<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
UNDER
SECURITIES ACT OF 1933
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
04-3310019
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
ONE INTERNATIONAL PLACE
ROOM 520
BOSTON, MA 02110
(617) 951-7690
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CORPORATION SERVICE COMPANY
1013 CENTRE ROAD
WILMINGTON, DELAWARE 19805
(302) 998-0595
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
ANNA H. GLICK, ESQ.
CADWALADER, WICKERSHAM & TAFT
NEW YORK, NEW YORK 10038
(212) 504-6309
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time on or after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, other than securities offered only in connection with dividend
or interest plans, please check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE AMOUNT OF
PRICE OFFERING REGISTRATION
TITLE OF SECURITIES BEING REGISTERED AMOUNT TO BE REGISTERED PER UNIT PRICE (1) FEE (2)
- ------------------------------------ ----------------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates .. $1,000,000 100% $1,000,000 $303.03(1)
- ------------------------------------ ----------------------- ---------- ------------ --------------
</TABLE>
- -----------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee.
(2) This registration statement and the registration fee pertain to the
initial offering of the Mortgage Pass-Through Certificates registered
hereunder by the registrant, and, in addition, cover offers and sales
relating to market-making transactions by Deutsche Morgan Grenfell,
Inc., an affiliate of the registrant. The amount of Mortgage
Pass-Through Certificates which may be initially offered hereunder and
the registration fee shall not be reduced by any offers and sales
relating to any such market-making transactions.
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 this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
Pursuant to Rule 429 of the Securities Act of 1933, the prospectus which
is part of this Registration Statement is a combined prospectus and includes
all the information currently required in a prospectus relating to the
securities covered by Registration Statement No. 333-4272. Such combined
prospectus, which relates to $500,000,000 principal amount of Mortgage
Pass-Through Certificates, constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 333-4272.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 199
[Version 1 -- Base Prospectus Supplement]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199 -
$ VARIABLE RATE CLASS A CERTIFICATES
$ VARIABLE RATE CLASS B CERTIFICATES
$100 VARIABLE RATE CLASS R CERTIFICATES
The Series 199 - Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following four classes (each, a "Class"):
(i) the Class A Certificates and Class R Certificates (collectively, the
"Senior Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. Only the Senior Certificates and the Class B Certificates
(collectively, the "Offered Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than , and that the Class B Certificates be rated not lower
than , by .
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY OF THEIR
AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
DEUTSCHE BANK AG OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE S- HEREIN AND PAGE IN THE
PROSPECTUS BEFORE PURCHASING ANY OFFERED CERTIFICATE.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
(the "Underwriter") intends to make a secondary market in the
Offered Certificates, but is not obligated to do so. There can be no
assurance that a secondary market for the Offered Certificates will develop
or, if it does develop, that it will continue. See "Risk Factors--Limited
Liquidity" herein. The Offered Certificates will not be listed on any
securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
, 199
<PAGE>
(cover continued)
Depositor estimated to be approximately $ , will be % of the initial
aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to certain
other conditions. It is expected that the Class A Certificates will be
delivered in book-entry form through the Same-Day Funds Settlement System of
DTC and that the Class B and Class R Certificates will be delivered at the
offices of the Underwriter, , on or about , 199 (the
"Delivery Date"), against payment therefor in immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by
the Depositor, that will consist primarily of a segregated pool (the
"Mortgage Pool") of conventional, fixed-and adjustable-rate, multifamily or
commercial, balloon mortgage loans (the "Mortgage Loans"). As of , 199
(the "Cut-off Date"), the Mortgage Loans had an aggregate principal balance
(the "Initial Pool Balance") of $ , after application of all payments of
principal due on or before such date, whether or not received. Certain
characteristics of the Mortgage Loans are described herein under "Description
of the Mortgage Pool".
THE RIGHTS OF THE HOLDERS OF THE CLASS B AND CLASS C CERTIFICATES TO
RECEIVE DISTRIBUTIONS WITH RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATE
TO THE RIGHTS OF THE HOLDERS OF THE SENIOR CERTIFICATES, AND THE RIGHTS OF
THE HOLDERS OF THE CLASS C CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT
TO THE MORTGAGE LOANS WILL BE SUBORDINATE TO THE RIGHTS OF THE HOLDERS OF THE
CLASS B CERTIFICATES, IN EACH CASE TO THE EXTENT DESCRIBED HEREIN AND IN THE
PROSPECTUS.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates--Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and
the Class C Certificates (collectively, the "REMIC Regular Certificates")
will constitute "regular interests", and the Class R Certificates will
constitute the sole class of "residual interests", in the Trust Fund. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Transfer of the Class R Certificates will be prohibited to any non-United
States person, and will be subject to certain additional transfer
restrictions described herein under "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to REMIC Residual
Certificates" and in the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business
day, then on the next business day, beginning in 199 (each, a
"Distribution Date"). As described herein, interest distributions on each
Class of Offered Certificates will be made on each Distribution Date based on
the variable pass-through rate (the "Pass-Through Rate") then applicable to
such Class and the stated principal amount (the "Certificate Balance") of
such Class outstanding immediately prior to such Distribution Date. The
Pass-Through Rate for each Class of Offered Certificates applicable to the
first Distribution Date will be % per annum. Subsequent to the initial
Distribution Date, the Pass-Through Rate for each Class of Offered
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates (as defined
herein) on the Mortgage Loans. Principal distributions on each Class of
Offered Certificates will be made in the amounts and in accordance with the
priorities described herein. See "Description of the
Certificates--Distributions" herein.
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, changes in its respective Pass-Through Rate and the
rate and timing of principal payments (including by reason of prepayments,
defaults and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors--Effect of Prepayments on Average Life of Certificates" in the
Prospectus. [The following disclosure is applicable to Stripped Interest
Certificates ("Class S Certificates"), when offered. . . THE YIELD TO
MATURITY ON THE CLASS S CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING BY REASONS OF PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. A RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS THAT IS MORE RAPID THAN EXPECTED BY INVESTORS WILL HAVE A MATERIAL
NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE CLASS S CERTIFICATES.
INVESTORS IN THE CLASS S CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN SUCH CERTIFICATES TO
RECOVER FULLY THEIR INITIAL INVESTMENTS. SEE "YIELD AND MATURITY
CONSIDERATIONS" HEREIN AND "YIELD AND MATURITY CONSIDERATIONS" AND "RISK
FACTORS--EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES" IN THE
PROSPECTUS.]
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
ii
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED , OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
iii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
TITLE OF CERTIFICATES ......... Mortgage Pass-Through Certificates, Series
199 - .
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche Bank
AG or any of their affiliates.
MASTER SERVICER ............... . See "Servicing of the Mortgage
Loans--The Master Servicer" herein.
SPECIAL SERVICER .............. . See "Servicing of the Mortgage
Loans--The Special Servicer" herein.
TRUSTEE ....................... . See "Description of the
Certificates--The Trustee" herein.
REMIC ADMINISTRATOR ........... . See "Certain Federal Income Tax
Consequences--REMICs--Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements--Events of Default" and "--Rights
Upon Event of Default" in the Prospectus.
MORTGAGE LOAN SELLER .......... . See "Description of the Mortgage
Pool--The Mortgage Loan Seller" herein.
CUT-OFF DATE .................. , 199 .
DELIVERY DATE ................. On or about , 199 .
REGISTRATION; DENOMINATIONS ... The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of DTC in denominations of $25,000
and integral multiples of $1 in excess
thereof. The Class B Certificates will be
issued in fully registered, certificated
form in denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to the
remainder of the initial Certificate Balance
of such Class. The Class R Certificates will
be issued in registered, certificated form
in minimum denominations of 20% percentage
interest in such Class.
The Class A Certificates will be represented
by one or more global Certificates
registered in the name of Cede & Co., as
nominee of DTC. No person acquiring an
interest in the Class A Certificates (any
such person, a "Class A Certificate Owner")
will be entitled to receive a Class A
Certificate in fully registered,
certificated form (a "Definitive Class A
Certificate"), except under the limited
circumstances described herein and in the
Prospectus. See "Description of the
Certificates--Book-Entry Registration of the
Class A Certificates" herein and
"Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in
the Prospectus.
S-1
<PAGE>
THE MORTGAGE POOL ............ The Mortgage Pool will consist of
conventional, balloon Mortgage Loans with an
Initial Pool Balance of $ . On or prior to
the Delivery Date, the Depositor will
acquire the Mortgage Loans from the Mortgage
Loan Seller pursuant to a Purchase
Agreement, dated [the date hereof], between
the Depositor and the Mortgage Loan Seller
(the "Purchase Agreement"). In the Purchase
Agreement, the Mortgage Loan Seller has made
certain representations and warranties to
the Depositor regarding the characteristics
and quality of the Mortgage Loans and, as
more particularly described herein, has
agreed to cure any material breach thereof
or repurchase the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign its
rights under the Purchase Agreement insofar
as they relate to or arise out of the
Mortgage Loan Seller's representations and
warranties regarding the Mortgage Loans. See
"Description of the Mortgage
Pool--Representations and Warranties;
Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in a
commercial property being operated as a ,
or ( Mortgage Loans which represent
% of the Initial Pool Balance) or a
multifamily rental property ( Mortgage
Loans which represent % of the Initial Pool
Balance) (each, a "Mortgaged Property").
of the Mortgage Loans, which represent
% of the Initial Pool Balance, are
secured by liens on Mortgaged Properties
located in . The remaining Mortgaged
Properties are located throughout other
states. See "Description of the Mortgage
Pool--Additional Mortgage Loan Information"
and "Risk Factors--Risks Associated With
Multifamily Properties" and "--Risks
Associated with Properties" and
"Description of the Mortgage
Pool--Additional Mortgage Loan Information"
herein. of the Mortgage Loans, which
represent % of the Initial Pool Balance,
provide for scheduled payments of principal
and/or interest ("Monthly Payments") to be
due on the first day of each month; the
remainder of the Mortgage Loans provide for
Monthly Payments to be due on the , ,
or day of each month (the date in any
month on which a Monthly Payment on a
Mortgage Loan is first due, the "Due Date").
The annualized rate at which interest
accrues (the "Mortgage Rate") on of the
Mortgage Loans (the "ARM Loans"), which
represent % of the Initial Pool Balance, is
subject to adjustment on specified Due Dates
(each such date of adjustment, an "Interest
Rate Adjustment Date") by adding a fixed
number of basis points (a "Gross Margin") to
the value of a base index (an "Index"),
subject, in cases, to lifetime maximum
and/or minimum Mortgage Rates, and in
cases, to periodic maximum and/or minimum
Mortgage Rates, in each case as described
herein; and the remaining Mortgage Loans
(the "Fixed Rate Loans") bear interest at
fixed Mortgage Rates. of the ARM Loans,
which represent % of the Initial
S-2
<PAGE>
Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while
the remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to occur
semi-annually or annually. [Identify
Mortgage Loan Index] See "Description of the
Mortgage Pool--Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of
the ARM Loans is subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that
would amortize the outstanding principal
balance of the Mortgage Loan over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date
following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly longer
than the remaining terms of such Mortgage
Loans, thereby leaving substantial principal
amounts due and payable (each such payment,
together with the corresponding interest
payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid
prior thereto.
DESCRIPTION OF THE CERTIFICATES The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer, the Special
Servicer, the Trustee and the REMIC
Administrator (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in the Trust Fund, which will
consist of the Mortgage Pool and certain
related assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. Each Class
of Offered Certificates will have the
initial Certificate Balance set forth on the
cover page, and the Class C Certificates
will have an initial Certificate Balance of
$ . See "Description of the
Certificates--General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal % per annum.
With respect to any Distribution Date
subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of
Certificates will equal the weighted average
of the applicable Effective Net Mortgage
Rates for the Mortgage Loans, weighted on
the basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution Date.
For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any
Distribution Date, the "applicable Effective
Net Mortgage Rate" for each Mortgage Loan is
an annualized rate equal to the Mortgage
Rate in effect for such Mortgage Loan as of
the [second] day of the most recently ended
calendar month, (a) reduced by basis
points (the Mortgage Rate, as so reduced,
the "Net Mortgage Rate"), and (b) if the
accrual of interest on such Mortgage Loan is
computed other than on the basis of a
360-day year consisting of twelve
S-3
<PAGE>
30-day months (which is the basis of accrual
for interest on the Certificates), then
adjusted to reflect that difference in
computation. See "Description of the
Certificates--Distributions--Pass-Through
Rates" and "--Distributions--Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
INTEREST DISTRIBUTIONS ON THE
SENIOR CERTIFICATES .......... On each Distribution Date, to the extent of
the Available Distribution Amount, holders
of each Class of Senior Certificates will be
entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
The "Distributable Certificate Interest" in
respect of any Class of Certificates for any
Distribution Date will equal one month's
interest at the then-applicable Pass-Through
Rate accrued on the Certificate Balance of
such Class of Certificates immediately prior
to such Distribution Date, reduced (to not
less than zero) by such Class of
Certificates' allocable share (in each case,
calculated as described herein) of any Net
Aggregate Prepayment Interest Shortfall
(also as described herein) for such
Distribution Date. See "Description of the
Certificates--Distributions--Distributable
Certificate Interest" herein.
The "Available Distribution Amount" for any
Distribution Date is, as described herein
under "Description of the
Certificates--Distributions", the total of
all payments or other collections (or
available advances) on or in respect of the
Mortgage Loans that are available for
distribution on the Certificates on such
date.
PRINCIPAL DISTRIBUTIONS ON THE
SENIOR CERTIFICATES .......... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after the distributions of interest to be
made on the Senior Certificates on such
date, holders of the Senior Certificates
will be entitled to distributions of
principal (until the Certificate Balances of
such Classes of Certificates are reduced to
zero) in an aggregate amount equal to the
sum of (a) such holders' pro rata share of
the Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal Distribution
Amount for such Distribution Date.
Distributions of principal on the Senior
Certificates will be paid first to the
holders of the Class R Certificates until
the Certificate Balance of such Certificates
is reduced to zero, and then to the holders
of the Class A Certificates. See
"Description of the
Certificates--Distributions--Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution Amount"
herein.
S-4
<PAGE>
INTEREST DISTRIBUTIONS ON THE
CLASS B CERTIFICATES ........ On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after all distributions to be made on the
Senior Certificates on such date (such
remaining portion, the "Class B Available
Distribution Amount"), holders of the Class
B Certificates will be entitled to receive
distributions of interest in an amount equal
to all Distributable Certificate Interest
with respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
PRINCIPAL DISTRIBUTIONS ON THE
CLASS B CERTIFICATES ......... On each Distribution Date, to the extent of
the Class B Available Distribution Amount
remaining after the distributions of
interest to be made on the Class B
Certificates on such date, holders of the
Class B Certificates will be entitled to
distributions of principal (until the
Certificate Balance of such Class of
Certificates is reduced to zero) in an
amount equal to the sum of (a) such holders'
pro rata share of the Scheduled Principal
Distribution Amount for such Distribution
Date, plus (b) if the Certificate Balances
of the Senior Certificates have been reduced
to zero, then to the extent not distributed
in reduction of such Certificate Balances on
such Distribution Date, the entire
Unscheduled Principal Distribution Amount
for such Distribution Date. See "Description
of the Certificates--Distributions" herein.
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS ............... The yield on the Offered Certificates of any
class will depend on, among other things,
the Pass-Through Rate for such Certificates.
The yield on any Offered Certificate that is
purchased at a discount or premium will also
be affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and (ii)
the extent to which such principal payments
are applied on any Distribution Date in
reduction of the Certificate Balance of the
Class to which such Certificate belongs. See
"Description of the
Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should consider
the risk that a slower than anticipated rate
of principal payments on such Certificate
will result in an actual yield that is lower
than such investor's expected yield. An
investor that purchases any Offered
Certificate at a premium should consider the
risk that a faster than anticipated rate of
principal payments on such Certificate will
result in an actual yield that is lower than
such investor's expected yield. Insofar as
an investor's initial investment in any
Offered Certificate is
S-5
<PAGE>
repaid, there can be no assurance that such
amounts can be reinvested in a comparable
alternative investment with a comparable
yield.
The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The Mortgage Loans may be prepaid at any
time, subject, in the case of Mortgage
Loans, to payment of a Prepayment Premium.
The investment performance of the Offered
Certificates may vary materially and
adversely from the investment expectations
of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield
to the holder of an Offered Certificate may
not be equal to the yield anticipated at the
time of purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that time,
the total return on investment expected by
the investor or the expected weighted
average life of the Certificate may not be
realized. For a discussion of certain
factors affecting prepayment of the Mortgage
Loans, including the effect of Prepayment
Premiums, see "Yield and Maturity
Considerations" herein. IN DECIDING WHETHER
TO PURCHASE ANY OFFERED CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT DECISION
AS TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS
TO BE USED.
[The structure of the Offered Certificates
causes the yield of certain Classes to be
particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans
and other factors, as follows:]
[Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each Distribution
Date will be allocated to the Class B
Certificates.]
[The following disclosure is applicable to
Stripped Interest Certificates, when offered
. . . The Stripped Interest Certificates.
The Class S Certificates are interest-only
Certificates and are not entitled to any
distributions in respect of principal. The
yield to maturity of the Class S
Certificates will be especially sensitive to
the prepayment, repurchase and default
experience on the Mortgage Loans, which may
fluctuate significantly from time to time. A
rate of principal payments that is more
rapid than expected by investors will have a
material negative effect on the yield to
maturity of the Class S Certificates. See
"Yield and Maturity Considerations--Yield
Sensitivity of the Class S Certificates"
herein.]
Class R Certificates: Holders of the Class R
Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may
S-6
<PAGE>
have tax liabilities with respect to their
Certificates during the early years of the
term of the Trust Fund that substantially
exceed the principal and interest payable
thereon during such periods. See "Yield and
Maturity Considerations", especially
"--Additional Yield Considerations
Applicable Solely to the Class R
Certificates," herein and "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
ADVANCES ...................... The Master Servicer is required to make
advances (each, an "Advance") of delinquent
principal and interest (net of related
Servicing Fees) on the Mortgage Loans or, in
the case of each Mortgage Loan that is
delinquent in respect of its Balloon Payment
or as to which the related Mortgaged
Property was acquired through foreclosure,
deed in lieu of foreclosure or otherwise,
only of delinquent interest (net of related
Servicing Fees), in any event under the
circumstances and subject to the limitations
set forth herein. Advances are intended to
maintain a regular flow of scheduled
interest and principal payments to the
Certificateholders, rather than to guarantee
or insure against losses. Accordingly,
Advances which cannot be reimbursed out of
collections on or in respect of the related
Mortgage Loans ("Nonrecoverable Advances")
will represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on certain
servicing expenses incurred by it or on its
behalf, such interest accruing at the rate
and payable under the circumstances
described herein. Interest accrued on
outstanding Advances will result in a
reduction in amounts payable on the
Certificates. See "Description of the
Certificates--Advances" and
"--Subordination; Allocation of Collateral
Support Deficit" herein and "Description of
the Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in
the Prospectus.
Each Distribution Date Statement delivered
by the Trustee to the Certificateholders
will contain information relating to the
amounts of Advances made with respect to the
related Distribution Date. See "Description
of the Certificates--Reports to
Certificateholders; Certain Available
Information" herein and "Description of
Certificates--Reports to Certificateholders"
in the Prospectus.
SUBORDINATION; ALLOCATION OF
COLLATERAL SUPPORT DEFICIT ... The rights of the holders of the Class B and
Class C Certificates to receive
distributions with respect to the Mortgage
Loans will be subordinate to the rights of
the holders of the Senior Certificates, and
the rights of the holders of the Class C
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinate to the rights of the holders of
the Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is intended
to en-
S-7
<PAGE>
hance the likelihood of timely receipt by
the holders of the Senior Certificates of
the full amount of all Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution Date,
and the ultimate receipt by such holders of
principal in an amount equal to the entire
aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser
degree, this subordination is also intended
to enhance the likelihood of timely receipt
by the holders of the Class B Certificates
of the full amount of all Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution Date,
and the ultimate receipt by such holders of
principal in an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on the
respective Classes of Certificates in the
order described herein under "Description of
the Certificates--Distributions-Priority".
No other form of Credit Support will be
available for the benefit of the holders of
the Offered Certificates.
Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans. To the
extent that the Senior Certificates are
amortized faster than the Mortgage Loans,
the percentage interest evidenced by the
Senior Certificates in the Trust Fund will
be decreased (with a corresponding increase
in the interest in the Trust Fund evidenced
by the Class B and Class C Certificates),
thereby increasing, relative to their
respective Certificate Balances, the
subordination afforded the Senior
Certificates by the Class B and Class C
Certificates. Following retirement of the
Class A Certificates, allocation to the
Class B Certificates, for so long as they
are outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of subordination
afforded thereto by the Class C
Certificates.
As a result of losses and other shortfalls
experienced with respect to the Mortgage
Loans or otherwise with respect to the Trust
Fund (which may include shortfalls arising
both from interest accrued on Advances and
from Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding immediately
following any Distribution Date may be less
than the aggregate Certificate Balance of
the Certificates immediately following the
distributions on such Distribution Date.
Such deficit (the "Collateral Support
Deficit") will be allocated first to the
Class C Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case until
the related Certificate Balance has been
reduced to zero. See "Description of the
Certificates--Subordination; Allocation of
Collateral Support Deficit" herein.
S-8
<PAGE>
OPTIONAL TERMINATION ......... At its option, on any Distribution Date on
which the remaining aggregate Stated
Principal Balance of the Mortgage Pool is
less than 5% of the Initial Pool Balance,
the Master Servicer or the Depositor may
purchase all of the Mortgage Loans and REO
Properties, and thereby effect termination
of the Trust Fund and early retirement of
the then outstanding Certificates. See
"Description of the
Certificates--Termination; Retirement of
Certificates" herein and in the Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES ............. An election will be made to treat the Trust
Fund as a REMIC for Federal income tax
purposes. Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham & Taft,
counsel to the Depositor, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A
through 860G of the Code. For Federal income
tax purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the Class
R Certificates will be the sole class of
"residual interests" in the Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying
the rules relating to "excess inclusions."
In addition, the Class R Certificates may
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will
be restricted under the Pooling and
Servicing Agreement to United States Persons
in a manner designed to prevent a transfer
of a noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates"
herein and "Certain Federal Income Tax
Consequences--Federal Income Tax
Consequences for REMIC
Certificates--Taxation of Residual
Certificates--Limitations on Offset or
Exemption of REMIC Income" and
"--Tax-Related Restrictions on Transfer of
Residual Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the Trust
Fund's term. Accordingly, on a present value
basis, the tax detriments occurring in the
earlier years may substantially exceed the
sum of any tax benefits in the later years.
As a result, the Class R Certificateholders'
after-tax rate of return may be zero or
negative, event if their pre-tax rate of
return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
S-9
<PAGE>
Class R Certificates", and "Certain Federal
Income Tax Consequences--Special Tax
Considerations Applicable to REMIC Residual
Certificates" herein.
For further information regarding the
Federal income tax consequences of investing
in the Offered Certificates, see "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
RATING ........................ It is a condition of their issuance that the
Senior Certificates be rated not lower than
" ", and that the Class B Certificates be
rated not lower than " ", by
([collectively,] the "Rating
Agenc[ies]"). A security rating is not a
recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning
Rating Agency. A security rating does not
address the frequency of prepayments of
Mortgage Loans, or the corresponding effect
on yield to investors. [The following
disclosure is applicable to Stripped
Interest Certificates, when offered A
security rating does not address the
frequency or likelihood of prepayments
(whether voluntary or involuntary) of
Mortgage Loans, or the possibility that, as
a result of prepayments, investors in the
Class S Certificates may realize a lower
than anticipated yield or may fail to
recover fully their initial investment.] See
"Rating" herein.
CERTAIN ERISA CONSIDERATIONS .. Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "Certain ERISA
Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT .............. [The Senior Certificates will constitute
"mortgage related securities" for purposes
of SMMEA, for so long as they are rated in
one of the two highest rating categories by
one or more nationally recognized
statistical rating organizations [and are
secured by liens on real property].
[The Class B Certificates will not
constitute "mortgage related securities"
within the meaning of SMMEA. As a result,
the appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to significant
interpretative uncertainties.]
Investors should consult their legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
S-10
<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following risk factors (as well as the risk factors set
forth under "Risk Factors" in the Prospectus) in connection with an
investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. The Offered Certificates will not be listed
on any securities exchange. See "Risk Factors--Limited Liquidity" in the
Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ] of the Mortgaged Properties during the month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except
for (i) those cases in which the condition or circumstance was remediated or
an escrow for such remediation has been established and (ii) those cases in
which an operations and maintenance plan or periodic monitoring of nearby
properties was recommended, which recommendations are consistent with
industrywide practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site
assessment is obtained (or until any required remedial action is thereafter
taken), but will decrease the likelihood that the Trust Fund will become
liable for a material adverse environmental condition at the Mortgaged
Property. However, there can be no assurance that the requirements of the
Pooling and Servicing Agreement will effectively insulate the Trust Fund from
potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements--Realization
Upon Defaulted Mortgage Loans", "Risk Factors--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Risk of Liability
Arising from Environmental Conditions" and "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations" in the Prospectus.
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. Mortgage Loans, which represent % of
the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in . In general, that concentration increases the exposure of
the Mortgage Pool to any adverse economic or other developments that may
occur in . In recent periods, (along with other regions of the
United States) has experienced a significant downturn in the market value of
real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances
can result in losses that are more severe, relative to the size of the pool,
than would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another
income-producing property that it owns, it could attempt to avert foreclosure
by filing a bankruptcy petition that might have the effect of interrupting
Monthly Payments for an indefinite period on all of the related Mortgage
Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
of the Mortgage Loans, which represent % of the Initial Pool Balance,
are ARM Loans. Increases in the required Monthly Payments on ARM Loans in
excess of those assumed in the original underwriting of such loans may result
in a default rate higher than that on mortgage loans with fixed mortgage
rates.
S-11
<PAGE>
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment)
due at its stated maturity unless prepaid prior thereto. Loans with Balloon
Payments involve a greater likelihood of default than self-amortizing loans
because the ability of a borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
mortgaged property. See "Risk Factors--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments" in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing
of the Mortgage Loans--Modifications, Waivers and Amendments" herein. There
can be no assurance, however, that any such extension or modification will
increase the present value of recoveries in a given case. Any delay in
collection of a Balloon Payment that would otherwise be distributable in
respect of a Class of Offered Certificates, whether such delay is due to
borrower default or to modification of the related Mortgage Loan by the
Special Servicer, will likely extend the weighted average life of such Class
of Offered Certificates. See "Yield and Maturity Considerations" herein and
in the Prospectus.
[Risks Particular to Properties. [Add disclosure relating to property
types with respect to which there exists a material concentration in a
particular Trust Fund.]]
[Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in
a reduction in timely rent payments or a reduction in occupancy levels.
Occupancy and rent levels may also be affected by construction of additional
housing units, local military base closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements. In addition, the level of mortgage interest rates may encourage
tenants to purchase single-family housing. Further, the cost of operating a
multifamily property may increase, including the costs of utilities and the
costs of required capital expenditures. All of these conditions and events
may increase the possibility that a borrower may be unable to meet its
obligation under its Mortgage Loan.]
Risks Relating to Lack of Certificateholder Control Over Trust
Fund. Certificateholders generally do not have a right to vote, except with
respect to required consents to certain amendments to the Pooling and
Servicing Agreement. Furthermore, Certificateholders will generally not have
the right to make decisions with respect to the administration of the Trust
Fund. Such decisions are generally made, subject to the express terms of the
Pooling and Servicing Agreement, by the Master Servicer, the Trustee, the
Special Servicer or the REMIC Administrator, as applicable. Any decision made
by one of those parties in respect of the Trust Fund, even if made in the
best interests of the Certificateholders (as determined by such party in its
good faith and reasonable judgment), may be contrary to the decision that
would have been made by the holders of any particular Class of Offered
Certificates and may negatively affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments
in respect of principal (including any principal prepayments, liquidations
and the principal portion of the repurchase prices of any Mortgage Loans
repurchased due to breaches of representations) are received with respect to
the Mortgage Loans, the remaining Mortgage Loans as a group may exhibit
increased concentration with respect to the type of properties, property
characteristics, number of Mortgagors and affiliated Mortgagors and
geographic location. Because unscheduled collections of principal on the
Mortgage Loans is payable on the Class A, Class B and Class C Certificates in
sequential order, such Classes that have a lower sequential priority are
relatively more likely to be exposed to any risks associated with changes in
concentrations of loan or property characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or
S-12
<PAGE>
advanced on or in respect of the Mortgage Loans will be subordinated to those
of the holders of the Senior Certificates and also, in the case of the
holders of the Class C Certificates, also to those of the holders of the
Class B Certificates. See "Description of the
Certificates--Distributions--Priority" and "--Subordination; Allocation of
Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co.,
as the nominee for DTC, and will not be registered in the names of the
related holders of Certificates or their nominees. As a result, holders of
Class A Certificates will not be recognized as "Certificateholders." Hence,
those beneficial owners will be able to exercise the rights of holders of
Certificates only indirectly through DTC and DTC Participants. See
"Description of the Certificates--General" and "--Book-Entry Registration"
herein and "Description of the Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of conventional, balloon
Mortgage Loans with an Initial Pool Balance of $ . Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in a commercial or
multifamily rental property (a "Mortgaged Property"). All percentages of the
Mortgage Loans, or of any specified group of Mortgage Loans, referred to
herein without further description are approximate percentages by aggregate
Cut-off Date Balance. The "Cut-off Date Balance" of any Mortgage Loan is the
unpaid principal balance thereof as of the Cut-off Date, after application of
all payments due on or before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental
entity or private mortgage insurer. The Depositor has not undertaken any
evaluation of the significance of the recourse provisions of any of a number
of the Mortgage Loans that provide for recourse against the related borrower
or another person in the event of a default. Accordingly, investors should
consider all of the Mortgage Loans to be nonrecourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and
will thereupon assign its interests in the Mortgage Loans, without recourse,
to the Trustee for the benefit of the Certificateholders. See "--The Mortgage
Loan Seller" herein and "Description of the Pooling Agreements--Assignment of
Mortgage Loans; Repurchases" in the Prospectus. For purposes of the
Prospectus, the Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19 and 19 . The Mortgage
Loan Seller originated of the Mortgage Loans, which represent % of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "--Underwriting Standards".
CERTAIN PAYMENT CHARACTERISTICS
of the Mortgage Loans, which represent % of the Initial Pool Balance,
have Due Dates that occur on the first day of each month. The remaining
Mortgage Loans have Due Dates that occur on the ( % of the Mortgage
Loans), ( % of the Mortgage Loans), ( % of the Mortgage Loans), and
( % of the Mortgage Loans) day of each month.
of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the
related Index, subject in cases to rounding conventions and lifetime
minimum and/or maximum Mortgage
S-13
<PAGE>
Rates and, in the case of Mortgage Loans, which represent % of the
Initial Pool Balance, to periodic minimum and/or maximum Mortgage Rates. The
remaining Mortgage Loans are Fixed Rate Loans. None of the ARM Loans is
convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on
the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment
Date, or may be based on the value of the related Index as most recently
published as of an Interest Rate Adjustment Date or as of a designated date
preceding an Interest Rate Adjustment Date. of the ARM Loans, which
represent % of the Initial Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly; of the ARM Loans, which represent %
of the Initial Pool Balance, provide for Interest Rate Adjustment Dates that
occur semi-annually; and the remaining ARM Loans provide for Interest Rate
Adjustment Dates that occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule
and pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest
Rate Adjustment Date. None of the ARM Loans provide for negative
amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due
at its stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment
Premiums are payable to the Master Servicer as additional servicing
compensation, to the extent not otherwise applied to offset Prepayment
Interest Shortfalls, and may be waived by the Master Servicer in accordance
with the servicing standard described under "Servicing of the Mortgage
Loans--General" herein.
[THE INDEX]
Describe Index and include 5 year history.
[DELINQUENT AND NONPERFORMING MORTGAGE LOANS]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
S-14
<PAGE>
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to
rounding.
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
% per annum
Weighted Average
Mortgage Rate (ARM Loans): % per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): % per annum
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
RANGE OF GROSS MARGINS(%) ARM LOANS DATE BALANCE DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ....................
============= ===================== =====================
</TABLE>
Weighted Average
Gross Margin: %
S-15
<PAGE>
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE ARM
LOANS
<TABLE>
<CAPTION>
MONTHLY
MORTGAGE RATE PAYMENT NUMBER OF PERCENT BY
ADJUSTMENT ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
FREQUENCY FREQUENCY LOANS DATE BALANCE DATE BALANCE
----------------- -------------- ------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Total .....
------------- --------------------- ---------------------
============= ===================== =====================
</TABLE>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
lifetime Mortgage Rates.
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
lifetime Mortgage Rates.
S-16
<PAGE>
MAXIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- -------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
annual Mortgage Rates.
MINIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- -------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
annual Mortgage Rates.
S-17
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
CUT-OFF DATE MORTGAGE CUT-OFF AGGREGATE CUT-OFF
BALANCE RANGE ($) LOANS DATE BALANCE DATE BALANCE
- ------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
------------- ---------------- ---------------------
Total ............
============= ================ =====================
</TABLE>
Average Cut-off Date
Balance (All Mortgage
Loans): $
Average Cut-off Date
Balance (ARM Loans): $
Average Cut-off Date
Balance (Fixed Rate Loans): $
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE AVERAGE PERCENT BY WEIGHTED
MORTGAGE CUT-OFF CUT-OFF AGGREGATE CUT-OFF AVERAGE
PROPERTY TYPE LOANS DATE BALANCE DATE BALANCE DATE BALANCE OCCUPANCY RATE
- --------------------------- ------------- ---------------- ---------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
Multifamily.................
[other property types] ....
Total ....................
</TABLE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE WEIGHTED
MORTGAGE CUT-OFF CUT-OFF AVERAGE
JURISDICTION LOANS DATE BALANCE DATE BALANCE DSC RATIO
- ---------------- ------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Total .........
