Regulations and the Proposed Section
475 Regulations.
The method of taxation of Residual Certificates described
in this section can produce a significantly less favorable
after-tax return for a Residual Certificate than would be the
case if the Certificate were taxable as a debt instrument. Also,
a Residual Owner's return may be adversely affected by the excess
inclusions rules described above. In certain periods, taxable
income and the resulting tax liability for a Residual Owner may
exceed any distributions it receives. In addition, a substantial
tax may be imposed on certain transferors of a Residual
Certificate and certain Residual Owners that are "pass-thru"
entities. See "Transfers of Residual Certificates" below.
Investors should consult their tax advisors before purchasing a
Residual Certificate.
Sale or Exchange of Certificates.
An Owner generally will recognize gain or loss upon sale
or exchange of a Regular or Residual Certificate equal to the
difference between the amount realized and the Owner's adjusted
basis in the Certificate. The adjusted basis in a Certificate
generally will equal the cost of the Certificate, increased by
income previously recognized, and reduced (but not below zero) by
previous distributions, and by any amortized premium in the case
of a Regular Certificate, or net losses allowed as a deduction in
the case of a Residual Certificate.
Except as described below, any gain or loss on the sale or
exchange of a Certificate held as a capital asset will be capital
gain or loss and will be long-term or short-term depending on
whether the Certificate has been held for more than one year.
Such gain or loss will be ordinary income or loss (i) for a bank
or thrift institution, and (ii) in the case of a Regular
Certificate, (a) to the extent of any accrued, but unrecognized,
market discount, or (b) to the extent income recognized by the
Owner is less than the income that would have been recognized if
the yield on such Certificate were 110% of the applicable federal
rate under Code Section 1274(d).
A Residual Owner should be allowed a loss upon termination
of the REMIC Pool equal to the amount of the Owner's remaining
adjusted basis in its Residual Certificates. Whether the
termination will be treated as a sale or exchange (resulting in a
capital loss) is unclear.
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Except as provided in Treasury regulations, the wash sale
rules of Code Section 1091 will apply to dispositions of a
Residual Certificate where the seller of the interest, during the
period beginning six months before the sale or disposition of the
interest and ending six months after such sale or disposition,
acquires (or enters into any other transaction that results in
the application of Code Section 1091) any REMIC residual
interest, or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a
residual interest.
Taxation of Certain Foreign Investors.
Regular Certificates. A Regular Certificate held by an
Owner that is a non-U.S. person (as defined below), and that has
no connection with the United States other than owning the
Certificate, will not be subject to U.S. withholding or income
tax with respect to the Certificate provided such Owner (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 an appropriate
statement, signed under penalties of perjury, identifying the
Owner and stating, among other things, that the Owner is a
non-U.S. person. If these conditions are not met, a 30%
withholding tax will apply to interest (including original issue
discount) unless an income tax treaty reduces or eliminates such
tax or unless the interest is effectively connected with the
conduct of a trade or business within the United States by such
Owner. In the latter case, such Owner will be subject to United
States federal income tax with respect to all income from the
Certificate at regular rates then applicable to U.S. taxpayers
(and in the case of a corporation, possibly also the branch
profits tax).
The term "non-U.S. person" means any person other than a
U.S. person. A U.S. person is a citizen or resident of the United
States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any
political subdivision thereof, or an estate or trust that is
subject to U.S. federal income tax regardless of the source of
its income.
Residual Certificates. A Residual Owner that is a non-U.S.
person, and that has no connection with the United States other
than owning a Residual Certificate, will not be subject to U.S.
withholding or income tax with respect to the Certificate (other
than with respect to excess inclusions) provided that (i) the
conditions described in the second preceding paragraph with
respect to Regular Certificates are met and (ii) in the case of a
Residual Certificate in a REMIC Pool holding Mortgage Loans, the
Mortgage Loans were originated after July 18, 1984. Excess
inclusions are subject to a 30% withholding tax in all events
(notwithstanding any contrary tax treaty provisions) when
distributed to the Residual Owner (or when the Residual
Certificate is disposed of). The Code grants the Treasury
Department authority to issue regulations requiring excess
inclusions to be taken into account earlier if necessary to
prevent avoidance of tax. The REMIC Regulations do not contain
such a rule. The preamble thereto states that the Internal
Revenue Service is considering issuing regulations concerning
withholding on distributions to foreign holders of residual
interests to satisfy accrued tax liability due to excess
inclusions.
With respect to a Residual Certificate that has been held
at any time by a non-U.S. person, the Trustee (or its agent) will
be entitled to withhold (and to pay to the Internal Revenue
Service) any portion of any payment on such Residual Certificate
that the Trustee reasonably determines is required to be
withheld. If the Trustee (or its agent) reasonably determines
that a more accurate determination of the amount required to be
withheld from a distribution can be made within a reasonable
period after the scheduled date for such distribution, it may
hold such distribution in trust for the Residual Owner until such
determination can be made.
Special tax rules and restrictions that apply to transfers
of Residual Certificates to and from non-U.S. persons are
discussed in the next section.
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Transfers of Residual Certificates.
Special tax rules and restrictions apply to transfers of
Residual Certificates to disqualified organizations or foreign
investors, and to transfers of noneconomic Residual Certificates.
Disqualified Organizations. In order to comply with the
REMIC rules of the Code, the Agreement will provide that no legal
or beneficial interest in a Residual Certificate may be
transferred to, or registered in the name of, any person unless
(i) the proposed purchaser provides to the Trustee an "affidavit"
(within the meaning of the REMIC Regulations) to the effect that,
among other items, such transferee is not a "disqualified
organization" (as defined below), is not purchasing a Residual
Certificate as an agent for a disqualified organization (i.e., as
a broker, nominee, or other middleman) and is not an entity (a
"Book-Entry Nominee") that holds REMIC residual securities as
nominee to facilitate the clearance and settlement of such
securities through electronic book-entry changes in accounts of
participating organizations and (ii) the transferor states in
writing to the Trustee that it has no actual knowledge that such
affidavit is false.
If despite these restrictions a Residual Certificate is
transferred to a disqualified organization, the transfer may
result in a tax equal to the product of (i) the present value of
the total anticipated future excess inclusions with respect to
such Certificate and (ii) the highest corporate marginal federal
income tax rate. Such a tax generally is imposed on the
transferor, except that if the transfer is through an agent for a
disqualified organization, the agent is liable for the tax. A
transferor is not liable for such tax 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 the affidavit
is false.
A disqualified organization may hold an interest in a
REMIC Certificate through a "pass-thru entity" (as defined
below). In that event, the pass-thru entity is subject to tax (at
the highest corporate marginal federal income tax rate) on excess
inclusions allocable to the disqualified organization. However,
such tax will not apply to the extent the pass-thru entity
receives affidavits from record holders of interests in the
entity stating that they are not disqualified organizations and
the entity does not have actual knowledge that the affidavits are
false.
For these purposes, (i) "disqualified organization" means
the United States, any state or political subdivision thereof,
any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, certain
organizations that are exempt from taxation under the Code
(including tax on excess inclusions) and certain corporations
operating on a cooperative basis, and (ii) "pass-thru 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-thru entity as a nominee for another will,
with respect to that interest, be treated as a pass-thru entity.
Foreign Investors. Under the REMIC Regulations, a transfer
of a Residual Certificate to a non-U.S. person that will not hold
the Certificate in connection with a U.S. trade or business will
be disregarded for all federal tax purposes if the Certificate
has "tax avoidance potential." A Residual Certificate has tax
avoidance potential unless, at the time of transfer, the
transferor reasonably expects that:
(i) for each excess inclusion, the REMIC will distribute
to the transferee residual interest holder an amount that will
equal at least 30 percent of the excess inclusion, and
(ii) each such amount will be distributed at or after the
time at which the excess inclusion accrues and not later than the
close of the calendar year following the calendar year of
accrual. A transferor has such reasonable expectation if the
above test would be met assuming that the REMIC's Mortgage Loans
will prepay at each rate between 50 percent and 200 percent of
the Prepayment Assumption.
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The REMIC Regulations also provide that a transfer of a
Residual Certificate from a non-U.S. person to a U.S. person (or
to a non-U.S. person that will hold the Certificate in connection
with a U.S. trade or business) is disregarded if the transfer has
"the effect of allowing the transferor to avoid tax on accrued
excess inclusions."
In light of these provisions, the Agreement provides that
a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. person, unless (i) such person
holds the Certificate in connection with the conduct of a trade
or business within the United States and furnishes the transferor
and the Trustee with an effective Internal Revenue Service Form
4224, or (ii) the transferee delivers to both the transferor and
the Trustee an opinion of nationally recognized tax counsel to
the effect that such transfer is in accordance with the
requirements of the Code and the regulations promulgated
thereunder and that such transfer will not be disregarded for
federal income tax purposes.
Noneconomic Residual Certificates. Under the REMIC
Regulations, a transfer of a "noneconomic" Residual Certificate
will be disregarded for all federal income tax purposes if a
significant purpose of the transfer is to impede the assessment
or collection of tax. Such a purpose exists if the transferor, at
the time of the transfer, either knew or should have known that
the transferee would be unwilling or unable to pay taxes due on
its share of the taxable income of the REMIC. A transferor is
presumed to lack such knowledge 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 had historically paid
its debts as they came due and found no significant evidence to
indicate that the transferee will not continue to pay its debts
as they become due, and
(ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual
interest, it may incur tax liabilities in excess of any cash
flows generated by the interest and that it intends to pay taxes
associated with holding the residual interest as they become due.
A Residual Certificate (including a Certificate with significant
value at issuance) is noneconomic unless, at the time of the
transfer, (i) the present value of the expected future
distributions on the Certificate at least equals the product of
the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which
the transfer occurs, and (ii) the transferor reasonably expects
that the transferee will receive distributions on the
Certificate, at or after the time at which taxes accrue, in an
amount sufficient to pay the taxes.