</TABLE>
S-18
<PAGE>
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF ORIGINAL MORTGAGE CUT-OFF CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- --------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ..............
============= ================ ================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): months
REMAINING TERM TO STATED MATURITY (IN MONTHS)
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING MORTGAGE CUT-OFF CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ...............
============= ================ ================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): months
S-19
<PAGE>
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
---------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ............
============= ================ ================
</TABLE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
---------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ............
============= ================ ================
</TABLE>
S-20
<PAGE>
The following table sets forth a range of Debt Service Coverage Ratios
for the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the
following table for any Mortgage Loan is the ratio of (i) Net Operating
Income produced by the related Mortgaged Property for the period (annualized
if the period was less than one year) covered by the most recent operating
statement available to the Depositor to (ii) the amount of the Monthly
Payment in effect as of the Cut-off Date multiplied by 12. "Net Operating
Income" is the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income and deposit forfeitures),
less operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance), and further less
fixed expenses (such as insurance and real estate taxes). Net Operating
Income generally does not reflect capital expenditures. The following table
was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has
made no attempt to verify its accuracy. In the case of Mortgage Loans (
ARM Loans and Fixed Rate Loans), representing % of the Initial Pool
Balance, operating statements could not be obtained, and accordingly, Debt
Service Coverage Ratios for those Mortgage Loans were not calculated. The
last day of the period (which may not correspond to the end of the calendar
year most recent to the Cut-off Date) covered by each operating statement
from which a Debt Service Coverage Ratio was calculated is set forth in Annex
A with respect to the related Mortgage Loan.
DEBT SERVICE COVERAGE RATIOS(A)
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF NUMBER OF AGGREGATE AGGREGATE
DEBT SERVICE MORTGAGE CUT-OFF CUT-OFF
COVERAGE RATIOS LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Not Calculated(B) ....
------------- ---------------- ----------------
Total .................
------------- ---------------- ----------------
</TABLE>
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): x(E)
- ------------
(A) The Debt Service Coverage Ratios are based on the most recently
available operating statements obtained from the respective mortgagors
or the related property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
S-21
<PAGE>
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage
Loan, as of any date of determination, is a fraction, expressed as a
percentage, the numerator of which is the original principal balance of such
Mortgage Loan or the Cut-off Date Balance of such Mortgage Loan, as
applicable, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. Because it is based on
the value of a Mortgaged Property determined as of loan origination, the
information set forth in the table below is not necessarily a reliable
measure of the related borrower's current equity in each Mortgaged Property.
In a declining real estate market, the fair market value of a Mortgaged
Property could have decreased from the value determined at origination, and
the current actual loan-to-value ratio of a Mortgage Loan may be higher than
even its LTV Ratio at origination, notwithstanding taking into account
amortization since origination.
LTV RATIOS AT ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
RANGE OF ORIGINAL MORTGAGE CUT-OFF DATE PERCENT BY AGGREGATE
LTV RATIOS(%) LOANS BALANCE CUT-OFF DATE BALANCE
- --------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
------------- ---------------- ---------------------
Total ..............
============= ================ =====================
</TABLE>
Weighted Average Original
LTV Ratio (All Mortgage
Loans): %
Weighted Average Original
LTV Ratio (ARM Loans):
%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): %
S-22
<PAGE>
LTV RATIOS AT CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
RANGE OF LTV RATIOS(%) MORTGAGE CUT-OFF DATE PERCENT BY AGGREGATE
AS OF CUT-OFF DATE LOANS BALANCE CUT-OFF DATE BALANCE
- -------------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
------------- ---------------- ---------------------
Total ...................
============= ================ =====================
</TABLE>
Weighted Average LTV
Ratio as of Cut-off Date
(All Mortgage Loans): %
Weighted Average LTV
Ratio as of Cut-off Date
(ARM Loans): %
Weighted Average LTV
Ratio as of Cut-off Date
(Fixed Rate Loans): %
OCCUPANCY RATES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
RANGE OF MORTGAGE CUT-OFF DATE PERCENT BY AGGREGATE
OCCUPANCY RATES(A) LOANS BALANCE CUT-OFF DATE BALANCE
- ---------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
------------- ---------------- ---------------------
Total ...............
============= ================ =====================
</TABLE>
Weighted Average Occupancy Rate
(All Mortgage Loans)(A): %
Weighted Average Occupancy Rate
(ARM Loans)(A): %
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): %
- ------------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than months prior to the Cut-off Date.
S-23
<PAGE>
PREPAYMENT RESTRICTIONS IN EFFECT AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
CUM.
% BY % OF
AGGREGATE AGGREGATE INITIAL
PREPAYMENT NUMBER OF CUT-OFF DATE CUT-OFF DATE POOL
RESTRICTIONS LOANS BALANCE BALANCE BALANCE
- -------------------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Locked Out (A) ............
Yield Maintenance (B) ....
Declining Percentage
Premium ..................
% Premium ...............
% Premium ...............
No Prepayment Restrictions
TOTALS ...................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
WEIGHTED AVERAGES
-------------------------------------------------------------------------------
STATED REMAINING INDICATIVE
PREPAYMENT MORTGAGE REMAINING AMORT. TERM IMPLIED CUT-OFF DATE
RESTRICTIONS RATE TERM (MO.) (MO.) DSCR DSCR LTV
- -------------------------- ------------ ------------- ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A) ............
Yield Maintenance (B) ....
Declining Percentage
Premium ..................
% Premium ...............
% Premium ...............
No Prepayment Restrictions
TOTALS ...................
</TABLE>
- ------------
(A) The weighted average term to the expiration of the lock-out periods is
years. of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the
expiration of their lock-out periods; the remaining Mortgage Loans are
subject to a yield maintenance-type Prepayment Premium following such
expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment
Premiums remain subject to payment of the Prepayment Premium until at
least months prior to maturity.
S-24
<PAGE>
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage
Loans is contained herein under "--Underwriting Standards" and
"--Representations and Warranties; Repurchases" and in the Prospectus under
"Description of the Trust Funds--Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than
30 days delinquent in respect of any Monthly Payment.]
THE MORTGAGE LOAN SELLER
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of ,]
is a organized in 19 under the laws of . As of December 31,
199 , the Mortgage Loan Seller had a net worth of approximately $ , and
currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $ , of which
approximately $ constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or
as of such other date specifically provided in the representation and
warranty, among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the
Prospectus and if the Mortgage Loan Seller cannot cure such breach within a
period of 90 days following its receipt of such notice, then the Mortgage
Loan Seller will be obligated pursuant to the Purchase Agreement (the
relevant rights under which will be assigned, together with its interests in
the Mortgage Loans, by the Depositor to the Trustee) to repurchase the
affected Mortgage Loan within such 90-day period at a price (the "Purchase
Price") equal to the sum of (i) the unpaid principal balance of such Mortgage
Loan, (ii) unpaid accrued interest on such Mortgage Loan at the Mortgage Rate
from the date to which interest was last paid to the Due Date in the Due
Period in which the purchase is to occur, and (iii) certain servicing
expenses that are reimbursable to the Master Servicer and the Special
Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and none of the Depositor, the Master Servicer or any
of their affiliates [(other than the Mortgage Loan Seller)] will be obligated
to repurchase any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the Depositor will not
include any Mortgage Loan in the Mortgage Pool if anything has come to the
Depositor's attention prior to the Closing Date that would
S-25
<PAGE>
cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling
Agreements--Representations and Warranties; Repurchases" in the Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Depositor deems such removal necessary or
appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Offered
Certificates, unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor
believes that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time
the Offered Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
SERVICING OF THE MORTGAGE LOANS
GENERAL
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by
the Master Servicer or the Special Servicer, as the case may be, in its good
faith and reasonable judgment), in accordance with applicable law, the terms
of the Pooling and Servicing Agreement, the terms of the respective Mortgage
Loans and, to the extent consistent with the foregoing, in the same manner as
would prudent institutional mortgage lenders and loan servicers servicing
mortgage loans comparable to the Mortgage Loans in the jurisdictions where
the Mortgaged Properties are located, and with a view to the maximization of
timely and complete recovery of principal and interest, but without regard
to: (i) any relationship that the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof, may have with the related
mortgagor; (ii) the ownership of any Certificate by the Master Servicer or
the Special Servicer, as the case may be, or any affiliate thereof; (iii) the
Master Servicer's or the Special Servicer's, as the case may be, obligation
to make advances, whether in respect of delinquent payments of principal
and/or interest or to cover certain servicing expenses; and (iv) the Master
Servicer's or the Special Servicer's, as the case may be, right to receive
compensation for its services under the Pooling and Servicing Agreement or
with respect to any particular transaction.
Except as otherwise described under "--Inspections; Collection of
Operating Information" below, the Master Servicer initially will be
responsible for the servicing and administration of the entire Mortgage Pool.
With respect to any Mortgage Loan (i) which has a Balloon Payment which is
past due or any other payment which is more than [60] days past due, (ii) as
to which the borrower has entered into or consented to bankruptcy,
appointment of a receiver or conservator or a similar insolvency proceeding,
or the borrower has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have
received notice of the foreclosure or proposed foreclosure of any other lien
on the Mortgaged Property, or (iv) as to which, in the judgment of the Master
Servicer, a payment default has occurred or is imminent and is not likely to
be cured by the borrower within [60] days, and prior to acceleration of
amounts due under the related Mortgage Note or commencement of any
foreclosure or similar
S-26
<PAGE>
proceedings, the Master Servicer will transfer its servicing responsibilities
to the Special Servicer, but will continue to receive payments on such
Mortgage Loan (including amounts collected by the Special Servicer), to make
certain calculations with respect to such Mortgage Loan and to make
remittances and prepare certain reports to the Certificateholders with
respect to such Mortgage Loan. If the related Mortgaged Property is acquired
in respect of any such Mortgage Loan (upon acquisition, an "REO Property"),
whether through foreclosure, deed-in-lieu of foreclosure or otherwise, the
Special Servicer will continue to be responsible for the operation and
management thereof. The Mortgage Loans serviced by the Special Servicer are
referred to herein as the "Specially Serviced Mortgage Loans" and, together
with any REO Properties, constitute the "Specially Serviced Mortgage Assets".
The Master Servicer shall have no responsibility for the performance by the
Special Servicer of its duties under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special
Servicer will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans.
Reference is also made to the Prospectus, in particular to the section
captioned "Pooling and Servicing Agreements", for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations
of the Master Servicer thereunder.
THE MASTER SERVICER
[ , a , will act as Master Servicer with respect to the
Mortgage Pool. Founded in as a , the Master Servicer today furnishes a
variety of wholesale banking services. As of December 31, 19, the Master
Servicer had a net worth of approximately $ , and a total mortgage loan
servicing portfolio of approximately $ , of which approximately $
represented multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at .
[If and to the extent available and relevant to an investment decision:
The following table sets forth the historical prepayment information with
respect to the Master Servicer's multifamily and commercial mortgage loan
servicing portfolio:
PREPAYMENT EXPERIENCE OF MASTER SERVICER'S MULTIFAMILY AND COMMERCIAL
MORTGAGE LOAN SERVICING PORTFOLIO
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
THE SPECIAL SERVICER
[ , a , will be responsible for the servicing and
administration of the Specially Serviced Mortgage Assets. As of December 31,
19 , the Special Servicer had a total mortgage loan servicing portfolio of
approximately $ , of which approximately $ represented multifamily
mortgage loans.
The Special Servicer has offices in states with a total staff of
employees. Its principal executive offices are located at .]
S-27
<PAGE>
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to %
per annum, in the case of Mortgage Loans other than Specially Serviced
Mortgage Loans, and % per annum, in the case of Specially Serviced Mortgage
Loans, and will be computed on the basis of the same principal amount and for
the same period respecting which any related interest payment on the related
Mortgage Loan is computed. [As additional servicing compensation, the Master
Servicer will be entitled to retain all Prepayment Premiums, assumption and
modification fees, late charges and penalty interest and, as and to the
extent described below, Prepayment Interest Excesses collected from
mortgagors. In addition, the Master Servicer is authorized but not required
to invest or direct the investment of funds held in the Certificate Account
in Permitted Investments, and the Master Servicer will be entitled to retain
any interest or other income earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the
Workout Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will
be payable monthly on a loan-by-loan basis from amounts received in respect
of interest on each Mortgage Loan, will accrue in accordance with the terms
of the related Mortgage Note at a rate equal to % per annum, in the case of
Mortgage Loans other than Specially Serviced Mortgage Loans, and % per
annum, in the case of Specially Serviced Mortgage Loans, and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the related Mortgage Loan is computed.
The "Workout Fee" will equal a specified percentage (varying from % to % (the
"Workout Fee Rate") depending on the related unpaid principal balance) of,
and will be payable from, all collections and proceeds received in respect of
principal of each Mortgage Loan which is or has been a Specially Serviced
Mortgage Loan (including those for which servicing has been returned to the
Master Servicer); provided that, in the case of Liquidation Proceeds, the
otherwise fixed Workout Fee Rate will be proportionately reduced to reflect
the extent to which, if at all, the principal portion of such Liquidation
Proceeds is less than the unpaid principal balance of the related Mortgage
Loan immediately prior to the receipt thereof. As additional servicing
compensation, the Special Servicer will be entitled to retain all assumption
and modification fees received on Mortgage Loans serviced thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "--General" above and, accordingly,
without regard to its right to receive compensation under the Pooling and
Servicing Agreement, additional servicing compensation in the nature of
assumption and modification fees, Prepayment Premiums and Prepayment Interest
Excesses may under certain circumstances provide the Master Servicer or the
Special Servicer, as the case may be, with an economic disincentive to comply
with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such
a principal prepayment occurs during any Due Period after the Due Date for
such Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount
of interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater
than Prepayment Interest Shortfalls incurred, such excess will be paid to the
Master Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--Advances", the Master Servicer will be entitled to receive
interest on Advances, and the Master Servicer and the Special
S-28
<PAGE>
Servicer will be entitled to receive interest on reimbursable servicing
expenses, such interest to be paid, contemporaneously with the reimbursement
of the related Advance or servicing expense, out of any other collections on
the Mortgage Loans.]
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement, and will not be entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
the Master Servicer will be permitted to pay certain of such expenses
directly out of the Certificate Account and at times without regard to the
relationship between the expense and the funds from which it is being paid.
In connection therewith, the Master Servicer will be responsible for all fees
of any sub-servicers, other than management fees earned in connection with
the operation of an REO Property, which management fees the Master Servicer
will be authorized to pay out of revenues received from such property
(thereby reducing the portion of such revenues that would otherwise be
available for distribution to Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and
"Description of the Pooling Agreements--Certificate Account" and "--Servicing
Compensation and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer may, consistent with its
normal servicing practices, agree to modify, waive or amend any term of any
Mortgage Loan, without the consent of the Trustee or any Certificateholder,
subject, however, to each of the following limitations, conditions and
restrictions:
(a) with limited exception, the Master Servicer and the Special Servicer
may not agree to any modification, waiver or amendment that will (i)
affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification standards]
The Master Servicer and the Special Servicer will notify the Trustee of
any modification, waiver or amendment of any term of any Mortgage Loan, and
must deliver to the Trustee or the related Custodian, for deposit in the
related Mortgage File, an original counterpart of the agreement related to
such modification, waiver or amendment, promptly (and in any event within
[10] business days) following the execution thereof. Copies of each agreement
whereby any such modification, waiver or amendment of any term of any
Mortgage Loan is effected are to be available for review during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once
per calendar year, commencing in the calendar year , and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related
Mortgage Loan, as soon as practicable thereafter. The Special Servicer will
prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition or value of the
Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review
the annual operating statements of the related
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Mortgaged Property. [Most] of the Mortgages obligate the related borrower to
deliver annual property operating statements. However, there can be no
assurance that any operating statements required to be delivered will in fact
be delivered, nor is the Special Servicer likely to have any practical means
of compelling such delivery in the case of an otherwise performing Mortgage
Loan.
Copies of the inspection reports and operating statements referred to
above are to be available for review by Certificateholders during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is
not published or is otherwise unavailable, then the Master Servicer is
required to select a comparable alternative index over which it has no direct
control, that is readily verifiable and that is acceptable under the terms of
the related Mortgage Note. If the Mortgage Rate or the Monthly Payment with
respect to any ARM Loan is not properly adjusted by the Master Servicer
pursuant to the terms of such Mortgage Loan and applicable law, the Master
Servicer is required to deposit in the Certificate Account on or prior to the
Due Date of the affected Monthly Payment, an amount equal to the excess, if
any, of (i) the amount that would have been received from the borrower if the
Mortgage Rate or Monthly Payment had been properly adjusted, over (ii) the
amount of such improperly adjusted Monthly Payment, subject to reimbursement
only out of such amounts as are recovered from the borrower in respect of
such excess.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any REO Property; (iii) such funds or assets as from time
to time are deposited in the Certificate Account; (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans;
and (v) certain rights of the Depositor under the Purchase Agreement relating
to Mortgage Loan document delivery requirements and the representations and
warranties of the Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate
Balance of $ , which represents % of the Initial Pool Balance; the
Class B Certificates will have an initial Certificate Balance of $ ,
which represents % of the Initial Pool Balance; the Class C Certificates
will have an initial Certificate Balance of $ , which represents %
of the Initial Pool Balance; and the Class R Certificates will have an
initial Certificate Balance of $100. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in
the Trust Fund. On each Distribution Date, the Certificate Balance of each
Class of Certificates will be reduced by any distributions of principal
actually made on, and any Collateral Support Deficit actually allocated to,
such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered
hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of
$25,000 and integral multiples of $1 in excess thereof. The Class B
Certificates will be issued in fully registered, certificated form in
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
with one Class B Certificate evidencing an additional amount equal to the
remainder of the initial Certificate Balance of such Class. The Class R
Certificates will be issued in registered, certificated form in minimum
denominations of 20% Percentage Interest in such Class. The "Percentage
Interest" evidenced by any Offered Certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial
Certificate Balance of the Class to which it belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co. No
Class A Certificate Owner will be entitled to receive a Definitive Class A
Certificate representing its interest in such Class, except as set forth
below under "--Book-Entry Registration of the Class A
Certificates--Definitive Class A Certificates". Unless and until Definitive
Class A Certificates are issued, all references to actions by holders of the
Class A Certificates will refer to actions taken by DTC upon instructions
received from Class A Certificate Owners through DTC Participants, and all
references herein to payments, notices, reports and statements to holders of
the Class A Certificates will refer to payments, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to Class A Certificate Owners through its DTC
Participants in accordance with DTC procedures. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC
Participants. Subject to certain restrictions on the transfer of such
Certificates to Plans (see "Certain ERISA Considerations" herein), the Class
B and Class R Certificates
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may be transferred or exchanged at the offices of located at
, without the payment of any service charges, other than any tax
or other governmental charge payable in connection therewith. will
initially serve as registrar (in such capacity, the "Certificate Registrar")
for purposes of recording and otherwise providing for the registration of the
Offered Certificates and of transfers and exchanges of the Class B and, if
issued, the Definitive Class A Certificates.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in
such Certificates will be held by investors through the book-entry facilities
of DTC. Except as described below, no Class A Certificate Owner will be
entitled to receive a physical certificate representing its beneficial
interest in such Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A Certificate will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the related
Class A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the related Class A Certificate Owner's Financial
Intermediary is not a DTC Participant). Therefore, the related Class A
Certificate Owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a
Class A Certificate may only be transferred by compliance with the procedures
of such Financial Intermediaries and DTC Participants. Arrangements may be
made for clearance and settlement through the Euroclear System and CEDEL,
S.A., if they are DTC Participants.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC Participant in the Class A Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Class A Certificates will be subject to the
rules, regulations and procedures governing DTC and DTC Participants as in
effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payments to the Class
A Certificate Owners that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Class A Certificate Owners that it
represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by
the Trustee to DTC. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Class A Certificate Owner to pledge to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Class A Certificates, may be limited due to
the lack of physical certificates for such Class A Certificates. In addition,
issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Class A Certificates.
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Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in
the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates--Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration,
the Trustee will reissue the Class A Certificates as Definitive Class A
Certificates issued in the respective principal amounts owned by individual
Class A Certificate Owners, and thereafter the Trustee and the Master
Servicer will recognize the holders of such Definitive Class A Certificates
as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on
the book-entry records thereof, see "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in 199 (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the
last business day of the month preceding the month in which the related
Distribution Date occurs. Each such distribution will be made by wire
transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the [Trustee] with
wiring instructions [no less than five business days prior to the related
Record Date (which wiring instructions may be in the form of a standing order
applicable to all subsequent distributions) and is the registered owner of
Certificates with an aggregate initial principal amount of at least
$5,000,000], or otherwise by check mailed to such Certificateholder. The
final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will
be specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated
pro rata among the outstanding Certificates of such Class based on their
respective Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and any
REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date subsequent
to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements--Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such
Distribution Date occurs and ends on the [first] day of the
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month in which such Distribution Date occurs. For purposes of the discussion
in the Prospectus, the Due Period is also the Prepayment Period. The
"Determination Date" for each Distribution Date is the [15th] day of the
month in which such Distribution Date occurs or, if any such [15th] day is
not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "--Termination;
Retirement of Certificates" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in
the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an amount
equal to all Distributable Certificate Interest in respect of the Senior
Certificates for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i) the
Senior Certificates' Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the Scheduled Principal
Distribution Amount for such Distribution Date, plus (b) the entire
Unscheduled Principal Distribution Amount for such Distribution Date (but
not more than would be necessary to reduce the aggregate Certificate
Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been reimbursed
in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class B Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i) the
Class B Certificates' Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by (ii) the Scheduled
Principal Distribution Amount for such Distribution Date, plus (b) if the
Certificate Balances of the Senior Certificates have been reduced to zero,
then to the extent not distributed in reduction of such Certificate
Balances on such Distribution Date, the entire Unscheduled Principal
Distribution Amount for such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the Class B Certificates to
zero);
(6) to distributions to the holders of the Class B Certificates ,
until all amounts of Collateral Support Deficit previously allocated to
the Class B Certificates, but not previously reimbursed, have been
reimbursed in full; (7) to distributions of interest to the holders of the
Class C Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such Distribution Date
and, to the extent not previously distributed, for all prior Distribution
Dates;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class C Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior Distribution Dates:
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been reimbursed
in full; and
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(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
The distributions of principal to the holders of the Senior Certificates
as described in clause (2) above will be paid first to the holders of the
Class R Certificates until the Certificate Balance of such Certificates is
reduced to zero, and then to the holders of the Class A Certificates.
Accordingly, it is expected that the Certificate Balance of the Class R
Certificates would be reduced to zero on the initial Distribution Date and
that no other distributions of interest or principal would thereafter be made
on the Class R Certificates except pursuant to subparagraph (10) immediately
above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in
an additional reduction in the Certificate Balance of the Class of
Certificates in respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal % per annum. With
respect to any Distribution Date subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage
Loans, weighted on the basis of their respective Stated Principal Balances
immediately prior to such Distribution Date. For purposes of calculating the
Pass-Through Rate for any Class of Certificates and any Distribution Date,
the "applicable Effective Net Mortgage Rate" for each Mortgage Loan is: (a)
if such Mortgage Loan accrues interest on the basis of a 360-day year
consisting of twelve 30-day months (a "30/360 basis", which is the basis of
accrual for interest on the Certificates), the Net Mortgage Rate in effect
for such Mortgage Loan as of the commencement of the related Due Period; and
(b) if such Mortgage Loan does not accrue interest on a 30/360 basis, the
annualized rate at which interest would have to accrue during the one month
period preceding the Due Date for such Mortgage Loan during the related Due
Period on a 30/360 basis in order to produce the aggregate amount of interest
(adjusted to the actual Net Mortgage Rate) accrued during such period. The
"Net Mortgage Rate" for each Mortgage Loan is equal to the related Mortgage
Rate in effect from time to time less the Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of
such Class of Certificates for such Distribution Date that is net of such
Class's allocable share (calculated as described below) of the aggregate of
any Prepayment Interest Shortfalls resulting from voluntary principal
prepayments made on the Mortgage Loans during the related Due Period that are
not offset by Prepayment Interest Excesses collected during the related Due
Period (the aggregate of such Prepayment Interest Shortfalls that are not so
offset or covered, as to such Distribution Date, the "Net Aggregate
Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of
Certificates for each Distribution Date is equal to one month's interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date. Accrued Certificate Interest
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal
the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such Class of Certificates for such
Distribution Date, and the denominator of which is equal to the Accrued
Certificate Interest in respect of all the Classes of Certificates for such
Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout
Fees payable therefrom to the Special Servicer], due during or, if and to the
extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related
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Due Period, in each case to the extent paid by the related borrower or
advanced by the Master Servicer and included in the Available Distribution
Amount for such Distribution Date. The Scheduled Principal Distribution
Amount from time to time will include all late payments of principal made by
a borrower, including late payments in respect of a delinquent Balloon
Payment, regardless of the timing of such late payments, except to the extent
such late payments are otherwise reimbursable to the Master Servicer for
prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period [, net of any
related Workout Fees payable therefrom to the Special Servicer]; and (b) any
other collections (exclusive of payments by borrowers) received on the
Mortgage Loans and any REO Properties during the related Due Period, whether
in the form of Liquidation Proceeds, Insurance Proceeds, Condemnation
Proceeds, net income from REO Property or otherwise, that were identified and
applied by the Master Servicer as recoveries of previously unadvanced
principal of the related Mortgage Loan [, net of any related Workout Fees
payable therefrom to the Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as
the "Distributable Principal."
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed
as a percentage, the numerator of which is the then Certificate Balance(s) of
such Class(es) of Certificates, and the denominator of which is the then
aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders subject to the Special Servicer's right to
receive any Workout Fee with respect to such Mortgage Loan. The Stated
Principal Balance of each Mortgage Loan will initially equal the Cut-off Date
Balance thereof and, on each Distribution Date, will be reduced by the
portion of the Distributable Principal for such date that is attributable to
such Mortgage Loan. The Stated Principal Balance of a Mortgage Loan may also
be reduced in connection with any forced reduction of the actual unpaid
principal balance thereof imposed by a court presiding over a bankruptcy
proceeding wherein the related borrower is the debtor. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure--Bankruptcy Laws" in the Prospectus.
If any Mortgage Loan is paid in full or such Mortgage Loan (or any Mortgaged
Property acquired in respect thereof) is otherwise liquidated, then, as of
the first Distribution Date that follows the end of the Due Period in which
such payment in full or liquidation occurred, and notwithstanding that a loss
may have occurred in connection with any such liquidation, the Stated
Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of
Collateral Support Deficit to, the Certificates, as well as for purposes of
calculating the amount of Servicing Fees payable each month, each REO
Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan", "Mortgage Loans" and "Mortgage Pool" herein and in the Prospectus,
when used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage
Loan, including the same adjustable or fixed Mortgage Rate (and, accordingly,
the same Net Mortgage Rate and Effective Net Mortgage Rate) and the same
unpaid principal balance and Stated Principal Balance. Amounts due on such
predecessor Mortgage Loan, including any portion thereof payable or
reimbursable to the Master Servicer, will continue to be "due" in respect of
the REO Loan; and amounts received in respect of the related REO Property,
net of payments to be made, or reimbursement to the Master Servicer or the
Special Servicer for payments previously advanced, in connection with the
operation and management of such property, generally will be applied by the
Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly
Payment "due" on an REO Loan will in all cases, for so long as the related
Mortgaged Property is part of the Trust Fund, be deemed to equal one month's
interest thereon at the applicable Mortgage Rate.
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SUBORDINATION; ALLOCATION OF COLLATERAL SUPPORT DEFICIT
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of
the Class C Certificates to receive distributions of amounts collected or
advanced on the Mortgage Loans will be subordinated, to the extent described
herein, to the rights of holders of the Class B Certificates. This
subordination is intended to enhance the likelihood of timely receipt by the
holders of the Senior Certificates of the full amount of all Distributable
Certificate Interest payable in respect of such Certificates on each
Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser degree, this subordination is also
intended to enhance the likelihood of timely receipt by the holders of the
Class B Certificates of the full amount of all Distributable Certificate
Interest payable in respect of such Certificates on each Distribution Date,
and the ultimate receipt by such holders of principal in an amount equal to
the entire Certificate Balance of the Class B Certificates. This
subordination will be accomplished by the application of the Available
Distribution Amount on each Distribution Date in accordance with the order of
priority described under "--Distributions--Priority" above. No other form of
Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Senior Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of such
Certificates relative to the actual amortization of the Mortgage Loans. To
the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, the percentage interest evidenced by the Senior Certificates
in the Trust Fund will be decreased (with a corresponding increase in the
interest in the Trust Fund evidenced by the Class B and Class C
Certificates), thereby increasing, relative to their respective Certificate
Balances, the subordination afforded the Senior Certificates by the Class B
and Class C Certificates. Following retirement of the Class A Certificates,
allocation to the Class B Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will provide a similar benefit to such Class of Certificates as regards
the relative amount of subordination afforded thereto by the Class C
Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate
the amount, if any, by which (i) the aggregate Stated Principal Balance of
the Mortgage Pool expected to be outstanding immediately following such
Distribution Date is less than (ii) the then aggregate Certificate Balance of
the REMIC Regular Certificates (any such deficit, "Collateral Support
Deficit"). The [Trustee] will be required to allocate any such Collateral
Support Deficit among the respective Classes of Certificates as follows:
first, to the Class C Certificates, until the remaining Certificate Balance
of such Class of Certificates is reduced to zero; second, to the Class B
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; and last, to the Class A Certificates, until
the remaining Certificate Balance of such Class of Certificates has been
reduced to zero. Any allocation of Collateral Support Deficit to a Class of
Certificates will be made by reducing the Certificate Balance thereof by the
amount so allocated. Any Collateral Support Deficit allocated to a Class of
REMIC Regular Certificates will be allocated among the respective
Certificates of such Class in proportion to the Percentage Interests
evidenced thereby. In general, Collateral Support Deficit will result from
the occurrence of: (i) losses and other shortfalls on or in respect of the
Mortgage Loans, including as a result of defaults and delinquencies thereon,
Nonrecoverable Advances made in respect thereof and the payment to the Master
Servicer of interest on Advances and certain servicing expenses; and (ii)
certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee as described under
"Description of the Pooling Agreements--Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling
Agreements--Certain Matters Regarding the Master Servicer and the Depositor"
in the Prospectus and certain federal, state and local taxes, and certain
tax-related expenses, payable out of the Trust Fund as described under
"Certain Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax
and Other Taxes" in the Prospectus. Accordingly, the allocation of Collateral
Support Deficit as described above will constitute an allocation of losses
and other shortfalls experienced by the Trust Fund.
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<PAGE>
ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability
determination described in the next paragraph, to make advances (each, an
"Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, funds held in the
Certificate Account that are not required to be part of the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of: (i) all Monthly Payments (net of the related Servicing Fee),
other than Balloon Payments, which were due on the Mortgage Loans during the
related Due Period and delinquent as of the related Determination Date; (ii)
in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount equal to one month's
interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee),
but only to the extent that the related mortgagor has not made a payment
sufficient to cover such amount under any forbearance arrangement or
otherwise that has been included in the Available Distribution Amount for
such Distribution Date; and (iii) in the case of each REO Property, an amount
equal to thirty days' imputed interest with respect thereto at the related
Mortgage Rate in effect as of the commencement of the related Due Period (net
of the related Servicing Fee), but only to the extent that such amount is not
covered by any net income from such REO Property included in the Available
Distribution Amount for such Distribution Date. The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan or REO Property
will continue through liquidation of such Mortgage Loan or disposition of
such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of
its own funds from any amounts collected in respect of the Mortgage Loan as
to which such Advance was made, whether in the form of late payments,
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds or otherwise
("Related Proceeds"). Notwithstanding the foregoing, the Master Servicer will
not be obligated to make any Advance that it determines in its reasonable
good faith judgment would, if made, not be recoverable out of Related
Proceeds (a "Nonrecoverable Advance"), and the Master Servicer will be
entitled to recover any Advance that it so determines to be a Nonrecoverable
Advance out of general funds on deposit in the Certificate Account.
Nonrecoverable Advances will represent a portion of the losses to be borne by
the Certificateholders. See "Description of the Certificates--Advances in
Respect of Delinquencies" and "Description of the Pooling
Agreements--Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be
entitled to be paid, out of any amounts then on deposit in the Certificate
Account, interest at % per annum (the "Reimbursement Rate") accrued on the
amount of such Advance or expense from the date made to but not including the
date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in
a reduction in amounts payable on the Class B Certificates; and to the extent
not offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that
any holder of an Offered Certificate must bear the cost of the Master
Servicer's and/or Special Servicer's Advances, the benefits of such Advances
to such holder will be contingent on the ability of such holder to reinvest
the amounts received as a result of such Advances at a rate of return equal
to or greater than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of
Advances made with respect to the related Distribution Date. See "Description
of the Certificates--Reports to Certificateholders; Certain Available
Information" herein and "Description of Certificates--Reports to
Certificateholders" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution
Date Statement") providing various items of information relating to
distributions made on such date with respect to the relevant Class and the
recent status of the
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<PAGE>
Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were
holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the
Trust Fund], during normal business hours, for review by any holder of an
Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the
Pooling Agreements--Evidence as to Compliance" in the Prospectus, (e) the
most recent property inspection report prepared by or on behalf of the
Special Servicer and delivered to the Trustee in respect of each Mortgaged
Property, (f) the most recent annual operating statements, if any, collected
by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, and (g) any and all modifications,
waivers and amendments of the terms of a Mortgage Loan entered into by the
Master Servicer or the Special Servicer and delivered to the Trustee. Copies
of any and all of the foregoing items will be available from the [Trustee]
upon request; however, the [Trustee] will be permitted to require payment of
a sum sufficient to cover the reasonable costs and expenses of providing such
copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory
or regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee
for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO
Property subject thereto, and (ii) the purchase of all of the assets of the
Trust Fund by the Master Servicer or the Depositor. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the
Certificate Registrar or other location specified in such notice of
termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and
(ii) the aggregate fair market value of all REO Properties then included in
the Trust Fund (which fair market
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<PAGE>
value for any REO Property may be less than the Purchase Price for the
corresponding REO Loan), as determined by an appraiser mutually agreed upon
by the Master Servicer and the Trustee, over (b) the aggregate of amounts
payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the
then aggregate Stated Principal Balance of the Mortgage Pool be less than 5%
of the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and
other assets in the Trust Fund (if the Trust Fund is to be terminated as a
result of the purchase described in the preceding paragraph), together with
all other amounts on deposit in the Certificate Account and not otherwise
payable to a person other than the Certificateholders (see "Description of
the Pooling Agreements--Certificate Account" in the Prospectus), will be
applied generally as described above under "--Distributions--Priority",
except that the distributions of principal described thereunder will, in the
case of each Class of Certificates, be made, subject to available funds, in
an amount equal to the related Certificate Balance then outstanding.