The Agreement will provide that no legal or beneficial
interest in a Residual Certificate may be transferred to, or
registered in the name of, any person unless the transferor
represents to the Trustee that it has conducted the investigation
of the transferee, and made the findings, described in the
preceding paragraph, and the proposed transferee provides to the
Trustee the transferee representations described in the preceding
paragraph, and agrees that it will not transfer the Certificate
to any person unless that person agrees to comply with the same
restrictions on future transfers.
Pending Legislation.
Legislation has been proposed which would provide that,
effective for taxable years beginning after December 31, 1986,
alternative minimum taxable income of a Residual Owner cannot be
less than the Owner's excess inclusions. Legislation has also
been proposed which would, effective for taxable years beginning
after December 31, 1995, eliminate the exception to the excess
inclusion rules for thrift institutions that hold residual
interests with significant value. No prediction can be made
whether any such proposed legislation will be enacted.
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Servicing Compensation and Other REMIC Pool Expenses.
Under Code Section 67, an individual, estate or trust is
allowed certain itemized deductions only to the extent that such
deductions, in the aggregate, exceed 2% of the Owner's adjusted
gross income, and such a person is not allowed such deductions to
any extent in computing its alterative minimum tax liability.
Under Treasury regulations, if such a person is an Owner of a
REMIC Certificate, the REMIC Pool is required to allocate to such
a person its share of the servicing fees and administrative
expenses paid by a REMIC together with an equal amount of income.
Those fees and expenses are deductible as an offset to the
additional income, but subject to the 2% floor.
In the case of a REMIC Pool that has multiple classes of
Regular Certificates with staggered maturities, fees and expenses
of the REMIC Pool would be allocated entirely to the Owners of
Residual Certificates. However, if the REMIC Pool were a
"single-class REMIC" as defined in applicable Treasury
regulations, such deductions would be allocated proportionately
among the Regular and Residual Certificates.
Reporting and Administrative Matters.
Annual reports will be made to the Internal Revenue
Service, and to Holders of record of Regular Certificates, and
Owners of Regular Certificates holding through a broker, nominee
or other middleman, that are not excepted from the reporting
requirements, of accrued interest, original issue discount,
information necessary to compute accruals of market discount,
information regarding the percentage of the REMIC Pool's assets
meeting the qualified assets tests described above under "Status
of Certificates" and, where relevant, allocated amounts of
servicing fees and other Code Section 67 expenses. Holders not
receiving such reports may obtain such information from the
related REMIC by contacting the person designated in IRS
Publication 938. Quarterly reports will be made to Residual
Holders showing their allocable shares of income or loss from the
REMIC Pool, excess inclusions, and Code Section 67 expenses.
The Trustee will sign and file federal income tax returns
for each REMIC Pool. To the extent allowable, the Company will
act as the tax matters person for each REMIC Pool. Each Owner of
a Residual Certificate, by the acceptance of its Residual
Certificate, agrees that the Company will act as the Owner's
agent in the performance of any duties required of the Owner in
the event that the Owner is the tax matters person.
An Owner of a Residual Certificate is required to treat
items on its federal income tax return consistently with the
treatment of the items on the REMIC Pool's return, unless the
Owner owns 100% of the Residual Certificate for the entire
calendar year or the Owner either files a statement identifying
the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The
Internal Revenue Service may assess a deficiency resulting from a
failure to comply with the consistency requirement without
instituting an administrative proceeding at the REMIC level. Any
person that holds a Residual Certificate as a nominee for another
person may be required to furnish the REMIC Pool, in a manner to
be provided in Treasury regulations, the name and address of such
other person and other information.
Non-REMIC Certificates
The discussion in this Section applies only to a Series of
Certificates for which no REMIC election is made.
Trust Fund as Grantor Trust.
Upon issuance of each Series of Certificates, Cleary,
Gottlieb, Steen & Hamilton or another law firm identified in the
related Prospectus Supplement, counsel to the Company, will
deliver its
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opinion to the effect that, under then current law, assuming
compliance by the Company, the Servicer or Master Servicer and
the Trustee with all the provisions of the Agreement (and such
other agreements and representations as may be referred to in the
opinion), the Trust Fund will be classified for federal income
tax purposes as a grantor trust and not as an association taxable
as a corporation. This opinion will be filed as an Exhibit to the
Form 8-K relating to such Series of Certificates.