THE TRUSTEE
, a , will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at .
See "Description of the Pooling Agreements--the Trustee", "--Duties of the
Trustee", "--Certain Matters Regarding the Trustee" and "--Resignation and
Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the
rate and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted
average of the applicable Effective Net Mortgage Rates. Accordingly, the
yield on the Offered Certificates will be sensitive to (x) adjustments to the
Mortgage Rates on the ARM Loans and (y) changes in the relative composition
of the Mortgage Pool as a result of scheduled amortization, voluntary
prepayments and involuntary liquidations of the Mortgage Loans. See
"Description of the Mortgage Pool" herein and "--Yield Considerations--Rate
and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on the Mortgage Loans (including
principal prepayments on the Mortgage Loans resulting from both voluntary
prepayments by the mortgagors and involuntary liquidations). The rate and
timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments
are due and the rate and timing of principal prepayments and other
unscheduled collections thereon (including for this purpose, collections made
in connection with liquidations of Mortgage Loans due to defaults, casualties
or condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans
S-40
<PAGE>
(and, accordingly, on the Offered Certificates) while work-outs are
negotiated or foreclosures are completed. See "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements--Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of Mortgage Loans--Foreclosure" in the Prospectus. Because the
rate of principal payments on the Mortgage Loans will depend on future events
and a variety of factors (as described below), no assurance can be given as
to such rate or the rate of principal prepayments in particular. The
Depositor is not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large
group of mortgage loans comparable to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which such Certificates are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans are in turn
distributed on such Certificates. An investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield and,
in the case of any Offered Certificate purchased at a premium, the risk that
a faster than anticipated rate of principal payments on such Certificate
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a payment of principal is made on
an Offered Certificate purchased at a discount or premium, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on
an investor's yield of principal payments on such investor's Offered
Certificates occurring at a rate higher (or lower) than the rate anticipated
by the investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Class C Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; second, by the holders of the
Class B Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; and last, by the holders of the Senior
Certificates. As more fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net
Aggregate Prepayment Interest Shortfalls will generally be borne by the
respective Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by
a number of factors, including, without limitation, prevailing interest
rates, the terms of the Mortgage Loans (for example, Prepayment Premiums,
adjustable Mortgage Rates and amortization terms that require Balloon
Payments), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand
for rental properties in such areas, the quality of management of the
Mortgaged Properties, the servicing of the Mortgage Loans, possible changes
in tax laws and other opportunities for investment. See "Risk Factors" and
"Description of the Mortgage Pool" herein and "Risk Factors" and "Yield and
Maturity Considerations--Yield and Prepayment Considerations" in the
Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related
Index (which may not rise and fall consistently with mortgage interest rates
then available) plus the related Gross Margin (which may be different from
margins then offered on adjustable rate mortgage loans). See "Description of
the Mortgage Pool--Certain Payment Characteristics" and "--The Index" herein.
As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on the ARM Loans decline in a manner consistent therewith, related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate, or
(ii) taking advantage of a different index, margin or
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<PAGE>
rate cap or floor on another adjustable rate mortgage loan. The Mortgage
Loans may be prepaid at any time and, in cases (approximately % of the
Initial Pool Balance), may be prepaid in whole or in part without payment of
a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by Federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to
which a default will have occurred as of any date or as to the overall rate
of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
days and as many as days following the Due Dates for the Mortgage Loans
during the related Due Period, the effective yield to the holders of the
Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming
such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any
Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans is paid or otherwise collected, which may be in the form of
scheduled amortization, voluntary prepayments, Insurance Proceeds,
Condemnation Proceeds and Liquidation Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of
the then scheduled principal balance of the pool of mortgage loans. As used
in each of the following tables, the column headed "0%" assumes that none of
the Mortgage Loans is prepaid before maturity. The columns headed " %",
" %", " %" and " %" assume that prepayments on the Mortgage Loans are made
at those levels of CPR. There is no assurance, however, that prepayments of
the Mortgage Loans will conform to any level of CPR, and no representation is
made that the Mortgage Loans will prepay at the levels of CPR shown or at any
other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the
Mortgage Loans, in each case prior to any prepayment of the loan, will be
timely received (with no defaults) and will be distributed on the 25th day of
each month commencing in 199 ; (ii) the Mortgage Rate in effect for
each Mortgage Loan as of the Cut-off Date will remain in effect (a) in the
case of each Fixed Rate Loan, to maturity and, (b) in the case of each ARM
Loan, until its next Interest Rate Adjustment Date, when a new Mortgage Rate
that is to remain in effect
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<PAGE>
to maturity will be calculated reflecting the value of the related Index as
of , 199 , subject to such Mortgage Loan's lifetime and/or periodic
rate caps and floors, if any; (iii) all Mortgage Loans accrue and pay
interest on a 30/360 basis; (iv) the monthly principal and interest payment
due for each Mortgage Loan on the first Due Date following the Cut-off Date
will continue to be due (a) in the case of each Fixed Rate Loan, on each Due
Date until maturity and (b) in the case of each ARM Loan, until its next
Payment Adjustment Date, when a new payment that is to be due on each Due
Date until maturity will be calculated reflecting the appropriate Mortgage
Rate and remaining amortization term; (v) any principal prepayments on the
Mortgage Loans will be received on their respective Due Dates at the
respective levels of CPR set forth in the tables, and there will be no Net
Aggregate Prepayment Interest Shortfalls in connection therewith; and (vi)
the Mortgage Loan Seller will not be required to repurchase any Mortgage
Loan, and neither the Master Servicer nor the Depositor will exercise its
option to purchase all the Mortgage Loans and thereby cause an early
termination of the Trust Fund. To the extent that the Mortgage Loans have
characteristics that differ from those assumed in preparing the tables set
forth below, the Class A Certificates or the Class B Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all
the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate
Balances (and weighted average lives) shown in the following tables. Such
variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage
Loans may be expected to prepay. Based on the foregoing assumptions, the
following table indicates the resulting weighted average lives of the Class A
Certificates and sets forth the percentage of the initial Certificate Balance
of the Class A Certificates that would be outstanding after each of the dates
shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- -------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Delivery Date ................... 100.0 100.0 100.0 100.0 100.0
25, 1997 .................
25, 1998 .................
25, 1999 .................
25, 2000 .................
25, 2001 .................
25, 2002 .................
25, 2003 .................
25, 2004 .................
25, 2005 .................
Weighted Average Life
(years)(A)......................
</TABLE>
- ------------
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth
the percentage of the initial Certificate Balance of the Class B Certificates
that would be outstanding after each of the dates shown at the indicated
CPRs.
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<PAGE>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- -------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Delivery Date ................... 100.0 100.0 100.0 100.0 100.0
25, 1997 .................
25, 1998 .................
25, 1999 .................
25, 2000 .................
25, 2001 .................
25, 2002 .................
25, 2003 .................
25, 2004 .................
25, 2005 .................
Weighted Average Life
(years)(A)......................
</TABLE>
- ------------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates,
when offered
YIELD SENSITIVITY OF THE CLASS S CERTIFICATES
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the
Mortgage Loans, which may fluctuate significantly from time to time. A rapid
rate of principal payments will have a material negative effect on the yield
to maturity of the Class S Certificates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in
the Class S Certificates should fully consider the associated risks,
including the risk that such investors may not fully recover their initial
investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of
interest on the Class S Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
assumptions described in the third paragraph under the heading "--Weighted
Average Life" above, including the assumptions regarding the characteristics
and performance of the Mortgage Loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price set forth below. Any differences between such assumptions and the
actual characteristics and performance of the Mortgage Loans and of the Class
S Certificates may result in yields being different from those shown in such
table. Discrepancies between assumed and actual characteristics and
performance underscore the hypothetical nature of the table, which is
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE CLASS S CERTIFICATES
AT THE FOLLOWING CPRS
ASSUMED PURCHASE PRICE 0% % % % % %
- -------------------------- ------- ------- ------- ------- ------- -------
$ ......................... % % % % % %
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to
the assumed stream of cash flows to be paid on the Class S Certificates,
would cause the discounted present value of such assumed stream of cash flows
to
S-44
<PAGE>
equal the assumed purchase price listed in the table. Accrued interest is
included in the assumed purchase price and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class S Certificates, and thus do
not reflect the return on any investment in the Class S Certificates when any
reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing
of cash flows is critical to determining yields, the pre-tax yield to
maturity on the Class S Certificates is likely to differ from those shown in
the tables, even if all of the Mortgage Loans prepay at the indicated CPRs
over any given time period or over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based on the determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class S Certificates should
fully consider the risk that a rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.]
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R CERTIFICATES
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of
Class R Certificates may have tax liabilities with respect to their
Certificates during the early years of the Trust Fund's term that
substantially exceed any distributions payable thereon during any such
period. In addition, holders of Class R Certificates may have tax liabilities
with respect to their Certificates the present value of which substantially
exceeds the present value of distributions payable thereon and of any tax
benefits that may arise with respect thereto. Accordingly, the after-tax rate
of return on the Class R Certificates may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Class R Certificates will depend on, among other things,
the timing and amounts of prepayments and losses experienced with respect to
the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates
of return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986
(the "Code"), and (i) the Class A, Class B and Class C Certificates will
evidence "regular interests" in such REMIC and (ii) the Class R Certificates
will be the sole class of "residual interests" in such REMIC, each within the
meaning of the REMIC Provisions in effect on the date hereof.] [Assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will be classified as a grantor trust under Subpart
E, part I of subchapter J of the Code, and not as an association taxable as a
corporation or as a partnership.]
The Certificates [may] [will] [will not] be treated as having been
issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate
of accrual of [original issue discount,] market discount and premium, if any,
for Federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at
a rate equal to [a CPR of %]. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Certain Federal
Income
S-45
<PAGE>
Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" in
the Prospectus.
The Certificates may be treated for Federal income tax purposes
as having been issued at a premium. Whether any holder of [either] such Class
of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" within the meaning of
Section 856(c)(4)(A) of the Code, and interest (including original issue
discount, if any) on the Offered Certificates will be interest described in
Section 856(c)(3)(B) of the Code. Moreover, the Offered Certificates will be
"qualified mortgages" within the meaning of Section 860G(a)(3) of the Code.
See "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Status of REMIC Certificates" in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests
to United States persons. Pursuant to the Pooling and Servicing Agreement,
the Class R Certificates may not be transferred to non-United States persons.
See "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating
to "excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess
inclusions with respect to the Class R Certificates, which will be in an
amount equal to all or virtually all of the taxable income includable by
holders of the Class R Certificates. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all
federal income tax purposes, and that the purported transferor of
"noneconomic" residual interests will continue to remain liable for any taxes
due with respect to the income on such residual interests, if "a significant
purpose of the transfer was to impede the assessment or collection of tax."
Based on the REMIC Regulations, the Class R Certificates may constitute
noneconomic residual interests during some or all of their terms for purposes
of the REMIC Regulations and, accordingly, if a significant purpose of a
transfer is to impede the assessment or collection of tax, transfers of the
Class R Certificates may be disregarded and purported transferors may remain
liable for any taxes due with respect to the income on the Class R
Certificates. All transfers of the Class R Certificates will be subject to
certain restrictions under the terms of the Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the
S-46
<PAGE>
Class R Certificates constitute noneconomic residual interests. See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax Related Restrictions on
Transfer of Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions
received by such Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash
distributions with respect to such periods. Consequently, Class R
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Fund's term as a
result of their ownership of the Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the Trust Fund's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or
disposition of a Class R Certificate (or possibly later under the "wash sale"
rules of Section 1091 of the Code) may cause the Class R Certificateholders'
after-tax rate of return to be zero or negative even if the Class R
Certificateholders' pre-tax rate of return is positive. That is, on a present
value basis, the Class R Certificateholders' resulting tax liabilities could
substantially exceed the sum of any tax benefits and the amount of any cash
distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Class R Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the Master Servicer as its agent
to perform all of the duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in
such Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the
Class R Certificates" herein and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates" in the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated , 199 (the "Underwriting Agreement"), (the
"Underwriter") has agreed to purchase and the Depositor has agreed to sell to
the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, , on or about , 199 against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds
to the Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately % of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by
selling its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter for whom they act as agent. In connection
with the sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
compensation. The
S-47
<PAGE>
Underwriter and any dealers that participate with such Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters and
any profit on the resale of the Offered Certificates positioned by them may
be deemed to be underwriting discounts and commissions under the Securities
Act of 1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the
Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the
applicable form of credit enhancement. Except as described herein under
"Description of the Certificates--Reports to Certificateholders; Certain
Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by . Certain federal income tax matters and other
matters will be passed upon for the Depositor by Cadwalader, Wickersham &
Taft.
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than " ", and the Class B Certificates be rated not lower than " ",
by .
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood
or frequency of prepayments (whether voluntary or involuntary) on the
Mortgage Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered . . . or the possibility that as a result of
prepayments investors in the Class S Certificates may realize a lower than
anticipated yield or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class
of Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
S-48
<PAGE>
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization [and are secured by liens on real property], the Senior
Certificates will constitute "mortgage related securities" within the meaning
of SMMEA.]
[The Class B Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. As a result, the appropriate
characterization of the Class B Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase the Class B Certificates, is subject to significant interpretive
uncertainties.]
[Except as to the status of the Senior Certificates as "mortgage related
securities," no] [No] representation is made as to the proper
characterization of any class of Offered Certificates for legal investment,
financial institution regulatory or other purposes, or as to the ability of
particular investors to purchase the Offered Certificates under applicable
legal investment or other restrictions. All institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Certificates constitute legal investments for them or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
CERTAIN ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, including insurance company
general accounts, that is subject to ERISA, or Section 4975 of the Code
(each, a "Plan") should review with its legal advisors whether the purchase
or holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975
of the Code or whether there exists any statutory or administrative exemption
applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Sections 4975(a) and (b) of the
Code and Section 501(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools, such as the
Mortgage Pool, and the purchase, sale and holding of mortgage pass-through
certificates, such as the Class A Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this Section "Certain
ERISA Considerations", the term "Underwriter" shall include (a)
[Underwriter], (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager
with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class A Certificates must not be subordinated to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class A Certificates at the time of acquisition by the Plan must be rated
in one of the three highest generic rating categories by Standard & Poor's
Ratings Services ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA,
Inc. ("Fitch"). Fourth, the Trustee cannot be an affiliate of any other
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, the Special Servicer, any
sub-servicer, and any mortgagor with respect to Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Class A Certificates. Fifth,
the sum of all
S-49
<PAGE>
payments made to and retained by the Underwriter must represent not more than
reasonable compensation for underwriting the Class A Certificates; the sum of
all payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Fund must represent not more than the fair
market value of such obligations; and the sum of all payments made to and
retained by the Master Servicer, the Special Servicer and any sub-servicer
must represent not more than reasonable compensation for such person's
services under the Pooling and Servicing Agreement and reimbursement of such
person's reasonable expenses in connection therewith. Sixth, the investing
Plan must be an accredited investor as defined in Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other Class
of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than " " by . As
of the Delivery Date, the fourth general condition set forth above will be
satisfied with respect to the Class A Certificates. A fiduciary of a Plan
contemplating purchasing a Class A Certificate in the secondary market must
make its own determination that, at the time of such purchase, the Class A
Certificates continue to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan contemplating purchasing a Class A
Certificate, whether in the initial issuance of such Certificates or in the
secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to
such Class A Certificate.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Class A Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Class A Certificates.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code)
in connection with (i) the direct or indirect sale, exchange or transfer of
Class A Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the Depositor, the Underwriter,
the Trustee, the Master Servicer, the Special Servicer, a Sub-Servicer or a
mortgagor is a Party in Interest with respect to the investing Plan, (ii) the
direct or indirect acquisition or disposition in the secondary market of the
Class A Certificates by a Plan and (iii) the holding of Class A Certificates
by a Plan. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E)
of the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Mortgage Pool.
S-50
<PAGE>
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D)
of the Code if such restrictions are deemed to otherwise apply merely because
a person is deemed to be a Party in Interest with respect to an investing
Plan by virtue of providing services to the Plan (or by virtue of having
certain specified relationships to such a person) solely as a result of the
Plan's ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates"
for purposes of the Exemption and (ii) the specific and general conditions
and the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the
exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. See
"Certain ERISA Considerations" in the Prospectus. A purchaser of a Class A
Certificate should be aware, however, that even if the conditions specified
in one or more exemptions are satisfied, the scope of relief provided by an
exemption may not cover all acts which might be construed as prohibited
transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions
or the imposition of excise taxes or civil penalties. As a result, no
transfer of a Class B Certificate [or Class R Certificate] or any interest
therein may be made to a Plan or to any person who is directly or indirectly
purchasing such Certificate or interest therein on behalf of, as named
fiduciary of, as trustee of, or with assets of a Plan, unless the prospective
transferee provides the Certificate Registrar with an opinion of counsel
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer and which establishes to the satisfaction of the Certificate
Registrar that such transfer will not result in a violation of Section 406 of
ERISA or Section 4975 of the Code or cause the Master Servicer, the Special
Servicer or the Trustee to be deemed a fiduciary of such Plan or result in
the imposition of an excise tax under Section 4975 of the Code. In lieu of
such opinion of counsel, the transferee may provide a certification
substantially to the effect that the purchase of Certificates by or on behalf
of such Plan is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code, will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement
and the following conditions are satisfied: (i) the transferee is an
insurance company and the source of funds used to purchase such Certificates
is an "insurance company general account" (as such term is defined in PTCE
95-60); (ii) the conditions set forth in PTCE 95-60 Parts I and III have been
satisfied; and (iii) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other plans maintained by the same employer (or
any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates. See "Certain ERISA Considerations" in the
Prospectus. Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
S-51
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
30/360 basis ................................. S-35
Accrued Certificate Interest ................. S-35
Advance ...................................... S-7,
S-38
ARM Loans .................................... S-2
Available Distribution Amount ................ S-33
Balloon Payment .............................. S-3
Certain ERISA Considerations ................. S-31
Certificate Balance .......................... ii
Certificate Registrar ........................ S-32
Certificates ................................. i
Class ........................................ i
Class A Certificate Owner .................... S-1
Class B Available Distribution Amount ........ S-5
Class S Certificates ......................... ii
Code ......................................... S-45
Collateral Support Deficit ................... S-8,
S-37
Cut-off Date ................................. ii
Cut-off Date Balance ......................... S-13
Debt Service Coverage Ratio .................. S-21
Definitive Class A Certificate ............... S-1,
S-32
Delivery Date ................................ ii
Determination Date ........................... S-34
Distributable Certificate Interest ........... S-35
Distributable Principal ...................... S-36
Distribution Date ............................ ii,
S-33
Distribution Date Statement .................. S-38
Due Date ..................................... S-2
Due Period ................................... S-33
Duff & Phelps ................................ S-49
ERISA ........................................ S-10
Exemption .................................... S-49
Financial Intermediary ....................... S-32
Fitch ........................................ S-49
Fixed Rate Loans ............................. S-2
Form 8-K ..................................... S-26
Gross Margin ................................. S-2
Index ........................................ S-2
Initial Pool Balance ......................... ii
Interest Rate Adjustment Date ................ S-2
LTV Ratio .................................... S-22
Master Servicing Fee ......................... S-28
Monthly Payments ............................. S-2
Mortgage ..................................... S-13
Mortgage Loans ............................... ii
Mortgage Note ................................ S-13
Mortgage Pool ................................ ii
Mortgage Rate ................................ S-2
Mortgaged Property ........................... S-2,
S-13
Net Aggregate Prepayment Interest
Shortfall ................................... S-35
Net Mortgage Rate ............................ S-3,
S-35
Net Operating Income ......................... S-21
Nonrecoverable Advance ....................... S-38
Nonrecoverable Advances ...................... S-7
Offered Certificates ......................... i,
S-31
Ownership Percentage ......................... S-36
Pass-Through Rate ............................ ii
Payment Adjustment Date ...................... S-3
Percentage Interest .......................... S-31
Plan ......................................... S-49
Pooling and Servicing Agreement .............. S-3
Prepayment Interest Excess ................... S-28
Prepayment Premiums .......................... S-14
Purchase Agreement ........................... S-2
Purchase Price ............................... S-25
Reimbursement Rate ........................... S-38
Related Proceeds ............................. S-38
REMIC ........................................ S-45
REMIC Provisions ............................. S-45
REMIC Regular Certificates ................... ii
REO Loan ..................................... S-36
REO Property ................................. S-27
Risk Factors ................................. S-11
Senior Certificates .......................... i,
S-31
Servicing Fees ............................... S-28
Special Servicing Fee ........................ S-28
Specially Serviced Mortgage Assets ........... S-27
Specially Serviced Mortgage Loans ............ S-27
Stated Principal Balance ..................... S-36
Trust Fund ................................... ii
Underwriter .................................. i,
S-47
<PAGE>
Underwriting Agreement ....................... S-47
Voting Rights ................................ S-39
Workout Fee .................................. S-28
Workout Fee Rate ............................. S-28
</TABLE>
S-52
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................... S-1
Risk Factors................................ S-11
Description of the Mortgage Pool............ S-13
Servicing of the Mortgage Loans............. S-26
Description of the Certificates............. S-31
Yield and Maturity Considerations........... S-40
Certain Federal Income Tax Consequences .... S-45
Method of Distribution...................... S-47
Legal Matters............................... S-48
Rating...................................... S-48
Legal Investment............................ S-49
Certain ERISA Considerations................ S-49
Index of Principal Definitions.............. S-52
PROSPECTUS
Prospectus Supplement.......................
Available Information.......................
Incorporation of Certain Information by
Reference..................................
Summary of Prospectus.......................
Risk Factors................................
Description of the Trust Funds..............
Yield and Maturity Considerations...........
The Depositor...............................
Description of the Certificates.............
Description of the Pooling Agreements ......
Description of Credit Support...............
Certain Legal Aspects of Mortgage Loans ....
Certain Federal Income Tax Consequences ....
State Tax and Other Considerations..........
Certain ERISA Considerations................
Legal Investment............................
Use of Proceeds.............................
Method of Distribution......................
Legal Matters...............................
Financial Information.......................
Rating......................................
Index of Principal Definitions..............
</TABLE>
DEUTSCHE MORTGAGE &
ASSET RECEIVING CORPORATION
$
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199 -
CLASS A CERTIFICATES VARIABLE RATE $
CLASS B CERTIFICATES VARIABLE RATE $
CLASS R CERTIFICATES VARIABLE RATE $100
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
DATED , 199
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 23, 1998
[VERSION 1 -- GENERAL BASE]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus
Supplement") will be offered from time to time in series. The Offered
Certificates of any series, together with any other mortgage pass-through
certificates of such series, are collectively referred to herein as the
"Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series,
the "Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving
Corporation (the "Depositor") and including a segregated pool (a "Mortgage
Asset Pool") of various types of multifamily and commercial mortgage loans
("Mortgage Loans"), mortgage-backed securities ("MBS") that evidence
interests in, or that are secured by pledges of, one or more of various types
of multifamily or commercial mortgage loans, or a combination of Mortgage
Loans and MBS (collectively, "Mortgage Assets"). The Mortgage Loans in (and
the mortgage loans underlying the MBS in) any Trust Fund will be secured by
first or junior liens on, or security interests in, one or more of the
following types of real property: (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units and mobile home
parks; and (ii) commercial properties consisting of office buildings, retail
shopping facilities, hotels and motels, health care-related facilities,
recreational vehicle parks, warehouse facilities, mini-warehouse facilities,
self-storage facilities, industrial facilities, parking lots, restaurants,
mixed use properties (that is, any combination of the foregoing), and
unimproved land. However, neither restaurants nor health care-related
facilities will represent security for a material concentration of the
Mortgage Loans in (or the mortgage loans underlying the MBS in) any Trust
Fund, based on principal balance at the time such Trust Fund is formed. If so
specified in the related Prospectus Supplement, the Trust Fund for a series
of Certificates may also include letters of credit, surety bonds, insurance
policies, guarantees, reserve funds, guaranteed investment contracts,
interest rate exchange agreements or interest rate cap or floor agreements
designed to reduce the effects of interest rate fluctuations on the Mortgage
Assets. See "Description of the Trust Funds", "Description of the
Certificates" and "Description of Credit Support".
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Mortgage Assets in the related Trust Fund and the timing of receipt of
such payments as described herein and in the related Prospectus Supplement.
See "Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR
ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS
AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING ON PAGE 9
HEREIN UNDER THE CAPTION "RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET
FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT
BEFORE PURCHASING ANY OFFERED CERTIFICATE.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described
under "Method of Distribution" and in the related Prospectus Supplement.
<PAGE>
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a
secondary market for any Offered Certificates will develop or, if it does
develop, that it will continue. Unless otherwise provided in the related
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
The date of this Prospectus is , 199
<PAGE>
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled
to distributions of principal, with disproportionate, nominal or no
distributions of interest; (iv) are entitled to distributions of interest,
with disproportionate, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund; or (vii) provide
for distributions of principal thereof to be made, subject to available
funds, based on a specified principal payment schedule or other methodology.
Distributions in respect of the Certificates of each series will be made on a
monthly, quarterly, semi-annual, annual or other periodic basis as specified
in the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof
as a "real estate mortgage investment conduit" (each, a "REMIC") for federal
income tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of
Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
ii
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth,
as and to the extent appropriate: (i) a description of the class or classes
of such Offered Certificates, including the payment provisions with respect
to each such class, the aggregate principal amount, if any, of each such
class, the rate at which interest accrues from time to time, if at all, with
respect to each such class or the method of determining such rate, and
whether interest with respect to each such class will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all; (ii) information with respect to any other classes of
Certificates of the same series; (iii) the respective dates on which
distributions are to be made; (iv) information as to the assets, including
the Mortgage Assets, constituting the related Trust Fund (all such assets,
with respect to the Certificates of any series, the "Trust Assets"); (v) the
circumstances, if any, under which the related Trust Fund may be subject to
early termination; (vi) additional information with respect to the method of
distribution of such Offered Certificates; (vii) whether one or more REMIC
elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the
person (the "REMIC Administrator") responsible for the various tax-related
duties in respect of each REMIC to be created; (viii) the initial percentage
ownership interest in the related Trust Fund to be evidenced by each class of
Certificates of such series; (ix) information concerning the Trustee (as
defined herein) of the related Trust Fund; (x) if the related Trust Fund
includes Mortgage Loans, information concerning the Master Servicer and any
Special Servicer (each as defined herein) of such Mortgage Loans and the
circumstances under which all or a portion, as specified, of the servicing of
a Mortgage Loan would transfer from the Master Servicer to the Special
Servicer; (xi) information as to the nature and extent of subordination of
any class of Certificates of such series, including a class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the
Offered Certificates. This Prospectus and the Prospectus Supplement relating
to each series of Offered Certificates contain summaries of the material
terms of the documents referred to herein and therein, but do not contain all
of the information set forth in the Registration Statement pursuant to the
rules and regulations of the Commission. For further information, reference
is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison, 14th Floor, Chicago, Illinois 60661; New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http:// www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or any related Prospectus Supplement, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Depositor or any other person. Neither the delivery of this
Prospectus or any related Prospectus Supplement nor any sale made hereunder
or thereunder shall under any circumstances create an implication that there
has been no change in the information herein since the date hereof or therein
since the date thereof. This Prospectus and any related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
iii
<PAGE>
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository
Trust Company ("DTC") as described herein, then unless otherwise provided in
the related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the
Offered Certificates. Conveyance of notices and other communications by DTC
to its participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable
Offered Certificates, will be governed by arrangements among them, subject to
any statutory or regulatory requirements as may be in effect from time to
time. See "Description of the Certificates--Reports to Certificateholders"
and "--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder. The Depositor intends to
make a written request to the staff of the Commission that the staff either
(i) issue an order pursuant to Section 12(h) of the Exchange Act exempting
the Depositor from certain reporting requirements under the Exchange Act with
respect to each Trust Fund or (ii) state that the staff will not recommend
that the Commission take enforcement action if the Depositor fulfills its
reporting obligations as described in its written request. If such request is
granted, the Depositor will file or cause to be filed with the Commission as
to each Trust Fund the periodic unaudited reports to holders of the Offered
Certificates referenced in the preceding paragraph; however, because of the
nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Depositor anticipates that a
significant portion of such reporting requirements will be permanently
suspended following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
prior to the termination of an offering of Offered Certificates evidencing
interests therein. The Depositor will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Offered Certificates, upon written or
oral request of such person, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
to the Depositor should be directed in writing to the Depositor at One
International Place, Room 520, Boston, Massachusetts 02110, Attention:
Secretary, or by telephone at (617) 951-7690.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT................................................................ iii
AVAILABLE INFORMATION................................................................ iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.................................... iv
SUMMARY OF PROSPECTUS................................................................ 1
RISK FACTORS......................................................................... 9
Limited Liquidity of Offered Certificates........................................... 9
Limited Assets...................................................................... 9
Credit Support Limitations.......................................................... 10
Effect of Prepayments on Average Life of Certificates............................... 10
Effect of Prepayments on Yield of Certificates ..................................... 12
Limited Nature of Ratings........................................................... 12
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans .. 12
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool .. 15
Termination......................................................................... 16
DESCRIPTION OF THE TRUST FUNDS....................................................... 16
General............................................................................. 16
Mortgage Loans...................................................................... 16
MBS................................................................................. 20
Certificate Accounts................................................................ 21
Credit Support...................................................................... 21
Cash Flow Agreements................................................................ 21
YIELD AND MATURITY CONSIDERATIONS.................................................... 22
General............................................................................. 22
Pass-Through Rate................................................................... 22
Payment Delays...................................................................... 22
Certain Shortfalls in Collections of Interest....................................... 22
Yield and Prepayment Considerations................................................. 23
Weighted Average Life and Maturity.................................................. 24
Other Factors Affecting Yield, Weighted Average Life and Maturity................... 25
THE DEPOSITOR........................................................................ 28
DEUTSCHE BANK AG..................................................................... 28
DESCRIPTION OF THE CERTIFICATES...................................................... 28
General............................................................................. 28
Distributions....................................................................... 29
Distributions of Interest on the Certificates....................................... 29
v
<PAGE>
PAGE
--------
Distributions of Principal of the Certificates...................................... 30
Distributions on the Certificates in Respect of Prepayment Premiums or in
Respect of Equity Participations................................................... 31
Allocation of Losses and Shortfalls................................................. 31
Advances in Respect of Delinquencies................................................ 31
Reports to Certificateholders....................................................... 32
Voting Rights....................................................................... 34
Termination......................................................................... 34
Book-Entry Registration and Definitive Certificates................................. 34
DESCRIPTION OF THE POOLING AGREEMENTS................................................ 36
General............................................................................. 36
Assignment of Mortgage Loans; Repurchases........................................... 36
Representations and Warranties; Repurchases......................................... 38
Collection and Other Servicing Procedures........................................... 39
Sub-Servicers....................................................................... 41
Certificate Account................................................................. 41
Modifications, Waivers and Amendments of Mortgage Loans............................. 43
Realization Upon Defaulted Mortgage Loans........................................... 44
Hazard Insurance Policies........................................................... 45
Due-on-Sale and Due-on-Encumbrance Provisions....................................... 46
Servicing Compensation and Payment of Expenses...................................... 46
Evidence as to Compliance........................................................... 47
Certain Matters Regarding the Master Servicer, the Special Servicer,
the REMIC Administrator and the Depositor.......................................... 47
Events of Default................................................................... 48
Rights Upon Event of Default........................................................ 49
Amendment........................................................................... 50
List of Certificateholders.......................................................... 51
The Trustee......................................................................... 51
Duties of the Trustee............................................................... 51
Certain Matters Regarding the Trustee............................................... 51
Resignation and Removal of the Trustee.............................................. 52
DESCRIPTION OF CREDIT SUPPORT........................................................ 53
General............................................................................. 53
Subordinate Certificates............................................................ 53
Insurance or Guarantees with Respect to Mortgage Loans.............................. 53
vi
<PAGE>
PAGE
--------
Letter of Credit.................................................................... 53
Certificate Insurance and Surety Bonds.............................................. 54
Reserve Funds....................................................................... 54
Credit Support with respect to MBS.................................................. 54
Interest Rate Exchange, Cap and Floor Agreements.................................... 54
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.............................................. 55
General............................................................................. 55
Types of Mortgage Instruments....................................................... 55
Leases and Rents.................................................................... 56
Personalty.......................................................................... 56
Foreclosure......................................................................... 56
Bankruptcy Laws..................................................................... 59
Environmental Considerations........................................................ 60
Due-on-Sale and Due-on-Encumbrance Provisions....................................... 62
Junior Liens; Rights of Holders of Senior Liens..................................... 62
Subordinate Financing............................................................... 62
Default Interest and Limitations on Prepayments..................................... 63
Applicability of Usury Laws......................................................... 63
Certain Laws and Regulations........................................................ 63
Americans with Disabilities Act..................................................... 63
Soldiers' and Sailors' Civil Relief Act of 1940..................................... 64
Forfeitures in Drug and RICO Proceedings............................................ 64
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.............................................. 65
Federal Income Tax Consequences for REMIC Certificates.............................. 65
Taxation of Regular Certificates.................................................... 68
Taxation of Residual Certificates................................................... 75
Taxes That May Be Imposed on the REMIC Pool......................................... 81
Liquidation of the REMIC Pool....................................................... 82
Administrative Matters.............................................................. 82
Limitations on Deduction of Certain Expenses........................................ 82
Taxation of Certain Foreign Investors............................................... 83
Backup Withholding.................................................................. 84
Reporting Requirements.............................................................. 84
Federal Income Tax Consequences For Certificates as to Which No REMIC Election Is
Made............................................................................... 85
Standard Certificates............................................................... 85
vii
<PAGE>
PAGE
--------
Stripped Certificates............................................................... 88
Reporting Requirements and Backup Withholding....................................... 91
Taxation of Certain Foreign Investors............................................... 91
STATE AND OTHER TAX CONSEQUENCES..................................................... 92
CERTAIN ERISA CONSIDERATIONS......................................................... 92
General............................................................................. 92
Plan Asset Regulations.............................................................. 92
Prohibited Transaction Exemptions................................................... 93
Tax Exempt Investors................................................................ 96
LEGAL INVESTMENT..................................................................... 96
USE OF PROCEEDS...................................................................... 98
METHOD OF DISTRIBUTION............................................................... 98
LEGAL MATTERS........................................................................ 99
FINANCIAL INFORMATION................................................................ 99
RATING............................................................................... 99
INDEX OF PRINCIPAL DEFINITIONS....................................................... 100
</TABLE>
viii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
SECURITIES OFFERED ............ Mortgage pass-through certificates.