Under the grantor trust rules of the Code, each Owner of a
Certificate will be treated for federal income tax purposes as
the owner of an undivided interest in the Mortgage Loans (and any
related assets) included in the Trust Fund. The Owner will
include in its gross income, gross income from the portion of the
Mortgage Loans allocable to the Certificate, and may deduct its
share of the expenses paid by the Trust Fund that are allocable
to the Certificate, at the same time and to the same extent as if
it had directly purchased and held such interest in the Mortgage
Loans and had directly received payments thereon and paid such
expenses. If an Owner is an individual, trust or estate, the
Owner will be allowed deductions for its share of Trust Fund
expenses (including reasonable servicing fees) only to the extent
that the sum of those expenses and the Owner's other
miscellaneous itemized deductions exceeds 2% of adjusted gross
income, and will not be allowed to deduct such expenses for
purposes of the alternative minimum tax. Distributions on a
Certificate will not be taxable to the Owner, and the timing or
amount of distributions will not affect the timing or amount of
income or deductions relating to a Certificate.
Status of the Certificates.
The Offered Certificates, other than Interest Only
Certificates, will be:
- "qualifying real property loans" under Code
Section 593(d);
- "real estate assets" under Code Section
856(c)(5)(A); and
- assets described in Section 7701(a)(19)(C) of
the Code,
to the extent the assets of the Trust Fund are so treated.
Interest income from such Certificates will be "interest on
obligations secured by mortgages on real property" under Code
Section 856(c)(3)(B) to the extent the income of the Trust Fund
qualifies under that section. An "Interest Only Certificate" is a
Certificate which is entitled to receive distributions of some or
all of the interest on the Mortgage Loans or other assets in a
REMIC Pool and that has either a notional or nominal principal
amount. Although not certain, Certificates that are Interest Only
Certificates should qualify under the foregoing Code sections to
the same extent as other Certificates.
Possible Application of Stripped Bond Rules.
The federal income tax treatment of Certificates will
depend on whether they are subject to the "stripped bond" rules
of Code Section 1286. In general, Certificates will be subject to
those rules in the hands of an Owner if (i) the Company (or
anyone else) retains rights to receive more than 100 basis points
of interest on any Mortgage Loans assigned to the Trust Fund
(disregarding rights to reasonable servicing compensation, but
including rights to fees in excess of reasonable compensation),
or (ii) Certificates are issued in two or more Classes
representing rights to non-pro rata shares of interest and
principal payments on the Mortgage Loans.
Notwithstanding the foregoing, a Certificate will not be
subject to the stripped bond rules in the hands of an Owner
unless, viewing the Certificate as a debt instrument issued by
the Trust Fund, it would have original issue discount. In
general, a Certificate will not have original issue discount if
it pays interest at a fixed rate, or a single variable rate,
monthly over its entire life, is issued within one month of the
first Distribution Date, and is issued with no more than a de
minimis
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amount of discount below its principal amount. Discount is de
minimis if the Certificate has an issue price (generally the
initial offering price at which a substantial amount of
Certificates are sold) that is not less than its principal amount
by more than .25% times the weighted average life of the
Certificate (calculated by rounding down the number of years to
each principal payment to the next lowest number). For a more
detailed discussion of the definition of original issue discount,
see "REMIC Certificates-Income from Regular Certificates-Original
Issue Discount" above.
Taxation of Certificates if Stripped Bond Rules Do Not Apply.
If the stripped bond rules do not apply to a Certificate,
then the Owner will be required to include in income its share of
the interest payments on the Mortgage Loans held by the Trust
Fund in accordance with its tax accounting method. The Owner must
also account for discount or premium on the Mortgage Loans if it
is considered to have purchased its interest in the Mortgage
Loans at a discount or premium. An Owner will be considered to
have purchased an interest in each Mortgage Loan at a price
determined by allocating its purchase price for the Certificate
among the Mortgage Loans in proportion to their fair market
values at the time of purchase. It is likely that discount would
be considered to accrue and premium would be amortized, as
described below, based on an assumption that there will be no
future prepayments of the Mortgage Loans, and not based on a
reasonable prepayment assumption.
Discount. The treatment of any discount relating to a
Mortgage Loan will depend on whether the discount is original
issue discount or market discount. Discount at which a Mortgage
Loan is purchased will be original issue discount only if the
Mortgage Loan itself has original issue discount; the issuance of
Certificates is not considered a new issuance of a debt
instrument that can give rise to original issue discount. A
Mortgage Loan generally will be considered to have original issue
discount if the greater of the amount of points charged to the
borrower, or the amount of any interest foregone during any
initial teaser period, exceeds .167% of the principal amount of
the Mortgage Loan times the number of full years to maturity
(i.e., 5% of the principal amount for a 30 year loan), or if
interest is not paid at a fixed rate or a single variable rate
(disregarding any initial teaser rate) over the life of the
Mortgage Loan. It is not anticipated that the amount of original
issue discount, if any, accruing on the Mortgage Loans in each
month will be significant relative to the interest paid currently
on the Mortgage Loans, but there can be no assurance that this
will be the case.