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
TRUSTEE ....................... The trustee (the "Trustee") for each series
of Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--The Trustee".
MASTER SERVICER ............... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series of
Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--Certain Matters
Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the
Depositor".
SPECIAL SERVICER .............. If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series of
Certificates will be named, or the
circumstances under which a Special Servicer
may be appointed will be described, in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements--Collection and Other Servicing
Procedures".
MBS ADMINISTRATOR ............. If a Trust Fund includes MBS, then the
entity responsible for administering such
MBS (the "MBS Administrator") will be named
in the related Prospectus Supplement. If an
entity other than the Trustee and the Master
Servicer is the MBS Administrator, such
entity will be herein referred to as the
"Manager".
REMIC ADMINISTRATOR ........... The person (the "REMIC Administrator")
responsible for the various tax-related
administration duties for a series of
Certificates as to which one or more REMIC
elections have been made, will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements--Certain Matters Regarding the
Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor".
THE MORTGAGE ASSETS ........... The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist of a
pool of mortgage loans ("Mortgage Loans")
secured by first or junior liens on, or
security interests in, one or more of the
following types of real property: (i)
residential properties ("Multifamily
Properties") consisting of five or more
rental or cooperatively-owned dwell-
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<PAGE>
ing units in high-rise, mid-rise or garden
apartment buildings or other residential
structures, and mobile home parks; and (ii)
commercial properties ("Commercial
Properties") consisting of office buildings,
retail shopping facilities (such as shopping
centers, malls and individual stores),
hotels and motels, health care-related
facilities (such as hospitals, skilled
nursing facilities, nursing homes,
congregate care facilities and senior
housing), recreational vehicle parks,
warehouse facilities, mini-warehouse
facilities, self-storage facilities,
industrial facilities, parking lots,
restaurants, mixed use properties (that is,
any combination of the foregoing), and
unimproved land. However, neither
restaurants nor health care-related
facilities will represent security for a
material concentration of the Mortgage Loans
in any Trust Fund, based on principal
balance at the time such Trust Fund is
formed. The Mortgage Loans will not be
guaranteed or insured by the Depositor or
any of its affiliates or, unless otherwise
provided in the related Prospectus
Supplement, by any governmental agency or
instrumentality or by any other person. If
so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or nonperforming as of the date
the related Trust Fund is formed.
As and to the extent described in the
related Prospectus Supplement, a Mortgage
Loan (i) may provide for no accrual of
interest or for accrual of interest thereon
at an interest rate (a "Mortgage Rate") that
is fixed over its term or that adjusts from
time to time, or that may be converted at
the borrower's election from an adjustable
to a fixed Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, (ii) may
provide for level payments to maturity or
for payments that adjust from time to time
to accommodate changes in the Mortgage Rate
or to reflect the occurrence of certain
events, and may permit negative
amortization, (iii) may be fully amortizing
or may be partially amortizing or
nonamortizing, with a balloon payment due on
its stated maturity date, (iv) may prohibit
over its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment in
connection with certain prepayments and (v)
may provide for payments of principal,
interest or both, on due dates that occur
monthly, quarterly, semi-annually or at such
other interval as is specified in the
related Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated by
the Depositor. See "Description of the Trust
Funds--Mortgage Loans".
If any Mortgage Loan, or group of related
Mortgage Loans, constitutes a concentration
of credit risk, financial statements or
other financial information with respect to
the related Mortgaged Property or Mortgaged
Properties will be included in the related
Prospectus Supplement. See "Description of
the Trust Funds--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements".
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<PAGE>
If and to the extent specified in the
related Prospectus Supplement, the Mortgage
Assets with respect to a series of
Certificates may also include, or consist
of, mortgage participations, mortgage
pass-through certificates and/or other
mortgage-backed securities (collectively,
"MBS"), that evidence an interest in, or are
secured by a pledge of, one or more mortgage
loans that conform to the descriptions of
the Mortgage Loans contained herein and
which may or may not be issued, insured or
guaranteed by the United States or an agency
or instrumentality thereof. See "Description
of the Trust Funds--MBS".
THE CERTIFICATES .............. Each series of Certificates will be issued
in one or more classes pursuant to a pooling
and servicing agreement or other agreement
specified in the related Prospectus
Supplement (in any case, a "Pooling
Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
As described in the related Prospectus
Supplement, the Certificates of each series,
including the Offered Certificates of such
series, may consist of one or more classes
of Certificates that, among other things:
(i) are senior (collectively, "Senior
Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more
other classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates"); (iii)
are entitled to distributions of interest,
with disproportionate, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of interest
thereon or principal thereof that commence
only after the occurrence of certain events,
such as the retirement of one or more other
classes of Certificates of such series; (v)
provide for distributions of principal
thereof to be made, from time to time or for
designated periods, at a rate that is faster
(and, in some cases, substantially faster)
or slower (and, in some cases, substantially
slower) than the rate at which payments or
other collections of principal are received
on the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust Fund
attributable to prepayment premiums, yield
maintenance payments or equity
participations.
If so specified in the related Prospectus
Supplement, a series of Certificates may
include one or more "Controlled Amortization
Classes", which will entitle the holders
thereof to receive principal distributions
according to a specified principal payment
schedule. Although prepayment risk cannot be
eliminated entirely for any class of
Certificates, a Controlled Amortization
Class will generally provide a relatively
stable cash flow so long
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<PAGE>
as the actual rate of prepayment on the
Mortgage Loans in the related Trust Fund
remains relatively constant at the rate, or
within the range of rates, of prepayment
used to establish the specific principal
payment schedule for such Certificates.
Prepayment risk with respect to a given
Mortgage Asset Pool does not disappear,
however, and the stability afforded to a
Controlled Amortization Class comes at the
expense of one or more other classes of the
same series, any of which other classes may
also be a class of Offered Certificates. See
"Risk Factors--Effect of Prepayments on
Average Life of Certificates" and "--Effect
of Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of REMIC
Residual Certificates (as defined herein),
will have an initial stated principal amount
(a "Certificate Balance"); and each class of
Certificates, other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates, will
accrue interest on its Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, on a
notional amount (a "Notional Amount"), based
on a fixed, variable or adjustable interest
rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount and/or
Pass-Through Rate (or, in the case of a
variable or adjustable Pass-Through Rate,
the method for determining such rate), as
applicable, for each class of Offered
Certificates.
If so specified in the related Prospectus
Supplement, a class of Certificates may have
two or more component parts, each having
characteristics that are otherwise described
herein as being attributable to separate and
distinct classes.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person or
entity, unless otherwise provided in the
related Prospectus Supplement. See "Risk
Factors--Limited Assets".
DISTRIBUTIONS OF INTEREST ON
THE CERTIFICATES ............. Interest on each class of Offered
Certificates (other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates) of
each series will accrue at the applicable
Pass-Through Rate on the Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, the Notional
Amount thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of the
specified dates on which distributions are
to be made, a "Distribution Date").
Distributions of interest with respect to
one or more classes of Certificates
(collectively, "Accrual Certificates") may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates, and
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<PAGE>
interest accrued with respect to a class of
Accrual Certificates prior to the occurrence
of such an event will either be added to the
Certificate Balance thereof or otherwise
deferred as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes
of Certificates may be reduced to the extent
of certain delinquencies, losses and other
contingencies described herein and in the
related Prospectus Supplement. See "Risk
Factors--Effect of Prepayments on Average
Life of Certificates" and "--Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest" and
"Description of the
Certificates--Distributions of Interest on
the Certificates".
DISTRIBUTIONS OF PRINCIPAL OF
THE CERTIFICATES ............. Each class of Certificates of each series
(other than certain classes of Stripped
Interest Certificates and certain classes of
REMIC Residual Certificates) will have a
Certificate Balance. The Certificate Balance
of a class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of principal
from future cash flow on the assets in the
related Trust Fund. The initial aggregate
Certificate Balance of all classes of a
series of Certificates will not be greater
than the outstanding principal balance of
the related Mortgage Assets as of a
specified date (the "Cut-off Date"), after
application of scheduled payments due on or
before such date, whether or not received.
As and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related series
of Certificates will be made on each
Distribution Date to the holders of the
class or classes of Certificates of such
series then entitled thereto until the
Certificate Balances of such Certificates
have been reduced to zero. Distributions of
principal with respect to one or more
classes of Certificates: (i) may be made at
a rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than the
rate at which payments or other collections
of principal are received on the Mortgage
Assets in the related Trust Fund; (ii) may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates of the
same series; (iii) may be made, subject to
certain limitations, based on a specified
principal payment schedule; or (iv) may be
contingent on the specified principal
payment schedule for another class of the
same series and the rate at which payments
and other collections of principal on the
Mortgage Assets in the related Trust Fund
are received. Unless otherwise specified in
the related Prospectus Supplement,
distributions of principal of any class of
Offered Certificates will be made on a pro
rata basis among all of the Certificates of
such class. See "Description of the
Certificates--Distributions of Principal of
the Certificates".
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<PAGE>
CREDIT SUPPORT AND
CASH FLOW AGREEMENTS ......... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund
may be provided to one or more classes of
Certificates of the related series in the
form of subordination of one or more other
classes of Certificates of such series,
which other classes may include one or more
classes of Offered Certificates, or by one
or more other types of credit support, which
may include a letter of credit, a surety
bond, an insurance policy, a guarantee, a
reserve fund, or a combination thereof (any
such coverage with respect to the
Certificates of any series, "Credit
Support"). If so provided in the related
Prospectus Supplement, a Trust Fund may
include: (i) guaranteed investment contracts
pursuant to which moneys held in the funds
and accounts established for the related
series will be invested at a specified rate;
or (ii) interest rate exchange agreements,
interest rate cap or floor agreements, or
other agreements designed to reduce the
effects of interest rate fluctuations on the
Mortgage Assets or on one or more classes of
Certificates (any such agreement, in the
case of clause (i) or (ii), a "Cash Flow
Agreement"). Certain relevant information
regarding any applicable Credit Support or
Cash Flow Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors--Credit Support Limitations",
"Description of the Trust Funds--Credit
Support" and "--Cash Flow Agreements" and
"Description of Credit Support".
ADVANCES ...................... If and to the extent provided in the related
Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, the Master
Servicer, the Special Servicer, the Trustee,
any provider of Credit Support and/or any
other specified person may be obligated to
make, or have the option of making, certain
advances with respect to delinquent
scheduled payments of principal and/or
interest on such Mortgage Loans. Any such
advances made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related
Prospectus Supplement. See "Description of
the Certificates--Advances in Respect of
Delinquencies". If and to the extent
provided in the Prospectus Supplement for a
series of Certificates, any entity making
such advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such advances
are outstanding, payable from amounts in the
related Trust Fund. See "Description of the
Certificates--Advances in Respect of
Delinquencies". If a Trust Fund includes
MBS, any comparable advancing obligation of
a party to the related Pooling Agreement, or
of a party to the related MBS Agreement,
will be described in the related Prospectus
Supplement.
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<PAGE>
OPTIONAL TERMINATION .......... If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination
through the repurchase of the Mortgage
Assets in the related Trust Fund by the
party or parties specified therein, under
the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class
or classes of Certificates by a specified
percentage or amount or upon a specified
date, a party specified therein may be
authorized or required to solicit bids for
the purchase of all of the Mortgage Assets
of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets
to retire such class or classes, under the
circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. The Certificates of each series will
constitute or evidence ownership of either
(i) "regular interests" ("REMIC Regular
Certificates") and "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a designated portion thereof,
treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code"), or (ii) interests
("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust (or a
partnership) under applicable provisions of
the Code.
Investors are advised to consult their tax
advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT .............. The Offered Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), only if
so specified in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus
Supplement.
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<PAGE>
RATING ........................ At their respective dates of issuance, each
class of Offered Certificates will be rated
not lower than investment grade by one or
more nationally recognized statistical
rating agencies (each, a "Rating Agency").
See "Rating" herein and in the related
Prospectus Supplement.
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<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any MBS included in such Trust Fund.
LIMITED LIQUIDITY OF OFFERED CERTIFICATES
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate
that an underwriter specified therein intends to establish a secondary market
in such Offered Certificates; however, no underwriter will be obligated to do
so. Any such secondary market may provide less liquidity to investors than
any comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any
Credit Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement
as described herein under the heading "Description of the
Certificates--Reports to Certificateholders". There can be no assurance that
any additional ongoing information regarding the Offered Certificates of any
series will be available through any other source. The limited nature of such
information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such
Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered
Certificates or class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain classes of Offered Certificates (in particular, a
class with a relatively long average life, a Companion Class (as defined
herein) or a class of Stripped Interest Certificates or Stripped Principal
Certificates) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Certificate
in response to an upward or downward movement in prevailing interest rates
may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid by such
holder. The Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis.
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person
9
<PAGE>
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make
payments on a series of Offered Certificates, no other assets will be
available for payment of the deficiency, and the holders of one or more
classes of such Offered Certificates will be required to bear the consequent
loss. Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, if and to the extent described in the
related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If and to the
extent so provided in the Prospectus Supplement for a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage Assets have been incurred, all or a portion of the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
CREDIT SUPPORT LIMITATIONS
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses; for
example, Credit Support may or may not cover loss by reason of fraud or
negligence by a mortgage loan originator or other parties. Any such losses
not covered by Credit Support may, at least in part, be allocated to one or
more classes of Offered Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates
(which may include Offered Certificates), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the
likelihood of temporary shortfalls and ultimate losses to holders of Senior
Certificates, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Offered Certificates of a series are made in a specified
order of priority, any related Credit Support may be exhausted before the
principal of the later paid classes of Offered Certificates of such series
has been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Mortgage Assets may fall primarily upon those
classes of Offered Certificates having a later right of payment. Moreover, if
a form of Credit Support covers the Offered Certificates of more than one
series and losses on the related Mortgage Assets exceed the amount of such
Credit Support, it is possible that the holders of Offered Certificates of
one (or more) such series will be disproportionately benefited by such Credit
Support to the detriment of the holders of Offered Certificates of one (or
more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level
of defaults, delinquencies and losses on the underlying Mortgage Assets and
certain other factors. There can, however, be no assurance that the loss
experience on the related Mortgage Assets will not exceed such assumed
levels. See "Description of the Certificates--Allocation of Losses and
Shortfalls" and "Description of Credit Support". If the losses on the related
Mortgage Assets do exceed such assumed levels, the holders of one or more
classes of Offered Certificates will be required to bear such additional
losses.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the
Offered Certificates of the related series may be highly unpredictable.
Prepayments on the Mortgage Loans in any Trust Fund will result in a faster
rate of principal payments on one or more classes of the related series of
Certificates than if payments on such
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<PAGE>
Mortgage Loans were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans in a Trust Fund may affect the average life of one or more
classes of Certificates of the related series, including a class of Offered
Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax and legal factors. For
example, if prevailing interest rates fall significantly below the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then, subject to
the particular terms of the Mortgage Loans (e.g., provisions that prohibit
voluntary prepayments during specified periods or impose penalties in
connection therewith) and the ability of borrowers to obtain new financing,
principal prepayments on such Mortgage Loans are likely to be higher than if
prevailing interest rates remain at or above the rates borne by those
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the Mortgage Rates borne by the Mortgage Loans included in a Trust
Fund, then principal prepayments on such Mortgage Loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those Mortgage Loans. There can be no assurance as to the actual
rate of prepayment on the Mortgage Loans in any Trust Fund or that such rate
of prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for
the Mortgage Loans in any Trust Fund, the retirement of any class of
Certificates of the related series could occur significantly earlier or
later, and the average life thereof could be significantly shorter or longer,
than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the
related series will depend on the terms and provisions of such Certificates.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases,
may be none) of such prepayments. A class of Certificates that entitles the
holders thereof to a disproportionately large share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of early
retirement of such class ("Call Risk") if the rate of prepayment is
relatively fast; while a class of Certificates that entitles the holders
thereof to a disproportionately small share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of an
extended average life of such class ("Extension Risk") if the rate of
prepayment is relatively slow. As and to the extent described in the related
Prospectus Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one
or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates,
a Controlled Amortization Class will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Mortgage Loans in
the related Trust Fund remains relatively constant at the rate, or within the
range of rates, of prepayment used to establish the specific principal
payment schedule for such Certificates. Prepayment risk with respect to a
given Mortgage Asset Pool does not disappear, however, and the stability
afforded to a Controlled Amortization Class comes at the expense of one or
more Companion Classes of the same series, any of which Companion Classes may
also be a class of Offered Certificates. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Mortgage Loans in the related Trust Fund when the rate of prepayment is
relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Controlled Amortization Class if all payments
of principal of the Mortgage Loans in the related Trust Fund were allocated
on a pro rata basis.
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EFFECT OF PREPAYMENTS ON YIELD OF CERTIFICATES
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which such Certificates are purchased at
a discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Certificate purchased at
a discount, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. See "Yield and
Maturity Considerations".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such
Offered Certificates will receive payments to which such Certificateholders
are entitled under the related Pooling Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the related Trust Fund. Furthermore, such
rating will not address the possibility that prepayment of the related
Mortgage Loans at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of the Certificates
of such series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a
large pool of mortgage loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans. In
other cases, such criteria may be based upon determinations of the values of
the Mortgaged Properties that provide security for the Mortgage Loans.
However, no assurance can be given that those values will not decline in the
future. As a result, the Credit Support required in respect of the Offered
Certificates of any series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Description of
Credit Support" and "Rating".
CERTAIN FACTORS AFFECTING DELINQUENCY, FORECLOSURE AND LOSS OF THE MORTGAGE
LOANS
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying
Mortgage Loans. Set forth below is a discussion of certain factors that will
affect the full and timely payment of the Mortgage Loans in any Trust Fund.
In addition, a description of certain material considerations associated with
investments in mortgage loans is included herein under "Certain Legal Aspects
of Mortgage Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans
made on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss
in the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds--Mortgage
Loans--Default and Loss Considerations with
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Respect to the Mortgage Loans". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay
the loan may be impaired. A number of the Mortgage Loans may be secured by
liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants.
Accordingly, a decline in the financial condition of the borrower or a
significant tenant, as applicable, may have a disproportionately greater
effect on the net operating income from such Mortgaged Properties than would
be the case with respect to Mortgaged Properties with multiple tenants.
Furthermore, the value of any Mortgaged Property may be adversely affected by
factors generally incident to interests in real property, including changes
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies,
including environmental legislation; natural disasters and civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots; and other
circumstances, conditions or events beyond the control of a Master Servicer
or a Special Servicer. Additional considerations may be presented by the type
and use of a particular Mortgaged Property. For instance, Mortgaged
Properties that operate as hospitals and nursing homes are subject to
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are
often operated pursuant to franchise, management or operating agreements that
may be terminable by the franchisor or operator, and the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law
requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be
greater than for pools of single-family loans because Mortgage Loans in a
Trust Fund will generally consist of a smaller number of higher balance loans
than would a pool of single-family loans of comparable aggregate unpaid
principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to
any such Mortgage Loan, recourse in the event of borrower default will be
limited to the specific real property and other assets, if any, that were
pledged to secure the Mortgage Loan. However, even with respect to those
Mortgage Loans that provide for recourse against the borrower and its assets
generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. See
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Anti-Deficiency
Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all
of the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated thereby, are
available to support debt service on, and ultimate repayment of, the
aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the
Mortgaged Properties securing any such group of Mortgage Loans to generate
net operating income sufficient to pay debt service will result in defaults
and ultimate losses.
There may not be complete identity of ownership of the Mortgaged
Properties securing a group of cross-collateralized Mortgage Loans. In such
an instance, creditors of one or more of the related borrowers could
challenge the cross-collateralization arrangement as a fraudulent conveyance.
Generally, under federal and state fraudulent conveyance statutes, the
incurring of an obligation or the transfer of property by a person will be
subject to avoidance under certain circumstances if the person did not
receive fair consideration or reasonably equivalent value in exchange for
such obligation or transfer and was then insolvent or was rendered insolvent
by such obligation or transfer. Accordingly, a creditor seeking
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ownership of a Mortgaged Property subject to such cross-collateralization to
repay such creditor's claim against the related borrower could assert (i)
that such borrower was insolvent at the time the cross-collateralized
Mortgage Loans were made and (ii) that such borrower did not, when it allowed
its property to be encumbered by a lien securing the indebtedness represented
by the other Mortgage Loans in the group of cross-collateralized Mortgage
Loans, receive fair consideration or reasonably equivalent value for, in
effect, "guaranteeing" the performance of the other borrowers. Although the
borrower making such "guarantee" will be receiving "guarantees" from each of
the other borrowers in return, there can be no assurance that such exchanged
"guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value, and no unqualified legal opinion to that effect
will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise
of a power of sale and because, in general, foreclosure actions are brought
in state court, and the courts of one state cannot exercise jurisdiction over
property in another state, it may be necessary upon a default under any such
Mortgage Loan to foreclose on the related Mortgaged Properties in a
particular order rather than simultaneously in order to ensure that the lien
of the related Mortgages is not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only
partially amortizing over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater
likelihood of default than self-amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by
a number of factors, including the value of the related Mortgaged Property,
the level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
and operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability
of credit for loans secured by multifamily or commercial, as the case may be,
real properties generally. Neither the Depositor nor any of its affiliates
will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent. See "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". While the Master
Servicer or the Special Servicer generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery than liquidation, taking into account the time value of money, there
can be no assurance that any such extension or modification will in fact
increase the present value of receipts from or proceeds of the affected
Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy
of Borrower. Each Mortgage Loan included in any Trust Fund secured by
Mortgaged Property that is subject to leases typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property
and obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of Mortgage
Loans--Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration
Clauses. Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan
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if the borrower sells, transfers or conveys the related Mortgaged Property or
its interest in the Mortgaged Property. Mortgages also may include a
debt-acceleration clause, which permits the lender to accelerate the debt
upon a monetary or nonmonetary default of the mortgagor. Such clauses are
generally enforceable subject to certain exceptions. The courts of all states
will enforce clauses providing for acceleration in the event of a material
payment default. The equity courts of any state, however, may refuse the
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances at a property, if agents or
employees of the lender have become sufficiently involved in the operations
of the borrower, regardless of whether the environmental damage or threat was
caused by the borrower or a prior owner. A lender also risks such liability
on foreclosure of the mortgage. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and
Special Servicer for the related Trust Fund will be required to cause the
borrower on each Mortgage Loan in such Trust Fund to maintain such insurance
coverage in respect of the related Mortgaged Property as is required under
the related Mortgage, including hazard insurance; provided that, as and to
the extent described herein and in the related Prospectus Supplement, each of
the Master Servicer and the Special Servicer may satisfy its obligation to
cause hazard insurance to be maintained with respect to any Mortgaged
Property through acquisition of a blanket policy. In general, the standard
form of fire and extended coverage policy covers physical damage to or
destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds
of risks. Unless the related Mortgage specifically requires the mortgagor to
insure against physical damage arising from such causes, then, to the extent
any consequent losses are not covered by Credit Support, such losses may be
borne, at least in part, by the holders of one or more classes of Offered
Certificates of the related series. See "Description of the Pooling
Agreements--Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher
rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may
be directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. The
Mortgage Loans securing certain series of Certificates may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration.
INCLUSION OF DELINQUENT AND NONPERFORMING MORTGAGE LOANS IN A MORTGAGE ASSET
POOL
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past
due or are nonperforming. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration
of the Mortgage Loans in
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any Trust Fund, based on principal balance at the time such Trust Fund is
formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however,
the same entity may act as both Master Servicer and Special Servicer. Credit
Support provided with respect to a particular series of Certificates may not
cover all losses related to such delinquent or nonperforming Mortgage Loans,
and investors should consider the risk that the inclusion of such Mortgage
Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments in respect of the subject Mortgage Asset Pool and the yield on
the Offered Certificates of such series. See "Description of the Trust
Funds--Mortgage Loans--General".
TERMINATION
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be
conducted in a commercially reasonable manner and, generally, assets will be
sold at their fair market value. In addition, if so specified in the related
Prospectus Supplement, upon the reduction of the aggregate principal balance
of some or all of the Mortgage Assets by a specified percentage, a party or
parties designated therein may be authorized to purchase such Mortgage
Assets, generally at a price equal to, in the case of any Mortgage Asset, the
unpaid principal balance thereof plus accrued interest (or, in some cases, at
fair market value). However, circumstances may arise in which such fair
market value may be less than the unpaid balance of the related Mortgage
Assets, together with interest thereon, sold and therefore, as a result of
such a sale or purchase, the Certificateholders of one or more Classes of
Certificates may receive an amount less than the Certificate Balance of, and
accrued unpaid interest on, their Certificates. See "Description of the
Certificates--Termination."
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under
the heading "--Mortgage Loans", unless otherwise noted, applies equally to
mortgage loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of
one or more of the following types of real property: (i) residential
properties ("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office
buildings, retail shopping facilities (such as shopping centers, malls and
individual stores), hotels or motels, health care-related facilities (such as
hospitals, skilled nursing facilities, nursing homes, congregate care
facilities and senior housing),
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recreational vehicle parks, warehouse facilities, mini-warehouse facilities,
self-storage facilities, industrial facilities, parking lots, restaurants,
mixed use properties (that is, any combination of the foregoing), and
unimproved land. However, neither restaurants nor health care-related
facilities will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time such
Trust Fund is formed. The Multifamily Properties may include mixed commercial
and residential structures and apartment buildings owned by private
cooperative housing corporations ("Cooperatives"). Unless otherwise specified
in the related Prospectus Supplement, each Mortgage will create a first
priority mortgage lien on a fee estate in a Mortgaged Property. If a Mortgage
creates a lien on a borrower's leasehold estate in a property, then, unless
otherwise specified in the related Prospectus Supplement, the term of any
such leasehold will exceed the term of the Mortgage Note by at least ten
years. Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will have been originated by a person (the "Originator") other
than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to
satisfy fully both the Senior Liens and the Mortgage Loan. In the event that
a holder of a Senior Lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. If the Master Servicer were to foreclose on any Mortgage Loan, it would
do so subject to any related Senior Liens. In order for the debt related to
such Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient
to pay off all sums due under the Mortgage Loan and any Senior Liens or
purchase the Mortgaged Property subject to such Senior Liens. In the event
that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment is not obtained and satisfied. Moreover,
deficiency judgments may not be available in certain jurisdictions, or the
particular Mortgage Loan may be a nonrecourse loan, which means that, absent
special facts, recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
repayment of the Mortgage Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of
the related Mortgaged Property and the ability of the Mortgaged Property to
generate income to service the mortgage debt. However, Mortgage Loans which
are seriously delinquent loans (that is, loans more than 60 days delinquent
or as to which foreclosure has been commenced) will not constitute a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage
Loans. Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful
operation of such property (that is, its ability to generate income).
Moreover, as noted above, some or all of the Mortgage Loans included in a
particular Trust Fund may be nonrecourse loans.
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Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important factor in evaluating the
likelihood of default on such a loan. Unless otherwise defined in the related
Prospectus Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan
at any given time is the ratio of (i) the Net Operating Income derived from
the related Mortgaged Property for a twelve-month period to (ii) the
annualized scheduled payments of principal and/or interest on the Mortgage
Loan and any other loans senior thereto that are secured by the related
Mortgaged Property. Unless otherwise defined in the related Prospectus
Supplement, "Net Operating Income" means, for any given period, the total
operating revenues derived from a Mortgaged Property during such period,
minus the total operating expenses incurred in respect of such Mortgaged
Property during such period other than (i) noncash items such as depreciation
and amortization, (ii) capital expenditures and (iii) debt service on the
related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
generally fluctuate over time and may or may not be sufficient to cover debt
service on the related Mortgage Loan at any given time. As the primary source
of the operating revenues of a nonowner occupied, income-producing property,
rental income (and, with respect to a Mortgage Loan secured by a Cooperative
apartment building, maintenance payments from tenant-stockholders of a
Cooperative) may be affected by the condition of the applicable real estate
market and/or area economy. In addition, properties typically leased,
occupied or used on a short-term basis, such as certain health care-related
facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or a tenant,
and Mortgage Loans secured by liens on such properties may pose a greater
likelihood of default and loss than loans secured by liens on Multifamily
Properties or on multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage
Loan. As may be further described in the related Prospectus Supplement, in
some cases leases of Mortgaged Properties may provide that the lessee, rather
than the borrower/landlord, is responsible for payment of operating expenses
("Net Leases"). However, the existence of such "net of expense" provisions
will result in stable Net Operating Income to the borrower/landlord only to
the extent that the lessee is able to absorb operating expense increases
while continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property must be liquidated
following a default. Unless otherwise defined in the related Prospectus
Supplement, the "Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio (expressed as a percentage) of (i) the then outstanding principal
balance of the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property to (ii) the Value of the related
Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, the "Value" of a Mortgaged Property will be its fair market value
as determined by an appraisal of such property conducted by or on behalf of
the Originator in connection with the origination of such loan. The lower the
Loan-to-Value Ratio, the greater the percentage of the borrower's equity in a
Mortgaged Property, and thus (a) the greater the incentive of the borrower to
perform under the terms of the related Mortgage Loan (in order to protect
such equity) and (b) the greater the cushion provided to the lender against
loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the likelihood of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined
at loan origination, and will likely continue to fluctuate from time to time
based upon certain factors including changes in economic conditions and the
real estate market. Moreover, even when current, an appraisal is not
necessarily a reliable estimate of value. Appraised values of
income-producing properties are
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generally based on the market comparison method (recent resale value of
comparable properties at the date of the appraisal), the cost replacement
method (the cost of replacing the property at such date), the income
capitalization method (a projection of value based upon the property's
projected net cash flow), or upon a selection from or interpolation of the
values derived from such methods. Each of these appraisal methods can present
analytical difficulties. It is often difficult to find truly comparable
properties that have recently been sold; the replacement cost of a property
may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and
expense and the selection of an appropriate capitalization rate and discount
rate. Where more than one of these appraisal methods are used and provide
significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of the likelihood of default and loss,
is even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property
performance. As a result, if a Mortgage Loan defaults because the income
generated by the related Mortgaged Property is insufficient to cover
operating costs and expenses and pay debt service, then the value of the
Mortgaged Property will reflect such and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be
no assurance that all of such factors will in fact have been prudently
considered by the Originators of the Mortgage Loans, or that, for a
particular Mortgage Loan, they are complete or relevant. See "Risk
Factors--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--General" and "--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or
for payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may permit
negative amortization, (iii) may be fully amortizing or may be partially
amortizing or nonamortizing, with a balloon payment due on its stated
maturity date, and (iv) may prohibit over its term or for a certain period
prepayments (the period of such prohibition, a "Lock-out Period" and its date
of expiration, a "Lock-out Date") and/or require payment of a premium or a
yield maintenance payment (a "Prepayment Premium") in connection with certain
prepayments, in each case as described in the related Prospectus Supplement.
A Mortgage Loan may also contain a provision that entitles the lender to a
share of appreciation of the related Mortgaged Property, or profits realized
from the operation or disposition of such Mortgaged Property or the benefit,
if any, resulting from the refinancing of the Mortgage Loan (any such
provision, an "Equity Participation"), as described in the related Prospectus
Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
in the related Trust Fund, which, to the extent then applicable, will
generally include the following: (i) the aggregate outstanding principal
balance and the largest, smallest and average outstanding principal balance
of the Mortgage Loans, (ii) the type or types of property that provide
security for repayment of the Mortgage Loans, (iii) the earliest and latest
origination date and maturity date of the Mortgage Loans, (iv) the original
and remaining terms to maturity of the Mortgage Loans, or the respective
ranges thereof, and the weighted average original and remaining terms to
maturity of the Mortgage Loans, (v) the Loan-to-Value Ratios of the Mortgage
Loans (either at origination or as of a more recent date), or the range
thereof, and the weighted average of such Loan-to-Value Ratios, (vi) the
Mortgage Rates borne by the Mortgage Loans, or the range thereof, and the
weighted average Mortgage Rate borne by the Mortgage Loans, (vii) with
respect to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the
index or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
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limits on Mortgage Rate adjustments at the time of any adjustment and over
the life of the ARM Loan, (viii) information regarding the payment
characteristics of the Mortgage Loans, including, without limitation, balloon
payment and other amortization provisions, Lock-out Periods and Prepayment
Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans (either
at origination or as of a more recent date), or the range thereof, and the
weighted average of such Debt Service Coverage Ratios, and (x) the geographic
distribution of the Mortgaged Properties on a state-by-state basis. In
appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the
provisions of leases and the nature of tenants of the Mortgaged Properties.
If the Depositor is unable to provide the specific information described
above at the time Offered Certificates of a series are initially offered,
more general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth
in a report which will be available to purchasers of those Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Commission within fifteen days following such
issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master
Servicer's prepayment experience irrelevant. Because of the nature of the
assets to be serviced and administered by a Special Servicer, no comparable
prepayment information will be presented with respect to the Special
Servicer's multifamily and/or commercial mortgage loan servicing portfolio.
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA"), the Governmental National
Mortgage Association ("GNMA") or the Federal Agricultural Mortgage
Corporation ("FAMC"), provided that, unless otherwise specified in the
related Prospectus Supplement, each MBS will evidence an interest in, or will
be secured by a pledge of, mortgage loans that conform to the descriptions of
the Mortgage Loans contained herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage
Asset Pool: (a) either will (i) have been previously registered under the
Securities Act of 1933, as amended, (ii) be exempt from such registration
requirements or (iii) have been held for at least the holding period
specified in Rule 144(k) under the Securities Act of 1933, as amended; and
(b) either (i) will have been acquired (other than from the Depositor or an
affiliate thereof) in bona fide secondary market transactions or (ii) if so
specified in the related Prospectus Supplement, may be derived from the
Depositor's (or an affiliate's) unsold allotments from the Depositor (or an
affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer")
and/or the servicer of the underlying mortgage loans (the "MBS Servicer")
will be parties to the MBS Agreement, generally together with a trustee (the
"MBS Trustee") or, in the alternative, with the original purchaser or
purchasers of the MBS.
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The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may
have assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the
Trust Fund, (ii) the original and remaining term(s) to stated maturity of the
MBS, if applicable, (iii) the pass-through or bond rate(s) of the MBS or the
formula for determining such rate(s), (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each
of the MBS, (vi) a description of the related credit support, if any, (vii)
the circumstances under which the related underlying mortgage loans, or the
MBS themselves, may be purchased prior to their maturity, (viii) the terms on
which mortgage loans may be substituted for those originally underlying the
MBS, (ix) the type of mortgage loans underlying the MBS and, to the extent
appropriate under the circumstances, such other information in respect of the
underlying mortgage loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements", and (x) the characteristics of any
cash flow agreements that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports
if such MBS was publicly offered or the reports the related MBS Issuer
provides the related MBS Trustee if such MBS was privately issued.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund will be deposited to the extent described herein and in the related
Prospectus Supplement. See "Description of the Pooling
Agreements--Certificate Account".
CREDIT SUPPORT
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may be provided to one or more
classes of Certificates of such series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other
types of Credit Support, which may include a letter of credit, a surety bond,
an insurance policy, a guarantee, a reserve fund, or any combination thereof.
The amount and types of such Credit Support, the identity of the entity
providing it (if applicable) and related information with respect to each
type of Credit Support, if any, will be set forth in the Prospectus
Supplement for a series of Certificates. See "Risk Factors--Credit Support
Limitations" and "Description of Credit Support".
CASH FLOW AGREEMENTS
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant
to which moneys held in the funds and accounts established for such series
will be invested at a specified rate. The Trust Fund may also include
interest
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rate exchange agreements, interest rate cap or floor agreements, or other
agreements designed to reduce the effects of interest rate fluctuations on
the Mortgage Assets on one or more classes of Certificates. The principal
terms of any such Cash Flow Agreement, including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof, will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
identify the obligor under the Cash Flow Agreement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can
generally be expected to have the same effect on the yield to maturity and/or
weighted average life of a class of Certificates as will the characteristics
and behavior of comparable Mortgage Loans, the effect may differ due to the
payment characteristics of the MBS. If a Trust Fund includes MBS, the related
Prospectus Supplement will discuss the effect, if any, that the payment
characteristics of the MBS may have on the yield to maturity and weighted
average lives of the Offered Certificates of the related series.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable
or adjustable Pass-Through Rate, which may or may not be based upon the
interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Certificates will specify
the Pass-Through Rate for each class of Offered Certificates of such series
or, in the case of a class of Offered Certificates with a variable or
adjustable Pass-Through Rate, the method of determining the Pass-Through
Rate; the effect, if any, of the prepayment of any Mortgage Loan on the
Pass-Through Rate of one or more classes of Offered Certificates; and whether
the distributions of interest on the Offered Certificates of any class will
be dependent, in whole or in part, on the performance of any obligor under a
Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related
Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans
were distributed to Certificateholders on the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment
only through the date of such prepayment, instead of through the Due Date for
the next succeeding scheduled payment. However, interest accrued on any
series of Certificates and distributable thereon on any Distribution Date
will generally correspond to interest accrued on the Mortgage Loans to their
respective Due Dates during the related Due Period. A "Due Period" will be a
specified time period (generally corresponding in length to the period
between Distribution Dates) and all scheduled payments on the Mortgage Loans
in the related Trust Fund that are due during a given Due Period will, to the
extent received by a specified date (the "Determination Date") or otherwise
advanced by the related Master Servicer, Special Servicer or other specified
person, be distributed to the holders of the Certificates of such series on
the next succeeding Distribution Date. Consequently, if a prepayment on any
Mortgage Loan is distributable to Certificateholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
to the Due Date for such
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Mortgage Loan in the related Due Period, then the interest charged to the
borrower (net of servicing and administrative fees) may be less (such
shortfall, a "Prepayment Interest Shortfall") than the corresponding amount
of interest accrued and otherwise payable on the Certificates of the related
series. If and to the extent that any such shortfall is allocated to a class
of Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for each series of Certificates will describe the
manner in which any such shortfalls will be allocated among the classes of
such Certificates. The related Prospectus Supplement will also describe any
amounts available to offset such shortfalls.
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the
Mortgage Loans in any Trust Fund will in turn be affected by the amortization
schedules thereof (which, in the case of ARM Loans, may change periodically
to accommodate adjustments to the Mortgage Rates thereon), the dates on which
any balloon payments are due, and the rate of principal prepayments thereon
(including for this purpose, voluntary prepayments by borrowers and also
prepayments resulting from liquidations of Mortgage Loans due to defaults,
casualties or condemnations affecting the related Mortgaged Properties, or
purchases of Mortgage Loans out of the related Trust Fund). Because the rate
of principal prepayments on the Mortgage Loans in any Trust Fund will depend
on future events and a variety of factors (as described below), no assurance
can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend
upon the degree to which they are purchased at a discount or premium and
when, and to what degree, payments of principal on the Mortgage Loans in the
related Trust Fund are in turn distributed on such Certificates (or, in the
case of a class of Stripped Interest Certificates, result in the reduction of
the Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on such Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield. In addition, if an
investor purchases an Offered Certificate at a discount (or premium), and
principal payments are made in reduction of the principal balance or notional
amount of such investor's Offered Certificates at a rate slower (or faster)
than the rate anticipated by the investor during any particular period, any
consequent adverse effects on such investor's yield would not be fully offset
by a subsequent like increase (or decrease) in the rate of principal
payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal the
Certificate Balances of one or more of the other classes of Certificates of
the same series. Accordingly, the yield on such Stripped Interest
Certificates will be inversely related to the rate at which payments and
other collections of principal are received on such Mortgage Assets or
distributions are made in reduction of the Certificate Balances of such
classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect
the yield to investors in Stripped Interest Certificates. If the Offered
Certificates of a series include any such Certificates, the related
Prospectus Supplement will include a table showing the effect of various
constant assumed levels of prepayment on yields on such Certificates. Such
tables will be intended to illustrate the sensitivity of yields to various
constant assumed prepayment rates and will not be intended to predict, or to
provide information that will enable investors to predict, yields or
prepayment rates.
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The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation,
the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located, the quality of management
of the Mortgaged Properties, the servicing of the Mortgage Loans, possible
changes in tax laws and other opportunities for investment. In general, those
factors which increase the attractiveness of selling a Mortgaged Property or
refinancing a Mortgage Loan or which enhance a borrower's ability to do so,
as well as those factors which increase the likelihood of default under a
Mortgage Loan, would be expected to cause the rate of prepayment in respect
of any Mortgage Asset Pool to accelerate. In contrast, those factors having
an opposite effect would be expected to cause the rate of prepayment of any
Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the
extent to which such provisions may be practicably enforced. To the extent
enforceable, such provisions could constitute either an absolute prohibition
(in the case of a Lock-out Period) or a disincentive (in the case of a
Prepayment Premium) to a borrower's voluntarily prepaying its Mortgage Loan,
thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest
rate is below a mortgage coupon, a borrower may have an increased incentive
to refinance its mortgage loan. Even in the case of ARM Loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on such ARM Loans decline in a manner consistent therewith, the related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. Therefore, as prevailing market
interest rates decline, prepayment speeds would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average
life of one or more classes of the Certificates of such series. Unless
otherwise specified in the related Prospectus Supplement, weighted average
life refers to the average amount of time that will elapse from the date of
issuance of an instrument until each dollar allocable as principal of such
instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments by
borrowers and also prepayments resulting from liquidations of Mortgage Loans
due to default, casualties or condemnations affecting the related Mortgaged
Properties and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative
to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or the Standard Prepayment Assumption ("SPA")
prepayment model. CPR represents an assumed constant rate of prepayment each
month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of mortgage loans for the life of such loans. SPA
represents an assumed variable rate of prepayment each month (expressed as an
annual percentage) relative to the then outstanding principal balance of a
pool of mortgage loans, with different prepayment assumptions often
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expressed as percentages of SPA. For example, a prepayment assumption of 100%
of SPA assumes prepayment rates of 0.2% per annum of the then outstanding
principal balance of such loans in the first month of the life of the loans
and an additional 0.2% per annum in each month thereafter until the thirtieth
month. Beginning in the thirtieth month, and in each month thereafter during
the life of the loans, 100% of SPA assumes a constant prepayment rate of 6%
per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of
the anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family mortgage loans. Thus, it is unlikely
that the prepayment experience of the Mortgage Loans included in any Trust
Fund will conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series with a Certificate
Balance, and the percentage of the initial Certificate Balance of each such
class that would be outstanding on specified Distribution Dates, based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the related Mortgage Loans are made at rates corresponding to
various percentages of CPR or SPA, or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions will illustrate the
sensitivity of the weighted average lives of the Certificates to various
assumed prepayment rates and will not be intended to predict, or to provide
information that will enable investors to predict, the actual weighted
average lives of the Certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments
be made at maturity. Because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan
or to sell the related Mortgaged Property, there is a possibility that
Mortgage Loans that require balloon payments may default at maturity, or that
the maturity of such a Mortgage Loan may be extended in connection with a
workout. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the borrower or adverse conditions in the
market where the property is located. In order to minimize losses on
defaulted Mortgage Loans, the Master Servicer or the Special Servicer, to the
extent and under the circumstances set forth herein and in the related
Prospectus Supplement, may be authorized to modify Mortgage Loans that are in
default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan may
delay distributions of principal on a class of Offered Certificates and
thereby extend the weighted average life of such Certificates and, if such
Certificates were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur (that is, Mortgage Loans that provide for the current
payment of interest calculated at a rate lower than the rate at which
interest accrues thereon, with the unpaid portion of such interest being
added to the related principal balance). Negative amortization on one or more
Mortgage Loans in any Trust Fund may result in negative amortization on the
Offered Certificates of the related series. The related Prospectus Supplement
will describe, if applicable, the manner in which negative amortization in
respect of the Mortgage Loans in any Trust Fund is allocated among the
respective classes of Certificates of the related series. The portion of any
Mortgage Loan negative amortization allocated to a class of Certificates may
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. In
addition, an ARM Loan that permits negative amortization would be expected
during a period of increasing interest rates to amortize at a slower rate
(and perhaps not at all) than if interest rates were declining or were
remaining constant. Such slower rate of Mortgage Loan amortization would
correspondingly be reflected in a slower rate of amortization for one or more
classes of Certificates of the
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related series. Accordingly, the weighted average lives of Mortgage Loans
that permit negative amortization (and that of the classes of Certificates to
which any such negative amortization would be allocated or that would bear
the effects of a slower rate of amortization on such Mortgage Loans) may
increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change
in its Mortgage Rate, (ii) provides that its scheduled payment will adjust
less frequently than its Mortgage Rate or (iii) provides for constant
scheduled payments notwithstanding adjustments to its Mortgage Rate.
Accordingly, during a period of declining interest rates, the scheduled
payment on such a Mortgage Loan may exceed the amount necessary to amortize
the loan fully over its remaining amortization schedule and pay interest at
the then applicable Mortgage Rate, thereby resulting in the accelerated
amortization of such Mortgage Loan. Any such acceleration in amortization of
its principal balance will shorten the weighted average life of such Mortgage
Loan and, correspondingly, the weighted average lives of those classes of
Certificates entitled to a portion of the principal payments on such Mortgage
Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate
was purchased at a premium or a discount and (ii) the extent to which the
payment characteristics of such Mortgage Loans delay or accelerate the
distributions of principal on such Certificate (or, in the case of a Stripped
Interest Certificate, delay or accelerate the reduction of the notional
amount thereof). See "--Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage
Loans and, accordingly, the weighted average lives of and yields on the
Certificates of the related series. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings or otherwise, may also have an effect upon the payment patterns
of particular Mortgage Loans and thus the weighted average lives of and
yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in
the related Trust Fund and the timing of such losses and shortfalls. In
general, the earlier that any such loss or shortfall occurs, the greater will
be the negative effect on yield for any class of Certificates that is
required to bear the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series,
including one or more classes of Offered Certificates of such series, may
provide for distributions of principal thereof from (i) amounts attributable
to interest accrued but not currently distributable on one or more classes of
Accrual Certificates, (ii) Excess Funds or (iii) any other amounts described
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, "Excess
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Funds" will, in general, represent that portion of the amounts distributable
in respect of the Certificates of any series on any Distribution Date that
represent (i) interest received or advanced on the Mortgage Assets in the
related Trust Fund that is in excess of the interest currently accrued on the
Certificates of such series, or (ii) Prepayment Premiums, payments from
Equity Participations or any other amounts received on the Mortgage Assets in
the related Trust Fund that do not constitute interest thereon or principal
thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources is likely to have
any material effect on the rate at which such Certificates are amortized and
the consequent yield with respect thereto.
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THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State
of Delaware on March 22, 1996, for the purpose of engaging in the business,
among other things, of acquiring and depositing mortgage assets in trust in
exchange for certificates evidencing interest in such trusts and selling or
otherwise distributing such certificates. The Depositor is not an affiliate
of Deutsche Bank AG. The principal executive offices of the Depositor are
located at One International Place, Room 520, Boston, Massachusetts 02110.
Its telephone number is (617) 951-7690. The Depositor's capitalization is
nominal. All of the shares of capital stock of the Depositor are held by The
Deutsche Mortgage & Asset Receiving Trust, a Massachusetts charitable lead
trust (the "DMARC Trust") formed by J H Management Corporation and J H
Holdings Corporation, both of which are Massachusetts corporations. J H
Holdings Corporation is the trustee of the DMARC Trust, which holds no assets
other than the stock of the Depositor. All of the stock of J H Holdings
Corporation and of J H Management Corporation is held by the 1960 Trust, an
independent charitable organization qualified under Section 501(c)(3) of the
Code, and operated for the benefit of a Massachusetts charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on
the Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or
an affiliate thereof. Deutsche Bank AG is the largest banking institution in
the Federal Republic of Germany and one of the largest in the world. It is
the parent company of a group (the "Deutsche Bank Group") consisting of
commercial banks, investment banking and fund management companies, mortgage
banks and property finance companies, installment financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies. The Deutsche Bank Group employs over 74,000
staff members at more than 2,400 branches and offices around the world.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement.
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one
or more classes of Certificates that, among other things: (i) provide for the
accrual of interest on the Certificate Balance or Notional Amount thereof at
a fixed, variable or adjustable rate; (ii) constitute Senior Certificates or
Subordinate Certificates; (iii) constitute Stripped Interest Certificates or
Stripped Principal Certificates; (iv) provide for distributions of interest
thereon or principal thereof that commence only after the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (v) provide for distributions of principal
thereof to be made, from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund; (vi) provide for distributions of principal thereof to be made,
subject to available funds, based on a specified principal payment schedule
or other methodology; or (vii) provide for distributions based on collections
on the Mortgage Assets in the related Trust Fund attributable to Prepayment
Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having
characteristics that are otherwise described herein as being attributable to
separate and distinct classes. For example, a class of Certificates may have
a Certificate Balance on which it accrues interest at a fixed, variable or
adjustable rate. Such class of Certificates may also have certain
characteristics attributable to Stripped Interest Certificates insofar as it
may also entitle the holders thereof to distributions of interest accrued on
a Notional Amount at a different fixed, variable or
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adjustable rate. In addition, a class of Certificates may accrue interest on
one portion of its Certificate Balance at one fixed, variable or adjustable
rate and on another portion of its Certificate Balance at a different fixed,
variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of DTC. The Offered Certificates of
each series (if issued as Definitive Certificates) may be transferred or
exchanged, subject to any restrictions on transfer described in the related
Prospectus Supplement, at the location specified in the related Prospectus
Supplement, without the payment of any service charges, other than any tax or
other governmental charge payable in connection therewith. Interests in a
class of Book-Entry Certificates will be transferred on the book-entry
records of DTC and its participating organizations. If so specified in the
related Prospectus Supplement, arrangements may be made for clearance and
settlement through CEDEL, S.A. or the Euroclear System, if they are
participants in DTC.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the holders of Certificates
of such series on such date. The particular components of the Available
Distribution Amount for any series and Distribution Date will be more
specifically described in the related Prospectus Supplement. In general, the
Distribution Date for a series of Certificates will be the 25th day of each
month (or, if any such 25th day is not a business day, the next succeeding
business day), commencing in the month immediately following the month in
which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount
of each distribution will be determined as of the close of business on the
date (the "Determination Date") specified in the related Prospectus
Supplement. All distributions with respect to each class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates in such class in proportion to the respective Percentage
Interests evidenced thereby unless otherwise specified in the related
Prospectus Supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank
or other entity having appropriate facilities therefor, if such
Certificateholder has provided the person required to make such payments with
wiring instructions no later than the related Record Date or such other date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in
the requisite amount or denomination specified therein), or by check mailed
to the address of such Certificateholder as it appears on the Certificate
Register; provided, however, that the final distribution in retirement of any
class of Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance
or notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different
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Pass-Through Rate, which in each case may be fixed, variable or adjustable.
The related Prospectus Supplement will specify the Pass-Through Rate or, in
the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate, for each class of Offered Certificates.
Unless otherwise specified in the related Prospectus Supplement, interest on
the Certificates of each series will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions
of accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates
that is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class
and such Distribution Date, subject to the sufficiency of that portion, if
any, of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof
on each Distribution Date or otherwise deferred as described in the related
Prospectus Supplement. With respect to each class of Certificates (other than
certain classes of Stripped Interest Certificates and certain classes of
REMIC Residual Certificates), the "Accrued Certificate Interest" for each
Distribution Date will be equal to interest at the applicable Pass-Through
Rate accrued for a specified period (generally the most recently ended
calendar month) on the outstanding Certificate Balance of such class of
Certificates immediately prior to such Distribution Date. Unless otherwise
provided in the related Prospectus Supplement, the Accrued Certificate
Interest for each Distribution Date on a class of Stripped Interest
Certificates will be similarly calculated except that it will accrue on a
Notional Amount that is either (i) based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal to the
Certificate Balances of one or more other classes of Certificates of the same
series. Reference to a Notional Amount with respect to a class of Stripped
Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related Prospectus Supplement, the amount
of Accrued Certificate Interest that is otherwise distributable on (or, in
the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) one or more classes of the Certificates of a series
may be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest", exceed the amount of any sums that are applied to
offset the amount of such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on
(or, in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of Offered Certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement,
any reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Certificates by reason of the allocation to such
class of a portion of any deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund will result in a corresponding increase in
the Certificate Balance of such class. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates" and "--Effect of Prepayments on
Yield of Certificates" and "Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will
be entitled to receive as principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a class of Certificates will be reduced by
distributions of principal made thereon from time to time and, if and to the
extent so provided in the related Prospectus Supplement, further by any
losses incurred in respect of the related Mortgage Assets allocated thereto
from time to time. In turn, the outstanding Certificate Balance of a class of
Certificates
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may be increased as a result of any deferred interest on or in respect of the
related Mortgage Assets being allocated thereto from time to time, and will
be increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect
thereof (reduced as described above). The initial aggregate Certificate
Balance of all classes of a series of Certificates will not be greater than
the aggregate outstanding principal balance of the related Mortgage Assets as
of a specified date (the "Cut-off Date"), after application of scheduled
payments due on or before such date, whether or not received. The initial
Certificate Balance of each class of a series of Certificates will be
specified in the related Prospectus Supplement. As and to the extent
described in the related Prospectus Supplement, distributions of principal
with respect to a series of Certificates will be made on each Distribution
Date to the holders of the class or classes of Certificates of such series
entitled thereto until the Certificate Balances of such Certificates have
been reduced to zero. Distributions of principal with respect to one or more
classes of Certificates may be made at a rate that is faster (and, in some
cases, substantially faster) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund. Distributions of principal with respect to one or more classes of
Certificates may not commence until the occurrence of certain events, such as
the retirement of one or more other classes of Certificates of the same
series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of
Certificates (each such class, a "Controlled Amortization Class") may be
made, subject to available funds, based on a specified principal payment
schedule. Distributions of principal with respect to one or more other
classes of Certificates (each such class, a "Companion Class") may be
contingent on the specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at which payments and
other collections of principal on the Mortgage Assets in the related Trust
Fund are received. Unless otherwise specified in the related Prospectus
Supplement, distributions of principal of any class of Offered Certificates
will be made on a pro rata basis among all of the Certificates of such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums
or payments in respect of Equity Participations received on or in connection
with the Mortgage Assets in any Trust Fund will be distributed on each
Distribution Date to the holders of the class of Certificates of the related
series entitled thereto in accordance with the provisions described in such
Prospectus Supplement. Alternatively, such items may be retained by the
Depositor or any of its affiliates or by any other specified person and/or
may be excluded as Trust Assets.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates. See "Description of Credit Support".
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special
Servicer, the Trustee, any provider of Credit Support and/or any other
specified person may be obligated to advance, or have the option of
advancing, on or before each Distribution Date, from its or their own funds
or from excess funds held in the related Certificate Account that are not
part of the Available Distribution Amount for the related series of
Certificates for such Distribution Date, an amount up to the aggregate of any
payments of principal (other
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than the principal portion of any balloon payments) and interest that were
due on or in respect of such Mortgage Loans during the related Due Period and
were delinquent on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including
amounts drawn under any fund or instrument constituting Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the
related Prospectus Supplement, including, in the case of a series that
includes one or more classes of Subordinate Certificates, if so identified,
collections on other Mortgage Assets in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously
made by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable
Advance will be reimbursable thereto from any amounts in the related
Certificate Account prior to any distributions being made to the related
series of Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on or prior to
any future Distribution Date to the extent that funds in such Certificate
Account on such Distribution Date are less than payments required to be made
to the related series of Certificateholders on such date. If so specified in
the related Prospectus Supplement, the obligation of a Master Servicer,
Special Servicer, Trustee or other entity to make advances may be secured by
a cash advance reserve fund or a surety bond. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any
such surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all
of such advances for a specified period during which such advances are
outstanding at the rate specified in such Prospectus Supplement, and such
entity will be entitled to payment of such interest periodically from general
collections on the Mortgage Loans in the related Trust Fund prior to any
payment to the related series of Certificateholders or as otherwise provided
in the related Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a
party to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the holders
of each class of the Offered Certificates of a series, a Master Servicer,
Manager or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will
set forth, among other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class of
Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
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(v) if the related Trust Fund includes Mortgage Loans, the aggregate
amount of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if
payable directly out of the related Trust Fund, by any Special Servicer and
any Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans
that are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments
made with respect to such Mortgage Loans during the related Prepayment Period
(that is, the specified period, generally corresponding in length to the
period between Distribution Dates, during which prepayments and other
unscheduled collections on the Mortgage Loans in the related Trust Fund must
be received in order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of
such class of Certificates at the close of business on such Distribution
Date, separately identifying any reduction in such Certificate Balance or
Notional Amount due to the allocation of any losses in respect of the related
Mortgage Assets, any increase in such Certificate Balance or Notional Amount
due to the allocation of any negative amortization in respect of the related
Mortgage Assets and any increase in the Certificate Balance of a class of
Accrual Certificates, if any, in the event that Accrued Certificate Interest
has been added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through
Rate or an adjustable Pass-Through Rate, the Pass-Through Rate applicable
thereto for such Distribution Date and, if determinable, for the next
succeeding Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund
as of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a
surety bond, the amount of coverage under each such instrument as of the
close of business on such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a
percentage. The Prospectus Supplement for each series of Certificates may
describe additional information to be included in reports to the holders of
the Offered Certificates of such series.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, Manager or Trustee for a series of Certificates, as the
case may be, will be required to furnish to each person who at any time
during the calendar year was a holder of an Offered Certificate of such
series a statement containing the information set forth in subclauses
(i)-(iii) above, aggregated for such calendar year or the applicable portion
thereof during which such person was a Certificateholder. Such obligation
will be deemed to have been satisfied to the extent that substantially
comparable information is provided pursuant to any requirements of the Code
as are from time to time in force. See, however, "-Book-Entry Registration
and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability
of the related Master Servicer, Manager or Trustee, as the case may be, to
include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to
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be included in the Distribution Date Statements that will be forwarded to the
holders of the Offered Certificates of that series in connection with
distributions made to them. The Depositor will provide the same information
with respect to any MBSs in its own reports that were publicly offered and
the reports the related MBS Issuer provides to the Trustee if privately
issued.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes
of such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement.
See "Description of the Pooling Agreements--Amendment". The holders of
specified amounts of Certificates of a particular series will have the right
to act as a group to remove the related Trustee and also upon the occurrence
of certain events which if continuing would constitute an Event of Default on
the part of the related Master Servicer, Special Servicer or REMIC
Administrator. See "Description of the Pooling Agreements--Events of
Default", "--Rights Upon Event of Default" and "--Resignation and Removal of
the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of
all property acquired upon foreclosure of any Mortgage Loan subject thereto
and (ii) the payment (or provision for payment) to the Certificateholders of
that series of all amounts required to be paid to them pursuant to such
Pooling Agreement. Written notice of termination of a Pooling Agreement will
be given to each Certificateholder of the related series, and the final
distribution will be made only upon presentation and surrender of the
Certificates of such series at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set
forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for
the purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation
of bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in
which such fair market value may be less than the unpaid balance of the
Mortgage Loans sold and therefore, as a result of such a sale, the
Certificateholders of one or more Classes of Certificates may receive an
amount less than the Certificate Balance of, and accrued unpaid interest on,
their Certificates.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be
offered in book-entry format through the facilities of DTC, and each such
class will be represented by one or more global Certificates registered in
the name of The Depository Trust Company ("DTC") or its nominee. If so
provided in the Prospectus Supplement, arrangements may be made for clearance
and settlement through the Euroclear System or CEDEL, S.A., if they are
participants in DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve
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System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between
DTC Participants through electronic computerized book-entry changes in their
accounts, thereby eliminating the need for physical movement of securities
certificates. DTC Participants that maintain accounts with DTC include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as banks, brokers,
dealers and trust companies that directly or indirectly clear through or
maintain a custodial relationship with a DTC Participant that maintains as
account with DTC. The rules applicable to DTC and DTC Participants are on
file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for such
purpose. In turn, the Financial Intermediary's ownership of such Certificates
will be recorded on the records of DTC (or of a participating firm that acts
as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC Participant). Therefore, the beneficial owner must
rely on the foregoing procedures to evidence its beneficial ownership of such
Certificates. The beneficial ownership interest of the owner of a Book-Entry
Certificate (a "Certificate Owner") may only be transferred by compliance
with the rules, regulations and procedures of such Financial Intermediaries
and DTC Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on such
date. Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of each such DTC Participant (and not of DTC, the
Depositor or any Trustee, Master Servicer, Special Servicer or Manager),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Accordingly, under a book-entry system, Certificate Owners may
receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement)
of Book-Entry Certificates will be the nominee of DTC, and the Certificate
Owners will not be recognized as Certificateholders under the Pooling
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly
through the DTC Participants who in turn will exercise their rights through
DTC. The Depositor has been informed that DTC will take action permitted to
be taken by a Certificateholder under a Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC interests
in the Book-Entry Certificates are credited. DTC may take conflicting actions
with respect to the Book-Entry Certificates to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the
ability of a Certificate Owner to pledge its interest in
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Book-Entry Certificates to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of its interest in
Book-Entry Certificates, may be limited due to the lack of a physical
certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) the Depositor advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Certificates and the Depositor is unable
to locate a qualified successor or (ii) the Depositor, at its option, elects
to terminate the book-entry system through DTC with respect to such
Certificates. Upon the occurrence of either of the events described in the
preceding sentence, DTC will be required to notify all DTC Participants of
the availability through DTC of Definitive Certificates. Upon surrender by
DTC of the certificate or certificates representing a class of Book-Entry
Certificates, together with instructions for registration, the Trustee for
the related series or other designated party will be required to issue to the
Certificate Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the holders of such
Definitive Certificates will be recognized as "Certificateholders" under and
within the meaning of the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one
or more REMIC elections have been made with respect to the Trust Fund, the
REMIC Administrator. However, a Pooling Agreement that relates to a Trust
Fund that includes MBS may include a Manager as a party, but may not include
a Master Servicer, Special Servicer or other servicer as a party. All parties
to each Pooling Agreement under which Certificates of a series are issued
will be identified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Mortgage Asset Seller or an affiliate
thereof may perform the functions of Master Servicer, Special Servicer,
Manager or REMIC Administrator. If so specified in the related Prospectus
Supplement, the Master Servicer may also perform the duties of Special
Servicer, and the Master Servicer, the Special Servicer or the Trustee may
also perform the duties of REMIC Administrator. Any party to a Pooling
Agreement or any affiliate thereof may own Certificates issued thereunder;
however, except in limited circumstances (including with respect to required
consents to certain amendments to a Pooling Agreement), Certificates issued
thereunder that are held by the Master Servicer or Special Servicer for the
related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. However,
the provisions of each Pooling Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may
appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize
all of the material provisions of the related Pooling Agreement. The
summaries herein do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each series of Certificates and the description of such
provisions in the related Prospectus Supplement. The Depositor will provide a
copy of the Pooling Agreement (without exhibits) that relates to any series
of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to it at its principal executive offices
specified herein under "The Depositor".
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans
to be included in the related Trust Fund, together with,
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unless otherwise specified in the related Prospectus Supplement, all
principal and interest to be received on or with respect to such Mortgage
Loans after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date. The Trustee will, concurrently with such assignment,
deliver the Certificates to or at the direction of the Depositor in exchange
for the Mortgage Loans and the other assets to be included in the Trust Fund
for such series. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Pooling Agreement. Such schedule
generally will include detailed information that pertains to each Mortgage
Loan included in the related Trust Fund, which information will typically
include the address of the related Mortgaged Property and type of such
property; the Mortgage Rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information; the original and
remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to
a custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee
(or its nominee), the Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office), an
assignment of the Mortgage in blank or to the Trustee (or its nominee) in
recordable form, together with any intervening assignments of the Mortgage
with evidence of recording thereon (except for any such assignment not
returned from the public recording office), and, if applicable, any riders or
modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling Agreement. Such
assignments may be blanket assignments covering Mortgages on Mortgaged
Properties located in the same county, if permitted by law. Notwithstanding
the foregoing, a Trust Fund may include Mortgage Loans where the original
Mortgage Note is not delivered to the Trustee if the Depositor delivers, or
causes to be delivered, to the related Trustee (or such custodian) a copy or
a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition,
if the Depositor cannot deliver, with respect to any Mortgage Loan, the
Mortgage or any intervening assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling Agreement
because of a delay caused by the public recording office, the Depositor will
deliver, or cause to be delivered, to the related Trustee (or such custodian)
a true and correct photocopy of such Mortgage or assignment as submitted for
recording. The Depositor will deliver, or cause to be delivered, to the
related Trustee (or such custodian) such Mortgage or assignment with evidence
of recording indicated thereon after receipt thereof from the public
recording office. If the Depositor cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because such Mortgage or assignment has been lost, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment
with evidence of recording thereon. Unless otherwise specified in the related
Prospectus Supplement, assignments of Mortgage to the Trustee (or its
nominee) will be recorded in the appropriate public recording office, except
in states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor or the originator of such Mortgage Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered
to it within a specified period of days after receipt thereof, and the
Trustee (or such custodian) will hold such documents in trust for the benefit
of the Certificateholders of such series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the Certificateholders of the related
series, the Trustee (or such custodian) will be required to notify the Master
Servicer, the Special Servicer and the Depositor, and one of such persons
will be required to notify the relevant Mortgage Asset Seller. In that case,
and if the Mortgage Asset Seller cannot deliver the document or cure the
defect within a specified number of days after receipt of such notice, then,
except as otherwise specified below or in the related Prospectus Supplement,
the Mortgage Asset Seller will be obligated to repurchase the related
Mortgage Loan from
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the Trustee at a price generally equal to the unpaid principal balance
thereof, together with accrued but unpaid interest through a date on or about
the date of purchase, or at such other price as will be specified in the
related Prospectus Supplement (in any event, the "Purchase Price"). If so
provided in the Prospectus Supplement for a series of Certificates, a
Mortgage Asset Seller, in lieu of repurchasing a Mortgage Loan as to which
there is missing or defective loan documentation, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy to holders of the Certificates of any series
or to the related Trustee on their behalf for missing or defective Mortgage
Loan documentation, and neither the Depositor nor, unless it is the Mortgage
Asset Seller, the Master Servicer or the Special Servicer will be obligated
to purchase or replace a Mortgage Loan if a Mortgage Asset Seller defaults on
its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage
Loans in any Trust Fund and to maintain possession of and, if applicable, to
review the documents relating to such Mortgage Loans, in any case as the
agent of the Trustee. The identity of any such custodian to be appointed on
the date of initial issuance of the Certificates will be set forth in the
related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule
of Mortgage Loans appearing as an exhibit to the related Pooling Agreement;
(ii) the enforceability of the related Mortgage Note and Mortgage and the
existence of title insurance insuring the lien priority of the related
Mortgage; (iii) the Warranting Party's title to the Mortgage Loan and the
authority of the Warranting Party to sell the Mortgage Loan; and (iv) the
payment status of the Mortgage Loan. It is expected that in most cases the
Warranting Party will be the Mortgage Asset Seller; however, the Warranting
Party may also be an affiliate of the Mortgage Asset Seller, the Depositor or
an affiliate of the Depositor, the Master Servicer, the Special Servicer or
another person acceptable to the Depositor. The Warranting Party, if other
than the Mortgage Asset Seller, will be identified in the related Prospectus
Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will
be required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of
the related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee at the
applicable Purchase Price. If so provided in the Prospectus Supplement for a
series of Certificates, a Warranting Party, in lieu of repurchasing a
Mortgage Loan as to which a breach has occurred, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy available to holders of the Certificates of
any series or to the related Trustee on their behalf for a breach of
representation and warranty by a Warranting Party, and neither the Depositor
nor the Master Servicer, in either case unless it is the Warranting Party,
will be obligated to purchase or replace a Mortgage Loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the
related series of Certificates is issued, and thus may not address
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events that may occur following the date as of which they were made. However,
the Depositor will not include any Mortgage Loan in the Trust Fund for any
series of Certificates if anything has come to the Depositor's attention that
would cause it to believe that the representations and warranties made in
respect of such Mortgage Loan will not be accurate in all material respects
as of the date of issuance. The date as of which the representations and
warranties regarding the Mortgage Loans in any Trust Fund were made will be
specified in the related Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer for any Mortgage Pool, directly or
through Sub-Servicers, will each be obligated under the related Pooling
Agreement to service and administer the Mortgage Loans in such Mortgage Pool
for the benefit of the related Certificateholders, in accordance with
applicable law and further in accordance with the terms of such Pooling
Agreement, such Mortgage Loans and any instrument of Credit Support included
in the related Trust Fund. Subject to the foregoing, the Master Servicer and
the Special Servicer will each have full power and authority to do any and
all things in connection with such servicing and administration that it may
deem necessary and desirable.