In the case of a Mortgage Loan that is considered to have
been purchased with market discount that exceeds a de minimis
amount (generally, .167% of the principal amount times the number
of whole years to maturity remaining at the time of purchase),
the Owner will be required to include in income in each month the
amount of such discount that has accrued through such month and
not previously been included in income, but limited to the amount
of principal on the Mortgage Loan that is received by the Trust
Fund in that month. Because the Mortgage Loans will provide for
monthly principal payments, such discount may be required to be
included in income at a rate that is not significantly slower
than the rate at which such discount accrues. Any market discount
that has not previously been included in income will be
recognized as ordinary income if and when the Mortgage Loan is
prepaid in full. For a more detailed discussion of the market
discount rules of the Code, see "REMIC Certificates-Income from
Regular Certificates-Market Discount" above.
In the case of market discount that does not exceed a de
minimis amount, the Owner generally will be required to allocate
ratably the portion of such discount that is allocable to a
Mortgage Loan among the principal payments on the Mortgage Loan
and to include the discount in ordinary income as the related
principal payments are made (whether as scheduled payments or
prepayments).
Premium. In the event that a Mortgage Loan is purchased at
a premium, the Owner may elect under Section 171 of the Code to
amortize such premium under a constant yield method based
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on the yield of the Mortgage Loan to such Owner, provided that
such Mortgage Loan was originated after September 27, 1985.
Premium allocable to a Mortgage Loan originated on or before that
date should be allocated among the principal payments on the
Mortgage Loan and allowed as an ordinary deduction as principal
payments are made (whether as scheduled payments or prepayments).
Taxation of Certificates if Stripped Bond Rules Apply.
If the stripped bond rules apply to a Certificate, income
on the Certificate will be treated as original issue discount and
will be included in income as it accrues under a constant yield
method. More specifically, for purposes of applying the original
issue discount rules of the Code, the Owner will likely be taxed
as if it had purchased a newly issued, single debt instrument
providing for payments equal to the payments on the interests in
the Mortgage Loans allocable to the Certificate, and having
original issue discount equal to the excess of the sum of such
payments over the Owner's purchase price for the Certificate
(which would be treated as the issue price). The amount of
original issue discount income accruing in any taxable year will
be computed generally as described above under "REMIC
Certificates-Income from Regular Certificates-Original Issue
Discount". It is possible, however, that the calculation must be
made using as the Prepayment Assumption an assumption of zero
prepayments. If the calculation is made assuming no future
prepayments, then the Owner should be allowed to deduct currently
any negative amount of original issue discount produced by the
accrual formula.
Different approaches could be applied in calculating
income under the stripped bond rules. For example, a Certificate
could be viewed as a collection of separate debt instruments (one
for each payment allocable to the Certificate) rather than a
single debt instrument. Also, in the case of an Interest-Only
Certificate, it could be argued that certain proposed regulations
governing contingent payment debt obligations apply. Owners
should consult their own tax advisors regarding the calculation
of income under the stripped bond rules.
Sales of Certificates.
A Certificateholder that sells a Certificate will
recognize gain or loss equal to the difference between the amount
realized in the sale and its adjusted tax basis in the
Certificate. In general, such adjusted basis will equal the
Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the
Certificate and decreased (but not below zero) by the amount of
any distributions received thereon, the amount of any losses
previously allowable to such Owner with respect to such
Certificate and any premium amortization thereon. Any such gain
or loss would be capital gain or loss if the Certificate was held
as a capital asset, subject to the potential treatment of gain as
ordinary income to the extent of any accrued but unrecognized
market discount under the market discount rules of the Code, if
applicable.
Foreign Investors.
Except as described in the following paragraph, an Owner
that is not a U. S. person (as defined under "REMIC Certificates-
Taxation of Certain Foreign Investors" above) and that is not
subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its
ownership of a Certificate will not be subject to United States
income or withholding tax in respect of a Certificate (assuming
the underlying Mortgage Loans were originated after July 18,
1984), if the Owner provides an appropriate statement, signed
under penalties of perjury, identifying the Owner and stating,
among other things, that the Owner is not a U.S. person. If these
conditions are not met, a 30% withholding tax will apply to
interest (including original issue discount) unless an income tax
treaty reduces or eliminates such tax or unless the interest is
effectively connected with the conduct of a trade or business
within the United States by such Owner. Income effectively
connected with a U.S. trade or business will be subject to United
States
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federal income tax at regular rates then applicable to
U.S. taxpayers (and in the case of a corporation, possibly also
the branch profits tax).
In the event the Trust Fund acquires ownership of real
property located in the United States in connection with a
default on a Mortgage Loan, then any rental income from such
property allocable to an Owner that is not a U.S. person
generally will be subject to a 30% withholding tax. In addition,
any gain from the disposition of such real property allocable to
an Owner that is not a U.S. person may be treated as income that
is effectively connected with a U.S. trade or business under
special rules governing United States real property interests.
The Trust Fund may be required to withhold tax on gain realized
upon a disposition of such real property by the Trust Fund at a
35% rate.
Reporting.
Tax information will be reported annually to the Internal
Revenue Service and to Holders of Certificates that are not
excluded from the reporting requirements.