As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that
it services and will be obligated to follow such collection procedures as it
would follow with respect to mortgage loans that are comparable to such
Mortgage Loans and held for its own account, provided (i) such procedures are
consistent with the terms of the related Pooling Agreement and (ii) do not
impair recovery under any instrument of Credit Support included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer and
the Special Servicer will each be permitted, in its discretion, unless
otherwise specified in the related Prospectus Supplement, to waive any
Prepayment Premium, late payment charge or other charge in connection with
any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be
required to perform as to the Mortgage Loans in such Trust Fund various other
customary functions of a servicer of comparable loans, including maintaining
escrow or impound accounts, if required under the related Pooling Agreement,
for payment of taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items; attempting to collect
delinquent payments; supervising foreclosures; negotiating modifications;
conducting property inspections on a periodic or other basis; managing (or
overseeing the management of) Mortgaged Properties acquired on behalf of such
Trust Fund through foreclosure, deed-in-lieu of foreclosure or otherwise
(each, an "REO Property"); and maintaining servicing records relating to such
Mortgage Loans. The related Prospectus Supplement will specify when and the
extent to which servicing of a Mortgage Loan is to be transferred from the
Master Servicer to the Special Servicer. In general, and subject to the
discussion in the related Prospectus Supplement, a Special Servicer will be
responsible for the servicing and administration of: (i) Mortgage Loans that
are delinquent in respect of a specified number of scheduled payments; (ii)
Mortgage Loans as to which the related borrower has entered into or consented
to bankruptcy, appointment of a receiver or conservator or similar insolvency
proceeding, or the related borrower has become the subject of a decree or
order for such a proceeding which shall have remained in force undischarged
or unstayed for a specified number of days; and (iii) REO Properties. If so
specified in the related Prospectus Supplement, a Pooling Agreement also may
provide that if a default on a Mortgage Loan has occurred or, in the judgment
of the related Master Servicer, a payment default is reasonably foreseeable,
the related Master Servicer may elect to transfer the servicing thereof, in
whole or in part, to the related Special Servicer. Unless otherwise provided
in the related Prospectus Supplement, when the circumstances no longer
warrant a Special Servicer's continuing to service a particular Mortgage Loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the Special Servicer and such borrower), the
Master Servicer will resume the servicing duties with respect thereto. If and
to the extent provided in the related Pooling Agreement and described in the
related Prospectus Supplement, a Special Servicer may perform certain limited
duties in respect of Mortgage Loans for which the Master Servicer is
primarily responsible (including, if so specified, performing property
inspections and evaluating financial statements); and a
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Master Servicer may perform certain limited duties in respect of any Mortgage
Loan for which the Special Servicer is primarily responsible (including, if
so specified, continuing to receive payments on such Mortgage Loan (including
amounts collected by the Special Servicer), making certain calculations with
respect to such Mortgage Loan and making remittances and preparing certain
reports to the Trustee and/or Certificateholders with respect to such
Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be responsible for filing and settling
claims in respect of particular Mortgage Loans under any applicable
instrument of Credit Support. See "Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a mortgagor that is unable to make Mortgage Loan payments may
also be unable to make timely payment of taxes and otherwise to maintain and
insure the related Mortgaged Property. In general, the related Special
Servicer will be required to monitor any Mortgage Loan that is in default,
evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related Mortgaged
Property, initiate corrective action in cooperation with the Mortgagor if
cure is likely, inspect the related Mortgaged Property and take such other
actions as it deems necessary and appropriate. A significant period of time
may elapse before the Special Servicer is able to assess the success of any
such corrective action or the need for additional initiatives. The time
within which the Special Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure)
on behalf of the Certificateholders of the related series may vary
considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a mortgagor files a bankruptcy petition, the Special
Servicer may not be permitted to accelerate the maturity of the Mortgage Loan
or to foreclose on the related Mortgaged Property for a considerable period
of time. See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and
other similar matters. In general, the Master Servicer may approve such a
request if it has determined, exercising its business judgment in accordance
with the applicable servicing standard, that such approval will not adversely
affect the security for, or the timely and full collectability of, the
related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be
filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not
require that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer also will be required to notify any superior lienholder
in writing of the existence of the Mortgage Loan and request notification of
any action (as described below) to be taken against the mortgagor or the
Mortgaged Property by the superior lienholder. If the Master Servicer is
notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer and the
Special Servicer will each be required to take, on behalf of the related
Trust Fund, whatever actions are necessary to protect the interests of the
related Certificateholders and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
or Special Servicer, as applicable, will be required to advance the necessary
funds to cure the default or
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reinstate the Senior Lien, if such advance is in the best interests of the
related Certificateholders and the Master Servicer or Special Servicer, as
applicable, determines such advances are recoverable out of payments on or
proceeds of the related Mortgage Loan.
SUB-SERVICERS
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless
otherwise specified in the related Prospectus Supplement, such Master
Servicer or Special Servicer will remain obligated under the related Pooling
Agreement. Unless otherwise provided in the related Prospectus Supplement,
each sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must provide for servicing of the applicable
Mortgage Loans consistent with the related Pooling Agreement. The Master
Servicer and Special Servicer in respect of any Mortgage Asset Pool will each
be required to monitor the performance of Sub-Servicers retained by it and
will have the right to remove a Sub-Servicer retained by it at any time it
considers such removal to be in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is
sufficient to pay such fees. Each Sub-Servicer will be reimbursed by the
Master Servicer or Special Servicer, as the case may be, that retained it for
certain expenditures which it makes, generally to the same extent such Master
Servicer or Special Servicer would be reimbursed under a Pooling Agreement.
See "--Certificate Account" and "--Servicing Compensation and Payment of
Expenses".
CERTIFICATE ACCOUNT
General. The Master Servicer, the Trustee and/or the Special Servicer
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained the corresponding
Certificate Account, which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
as an interest-bearing or a noninterest-bearing account and the funds held
therein may be invested pending each succeeding Distribution Date in United
States government securities and other investment grade obligations that are
acceptable to each Rating Agency that has rated any one or more classes of
Certificates of the related series ("Permitted Investments"). Such Permitted
Investments include federal funds, uncertificated certificates of deposit,
time deposits, bankers' acceptances and repurchase agreements, certain United
States dollar-denominated commercial paper, units of money market funds that
maintain a constant net asset value and any other obligations or security
acceptable to each Rating Agency. Unless otherwise provided in the related
Prospectus Supplement, any interest or other income earned on funds in a
Certificate Account will be paid to the related Master Servicer, Trustee or
Special Servicer as additional compensation. A Certificate Account may be
maintained with the related Master Servicer, Special Servicer, Trustee or
Mortgage Asset Seller or with a depository institution that is an affiliate
of any of the foregoing or of the Depositor, provided that it complies with
applicable Rating Agency standards. If permitted by the applicable Rating
Agency or Agencies, a Certificate Account may contain funds relating to more
than one series of mortgage pass-through certificates and may contain other
funds representing payments on mortgage loans owned by the related Master
Servicer or Special Servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the
Special Servicer subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date) are to be deposited in the Certificate Account
for each Trust Fund that includes Mortgage Loans, within a certain period
following receipt (in the case of collections on or in respect of the
Mortgage Loans) or otherwise as provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof
retained by the Master Servicer or the Special Servicer as its servicing
compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation
of a Mortgaged Property (other than proceeds applied to the restoration of
the property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such
amounts, together with those amounts listed in clause (vii) below,
"Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or
any other specified person as described under "--Assignment of Mortgage
Loans; Repurchases" and "--Representations and Warranties; Repurchases", all
proceeds of the purchase of any defaulted Mortgage Loan as described under
"--Realization Upon Defaulted Mortgage Loans", and all proceeds of any
Mortgage Asset purchased as described under "Description of the
Certificates--Termination; Retirement of Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is
not otherwise retained by the Depositor or another specified person, any
payments on account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations with respect to the Mortgage
Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "--Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the
Special Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer, the Special Servicer or
the Trustee, as the case may be, of funds held in the Certificate Account;
and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the
related Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer,
Trustee or Special Servicer may make withdrawals from the Certificate Account
for each Trust Fund that includes Mortgage Loans for any of the following
purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which
such fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments
of principal and interest made by it, and certain unreimbursed servicing
expenses incurred by it, with respect to Mortgage Loans in the Trust Fund and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent
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late payments collected on the particular Mortgage Loans, Liquidation
Proceeds, Insurance Proceeds and Condemnation Proceeds collected on the
particular Mortgage Loans and properties, and net income collected on the
particular properties, with respect to which such advances were made or such
expenses were incurred or out of amounts drawn under any form of Credit
Support with respect to such Mortgage Loans and properties, or if in the
judgment of the Master Servicer, the Special Servicer or such other person,
as applicable, such advances and/or expenses will not be recoverable from
such amounts, such reimbursement to be made from amounts collected on other
Mortgage Loans in the same Trust Fund or, if and to the extent so provided by
the related Pooling Agreement and described in the related Prospectus
Supplement, only from that portion of amounts collected on such other
Mortgage Loans that is otherwise distributable on one or more classes of
Subordinate Certificates of the related series;
(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified
person interest accrued on the advances and servicing expenses described in
clause (iii) above incurred by it while such remain outstanding and
unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any
containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization Upon
Defaulted Mortgage Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the Depositor" and "--Certain Matters
Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held
in the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood
of timely
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payment of amounts due thereon and (iii) will not adversely affect the
coverage under any applicable instrument of Credit Support. Unless otherwise
provided in the related Prospectus Supplement, the Special Servicer also may
agree to any other modification, waiver or amendment if, in its judgment, (i)
a material default on the Mortgage Loan has occurred or a payment default is
imminent, (ii) such modification, waiver or amendment is reasonably likely to
produce a greater recovery with respect to the Mortgage Loan, taking into
account the time value of money, than would liquidation and (iii) such
modification, waiver or amendment will not adversely affect the coverage
under any applicable instrument of Credit Support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of
the Trustee, may at any time institute foreclosure proceedings, exercise any
power of sale contained in the related Mortgage, obtain a deed in lieu of
foreclosure, or otherwise acquire title to the related Mortgaged Property, by
operation of law or otherwise. Unless otherwise specified in the related
Prospectus Supplement, the Special Servicer may not, however, acquire title
to any Mortgaged Property, have a receiver of rents appointed with respect to
any Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series
of Certificateholders, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of such Mortgaged Property within the meaning of certain federal
environmental laws, unless the Special Servicer has previously received a
report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the Mortgaged Property
that have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters and
related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value
of money, than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special
Servicer, a provider of Credit Support and/or the holder or holders of
certain classes of the related series of Certificates a right of first
refusal to purchase from the Trust Fund, at a predetermined price (which, if
less than the Purchase Price, will be specified in the related Prospectus
Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. In addition, unless otherwise specified in the
related Prospectus Supplement, the Special Servicer may offer to sell any
defaulted Mortgage Loan if and when the Special Servicer determines,
consistent with its normal servicing procedures, that such a sale would
produce a greater recovery, taking into account the time value of money, than
would liquidation of the related Mortgaged Property. In the absence of any
such sale, the Special Servicer will generally be required to proceed against
the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service (the "IRS") grants an
extension of time to sell such property or (ii) the Trustee receives an
opinion of independent counsel to the effect that the holding of the property
by the Trust Fund for more than two years after its acquisition will not
result in the imposition of a tax on the Trust Fund or cause the Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC under the
Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other tax-related limitations, the Special Servicer will
generally be required to attempt to sell any Mortgaged
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Property so acquired on the same terms and conditions it would if it were the
owner. Unless otherwise provided in the related Prospectus Supplement, if
title to any Mortgaged Property is acquired by a Trust Fund as to which a
REMIC election has been made, the Special Servicer will also be required to
ensure that the Mortgaged Property is administered so that it constitutes
"foreclosure property" within the meaning of Code Section 860G(a)(8) at all
times, that the sale of such property does not result in the receipt by the
Trust Fund of any income from nonpermitted assets as described in Code
Section 860F(a)(2)(B), and that the Trust Fund does not derive any "net
income from foreclosure property" within the meaning of Code Section
860G(c)(2), with respect to such property. If the Trust Fund acquires title
to any Mortgaged Property, the Special Servicer, on behalf of the Trust Fund,
may retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Special
Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
reimbursable expenses incurred by the Special Servicer and/or the Master
Servicer in connection with such Mortgage Loan, then, to the extent that such
shortfall is not covered by any instrument or fund constituting Credit
Support, the Trust Fund will realize a loss in the amount of such shortfall.
The Special Servicer and/or the Master Servicer will be entitled to
reimbursement out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, any and all amounts that represent unpaid servicing
compensation in respect of the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent payments made with respect to the Mortgage Loan. In addition, if
and to the extent set forth in the related Prospectus Supplement, amounts
otherwise distributable on the Certificates may be further reduced by
interest payable to the Master Servicer and/or Special Servicer on such
servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any,
of the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will
be required to expend its own funds to effect such restoration unless (and to
the extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or
amounts drawn on any instrument or fund constituting Credit Support.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer
with respect to Mortgage Loans serviced thereby) to use reasonable efforts to
cause each Mortgage Loan borrower to maintain a hazard insurance policy that
provides for such coverage as is required under the related Mortgage or, if
the Mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related Mortgaged Property, such
coverage as is consistent with the Master Servicer's (or Special Servicer's)
normal servicing procedures. Unless otherwise specified in the related
Prospectus Supplement, such coverage generally will be in an amount equal to
the lesser of the principal balance owing on such Mortgage Loan and the
replacement cost of the related Mortgaged Property. The ability of a Master
Servicer (or Special Servicer) to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance
policy referred to below, or upon the extent to which information concerning
covered losses is furnished by borrowers. All amounts collected by a Master
Servicer (or Special Servicer) under any such policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master
Servicer (or Special Servicer) may satisfy its obligation to cause each
borrower to maintain such a hazard
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insurance policy by maintaining a blanket policy insuring against hazard
losses on the Mortgage Loans in a Trust Fund. If such blanket policy contains
a deductible clause, the Master Servicer (or Special Servicer) will be
required, in the event of a casualty covered by such blanket policy, to
deposit in the related Certificate Account all additional sums that would
have been deposited therein under an individual policy but were not because
of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin and domestic animals.
Accordingly, a Mortgaged Property may not be insured for losses arising from
any such cause unless the related Mortgage specifically requires, or permits
the holder thereof to require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser
of (i) the replacement cost of the improvements less physical depreciation
and (ii) such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of such
improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale
or other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer (or Special Servicer) will determine whether to exercise any
right the Trustee may have under any such provision in a manner consistent
with the Master Servicer's (or Special Servicer's) normal servicing
procedures. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer or Special Servicer, as applicable, will be entitled to
retain as additional servicing compensation any fee collected in connection
with the permitted transfer of a Mortgaged Property. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund,
including Mortgage Loans serviced by the related Special Servicer. If and to
the extent described in the related Prospectus Supplement, a Special
Servicer's primary compensation with respect to a series of Certificates may
consist of any or all of the following components: (i) a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund,
whether or not serviced by it; (ii) an additional specified portion of the
interest payments on each Mortgage Loan then currently serviced by it; and
(iii) subject to any specified limitations, a fixed percentage of some or all
of the collections and proceeds received with respect to each Mortgage Loan
which was at any time serviced by it, including Mortgage Loans for which
servicing was returned to the Master Servicer. Insofar as any portion of the
Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan.
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As additional compensation, a Master Servicer or Special Servicer may be
entitled to retain all or a portion of late payment charges, Prepayment
Premiums, modification fees and other fees collected from borrowers and any
interest or other income that may be earned on funds held in the related
Certificate Account. A more detailed description of each Master Servicer's
and Special Servicer's compensation will be provided in the related
Prospectus Supplement. Any Sub-Servicer will receive as its sub-servicing
compensation a portion of the servicing compensation to be paid to the Master
Servicer or Special Servicer that retained such Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration
of the related Trust Fund, including, without limitation, payment of the fees
and disbursements of independent accountants, payment of fees and
disbursements of the Trustee and any custodians appointed thereby and payment
of expenses incurred in connection with distributions and reports to
Certificateholders. Certain other expenses, including certain expenses
related to Mortgage Loan defaults and liquidations and, to the extent so
provided in the related Prospectus Supplement, interest on such expenses at
the rate specified therein, may be required to be borne by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-off Date, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that
(i) it has obtained a letter of representation regarding certain matters from
the management of the Master Servicer which includes an assertion that the
Master Servicer has complied with certain minimum mortgage loan servicing
standards (to the extent applicable to commercial and multifamily mortgage
loans), identified in the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers Association of America, with
respect to the Master Servicer's servicing of commercial and multifamily
mortgage loans during the most recently completed calendar year and (ii) on
the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public
Accountants, such representation is fairly stated in all material respects,
subject to such exceptions and other qualifications that, in the opinion of
such firm, such standards require it to report. In rendering its report such
firm may rely, as to the matters relating to the direct servicing of
commercial and multifamily mortgage loans by Sub-Servicers, upon comparable
reports of firms of independent public accountants rendered on the basis of
examinations conducted in accordance the same standards (rendered within one
year of such report) with respect to those Sub-Servicers. The Prospectus
Supplement may provide that additional reports of independent certified
public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed
by one or more officers of the Master Servicer or the Special Servicer, as
the case may be, to the effect that, to the best knowledge of each such
officer, the Master Servicer or the Special Servicer, as the case may be, has
fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material
default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as
to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders
upon written request to the Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE
REMIC ADMINISTRATOR AND THE DEPOSITOR
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer,
the Special Servicer and any REMIC Administrator
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to resign from its obligations thereunder only upon (a) the appointment of,
and the acceptance of such appointment by, a successor thereto and receipt by
the Trustee of written confirmation from each applicable Rating Agency that
such resignation and appointment will not have an adverse effect on the
rating assigned by such Rating Agency to any class of Certificates of such
series or (b) a determination that such obligations are no longer permissible
under applicable law or are in material conflict by reason of applicable law
with any other activities carried on by it. No such resignation will become
effective until the Trustee or other successor has assumed the obligations
and duties of the resigning Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. The Master
Servicer and Special Servicer for each Trust Fund will be required to
maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken,
in good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer,
the REMIC Administrator, the Depositor or any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of such obligations
and duties. Unless otherwise specified in the related Prospectus Supplement,
each Pooling Agreement will further provide that the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor and any director,
officer, employee or agent of any of them will be entitled to indemnification
by the related Trust Fund against any loss, liability or expense incurred in
connection with any legal action that relates to such Pooling Agreement or
the related series of Certificates; provided, however, that such
indemnification will not extend to any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under such Pooling Agreement, or by
reason of reckless disregard of such obligations or duties. In addition, each
Pooling Agreement will provide that none of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Pooling Agreement and
that in its opinion may involve it in any expense or liability. However, each
of the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of
Certificateholders thereunder. In such event, the legal expenses and costs of
such action, and any liability resulting therefrom, will be expenses, costs
and liabilities of the related series of Certificateholders, and the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as
the case may be, will be entitled to charge the related Certificate Account
therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor, will be the successor of
the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and
the REMIC Administrator will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it
with due care.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the
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Master Servicer to distribute or cause to be distributed to the
Certificateholders of such series, or to remit to the Trustee for
distribution to such Certificateholders, any amount required to be so
distributed or remitted, which failure continues unremedied for five days
after written notice thereof has been given to the Master Servicer by any
other party to the related Pooling Agreement, or to the Master Servicer, with
a copy to each other party to the related Pooling Agreement, by
Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for such
series; (ii) any failure by the Special Servicer to remit to the Master
Servicer or the Trustee, as applicable, any amount required to be so
remitted, which failure continues unremedied for five days after written
notice thereof has been given to the Special Servicer by any other party to
the related Pooling Agreement, or to the Special Servicer, with a copy to
each other party to the related Pooling Agreement, by the Certificateholders
entitled to not less than 25% (or such other percentage specified in the
related Prospectus Supplement) of the Voting Rights of such series; (iii) any
failure by the Master Servicer or the Special Servicer duly to observe or
perform in any material respect any of its other covenants or obligations
under the related Pooling Agreement, which failure continues unremedied for
sixty days after written notice thereof has been given to the Master Servicer
or the Special Servicer, as the case may be, by any other party to the
related Pooling Agreement, or to the Master Servicer or the Special Servicer,
as the case may be, with a copy to each other party to the related Pooling
Agreement, by Certificateholders entitled to not less than 25% (or such other
percentage specified in the related Prospectus Supplement) of the Voting
Rights for such series; (iv) any failure by a REMIC Administrator (if other
than the Trustee) duly to observe or perform in any material respect any of
its covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the REMIC Administrator by any other party to the related
Pooling Agreement, or to the REMIC Administrator, with a copy to each other
party to the related Pooling Agreement, by Certificateholders entitled to not
less than 25% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series; and (v) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities, or
similar proceedings in respect of or relating to the Master Servicer, the
Special Servicer or the REMIC Administrator (if other than the Trustee), and
certain actions by or on behalf of the Master Servicer, the Special Servicer
or the REMIC Administrator (if other than the Trustee) indicating its
insolvency or inability to pay its obligations. Material variations to the
foregoing Events of Default (other than to add thereto or shorten cure
periods or eliminate notice requirements) will be specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, when a single entity acts as Master Servicer, Special Servicer
and REMIC Administrator, or in any two of the foregoing capacities, for any
Trust Fund, an Event of Default in one capacity will constitute an Event of
Default in each capacity.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, the Trustee will be required, to terminate all
of the rights and obligations of the defaulting party as Master Servicer,
Special Servicer or REMIC Administrator, as applicable, under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement
(except that if the defaulting party is required to make advances thereunder
regarding delinquent Mortgage Loans, but the Trustee is prohibited by law
from obligating itself to make such advances, or if the related Prospectus
Supplement so specifies, the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, if the Trustee is
unwilling or unable so to act, it may (or, at the written request of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, it will be required to) appoint, or petition a
court of competent jurisdiction to appoint, a loan servicing institution or
other entity that (unless otherwise provided in the related Prospectus
Supplement) is acceptable to each applicable Rating Agency to act as
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successor to the Master Servicer, Special Servicer or REMIC Administrator, as
the case may be, under the Pooling Agreement. Pending such appointment, the
Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "-Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for sixty days
after receipt of such request and indemnity has neglected or refused to
institute any such proceeding. However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Pooling Agreement or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any
of the holders of Certificates covered by such Pooling Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent
of any of the holders of Certificates covered by such Pooling Agreement, (i)
to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the
Certificate Account, provided that (A) such change would not adversely affect
in any material respect the interests of any Certificateholder, as evidenced
by an opinion of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency, (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (A) to such extent as shall be necessary to maintain
the qualification of the Trust Fund (or any designated portion thereof) as a
REMIC or to avoid or minimize the risk of imposition of any tax on the
related Trust Fund, provided that the Trustee has received an opinion of
counsel to the effect that (1) such action is necessary or desirable to
maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Pooling Agreement, or (B) to restrict
the transfer of the REMIC Residual Certificates, provided that the Depositor
has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as
evidenced by a letter from each applicable Rating Agency, and that any such
amendment will not give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee (See "Certain
Federal Income Tax Consequences--REMICs--Tax and Restrictions on Transfers of
REMIC Residual Certificates to Certain Organizations" herein), (v) to make
any other provisions with respect to matters or questions arising under such
Pooling Agreement or any other change, provided that such action will not
adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not
material to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such
Pooling Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a
Certificate of any class without the consent of the holder of such
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Certificate or (ii) reduce the aforesaid percentage of Certificates of any
class the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such class covered
by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to
consent to any amendment to a Pooling Agreement without having first received
an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Master Servicer, the Special Servicer, the
Depositor, the Trustee or any other specified person in accordance with such
amendment will not result in the imposition of a tax on the related Trust
Fund or cause such Trust Fund (or any designated portion thereof) to fail to
qualify as a REMIC.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for
purposes of communicating with other holders of Certificates of the same
series with respect to their rights under the related Pooling Agreement, the
Trustee or other specified person will afford such Certificateholders access
during normal business hours to the most recent list of Certificateholders of
that series held by such person. If such list is as of a date more than 90
days prior to the date of receipt of such Certificateholders' request, then
such person, if not the registrar for such series of Certificates, will be
required to request from such registrar a current list and to afford such
requesting Certificateholders access thereto promptly upon receipt.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any
Master Servicer, Special Servicer or REMIC Administrator and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will
not be accountable for the use or application by or on behalf of any Master
Servicer or Special Servicer of any funds paid to the Master Servicer or
Special Servicer in respect of the Certificates or the underlying Mortgage
Assets. If no Event of Default has occurred and is continuing, the Trustee
for each series of Certificates will be required to perform only those duties
specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to
any loss liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of
its obligations and duties thereunder, or by reason of its reckless disregard
of such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of
its trusts or powers under the related Pooling Agreement
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or perform any of this duties thereunder either directly or by or through
agents or attorneys, and the Trustee will not be responsible for any willful
misconduct or gross negligence on the part of any such agent or attorney
appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee. Notwithstanding anything herein
to the contrary, if any entity is acting as both Trustee and REMIC
Administrator, then any resignation or removal of such entity as the Trustee
will also constitute the resignation or removal of such entity as REMIC
Administrator, and the successor trustee will serve as successor to the REMIC
Administrator as well.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may
provide credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss
and will not guarantee payment to Certificateholders of all amounts to which
they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the related Credit Support
or that are of a type not covered by such Credit Support, Certificateholders
will bear their allocable share of deficiencies. Moreover, if a form of
Credit Support covers the Offered Certificates of more than one series and
losses on the related Mortgage Assets exceed the amount of such Credit
Support, it is possible that the holders of Offered Certificates of one (or
more) such series will be disproportionately benefited by such Credit Support
to the detriment of the holders of Offered Certificates of one (or more)
other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature
and amount of coverage under such Credit Support, (ii) any conditions to
payment thereunder not otherwise described herein, (iii) the conditions (if
any) under which the amount of coverage under such Credit Support may be
reduced and under which such Credit Support may be terminated or replaced and
(iv) the material provisions relating to such Credit Support. Additionally,
the related Prospectus Supplement will set forth certain information with
respect to the obligor, if any, under any instrument of Credit Support. See
"Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the method and amount of
subordination provided by a class or classes of Subordinate Certificates in a
series and the circumstances under which such subordination will be
available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such
provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of
such coverage.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of
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credit, issued by a bank or other financial institution specified in such
Prospectus Supplement (the "Letter of Credit Bank"). Under a letter of
credit, the Letter of Credit Bank will be obligated to honor draws thereunder
in an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of some or all of the related
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related Prospectus Supplement. The obligations of the
Letter of Credit Bank under the letter of credit for each series of
Certificates will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest or distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. The related
Prospectus Supplement will describe any limitations on the draws that may be
made under any such instrument.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments,
a demand note or a combination thereof will be deposited, in the amounts
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of certain collections received on the related
Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for
the purposes, in the manner, and to the extent specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
reserve funds may be established to provide protection only against certain
types of losses and shortfalls. Following each Distribution Date, amounts in
a reserve fund in excess of any amount required to be maintained therein may
be released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or
other gain from such investments will be credited to the related reserve fund
for such series, and any loss resulting from such investments will be charged
to such reserve fund. However, such income may be payable to any related
Master Servicer or another service provider as additional compensation for
its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
INTEREST RATE EXCHANGE, CAP AND FLOOR AGREEMENTS
If so specified in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include interest rate exchange agreements or
interest rate cap or floor agreements. These types of
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agreements may be used to limit the exposure of the Trust Fund or investors
in the Certificates to fluctuations in interest rates and to situations where
interest rates become higher or lower than specified thresholds. Generally,
an interest rate exchange agreement is a contract between two parties to pay
and receive, with a set frequency, interest payments determined by applying
the differential between two interest rates to an agreed-upon notional
principal. Generally, an interest rate cap agreement is a contract pursuant
to which one party agrees to reimburse another party for a floating rate
interest payment obligation, to the extent that the rate payable at any time
exceeds a specified cap. Generally, an interest rate floor agreement is a
contract pursuant to which one party agrees to reimburse another party in the
event that amounts owing to the latter party under a floating rate interest
payment obligation are payable at a rate which is less than a specified
floor. The specific provisions of these types of agreements will be described
in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable local law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular jurisdiction, or to encompass
the laws of all jurisdictions in which the security for the Mortgage Loans
(or mortgage loans underlying any MBS) is situated. Accordingly, the
summaries are qualified in their entirety by reference to the applicable laws
of those jurisdictions. See "Description of the Trust Funds--Mortgage Loans".
If a significant percentage of Mortgage Loans (or mortgage loans underlying
MBS), by balance, are secured by properties in a particular jurisdiction,
relevant local laws, to the extent they vary materially from this discussion,
will be discussed in the Prospectus Supplement. For purposes of the following
discussion, "Mortgage Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with
a power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal
title to the property is held by a land trustee under a land trust agreement
for the benefit of the borrower. At origination of a mortgage loan involving
a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally
liable for the mortgage note obligation. The
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mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed
by the express provisions of the related instrument, the law of the state in
which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels
or motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
room rates and must file continuation statements, generally every five years,
to maintain perfection of such security interest. In certain cases, Mortgage
Loans secured by hotels or motels may be included in a Trust Fund even if the
security interest in the room rates was not perfected or the requisite UCC
filings were allowed to lapse. Even if the lender's security interest in room
rates is perfected under applicable nonbankruptcy law, it will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to enforce its rights to collect the room rates following a
default. In the bankruptcy setting, however, the lender will be stayed from
enforcing its rights to collect room rates, but those room rates (in light of
certain revisions to the Bankruptcy Code which are effective for all
bankruptcy cases commenced on or after October 22, 1994) constitute "cash
collateral" and therefore cannot be used by the bankruptcy debtor without a
hearing or lender's consent and unless the lender's interest in the room
rates is given adequate protection (e.g., cash payment for otherwise
encumbered funds or a replacement lien on unencumbered property, in either
case equal in value to the amount of room rates that the debtor proposes to
use, or other similar relief). See "--Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years,
to maintain that perfection. In certain cases, Mortgage Loans secured in part
by personal property may be included in a Trust Fund even if the security
interest in such personal property was not perfected or the requisite UCC
filings were allowed to lapse.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal
remedies under the mortgage. If the borrower defaults in payment or
performance of its obligations under the note or mortgage, the lender has the
right to institute foreclosure proceedings to sell the real property at
public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances.
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A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain
Provisions. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects
of mortgage defaults perceived as harsh or unfair. Relying on such
principles, a court may alter the specific terms of a loan to the extent it
considers necessary to prevent or remedy an injustice, undue oppression or
overreaching, or may require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's and have required that lenders
reinstate loans or recast payment schedules in order to accommodate borrowers
who are suffering from a temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain the mortgaged
property or an impermissible further encumbrance of the mortgaged property.
Finally, some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness
of the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the right
of the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained
in any other type of mortgage instrument if applicable law so permits. A
power of sale under a deed of trust allows a nonjudicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable
state law. In some states, prior to such sale, the trustee under the deed of
trust must record a notice of default and notice of sale and send a copy to
the borrower and to any other party who has recorded a request for a copy of
a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record
in the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. The borrower or junior lienholder
may then have the right, during a reinstatement period required in some
states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure
sale. Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other
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things, redemption rights that may exist) and because of the possibility that
physical deterioration of the property may have occurred during the
foreclosure proceedings. Therefore, it is common for the lender to purchase
the mortgaged property for an amount equal to the secured indebtedness and
accrued and unpaid interest plus the expenses of foreclosure, in which event
the borrower's debt will be extinguished, or for a lesser amount in order to
preserve its right to seek a deficiency judgment if such is available under
state law and under the terms of the Mortgage Loan documents. (The Mortgage
Loans, however, may be nonrecourse. See "Risk Factors--Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans--Limited
Recourse Nature of the Mortgage Loans".) Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, the lender will become the owner of the property and have both the
benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance
and to make such repairs as are necessary to render the property suitable for
sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services
of a real estate broker and pay the broker's commission in connection with
the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an
amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of
the foreclosing lender, from exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered
by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate
to that of the foreclosing lender have an equity of redemption and may redeem
the property by paying the entire debt with interest. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be
limited to the Mortgaged Property and such other assets, if any, that were
pledged to secure the Mortgage Loan. However, even if a mortgage loan by its
terms provides for recourse to the borrower's other assets, a lender's
ability to realize upon those assets may be limited by state law. For
example, in some states a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes may require
the lender
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to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists will usually proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess
of the outstanding debt over the fair market value of the property at the
time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks
is that if the borrower's leasehold were to be terminated upon a lease
default, the leasehold mortgagee would lose its security. This risk may be
lessened if the ground lease requires the lessor to give the leasehold
mortgagee notices of lessee defaults and an opportunity to cure them, permits
the leasehold estate to be assigned to and by the leasehold mortgagee or the
purchaser at a foreclosure sale, and contains certain other protective
provisions typically included in a "mortgageable" ground lease. Certain
Mortgage Loans, however, may be secured by ground leases which do not contain
these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest
on the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be
vacant or occupied by nonowner tenants. Such loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate
of a borrower in real property. Such a loan typically is subordinate to the
mortgage, if any, on the Cooperative's building which, if foreclosed, could
extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the Cooperative.