Backup Withholding
Distributions made on a Certificate and proceeds from the
sale of a Certificate to or through certain brokers may be
subject to a "backup" withholding tax of 31% unless, in general,
the Owner of the Certificate complies with certain procedures or
is a corporation or other person exempt from such withholding.
Any amounts so withheld from distributions on the Certificates
would be refunded by the Internal Revenue Service or allowed as a
credit against the Owner's federal income tax.
STATE TAX CONSIDERATIONS
In addition to the Federal income tax consequences
described in "Federal Income Tax Consequences," potential
investors should consider the state income tax consequences of
the acquisition, ownership, and disposition of the Offered
Certificates. State income tax law may differ substantially from
the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any
state. Therefore, potential investors should consult their own
tax advisors with respect to the various state tax consequences
of an investment in the Offered Certificates.
PLAN OF DISTRIBUTION
The Offered Certificates are being offered hereby in
Series through one or more of the various methods described
below. The related Prospectus Supplement will describe the method
of offering being utilized for the Offered Certificates of each
Series and will state the public offering or purchase price of
each class of Offered Certificates of such Series being offered
thereby or the method by which such price will be determined and
the net proceeds to the Company from the sale of each such class.
The Offered Certificates of each Series will be offered
through the following methods from time to time, and offerings
may be made concurrently through more than one of these methods
and 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 underwriting and public
reoffering by underwriters;
2. By placements by the Company with institutional
investors through dealers or agents; and
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3. By direct placements by the Company with institutional
investors.
If underwriters are used in a sale of any Offered
Certificates, such Offered 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 the 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 related
Prospectus Supplement.
In connection with the sale of the Offered Certificates,
underwriters may receive compensation from the Company 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 Offered
Certificates, and any discounts or commissions received by them
from the Company and any profit on the resale of Offered
Certificates by them may be deemed to be underwriting discounts
and commissions under the Securities Act. The related Prospectus
Supplement will describe any such compensation paid by the
Company.
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 Offered Certificates if
any are purchased and that the Company will indemnify the
underwriters against certain civil liabilities, including
liabilities under the Securities Act, or will contribute to
payments required to be made in respect thereof.
With respect to Offered Certificates offered other than
through underwriters, the related Prospectus Supplement will
contain information regarding the nature of such offering and any
agreements to be entered into between the Company and purchasers
of such Offered Certificates.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus
Supplement, the Company intends to use the net proceeds of sales
of Certificates for the acquisition of Mortgage Loans,
Mortgage-Backed Securities, Contracts and servicing rights.
LEGAL MATTERS
Certain legal matters in connection with the Offered
Certificates offered hereby will be passed upon for the Company
by Cleary, Gottlieb, Steen & Hamilton or by another law firm
identified in the related Prospectus Supplement. Certain federal
income tax matters will be passed upon for the Company by Cleary,
Gottlieb, Steen & Hamilton or by another law firm identified in
the related Prospectus Supplement.
FINANCIAL INFORMATION
A Trust Fund will be formed with respect to each Series of
Certificates. No Trust Fund will have any assets or obligations
prior to the issuance of the related Series of Certificates. No
Trust Fund will engage in any activities other than those
described herein or in the related Prospectus Supplement.
Accordingly, no financial statement with respect to any Trust
Fund is included in this Prospectus or will be included in the
related Prospectus Supplement.
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ADDITIONAL INFORMATION
Copies of FHLMC's most recent Offering Circulars for FHLMC
Securities, FHLMC's Information Statement and most recent
Supplement to such Information Statement and any quarterly report
made available by FHLMC can be obtained by writing or calling the
Investor Inquiry Department at 8200 Jones Branch Drive, McLean,
Virginia 22102, (703) 903-2581. The Company makes no
representations as to the accuracy or completeness of the
information set forth in FHLMC's Offering Circulars, Information
Statements, Information Statement Supplements or other reports or
statements.
Copies of FNMA's most recent Prospectuses for FNMA
Securities and FNMA's annual and quarterly reports as well as
other financial information are available from the Vice President
for Investor Relations of FNMA, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016, (202) 752-7115. The Company makes no
representations as to the accuracy or completeness of the
information set forth in FNMA's Prospectuses, annual reports or
other reports or statements.
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INDEX OF PRINCIPAL DEFINITIONS
Accrual Certificates...........................................19
Agency Securities...............................................i
Agreement.......................................................1
Appraisal Regulations..........................................76
APR.............................................................6
Available Funds................................................50
BIF............................................................57
Book-Entry Nominee.............................................88
Certificate Account............................................20
Certificate Interest Rate.......................................2
Certificate Register...........................................16
Certificateholders or Holders...................................3
Charter Act....................................................29
Cleanup Costs..................................................15
Code............................................................9
Collection Account.............................................50
Commission.....................................................iv
Company.........................................................i
Contract Pool..................................................30
Contracts.......................................................i
Conventional Loans.............................................28
Cooperative Loans..............................................24
Cooperatives....................................................4
Cut-off Date...................................................18
Definitive Certificates........................................16
Delinquent Mortgage Loan.......................................33
Deposit Date...................................................50
Depository.....................................................16
Determination Date.............................................50
Deutsche Bank...................................................i
Direct Master Servicing Arrangement............................42
Distribution Date..............................................19
DMARC Trust....................................................61
DOL............................................................77
Eligible Investments...........................................20
Eligible Reserve Fund Investments..............................38
ERISA...........................................................9
Exchange Act...................................................iv
FDIC...........................................................57
Federal Income Tax Consequences.................................9
FHA.............................................................6
FHA Loans......................................................26
FHLMC...........................................................i
FHLMC Act......................................................27
FHLMC Securities................................................5
Financial Intermediary.........................................17
FIRREA.........................................................76
FIRREA Appraisal...............................................76
FNMA............................................................i
FNMA Securities.................................................5
Giant PCs......................................................28
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Giant Securities...............................................28
GIC............................................................38
GNMA............................................................i
GNMA Issuer....................................................26
GNMA Securities.................................................5
Gold Giant PCs.................................................28
Gold PCs.......................................................28
GPM Securities.................................................30
Guarantor.......................................................8
Guaranty Agreement.............................................26
Housing Act....................................................26
HUD............................................................26
Interest Accrual Period........................................20
Limited Guarantee...............................................7
Liquidating Loan................................................7
Manufacturer's Invoice Price...................................31
Master Servicer.................................................1
MBS Securities.................................................29
Mega Securities................................................29
Mortgage Loans..................................................i
Mortgage Notes.................................................23
Mortgage Pool Insurance Policy..................................8
Mortgage Rates.................................................25
Mortgage-Backed Securities......................................5
Mortgaged Properties............................................4
Mortgages......................................................23
Multiclass PCs.................................................28
NCUA...........................................................75
Nonrecoverable Advance.........................................48
Offered Certificate.............................................i
Originator.....................................................70
Parties in Interest............................................77
PCs............................................................28
Plans..........................................................76
Policy Statement...............................................75
Principal Prepayments..........................................21
Private Securities..............................................i
Proposed Section 475 Regulations...............................86
PTE 83-1.......................................................77
Record Date....................................................19
Registration Statement..........................................v
Regular Certificates...........................................78
REMIC..........................................................ii
REMIC Securities...............................................29
Remittance Rate.................................................3
Residual Certificates..........................................79
Residual Owners................................................84
Responsible Party...............................................7
SAIF...........................................................57
Securities Act..................................................v
Senior Certificates............................................32
Series..........................................................i
Servicer....................................................1, 15
SMBS Securities................................................29
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SMMEA..........................................................10
Stripped Giant PCs.............................................28
Subordinated Certificates......................................32
Superlien......................................................70
Supervisory Master Servicing Arrangement.......................42
Temporary Section 475 Regulations..............................85
Title V........................................................69
Trust Fund......................................................i
Trustee........................................................15
UCC............................................................65
VA..............................................................6
VA Loans.......................................................26
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Insurance and Distribution.
The expenses expected to be incurred in connection with the
issuance and distribution of the securities being registered,
other than underwriting compensation, are as set forth below. All
such expenses, except for the filing fee, are estimated.
SEC Registration Fee (actual)............ $151,557.12
Legal Fees and Expenses.................. ___________*
Accounting Fees and Expenses............. ___________*
Trustee's Fees and Expenses.............. ___________*
Printing and Engraving................... ___________*
Rating Agency Fees....................... ___________*
Miscellaneous............................ ___________*
Total.......................... $___________*
- ---------------
* To be filed by amendment.
Item 15. Indemnification of Directors and Officers.
The certificate of incorporation of the Registrant
provides that the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of
Delaware, indemnify each director and officer of the Registrant
against expenses (including attorney's fees and expenses),
judgments, fines, penalties and amounts paid in settlement
incurred in connection with the investigation, preparation to
defend or defense of any threatened, pending or completed action,
suit, proceeding or claim to which such director or officer is or
was a party in his capacity as director of officer, except in
connection with any such action, suit, proceeding or claim
brought by on behalf of such director of officer.
Each Pooling and Servicing Agreement will provide that
no director, officer, employee or agent of the Registrant is
liable to the related Trust Fund or the Certificate holders,
except for such person's own willful malfeasance, bad faith,
gross negligence in the performance of duties or reckless
disregard of obligations and duties. Each Pooling and Servicing
Agreement 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 and Servicing Agreement and related Certificates other
than such expenses related to particular Mortgage Loans.
Each underwriter who executes 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 from certain information furnished to the Registrant by or
on behalf of such indemnifying party.
It is anticipated that 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
II-1
<PAGE>
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 under this Registration Statement.
Item 16. Exhibits.