Further, transfer of shares in a Cooperative are subject to various
regulations as well as to restrictions under the governing documents of the
Cooperative, and the shares may be cancelled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the Cooperative
provides, among other things, the lender with an opportunity to cure a
default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given the
debtor and the method, manner, time, place and terms of the sale. Article 9
of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the Cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of
the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a
corresponding partial reduction of the amount
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of lender's security interest) pursuant to a confirmed plan or lien avoidance
proceeding, thus leaving the lender a general unsecured creditor for the
difference between such value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration
of the repayment schedule (with or without affecting the unpaid principal
balance of the loan), and/or by an extension (or shortening) of the term to
maturity. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under the
Bankruptcy Code, a lender may be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. Recent amendments
to the Bankruptcy code, however, may minimize the impairment of the lender's
ability to enforce the borrower's assignment of rents and leases. In addition
to the inclusion of hotel revenues within the definition of "cash collateral"
as noted previously in the section entitled "--Leases and Rents", the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest
in rents is unperfected under the laws of certain states until the lender has
taken some further action, such as commencing foreclosure or obtaining a
receiver prior to activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to
a lessee under such lease. Under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that
occurred prior to the filing of the lessee's petition. In addition, the
Bankruptcy Code generally provides that a trustee or debtor-in-possession
may, subject to approval of the court, (i) assume the lease and retain it or
assign it to a third party or (ii) reject the lease. If the lease is assumed,
the trustee or debtor-in-possession (or assignee, if applicable) must cure
any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for
termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years,
of the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or
disposal activity. Such environmental risks include the possible diminution
of the value of a contaminated property or, as discussed below, potential
liability for clean-up costs or other remedial actions that could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators"
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of contaminated real property for the costs of clean-up. A secured lender may
be liable as an "owner" or "operator" of a contaminated mortgaged property if
agents or employees of the lender have participated in the management of such
mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination and
regardless of whether the lender has actually taken possession of a mortgaged
property through foreclosure, deed in lieu of foreclosure or otherwise.
Moreover, such liability is not limited to the original or unamortized
principal balance of a loan or to the value of the property securing a loan.
Excluded from CERCLA's definition of "owner" or "operator", however, is a
person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest". This is the
so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Act
offers substantial protection to lenders by defining the activities in which
a lender can engage and still have the benefit of the secured creditor
exemption. In order for a lender to be deemed to have participated in the
management of a mortgaged property, the lender must actually participate in
the operational affairs of the property of the borrower. The Act provides
that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or
assumes day-to-day management of all operational functions of the mortgaged
property. The Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time
on commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to
hazardous environmental conditions on a property. While it may be more
difficult to hold a lender liable in such cases, unanticipated or uninsured
liabilities of the borrower may jeopardize the borrower's ability to meet its
loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize
the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable,
it can bring an action for contribution against the owner or operator who
created the environmental hazard, but that individual or entity may be
without substantial assets. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that
neither the Master Servicer nor the Special Servicer, acting on behalf of the
Trustee, may acquire title to a Mortgaged Property or take over its operation
unless the Special Servicer, based solely (as to environmental matters) on a
report prepared by a person who regularly conducts environmental audits, has
made the determination that it is appropriate to do so, as described under
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans".
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If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will
be required to operate the property in accordance with those laws and
regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following
foreclosure). Such disclosure may decrease the amount that prospective buyers
are willing to pay for the affected property, sometimes substantially, and
thereby decrease the ability of the lender to recoup its investment in a loan
upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to
the issuance of the related Certificates. Environmental site assessments,
however, vary considerably in their content, quality and cost. Even when
adhering to good professional practices, environmental consultants will
sometimes not detect significant environmental problems because to do an
exhaustive environmental assessment would be far too costly and
time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate
the maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limitations as set
forth in the Garn Act and the regulations promulgated thereunder.
Accordingly, a Master Servicer may nevertheless have the right to accelerate
the maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, without regard to the Master
Servicer's ability to demonstrate that a sale threatens its legitimate
security interest.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully
both the Senior Liens and the Mortgage Loan. In the event that a holder of a
Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. In the event that such proceeds from a foreclosure or similar sale of
the related Mortgaged Property are insufficient to satisfy all Senior Liens
and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of the
junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained
and (ii) the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain jurisdictions
or the Mortgage Loan may be nonrecourse.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be
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unenforceable. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to additional risk. First,
the borrower may have difficulty servicing and repaying multiple loans.
Moreover, if the subordinate financing permits recourse to the borrower (as
is frequently the case) and the senior loan does not, a borrower may have
more incentive to repay sums due on the subordinate loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In addition, the enforceability of provisions that provide for prepayment
fees or penalties upon an involuntary prepayment is unclear under the laws of
many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply
to certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or
adoption) be eligible for inclusion in a Trust Fund unless (i) such Mortgage
Loan provides for such interest rate, discount points and charges as are
permitted in such state or (ii) such Mortgage Loan provides that the terms
thereof are to be construed in accordance with the laws of another state
under which such interest rate, discount points and charges would not be
usurious and the borrower's counsel has rendered an opinion that such choice
of law provision would be given effect.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply
(together with an inability to remedy any such failure) could result in
material diminution in the value of a Mortgaged Property which could,
together with the possibility of limited alternative uses for a particular
Mortgaged Property (i.e., a nursing or convalescent home or hospital), result
in a failure to realize the full principal amount of the related Mortgage
Loan.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such
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as hotels, restaurants, shopping centers, hospitals, schools and social
service center establishments) must remove architectural and communication
barriers which are structural in nature from existing places of public
accommodation to the extent "readily achievable." In addition, under the ADA,
alterations to a place of public accommodation or a commercial facility are
to be made so that, to the maximum extent feasible, such altered portions are
readily accessible to and usable by disabled individuals. The "readily
achievable" standard takes into account, among other factors, the financial
resources of the affected site, owner, landlord or other applicable person.
In addition to imposing a possible financial burden on the borrower in its
capacity as owner or landlord, the ADA may also impose such requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with
the requirements of the ADA may be subject to more stringent requirements
than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief
Act applies to individuals who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief
Act applies to individuals who enter military service (including reservists
who are called to active duty) after origination of the related mortgage
loan, no information can be provided as to the number of loans with
individuals as borrowers that may be affected by the Relief Act. Application
of the Relief Act would adversely affect, for an indeterminate period of
time, the ability of a Master Servicer or Special Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition,
the Relief Act imposes limitations that would impair the ability of the
Master Servicer or Special Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as
regulations (the "REMIC Regulations") promulgated by the U.S. Department of
Treasury (the "Treasury"). Investors should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool". For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes
of "Regular Certificates" and one Class of "Residual Certificates" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Depositor, has advised the
Depositor that in the firm's opinion, assuming (i) the making of such an
election, (ii) compliance with the Pooling Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect
to the related Trust Fund will be made, in which event references to "REMIC"
or "REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. If
so specified in the applicable Prospectus Supplement, the portion of a Trust
Fund as to which a REMIC election is not made may be treated as a grantor
trust for federal income tax purposes. See "--Federal Income Tax Consequences
for Certificates as to Which No REMIC Election Is Made".
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" (such as
single family or multifamily properties, but not commercial properties)
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C), and otherwise will not qualify for
such treatment. REMIC Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the Regular Certificates and income with
respect to Residual Certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Code Section 856(c)(3)(B) in the same proportion
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that, for both purposes, the assets of the REMIC Pool would be so treated. If
at all times 95% or more of the assets of the REMIC Pool qualify for each of
the foregoing respective treatments, the REMIC Certificates will qualify for
the corresponding status in their entirety. For purposes of Code Section
856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates qualify
for such treatment. Where two REMIC Pools are a part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buy-Down Funds. REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of
Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the
"SBJPA of 1996") repealed the reserve method for bad debts of domestic
building and loan associations and mutual savings banks, and thus has
eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments". The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement is met if
at all times the aggregate adjusted basis of the nonqualified assets is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC
also must provide "reasonable arrangements" to prevent its residual interest
from being held by "disqualified organizations" and must furnish applicable
tax information to transferors or agents that violate this requirement. The
Pooling Agreement for each Series will contain a provision designed to meet
this requirement. See "Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified
Organizations".
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured
by timeshare interests and loans secured by shares held by a tenant
stockholder in a cooperative housing corporation, provided, in general, (i)
the fair market value of the real property security (including buildings and
structural components thereof) is at least 80% of the principal balance of
the related Mortgage Loan or mortgage loan underlying the Mortgage
Certificate either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest
in real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. If the Mortgage Loan has been
substantially modified other than in connection with a default or reasonably
foreseeable default, it must meet the
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loan-to-value test in (i) of the preceding sentence as of the date of the
last such modification or at closing. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by
real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such
90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally not held
beyond the close of the third calendar year following the acquisition of the
property by the REMIC Pool, with an extension that may be granted by the
Internal Revenue Service (the "Service").
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest
in a REMIC Pool that is issued on the Startup Day with fixed terms, is
designated as a regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable
rate, or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. Such a specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a fixed
or qualified variable or inverse variable rate on some or all of the
qualified mortgages minus a different fixed or qualified variable rate. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments
on qualified mortgages may be zero. A residual interest is an interest in a
REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool
may be treated as a regular interest even if payments of principal with
respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on
the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that series will constitute a single class of residual interests
on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for
such year and thereafter. In this event, an entity with multiple classes of
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ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the Tax Reform Act of 1986 (the "1986 Act")
indicates that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income
for the period of time in which the requirements for REMIC status are not
satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless
of the method of accounting otherwise used by such Regular
Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any Class of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable
to such income. The following discussion is based in part on temporary and
final Treasury regulations issued on February 2, 1994, as amended on June 14,
1996 (the "OID Regulations") under Code Sections 1271 through 1273 and 1275
and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent such issues are not addressed in such
regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided
that the Service will not take a different position as to those matters not
currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the Service to apply or depart from the
OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not
be considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price". The
issue price of a Class of Regular Certificates offered pursuant to this
Prospectus generally is the first price at which a substantial amount of
Regular Certificates of that Class is sold to the public (excluding bond
houses, brokers and underwriters). Although unclear under the OID
Regulations, the Depositor intends to treat the issue price of a Class as to
which there is no substantial sale as of the issue date or that is retained
by the Depositor as the fair market value of that Class as of the issue date.
The issue price of a Regular Certificate also includes the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate, unless the Regular
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Certificateholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but
generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest". Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Regular Certificate. Because there
is no penalty or default remedy in the case of nonpayment of interest with
respect to a Regular Certificate, it is possible that no interest on any
Class of Regular Certificates will be treated as qualified stated interest.
However, except as provided in the following three sentences or in the
applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, the Depositor intends to treat
interest with respect to the Regular Certificates as qualified stated
interest. Distributions of interest on an Accrual Certificate, or on other
Regular Certificates with respect to which deferred interest will accrue,
will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the
Depositor intends to treat an "interest only" class, or a class on which
interest is substantially disproportionate to its principal amount (a
so-called "super-premium" class) as having no qualified stated interest.
Where the interval between the issue date and the first Distribution Date on
a Regular Certificate is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The
Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be determined in accordance with the assumed rate
of prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates
will be set forth in the related Prospectus Supplement. Holders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the Regular Certificate
is held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method".
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as
the accrual period. With respect to each Regular Certificate, a calculation
will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based
on the Prepayment Assumption. Other than as discussed below with respect to a
Random Lot Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the
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preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price
of a Regular Certificate at the beginning of any accrual period equals the
issue price of the Regular Certificate, increased by the aggregate amount of
original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity
that were made on the Regular Certificate in such prior periods. The original
issue discount accruing during any accrual period (as determined in this
paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either
an increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Random Lot Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case
of a distribution in retirement of the entire unpaid principal balance of any
Random Lot Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Random Lot Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate", or (d) a single fixed rate and a single
objective
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rate that is a "qualified inverse floating rate". A floating rate is a
qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65, but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate (other than a qualified floating
rate) is a rate that is determined using a single fixed formula and that is
based on objective financial or economic information, provided that such
information is not (i) within the control of the issuer or a related party or
(ii) unique to the circumstances of the issuer or a related party. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified floating rate may nevertheless be an objective rate. A Class of
Regular Certificates may be issued under this Prospectus that does not have a
variable rate under the OID Regulations, for example, a Class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within
the meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular
Certificates. However, if final regulations dealing with contingent interest
with respect to Regular Certificates apply the same principles as the OID
Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed
rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two
or more variable rates), including a rate based on the average cost of funds
of one or more financial institutions, or a positive or negative multiple of
such a rate (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or (ii)
bearing one or more such variable rates for one or more periods or one or
more fixed rates for one or more periods, and a different variable rate or
fixed rate for other periods qualifies as a regular interest in a REMIC.
Accordingly, unless otherwise indicated in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates that qualify
as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity
and future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date) for the relevant Class.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor intends to treat such variable interest as qualified stated
interest, other than variable interest on an interest-only or super-premium
Class, which will be treated as non-qualified stated interest includible in
the stated redemption price at maturity. Ordinary income reportable for any
period will be adjusted based on subsequent changes in the applicable
interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to
create more than de minimis original issue discount. The yield on such
Regular Certificates for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates,
in the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the
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applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each
accrual period either increasing or decreasing the amount of ordinary income
reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues
with respect to a Class of Regular Certificates may constitute income to the
holders of such Regular Certificates prior to the time distributions of cash
with respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Certificate (i) is exceeded by the then-current
principal amount of the Regular Certificate or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received,
in an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to
the 1986 Act provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the end
of such period, or in the case of a Regular Certificate issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such
period. Such purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the
stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid
or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized or
the Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in
which such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should
consult their own tax
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advisors regarding the application of these rules. Investors should also
consult Revenue Procedure 92-67 concerning the elections to include market
discount in income currently and to accrue market discount on the basis of
the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased
at a premium. If the Regular Certificateholder holds such Regular Certificate
as a "capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. See "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest,
original issue discount, de minimis original issue discount, market discount
and de minimis market discount, as adjusted by any amortizable bond premium
or acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply
or if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to
have made elections to amortize bond premium or to report market discount
income currently as it accrues under the constant yield method, respectively,
for all debt instruments acquired by the holder in the same taxable year or
thereafter. The election is made on the holder's federal income tax return
for the year in which the debt instrument is acquired and is irrevocable
except with the approval of the Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Certificate and reduced by
amounts included in the stated redemption price at maturity of the Regular
Certificate that were previously received by the seller, by any amortized
premium and by previously recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion
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transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with
respect to any prior distribution of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if its
yield on such Regular Certificate were 110% of the applicable Federal rate as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans allocable to a particular
class of Regular Certificates, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate may have income, or may incur a diminution in cash flow as a
result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a
subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may
take the position that original issue discount must continue to be accrued in
spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts
are applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection
with a trade or business should in general be allowed to deduct as an
ordinary loss any such loss sustained during the taxable year on account of
any such Regular Certificates becoming wholly or partially worthless, and
that, in general, holders of Regular Certificates that are not corporations
and do not hold the Regular Certificates in connection with a trade or
business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a
portion of any class or subclass of such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate holders
of Regular Certificates should be allowed a bad debt deduction at such time
as the principal balance of any class or subclass of such Regular
Certificates is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all Mortgage Loans remaining in the Trust Fund have been
liquidated or such class of Regular Certificates has been otherwise retired.
The Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original
issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders
of Regular Certificates are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with
respect to such Regular Certificates. While losses attributable to interest
previously reported as income should be deductible as ordinary losses by both
corporate and non-corporate holders, the Internal Revenue Service may take
the position that losses attributable to accrued original issue discount may
only be deducted as short-term capital losses by non-corporate holders not
engaged in a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Such taxpayers are advised to consult their tax advisors regarding the
treatment of losses on Regular Certificates.
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"),
and will not be taxed separately to the REMIC Pool. The daily portions of
REMIC taxable income or net loss of a Residual Certificateholder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Certificateholders in proportion to their
respective holdings of Residual Certificates in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting,
except that (i) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply, (ii) all bad
loans will be deductible as business bad debts and (iii) the limitation on
the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans, plus income
from amortization of issue premium, if any, on the Regular Certificates, plus
income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees
on the Mortgage Loans, other administrative expenses of the REMIC Pool and
realized losses on the Mortgage Loans. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Certificates of any class
of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the
Mortgage Loans, on the one hand, and the timing of deductions for interest
(including original issue discount) on the Regular Certificates or income
from amortization of issue premium on the Regular Certificates, on the other
hand. In the event that an interest in the Mortgage Loans is acquired by the
REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Certificateholder may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon
such distributions on those Regular Certificates on account of any unaccrued
original issue discount relating to those Regular Certificates. When there is
more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly
likely to occur in the early years following issuance of the Regular
Certificates when distributions in reduction of principal are being made in
respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a
series of Regular Certificates, may increase over time as distributions in
reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Certificateholders must have sufficient
other sources of cash to pay any federal, state or local income taxes due as
a result of such mismatching or unrelated deductions against which to offset
such income, subject to the discussion of "excess inclusions" below under
"Limitations on Offset or Exemption of REMIC Income". The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholder's after-tax rate of return. In
addition, a Residual Certificateholder's taxable
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income during certain periods may exceed the income reflected by such
Residual Certificateholder for such periods in accordance with generally
accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in
Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Certificateholder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated
by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration
of the income of Residual Certificateholders described above under "Taxation
of REMIC Income", the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Service may provide future guidance on the proper
tax treatment of payments made by a transferor of such a residual interest to
induce the transferee to acquire the interest, and Residual
Certificateholders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not
so provide. See "Treatment of Certain Items of REMIC Income and
Expense--Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are
subject to differing interpretations. The Depositor makes no representation
as to the specific method that it will use for reporting income with respect
to the Mortgage Loans and expenses with respect to the Regular Certificates,
and different methods could result in different timing of reporting of
taxable income or net loss to Residual Certificateholders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as
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original issue discount income on Regular Certificates as described above
under "Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates", without regard to the de minimis rule
described therein, and "--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the Deferred
Interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal
balances. The REMIC Pool's basis in such Mortgage Loans is generally the fair
market value of the Mortgage Loans immediately after the transfer thereof to
the REMIC Pool. The REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the
REMIC Pool (or the fair market value thereof at the Closing Date, in the case
of a retained Class). In respect of Mortgage Loans that have market discount
to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates--Market Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices (or the fair market value of retained Classes) of the
regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--Premium", a REMIC Pool that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect
under Code Section 171 to amortize premium on whole mortgage loans or
mortgage loans underlying MBS that were originated after September 27, 1985
or MBS that are REMIC regular interests under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. To the extent
that the mortgagors with respect to the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans (including
underlying mortgage loans) originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject
to special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter
allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Code Section 1274(d), multiplied by (ii) the
adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described
in this paragraph for all prior quarters, decreased by any distributions made
with respect to such Residual Certificate prior to the beginning of such
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of such
income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on
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such Residual Certificateholder's return. However, net operating loss
carryovers are determined without regard to excess inclusion income. Further,
if the Residual Certificateholder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual
Certificateholder's excess inclusions will be treated as unrelated business
taxable income of such Residual Certificateholder for purposes of Code
Section 511. In addition, REMIC taxable income is subject to 30% withholding
tax with respect to certain persons who are not U.S. Persons (as defined
below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or a regulated investment company
could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. Persons. The SBJPA of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for
a taxable year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deduction must
be computed without regard to any excess inclusions. These rules are
effective for taxable years beginning after December 31, 1996, unless a
Residual Certificateholder elects to have such rules apply only to taxable
years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals
the applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on
the transferor of the Residual Certificate, except that where such transfer
is through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable
for such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not
have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization, and (ii) the highest
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marginal federal corporate income tax rate. Such tax would be deductible from
the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received
an affidavit from such record holder that it is not a Disqualified
Organization or stating such holder's taxpayer identification number and,
during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if
all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section
521) that is exempt from taxation under the Code unless such organization is
subject to the tax on unrelated business income imposed by Code Section 511,
(ii) "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity, and (iii) an "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
bear a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a U.S.
Person, as defined below under "Foreign Investors") is disregarded for all
federal income tax purposes if a significant purpose of the transferor is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest
at least equals the product of the present value of the
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anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in
the same manner as set forth above under "Disqualified Organizations". The
REMIC Regulations explain that a significant purpose to impede the assessment
or collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of cash flows generated by the
interest and that the transferee intends to pay taxes associated with holding
the residual interest as they become due. The Pooling Agreement with respect
to each series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "Disqualified Organizations".
The transferor must have no actual knowledge or reason to know that such
statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below),
unless such transferee's income is effectively connected with the conduct of
a trade or business within the United States. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer,
(i) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions
accrue and prior to the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will
be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury
regulations) or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to United States federal income tax regardless of the source of its income or
a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates--Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in such Residual
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Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss
includible in the federal income tax returns of Residual Certificateholders,
but rather will be taxed directly to the REMIC Pool at a 100% rate.
Prohibited transactions generally include (i) the disposition of a qualified
mortgage other than for (a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time)
or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible
adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Certificateholder, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call and (v) as
otherwise permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts.
Generally, property acquired by deed in lieu of foreclosure would be treated
as "foreclosure property" for a period ending with the third calendar year
following the year of acquisition of such property, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income
from foreclosure property other than qualifying rents and other qualifying
income for a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material
state income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of
its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts
retained to meet claims) to holders of Regular Certificates and Residual
Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool will be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or
credit in a unified administrative proceeding. The Residual Certificateholder
owning the largest percentage interest in the Residual Certificates will be
obligated to act as "tax matters person", as defined in applicable Treasury
regulations, with respect to the REMIC Pool. Each Residual Certificateholder
will be deemed, by acceptance of such Residual Certificates, to have agreed
(i) to the appointment of the tax matters person as provided in the preceding
sentence and (ii) to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i)
3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
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the case of a married individual filing a separate return) (subject to
adjustments for inflation) or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for the servicing
fee and all administrative and other expenses relating to the REMIC Pool, or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion
of such expenses to holders of Regular Certificates, as well as holders of
Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates. Unless otherwise indicated in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or
other Non-U.S. Persons (as defined below), will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-U.S. Person (i) is not a "10-percent
shareholder" within the meaning of Code Section 871(h)(3)(B) or a controlled
foreign corporation described in Code Section 881(c)(3)(C) and (ii) provides
the Trustee, or the person who would otherwise be required to withhold tax
from such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial
owner and stating, among other things, that the beneficial owner of the
Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless
reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-U.S. Person. In
the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Prepayment Premiums distributable to
Regular Certificateholders who are Non-U.S. Persons may be subject to 30%
United States withholding tax. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Certificate. The term "Non-U.S. Person" means any
person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 1999, although valid withholding certificates that are held on
December 31, 1998, remain valid until the earlier of December 31, 1999 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular
Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply
in the case of
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tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to
the conditions described in "Regular Certificates" above, but only to the
extent that (i) the Mortgage Loans (including mortgage loans underlying MBS)
were issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of
assets therein (as to which a separate REMIC election will be made), to which
the Residual Certificate relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
whole mortgage loans will not be, but MBS and regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent
of that portion of REMIC taxable income that constitutes an "excess
inclusion". See "Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income". If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States
federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential". Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Service or
allowed as a credit against the Regular Certificateholder's federal income
tax liability. The New Regulations change certain of the rules relating to
certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and
information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals,
estates, non-exempt and non-charitable trusts, and partnerships who are
either holders of record of Regular Certificates or beneficial owners who own
Regular Certificates through a broker or middleman as nominee. All brokers,
nominees and all other non-exempt holders of record of Regular Certificates
(including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies,
common trust funds, thrift institutions and charitable trusts) may request
such information for any calendar quarter by telephone or in writing by
contacting the person designated in Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee.
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The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool
to each Residual Certificateholder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS
TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Where there is no fixed retained yield with respect to
the Mortgage Loans underlying the Standard Certificates, the holder of each
such Standard Certificate (a "Standard Certificateholder") in such series
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the Trust Fund represented by its Standard
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees". Accordingly, the holder
of a Standard Certificate of a particular series will be required to report
on its federal income tax return its pro rata share of the entire income from
the Mortgage Loans represented by its Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount
(if any), prepayment fees, assumption fees, and late payment charges received
by the Master Servicer, in accordance with such Standard Certificateholder's
method of accounting. A Standard Certificateholder generally will be able to
deduct its share of the servicing fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Fund. However, investors who are individuals, estates or trusts
who own Standard Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the servicing fee and all such administrative and other
expenses of the Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income.
In addition, Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate
return) (subject to adjustments for inflation), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect
to interest at the pass-through rate on such Standard Certificates. In
addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where
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the servicing fee is in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "Stripped
Certificates" and "Recharacterization of Servicing Fees", respectively.
Tax Status
Standard Certificates will have the following status for federal income
tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Certificate is of the type described in
such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and
Expense--Premium".
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount
greater than a statutory de minimis exception, including a payment of points
currently deductible by the borrower under applicable Code provisions or,
under certain circumstances, by the presence of "teaser rates" on the
Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than
the sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Loans acquired by a Standard Certificateholder are purchased at a price equal
to the then unpaid principal amount of such Mortgage Loans, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
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Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply and it is
unclear whether a Prepayment Assumption would apply. Rather, the holder will
accrue market discount pro rata over the life of the Mortgage Loans, unless
the constant yield method is elected. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed
for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there
are no authoritative guidelines for federal income tax purposes as to either
the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Standard Certificate, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan
basis. If a loan-by-loan basis is appropriate, the likelihood that such
amount would exceed reasonable servicing compensation as to some of the
Mortgage Loans would be increased. Service guidance indicates that a
servicing fee in excess of reasonable compensation ("excess servicing") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess
of such amounts is not greater than the value of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of
the right to receive some or all of the interest payments on an obligation
from the right to receive some or all of the principal payments on the
obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds". Subject to the de minimis rule discussed below
under "--Stripped Certificates", each stripped bond or stripped coupon could
be considered for this purpose as a non-interest bearing obligation issued on
the date of issue of the Standard Certificates, and the original issue
discount rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests
in a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Loans the ownership
of which is attributed to the Master Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Standard Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and the other assets represented by the Standard Certificate.
In general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the
amount of any income previously reported with respect to the Standard
Certificate and decreased by the amount of any losses previously reported
with respect to the Standard Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Loans, and except for certain financial institutions subject to
the provisions of
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Code Section 582(c), any such gain or loss would be capital gain or loss if
the Standard Certificate was held as a capital asset. However, gain on the
sale of a Standard Certificate will be treated as ordinary income (i) if a
Standard Certificate is held as part of a "conversion transaction" as defined
in Code Section 1258(c), up to the amount of interest that would have accrued
on the Standard Certificateholder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate in effect at
the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of property that was held as a part of such transaction or (ii) in the case
of a non-corporate taxpayer, to the extent such taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates". Stripped Certificates include "Stripped Interest Certificates"
and "Stripped Principal Certificates" (as defined in this Prospectus) as to
which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor or
any of its affiliates retains (for its own account or for purposes of
resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Master
Servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Certificates--Recharacterization of Servicing Fees" above) and
(iii) Certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective entitlements to distributions of
each class (or subclass) of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above
under "Standard Certificates--General", subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part 1 of subchapter J of the Code and
not as an association taxable as a corporation or a "taxable mortgage pool"
within the meaning of Code Section 7701(i), and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286
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computations with respect to Stripped Certificates arguably should be made in
one of the ways described below under "Taxation of Stripped
Certificates--Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single
issuer to a single investor in a single transaction should be treated as a
single debt instrument for original issue discount purposes. The Pooling
Agreement requires that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents
a right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment suggests that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations.
Further, these final regulations provide that the purchaser of such a
Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under
the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described under "Certain Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt,
counsel has advised the Depositor that Stripped Certificates owned by
applicable holders should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A), "obligation[s] principally
secured by an interest in real property" within the meaning of Code Section
860G(a)(3)(A), and "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by
the 1986 Act, the amount of original issue discount required to be included
in the income of a holder of a Stripped Certificate (referred to in this
discussion as a "Stripped Certificateholder") in any taxable year likely will
be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates". However, with the apparent exception of a Stripped Certificate
qualifying as a market discount obligation, as described above under
"General", the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated
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or decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped
Certificateholder's Stripped Certificate. While the matter is not free from
doubt, the holder of a Stripped Certificate should be entitled in the year
that it becomes certain (assuming no further prepayments) that the holder
will not recover a portion of its adjusted basis in such Stripped Certificate
to recognize an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead
to different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the
date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more classes
of Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations
less likely to be applicable. The preamble to those regulations states that
they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
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Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income
tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable
to enable such Certificateholders to prepare their federal income tax
returns. Such information will include the amount of original issue discount
accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amounts required to be reported
by the Trustee may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder,
other than an original Certificateholder that purchased at the issue price.
In particular, in the case of Stripped Certificates, unless provided
otherwise in the applicable Prospectus Supplement, such reporting will be
based upon a representative initial offering price of each class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Service. If a Certificateholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Standard Certificateholder
or Stripped Certificateholder on original issue discount recognized by the
Standard Certificateholder or Stripped Certificateholders on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ
substantially from the corresponding federal law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax
advisors with respect to the various tax consequences of investments in the
Offered Certificates.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and bank collective investment funds and insurance company
general and separate accounts in which such ERISA Plans are invested. Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code and on Individual Retirement Accounts described in Section 408 of
the Code (collectively, "Tax Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Offered Certificates without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and
state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons ("parties in interest" within the meaning of ERISA and
"disqualified persons" within the meaning of the Code; collectively, "Parties
in Interest") who have certain specified relationships to the Plan, unless a
statutory or administrative exemption is available with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in
Interest to a prohibited transaction may be subject to a nondeductible 15%
per annum excise tax on the amount involved in such transaction, which excise
tax increases to 100% if the Party in Interest involved in the transaction
does not correct such transaction during the taxable period. In addition,
such Party in Interest may be subject to a penalty imposed pursuant to
Section 502(i) of ERISA. The United States Department of Labor ("DOL") and
participants, beneficiaries and fiduciaries of ERISA Plans may generally
enforce violations of ERISA, including the prohibited transaction provisions.
If the prohibited transaction amounts to a breach of fiduciary responsibility
under ERISA, a 20% civil penalty may be imposed on the fiduciary or other
person participating in the breach.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund, including a Plan's
investment in Offered Certificates, might be deemed to constitute prohibited
transactions under ERISA and the Code if the underlying Mortgage Assets and
other assets included in a related Trust Fund are deemed to be assets of such
Plan. Section 2510.3-101 of the DOL regulations (the "Plan Asset
Regulations") defines the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the Plan Asset
Regulations, generally, when a Plan acquires an equity interest in an entity,
the Plan's assets include both such equity interest and an undivided interest
in each of the underlying assets of the entity, unless certain exceptions not
applicable here apply,
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or unless the equity participation in the entity by "benefit plan investors"
(i.e., Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if
25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. Equity participation in a Trust Fund will be
significant on any date if immediately after the most recent acquisition of
any Certificate, 25% or more of any class of Certificates is held by benefit
plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the
Master Servicer, any Special Servicer, any Sub-Servicer, any Manager, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with
respect to an investing Plan (or of a Plan holding an interest in an
investing entity). If so, the acquisition or holding of Certificates by or on
behalf of the investing Plan could also give rise to a prohibited transaction
under ERISA and the Code, unless some statutory or administrative exemption
is available. Certificates acquired by a Plan may be assets of that Plan.
Under the Plan Asset Regulations, the Trust Fund, including the Mortgage
Asset Loans and the other assets held in the Trust Fund, may also be deemed
to be Plan Assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in
such circumstances, especially if, with respect to such assets, the
Depositor, the Master Servicer, any Special Servicer, any Sub-Servicer, any
Manager, the Trustee, the obligor under any credit enhancement mechanism or
an affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give
(or regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of
the investing Plan. If the Mortgage Assets and other assets included in a
Trust Fund constitute Plan Assets, then any party exercising management or
discretionary control regarding those assets, such as the Master Servicer,
any Special Servicer, any Sub-Servicer, the Trustee, the obligor under any
credit enhancement mechanism, or certain affiliates thereof may be deemed to
be a Plan "fiduciary" and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the Mortgage Assets and other
assets included in a Trust Fund constitute Plan Assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets
include such certificate but do not solely by reason of the Plan's holdings
of such certificate include any of the mortgages underlying such certificate.
The Plan Asset Regulations include in the definition of a "guaranteed
governmental mortgage pool certificate" FHLMC Certificates, GNMA Certificates
and FNMA Certificates, but do not include FAMC Certificates. Accordingly,
even if such MBS (other than FAMC Certificates) included in a Trust Fund were
deemed to be assets of Plan investors, the mortgages underlying such MBS
(other than FAMC Certificates) would not be treated as assets of such Plans.