*1.1 - Form of Underwriting Agreement
*3.1 - Certificate of Incorporation of Deutsche
Mortgage & Asset Receiving Corporation
*3.2 - Bylaws of Deutsche Mortgage & Asset Receiving
Corporation
*4.1 - Form of Pooling and Servicing Agreement
**5.1 - Form of Opinion of Cleary, Gottlieb, Steen &
Hamilton as to legality
***8.1 - Opinion of Cleary, Gottlieb, Steen & Hamilton
as to tax legality
23.1 - Form of Consent of Cleary, Gottlieb, Steen &
Hamilton (incorporated in Exhibits 5.1 and 8.1)
24.1 - Power of Attorney (set forth on page II-4)
- -------------
* Previously filed.
** Actual opinion to be filed by amendment.
*** Filed herewith.
Item 17. Undertakings.
A. 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 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 of whether indemnification
by it is against public policy as expressed in he Act and will be
governed by the final adjudication of such issue.
B. Undertaking pursuant to Rule 415.
The Registrant hereby undertakes:
(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 from 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 the Registration Statement or any
material change to such information in the Registration
Statement.
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<PAGE>
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to e 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.
C. Undertaking pursuant to Item 512(b) of Regulation
S-K.
The undersigned registrant hereby undertakes 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 section 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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
the Registrant certifies that it has reasonable grounds to
believe that it meets all the requirements for filing on Form
S-3, reasonably believes that the security rating requirement
contained in Transaction Requirement B.5 of Form S-3 will be met
by the time of the sale of the securities hereunder and has duly
caused this 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 20th day of
April, 1998.
Deutsche Mortgage & Asset Receiving Corporation
By: Nancy D. Smith /c/
-------------------------
Nancy D. Smith
Director (President)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the
undersigned directors and officers of the Registrant, by virtue
of their signatures appearing below, hereby constitutes and
appoints Nancy D. Smith and Louise E. Colby, and each of them,
his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities
(including his or her capacity as a director and/or officer of
the Registrant), to sign this Registration Statement and any
and/or all amendments (including post-effective amendments) to
this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
Pursuant to the requirements of the Securities Act of
1933, the Registration Statement and this Power of Attorney have
been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
--------- ----- ----
Nancy D. Smith /c/ Director (President April 20, 1998
- -------------------- and Chief Executive
Nancy D. Smith Officer)
Nancy D. Smith /c/ (Treasurer and Chief April 20, 1998
- -------------------- Financial Officer)
R. Douglas Donaldson
Nancy D. Smith /c/ Director April 20, 1998
- --------------------
Louise E. Colby
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<PAGE>
EXHIBIT INDEX
Exhibit No. Exhibit Page
----------- ------- ----
*1.1 - Form of Underwriting Agreement ______
*3.1 - Certificate of Incorporation of Deutsche
Mortgage & Asset Receiving Corporation ______
*3.2 - Bylaws of Deutsche Mortgage & Asset
Receiving Corporation ______
*4.1 - From of Pooling and Servicing Agreement ______
**5.1 - Form of Opinion of Cleary, Gottlieb,
Steen & Hamilton as to legality ______
***8.1 - Opinion of Cleary, Gottlieb, Steen &
Hamilton as to tax matters ______
23.1 - Form of Consent of Cleary, Gottlieb,
Steen & Hamilton (incorporated in Exhibits
5.1 and 8.1) ______
24.1 - Power of Attorney (set forth on page II-4) ______
- -------------
* Previously filed.
** Actual opinion to be filed by amendment.
*** Filed herewith.
[Letterhead of Cleary, Gottlieb, Steen & Hamilton]
Exhibit 8.1
April 17, 1998
Deutsche Mortgage & Asset Receiving Corporation
One International Plaza
Room 608
Boston, Massachusetts 02110
Dear Sirs:
We have acted as your counsel in connection with the
above Registration Statement (the "Registration Statement") filed
on May 3, 1996 with the Securities and Exchange Commission
pursuant to the Securities Act of 1933 (the "Act"), and amended
on October 2, 1996 and April 17, 1998, and the related prospectus
(the "Prospectus") in respect of Mortgage Pass-Through
Certificates ("Certificates"). Our advice formed the basis for
the discussion of federal income tax consequences appearing in
the Prospectus under the heading "Federal Income Tax
Consequences." Such discussion does not purport to deal with all
possible federal income tax consequences of an investment in
Certificates, but with respect to those tax consequences which
are discussed, in our opinion, the discussion is a fair and
accurate summary of the matters addressed therein under existing
law and the assumptions stated therein.
We hereby consent to the filing of this letter as an
Exhibit to the Registration Statement and to the reference to
this firm in the Registration Statement and Prospectus under the
heading "Certain Federal Income Tax Consequences," without
admitting that we are "experts" within the meaning of the Act or
the rules and regulations of the Securities and Exchange
Commission issued thereunder.
<PAGE>
Deutsche Mortgage & Asset Receiving Corporation
April 17, 1998
Page 2
Very truly yours,
CLEARY, GOTTLIEB, STEEN & HAMILTON
By: /s/ Dana L. Trier
--------------------------------
Dana L. Trier, a partner