Private label mortgage participations, mortgage pass-through certificates,
FAMC Certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations. Potential Plan investors should consult their counsel and review
the ERISA discussion in the related Prospectus Supplement before purchasing
any such Certificates.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL granted an individual exemption, DOL exemption application number
E-0003 (the "Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and
Deutsche Morgan Grenfell Inc. ("DMG") which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through
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certificates underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "Underwriter"
shall include (a) DBNY and DMG, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under
common control with DBNY and DMG and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan
or with Plan Assets must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the
"Exemption Rating Agencies"). Fourth, the Trustee cannot be an affiliate of
any member of the "Restricted Group" which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, any Sub-Servicer and any obligor
with respect to assets included in the Trust Fund constituting more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund as of the date of initial issuance of the Certificates. Fifth, the sum
of all payments made to and retained by the Underwriter(s) must represent not
more than reasonable compensation for underwriting the Certificates; the sum
of all payments made to and retained by the Depositor pursuant to the
assignment of the assets to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments
made to and retained by the Master Servicer and any Sub-Servicer must
represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the Exemption states that the
investing Plan or Plan Asset investor must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) Certificates
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of Certificates by or on
behalf of a Plan or with Plan Assets; and (iii) Certificates evidencing
interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any acquisition of
Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets intending to
purchase a Certificate must make its own determination that the conditions
set forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA
for the acquisition or holding of a Certificate on behalf of an "Excluded
Plan" by any person who has discretionary authority or renders investment
advice with respect to the assets of such Excluded Plan. For purposes of the
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code,
in connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance
94
<PAGE>
of Certificates between the Depositor or an Underwriter and a Plan when the
person who has discretionary authority or renders investment advice with
respect to the investment of Plan Assets in the Certificates is (a) a
mortgagor with respect to 5% or less of the fair market value of the Trust
Fund Assets or (b) an affiliate of such a person, (2) the direct or indirect
acquisition or disposition in the secondary market of Certificates by a Plan
and (3) the holding of Certificates by a Plan or with Plan Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Certificates so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the
servicing, management and operation of the Trust Fund, provided that the
general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to
an investing Plan by virtue of providing services to the Plan (or by virtue
of having certain specified relationships to such a person) solely as a
result of the Plan's ownership of Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three
highest generic rating categories by the Exemption Rating Agencies, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf
of any Plan, or to any other person investing Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion
of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the
Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or
the Master Servicer to any obligation in addition to those undertaken in the
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Part I
and III have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
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<PAGE>
There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would
apply to all transactions involving the Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates. Neither the
Depositor, the Trustee, the Master Servicer nor any of their respective
affiliates will make any representation to the effect that the Certificates
satisfy all legal requirements with respect to the investment therein by
Plans generally or any particular Plan or to the effect that the Certificates
are an appropriate investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE (OTHER THAN A SUBORDINATE CERTIFICATE,
RESIDUAL CERTIFICATE OR ANY CERTIFICATE WHICH IS NOT RATED IN ONE OF THE
THREE HIGHEST GENERIC RATING CATEGORIES BY THE EXEMPTION RATING AGENCIES), A
FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND
GENERAL CONDITIONS SET FORTH IN THE EXEMPTION OR ONE OF THE CLASS EXEMPTIONS
WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE
EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION, A PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A
CERTIFICATE ON BEHALF OF A PLAN.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in
one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series evidencing interests in a Trust Fund consisting of
loans secured by first liens on real property and originated by certain types
of Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation, to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the
United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cutoff for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in "mortgage related securities" secured by
liens on residential, or mixed residential and commercial properties, in most
cases by requiring the affected investors to rely solely upon existing state
law, and not SMMEA. Pursuant to Section 347 of the Riegle Community
Development and Regulatory Improvement Act of 1994, which amended the
definition of "mortgage related security" to include, in relevant part,
Offered Certificates satisfying the rating and qualified Originator
requirements for "mortgage related securities," but evidencing interests in a
Trust Fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial
structures, states were authorized to enact legislation, on or before
September 23, 2001, specifically referring to Section 347 and prohibiting or
restricting the purchase, holding or investment by state-regulated entities
in such types of Offered Certificates. Accordingly, the investors affected by
any such state legislation, when and if enacted, will be authorized to invest
in Offered Certificates qualifying as "mortgage related securities" only to
the extent provided in such legislation.
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<PAGE>
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. Section 1.5), certain "Type IV securities," defined in 12 C.F.R.
Section 1.2(1) to include certain "commercial mortgage-related securities"
and "residential mortgage-related securities." As so defined, "commercial
mortgage-related security" and "residential mortgage-related security" mean,
in relevant part, "mortgage related security" within the meaning of SMMEA,
provided that, in the case of a "commercial mortgage-related security," it
"represents ownership of a promissory note or certificate of interest or
participation that is directly secured by a first lien on one or more parcels
of real estate upon which one or more commercial structures are located and
that is fully secured by interests in a pool of loans to numerous obligors."
In the absence of any rule or administrative interpretation by the OCC
defining the term "numerous obligors," no representation is made as to
whether any class of Offered Certificates will qualify as "commercial
mortgage-related securities," and thus as "Type IV securities," for
investment by national banks. Federal credit unions should review National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities, and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot
program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the Office of Thrift Supervision, and by the NCUA
(with certain modifications), prohibits depository institutions from investing
in certain "high-risk mortgage securities" (including securities such as
certain series or classes of the Offered Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. On September 29, 1997, the FFIEC
released for public comment a proposed "Supervisory Policy Statement on
Investment Securities and End-User Derivatives Activities" (the "1997
Statement"), which would replace the Policy Statement. As proposed, the 1997
Statement would delete the specific "high-risk mortgage securities" tests,
and substitute general guidelines which depository institutions should follow
in managing risks (including market, credit, liquidity, operational
(transactional), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
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<PAGE>
Except as to the status of certain classes of Offered Certificates as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the Offered Certificates.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor to cover expenses related thereto. The
Depositor expects to sell the Certificates from time to time, but the timing
and amount of offerings of Certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method
of offering being utilized for that series and will state the net proceeds to
the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of
the Offered Certificates of a particular series may be made through a
combination of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related Prospectus
Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of a series may be offered in whole or in part to the
seller of the related Mortgage Assets that would comprise the Trust Fund for
such Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
to be determined at the time of sale or at the time of commitment therefor.
The managing underwriter or underwriters with respect to the offer and sale
of Offered Certificates of a particular series will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the Offered
Certificates may be deemed to be underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
Depositor and any profit on the resale of Offered Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of the Offered Certificates of any series will provide that the obligations
of the underwriters will be subject to certain conditions
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<PAGE>
precedent, that the underwriters will be obligated to purchase all such
Certificates if any are purchased (other than in connection with an
underwriting on a best efforts basis) and that, in limited circumstances, the
Depositor will indemnify the several underwriters and the underwriters will
indemnify the Depositor against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, or will contribute
to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with reoffers and sales by
them of Offered Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold
by the Depositor at any time to one or institutional investors.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by the Underwriter in connection with offers and
sales related to market-making transactions in the Offered Certificates with
respect to which the Underwriter acts as principal. The Underwriter may also
act as agent in such transactions. Sales may be made at negotiated prices
determined at the time of sales.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement. The Depositor has determined that its financial statements will
not be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
Stripped Interest Certificates might, in extreme cases fail to recoup their
initial investments. Furthermore, ratings on mortgage pass-through
certificates do not address the price of such certificates or the suitability
of such certificates to the investor.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1986 Act .................... 68
Act ......................... 61
ADA ......................... 63
ARM Loans ................... 19
Book-Entry Certificates ..... 29
capital asset ............... 73
CERCLA ...................... 60
Certificate Account ......... 21
Certificate Owner ........... 35
Code ........................ 65
Commercial Properties ....... 16
Commission .................. 3
Companion Class ............. 31
Condemnation Proceeds ....... 42
Controlled Amortization Class 31
Cooperatives ................ 17
CPR ......................... 24
Crime Control Act ........... 64
Cut-off Date ................ 31
DBNY ........................ 93
Definitive Certificates ..... 29
Depositor ................... 1
Determination Date .......... 22, 29
Deutsche Bank Group ......... 28
Disqualified Organization ... 79
Disqualified Organizations .. 80
Distribution Date Statement . 32
DMARC Trust ................. 28
DMG ......................... 93
DOL ......................... 92
DTC ......................... 4, 34
DTC Participants ............ 35
Due Dates ................... 19
Equity Participation ........ 19
ERISA ....................... 92
ERISA Plans ................. 92
Exchange Act ................ 4
Exemption ................... 93
Exemption Rating Agencies ... 94
FAMC ........................ 20
FHLMC ....................... 20
Financial Intermediary ...... 35
FNMA ........................ 20
Foreign Investors ........... 79
Garn Act .................... 62
GNMA ........................ 20
Insurance Proceeds .......... 42
IRS ......................... 44
Letter of Credit Bank ....... 54
Lock-out Date ............... 19
Lock-out Period ............. 19
Mark to Market Regulations .. 81
Market Discount ............. 72, 73
MBS ......................... 1, 16
MBS Agreement ............... 20
MBS Issuer .................. 20
MBS Servicer ................ 20
MBS Trustee ................. 20
Mortgage Asset Pool ......... 1
Mortgage Asset Seller ....... 16
Mortgage Assets ............. 1, 16
Mortgage Loans .............. 1, 16
Mortgage Notes .............. 16
Mortgaged Properties ........ 16
Mortgages ................... 16
Multifamily Properties ...... 16
Net Leases .................. 18
Nonrecoverable Advance ...... 32
Non-U.S. Person ............. 83
Offered Certificates ........ 1
OID Regulations ............. 68
original issue discount ..... 68
Original Issue Discount ..... 71, 72
Originator .................. 17
Parties in Interest ......... 92
Pass-Through Entity ......... 78, 79
Percentage Interest ......... 29
Permitted Investments ....... 41
Plan Asset Regulations ...... 92
Prepayment Assumption ....... 69
Prepayment Interest Shortfall 23
Prepayment Premium .......... 19
Prospectus Supplement ....... 1
Purchase Price .............. 38
Random Lot Certificates ..... 68
Rating Agency ............... 8
Record Date ................. 29
Regular Certificateholder ... 68
Regular Certificates ........ 65, 84
Related Proceeds ............ 32
100
<PAGE>
Relief Act ............................... 64
REMIC .................................... 2, 65
REMIC Administrator ...................... 3
REMIC Certificates ....................... 65
REMIC Pool ............................... 65
REMIC Regulations ........................ 65
REO Property ............................. 39
Residual Certificateholders .............. 75
Residual Certificates .................... 65
RICO ..................................... 64
Senior Liens ............................. 17
Service .................................. 67
SMMEA .................................... 7
SPA ...................................... 24
Standard Certificateholder ............... 85
Startup Day .............................. 66
stripped bond ............................ 87
stripped bonds ........................... 87
Stripped Certificateholder ............... 89
85, 86,
Stripped Certificates .................... 87, 88
stripped coupons ......................... 87
Stripped Interest Certificates ........... 88
Stripped Principal Certificates .......... 88
Sub-Servicer ............................. 41
Sub-Servicing Agreement .................. 41
Tax Exempt Investor ...................... 96
Tax Favored Plans ........................ 92
Title V .................................. 63
Treasury ................................. 65
Trust Assets ............................. 3
Trust Fund ............................... 1
UBTI ..................................... 96
UCC ...................................... 56
U.S. Person .............................. 80
Voting Rights ............................ 34
Warranting Party ......................... 38
</TABLE>
101
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 199
[Version 2 -- Health Care Concentration]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199 -
$ VARIABLE RATE CLASS A CERTIFICATES
$ VARIABLE RATE CLASS B CERTIFICATES
$100 VARIABLE RATE CLASS R CERTIFICATES
The Series 199 - Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following four classes (each, a "Class"):
(i) the Class A Certificates and Class R Certificates (collectively, the
"Senior Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. Only the Senior Certificates and the Class B Certificates
(collectively, the "Offered Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than , and that the Class B Certificates be rated not lower
than , by .
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY OF THEIR
AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
DEUTSCHE BANK AG OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE S-12 HEREIN AND PAGE IN THE
PROSPECTUS BEFORE PURCHASING ANY OFFERED CERTIFICATE.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
(the "Underwriter") intends to make a secondary market in the Offered
Certificates, but is not obligated to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. See "Risk Factors--Limited Liquidity" herein.
The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
, 199
<PAGE>
(cover continued)
Depositor estimated to be approximately $ , will be % of the
initial aggregate Certificate Balance of the Offered Certificates[, plus
accrued interest on the Offered Certificates from the Cut-off Date]. The
Offered Certificates are offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
certain other conditions. It is expected that the Class A Certificates will
be delivered in book-entry form through the Same-Day Funds Settlement System
of DTC and that the Class B and Class R Certificates will be delivered at the
offices of the Underwriter, , on or about , 199
(the "Delivery Date"), against payment therefor in immediately available
funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by
the Depositor, that will consist primarily of a segregated pool (the
"Mortgage Pool") of conventional, fixed-and adjustable-rate, multifamily
or commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage
Loan is secured by a first mortgage lien on a fee simple estate in real
property operated as a Health Care-Related Facility (as defined in the
Prospectus), retail property, office building or multifamily rental property.
As of , 199 (the "Cut-off Date"), the Mortgage Loans had an aggregate
principal balance (the "Initial Pool Balance") of $ , after application
of all payments of principal due on or before such date, whether or not
received. Certain characteristics of the Mortgage Loans are described herein
under "Description of the Mortgage Pool".
THE RIGHTS OF THE HOLDERS OF THE CLASS B AND CLASS C CERTIFICATES TO
RECEIVE DISTRIBUTIONS WITH RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATE
TO THE RIGHTS OF THE HOLDERS OF THE SENIOR CERTIFICATES, AND THE RIGHTS OF
THE HOLDERS OF THE CLASS C CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT
TO THE MORTGAGE LOANS WILL BE SUBORDINATE TO THE RIGHTS OF THE HOLDERS OF THE
CLASS B CERTIFICATES, IN EACH CASE TO THE EXTENT DESCRIBED HEREIN AND IN THE
PROSPECTUS.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates--Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and
the Class C Certificates (collectively, the "REMIC Regular Certificates")
will constitute "regular interests", and the Class R Certificates will
constitute the sole class of "residual interests", in the Trust Fund. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Transfer of the Class R Certificates will be prohibited to any non-United
States person, and will be subject to certain additional transfer
restrictions described herein under "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to REMIC Residual
Certificates" and in the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business
day, then on the next business day, beginning in 199 (each, a
"Distribution Date"). As described herein, interest distributions on each
Class of Offered Certificates will be made on each Distribution Date based on
the variable pass-through rate (the "Pass-Through Rate") then applicable to
such Class and the stated principal amount (the "Certificate Balance") of
such Class outstanding immediately prior to such Distribution Date. The
Pass-Through Rate for each Class of Offered Certificates applicable to the
first Distribution Date will be % per annum. Subsequent to the initial
Distribution Date, the Pass-Through Rate for each Class of Offered
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates (as defined
herein) on the Mortgage Loans. Principal distributions on each Class of
Offered Certificates will be made in the amounts and in accordance with the
priorities described herein. See "Description of the
Certificates--Distributions" herein.
<PAGE>
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, changes in its respective Pass-Through Rate and the
rate and timing of principal payments (including by reason of prepayments,
defaults and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors--Effect of Prepayments on Average Life of Certificates" in the
Prospectus. [The following disclosure is applicable to Stripped Interest
Certificates ("Class S Certificates"), when offered . . . THE YIELD TO
MATURITY ON THE CLASS S CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE
AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING BY REASONS OF PREPAYMENTS,
DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. A RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS THAT IS MORE RAPID THAN EXPECTED BY INVESTORS WILL HAVE A MATERIAL
NEGATIVE EFFECT ON THE YIELD TO MATURITY OF THE CLASS S CERTIFICATES.
INVESTORS IN THE CLASS S CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE
LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN SUCH CERTIFICATES TO
RECOVER FULLY THEIR INITIAL INVESTMENTS. SEE "YIELD AND MATURITY
CONSIDERATIONS" HEREIN AND "YIELD AND MATURITY CONSIDERATIONS" AND "RISK
FACTORS--EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES" IN THE
PROSPECTUS.]
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
ii
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED , OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
iii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
TITLE OF CERTIFICATES ......... Mortgage Pass-Through Certificates, Series
199 - .
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche Bank
AG or any of their affiliates.
MASTER SERVICER ............... . See "Servicing of the Mortgage
Loans--The Master Servicer" herein.
SPECIAL SERVICER .............. . See "Servicing of the Mortgage
Loans--The Special Servicer" herein.
TRUSTEE ....................... . See "Description of the
Certificates--The Trustee" herein.
REMIC ADMINISTRATOR ........... . See "Certain Federal Income Tax
Consequences--REMICs--Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements--Events of Default" and "--Rights
Upon Event of Default" in the Prospectus.
MORTGAGE LOAN SELLER .......... . See "Description of the Mortgage
Pool--The Mortgage Loan Seller" herein.
CUT-OFF DATE .................. , 199 .
DELIVERY DATE ................. On or about , 199 .
REGISTRATION; DENOMINATIONS ... The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of DTC in denominations of $25,000
and integral multiples of $1 in excess
thereof. The Class B Certificates will be
issued in fully registered, certificated
form in denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to the
remainder of the initial Certificate Balance
of such Class. The Class R Certificates will
be issued in registered, certificated form
in minimum denominations of 20% percentage
interest in such Class.
The Class A Certificates will be represented
by one or more global Certificates
registered in the name of Cede & Co., as
nominee of DTC. No person acquiring an
interest in the Class A Certificates (any
such person, a "Class A Certificate Owner")
will be entitled to receive a Class A
Certificate in fully regis-
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<PAGE>
tered, certificated form (a "Definitive
Class A Certificate"), except under the
limited circumstances described herein and
in the Prospectus. See "Description of the
Certificates--Book-Entry Registration of the
Class A Certificates" herein and
"Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in
the Prospectus.
THE MORTGAGE POOL ............. The Mortgage Pool will consist of
conventional, balloon Mortgage Loans with
an Initial Pool Balance of $ . On or
prior to the Delivery Date, the Depositor
will acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a Purchase
Agreement, dated [the date hereof], between
the Depositor and the Mortgage Loan Seller
(the "Purchase Agreement"). In the Purchase
Agreement, the Mortgage Loan Seller has made
certain representations and warranties to
the Depositor regarding the characteristics
and quality of the Mortgage Loans and, as
more particularly described herein, has
agreed to cure any material breach thereof
or repurchase the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign its
rights under the Purchase Agreement insofar
as they relate to or arise out of the
Mortgage Loan Seller's representations and
warranties regarding the Mortgage Loans. See
"Description of the Mortgage
Pool--Representations and Warranties;
Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in real
property (as to such Mortgage Loan, the
"Mortgaged Property") operated as a Health
Care-Related Facility ( Mortgage Loans
which represent % of the Initial Pool
Balance), a retail property ( Mortgage
Loans which represent % of the Initial
Pool Balance), an office building (
Mortgage Loans which represent % of the
Initial Pool Balance) or a multifamily
rental property ( Mortgage Loans which
represent % of the Initial Pool Balance).
of the Mortgage Loans, which represent % of
the Initial Pool Balance, are secured by
liens on Mortgaged Properties located in .
The remaining Mortgaged Properties are
located throughout other states. See
"Description of the Mortgage
Pool--Additional Mortgage Loan Information"
and "Risk Factors--Risks Associated With
Multifamily Properties" and "--Risks
Associated with Properties" and "Description
of the Mortgage Pool--Additional Mortgage
Loan Information" herein. of the Mortgage
Loans, which represent % of the Initial Pool
Balance, provide for scheduled payments of
principal and/or interest ("Monthly
Payments") to be due on the first day of
each month; the remainder of the Mortgage
Loans provide for Monthly Payments to be due
on the , , or day of each month (the
date in any month on which a Monthly Payment
on a Mortgage Loan is first due, the "Due
Date"). The annualized rate at which
interest accrues (the "Mortgage Rate") on
of the Mortgage Loans (the "ARM
Loans"), which
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<PAGE>
represent % of the Initial Pool Balance,
is subject to adjustment on specified Due
Dates (each such date of adjustment, an
"Interest Rate Adjustment Date") by adding a
fixed number of basis points (a "Gross
Margin") to the value of a base index (an
"Index"), subject, in cases, to lifetime
maximum and/or minimum Mortgage Rates, and
in cases, to periodic maximum and/or minimum
Mortgage Rates, in each case as described
herein; and the remaining Mortgage Loans
(the "Fixed Rate Loans") bear interest at
fixed Mortgage Rates. of the ARM Loans,
which represent % of the Initial Pool
Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while
the remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to occur
semi-annually or annually. [Identify
Mortgage Loan Index] See "Description of the
Mortgage Pool--Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of
the ARM Loans is subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that
would amortize the outstanding principal
balance of the Mortgage Loan over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date
following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly longer
than the remaining terms of such Mortgage
Loans, thereby leaving substantial principal
amounts due and payable (each such payment,
together with the corresponding interest
payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid
prior thereto.
DESCRIPTION OF THE
CERTIFICATES ................. The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer, the Special
Servicer, the Trustee and the REMIC
Administrator (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in the Trust Fund, which will
consist of the Mortgage Pool and certain
related assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. Each Class
of Offered Certificates will have the
initial Certificate Balance set forth on the
cover page, and the Class C Certificates
will have an initial Certificate Balance of
$ . See "Description of the
Certificates--General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal % per annum.
With respect to any Distribution Date
subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of
Certificates will equal the weighted average
of the applicable Effective Net Mortgage
Rates for the Mortgage Loans, weighted
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<PAGE>
on the basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution Date.
For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any
Distribution Date, the "applicable Effective
Net Mortgage Rate" for each Mortgage Loan is
an annualized rate equal to the Mortgage
Rate in effect for such Mortgage Loan as of
the [second] day of the most recently ended
calendar month, (a) reduced by basis
points (the Mortgage Rate, as so reduced,
the "Net Mortgage Rate"), and (b) if the
accrual of interest on such Mortgage Loan is
computed other than on the basis of a
360-day year consisting of twelve 30-day
months (which is the basis of accrual for
interest on the Certificates), then adjusted
to reflect that difference in computation.
See "Description of the
Certificates--Distributions--Pass-Through
Rates" and "--Distributions--Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
INTEREST DISTRIBUTIONS
ON THE SENIOR CERTIFICATES ... On each Distribution Date, to the extent of
the Available Distribution Amount, holders
of each Class of Senior Certificates will be
entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
The "Distributable Certificate Interest" in
respect of any Class of Certificates for any
Distribution Date will equal one month's
interest at the then-applicable Pass-Through
Rate accrued on the Certificate Balance of
such Class of Certificates immediately prior
to such Distribution Date, reduced (to not
less than zero) by such Class of
Certificates' allocable share (in each case,
calculated as described herein) of any Net
Aggregate Prepayment Interest Shortfall
(also as described herein) for such
Distribution Date. See "Description of the
Certificates--Distributions--Distributable
Certificate Interest" herein.
The "Available Distribution Amount" for any
Distribution Date is, as described herein
under "Description of the
Certificates--Distributions", the total of
all payments or other collections (or
available advances) on or in respect of the
Mortgage Loans that are available for
distribution on the Certificates on such
date.
PRINCIPAL DISTRIBUTIONS ON
THE SENIOR CERTIFICATES ...... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after the distributions of interest to be
made on the Senior Certificates on such
date, holders of the Senior Certificates
will be entitled to distributions of
principal (until the Certificate Balances of
such Classes of Certificates are reduced to
zero) in an aggregate amount equal to the
sum of (a) such holders' pro rata share of
the Scheduled Principal Distribution Amount
for such Distribution Date, plus
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<PAGE>
(b) the entire Unscheduled Principal
Distribution Amount for such Distribution
Date. Distributions of principal on the
Senior Certificates will be paid first to
the holders of the Class R Certificates
until the Certificate Balance of such
Certificates is reduced to zero, and then to
the holders of the Class A Certificates. See
"Description of the
Certificates--Distributions--Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution Amount"
herein.
INTEREST DISTRIBUTIONS ON
THE CLASS B CERTIFICATES ..... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after all distributions to be made on the
Senior Certificates on such date (such
remaining portion, the "Class B Available
Distribution Amount"), holders of the Class
B Certificates will be entitled to receive
distributions of interest in an amount equal
to all Distributable Certificate Interest
with respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
PRINCIPAL DISTRIBUTIONS ON
THE CLASS B CERTIFICATES ..... On each Distribution Date, to the extent of
the Class B Available Distribution Amount
remaining after the distributions of
interest to be made on the Class B
Certificates on such date, holders of the
Class B Certificates will be entitled to
distributions of principal (until the
Certificate Balance of such Class of
Certificates is reduced to zero) in an
amount equal to the sum of (a) such holders'
pro rata share of the Scheduled Principal
Distribution Amount for such Distribution
Date, plus (b) if the Certificate Balances
of the Senior Certificates have been reduced
to zero, then to the extent not distributed
in reduction of such Certificate Balances on
such Distribution Date, the entire
Unscheduled Principal Distribution Amount
for such Distribution Date. See "Description
of the Certificates--Distributions" herein.
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS ............... The yield on the Offered Certificates of any
class will depend on, among other things,
the Pass-Through Rate for such Certificates.
The yield on any Offered Certificate that is
purchased at a discount or premium will also
be affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and (ii)
the extent to which such principal payments
are applied on any Distribution Date in
reduction of the Certificate Balance of the
Class to which such Certificate belongs. See
"Description of the
Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
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<PAGE>
An investor that purchases an Offered
Certificate at a discount should consider
the risk that a slower than anticipated rate
of principal payments on such Certificate
will result in an actual yield that is lower
than such investor's expected yield. An
investor that purchases any Offered
Certificate at a premium should consider the
risk that a faster than anticipated rate of
principal payments on such Certificate will
result in an actual yield that is lower than
such investor's expected yield. Insofar as
an investor's initial investment in any
Offered Certificate is repaid, there can be
no assurance that such amounts can be
reinvested in a comparable alternative
investment with a comparable yield.
The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The Mortgage Loans may be prepaid at any
time, subject, in the case of Mortgage
Loans, to payment of a Prepayment Premium.
The investment performance of the Offered
Certificates may vary materially and
adversely from the investment expectations
of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield
to the holder of an Offered Certificate may
not be equal to the yield anticipated at the
time of purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that time,
the total return on investment expected by
the investor or the expected weighted
average life of the Certificate may not be
realized. For a discussion of certain
factors affecting prepayment of the Mortgage
Loans, including the effect of Prepayment
Premiums, see "Yield and Maturity
Considerations" herein. IN DECIDING WHETHER
TO PURCHASE ANY OFFERED CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT DECISION
AS TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS
TO BE USED.
[The structure of the Offered Certificates
causes the yield of certain Classes to be
particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans
and other factors, as follows:]
[Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each Distribution
Date will be allocated to the Class B
Certificates.]
[The following disclosure is applicable to
Stripped Interest Certificates, when
offered. . . The Stripped Interest
Certificates. [The Class S Certificates are
interest-only Certificates and are not
entitled to any distributions in respect of
principal. The yield to maturity of the
Class S Certificates will be especially
sensitive to the prepayment, repurchase and
default experience on the Mortgage Loans,
which may fluctuate significantly from
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<PAGE>
time to time. A rate of principal payments
that is more rapid than expected by
investors will have a material negative
effect on the yield to maturity of the Class
S Certificates. See "Yield and Maturity
Considerations--Yield Sensitivity of the
Class S Certificates" herein.]
Class R Certificates: Holders of the Class R
Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the
early years of the term of the Trust Fund
that substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "--Additional
Yield Considerations Applicable Solely to
the Class R Certificates," herein and
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ADVANCES ...................... The Master Servicer is required to make
advances (each, an "Advance") of delinquent
principal and interest (net of related
Servicing Fees) on the Mortgage Loans or, in
the case of each Mortgage Loan that is
delinquent in respect of its Balloon Payment
or as to which the related Mortgaged
Property was acquired through foreclosure,
deed in lieu of foreclosure or otherwise,
only of delinquent interest (net of related
Servicing Fees), in any event under the
circumstances and subject to the limitations
set forth herein. Advances are intended to
maintain a regular flow of scheduled
interest and principal payments to the
Certificateholders, rather than to guarantee
or insure against losses. Accordingly,
Advances which cannot be reimbursed out of
collections on or in respect of the related
Mortgage Loans ("Nonrecoverable Advances")
will represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on certain
servicing expenses incurred by it or on its
behalf, such interest accruing at the rate
and payable under the circumstances
described herein. Interest accrued on
outstanding Advances will result in a
reduction in amounts payable on the
Certificates. See "Description of the
Certificates--Advances" and
"--Subordination; Allocation of Collateral
Support Deficit" herein and "Description of
the Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in
the Prospectus.
Each Distribution Date Statement delivered
by the Trustee to the Certificateholders
will contain information relating to the
amounts of Advances made with respect to the
related Distribution Date. See "Description
of the Certificates--Reports to
Certificateholders; Certain Available
Information" herein and "Description of
Certificates--Reports to Certificateholders"
in the Prospectus.
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<PAGE>
SUBORDINATION; ALLOCATION OF
COLLATERAL SUPPORT DEFICIT ... The rights of the holders of the Class B and
Class C Certificates to receive
distributions with respect to the Mortgage
Loans will be subordinate to the rights of
the holders of the Senior Certificates, and
the rights of the holders of the Class C
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinate to the rights of the holders of
the Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is intended
to enhance the likelihood of timely receipt
by the holders of the Senior Certificates of
the full amount of all Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution Date,
and the ultimate receipt by such holders of
principal in an amount equal to the entire
aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser
degree, this subordination is also intended
to enhance the likelihood of timely receipt
by the holders of the Class B Certificates
of the full amount of all Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution Date,
and the ultimate receipt by such holders of
principal in an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on the
respective Classes of Certificates in the
order described herein under "Description of
the Certificates--Distributions--Priority".
No other form of Credit Support will be
available for the benefit of the holders of
the Offered Certificates.
Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans. To the
extent that the Senior Certificates are
amortized faster than the Mortgage Loans,
the percentage interest evidenced by the
Senior Certificates in the Trust Fund will
be decreased (with a corresponding increase
in the interest in the Trust Fund evidenced
by the Class B and Class C Certificates),
thereby increasing, relative to their
respective Certificate Balances, the
subordination afforded the Senior
Certificates by the Class B and Class C
Certificates. Following retirement of the
Class A Certificates, allocation to the
Class B Certificates, for so long as they
are outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of subordination
afforded thereto by the Class C
Certificates.
As a result of losses and other shortfalls
experienced with respect to the Mortgage
Loans or otherwise with respect to the Trust
Fund (which may include shortfalls arising
both from interest accrued on Advances and
from Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
S-8
<PAGE>
Pool expected to be outstanding immediately
following any Distribution Date may be less
than the aggregate Certificate Balance of
the Certificates immediately following the
distributions on such Distribution Date.
Such deficit (the "Collateral Support
Deficit") will be allocated first to the
Class C Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case until
the related Certificate Balance has been
reduced to zero. See "Description of the
Certificates--Subordination; Allocation of
Collateral Support Deficit" herein.
OPTIONAL TERMINATION .......... At its option, on any Distribution Date on
which the remaining aggregate Stated
Principal Balance of the Mortgage Pool is
less than 5% of the Initial Pool Balance,
the Master Servicer or the Depositor may
purchase all of the Mortgage Loans and REO
Properties, and thereby effect termination
of the Trust Fund and early retirement of
the then outstanding Certificates. See
"Description of the
Certificates--Termination; Retirement of
Certificates" herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. An election will be made to treat the Trust
Fund as a REMIC for Federal income tax
purposes. Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham & Taft,
counsel to the Depositor, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A
through 860G of the Code. For Federal income
tax purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the Class
R Certificates will be the sole class of
"residual interests" in the Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying
the rules relating to "excess inclusions."
In addition, the Class R Certificates may
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will
be restricted under the Pooling and
Servicing Agreement to United States Persons
in a manner designed to prevent a transfer
of a noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates"
herein and "Certain Federal Income Tax
Consequences--Federal Income Tax
Consequences for REMIC
Certificates--Taxation of Residual
Certificates--Limitations on Offset or
Exemption of REMIC Income" and
"--Tax-Related Restrictions on Transfer of
Residual Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the
S-9
<PAGE>
Class R Certificates during such years,
with corresponding tax deductions or losses
deferred until the later years of the Trust
Fund's term. Accordingly, on a present value
basis, the tax detriments occurring in the
earlier years may substantially exceed the
sum of any tax benefits in the later years.
As a result, the Class R Certificateholders'
after-tax rate of return may be zero or
negative, event if their pre-tax rate of
return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain Federal
Income Tax Consequences--Taxation of
Residual Certificates" herein.
For further information regarding the
Federal income tax consequences of investing
in the Offered Certificates, see "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
RATING ........................ It is a condition of their issuance that the
Senior Certificates be rated not lower than
" ", and that the Class B Certificates be
rated not lower than " ", by
([collectively,] the "Rating Agenc[ies]"). A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning Rating Agency. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered A security rating
does not address the frequency or likelihood
of prepayments (whether voluntary or
involuntary) of Mortgage Loans, or the
possibility that, as a result of
prepayments, investors in the Class S
Certificates may realize a lower than
anticipated yield or may fail to recover
fully their initial investment.] See
"Rating" herein.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT .............. [The Senior Certificates will constitute
"mortgage related securities" for purposes
of SMMEA, for so long as they are rated in
one of the two highest rating categories by
one or more nationally recognized
statistical rating organizations [and are
secured by liens on real property].
S-10
<PAGE>
[The Class B Certificates will not
constitute "mortgage related securities"
within the meaning of SMMEA. As a result,
the appropriate characterization of the
Class B Certificates under various legal
investment restrictions, and thus the
ability of investors subject to these
restrictions to purchase the Class B
Certificates, may be subject to significant
interpretative uncertainties.]
Investors should consult their legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
S-11
<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following risk factors (as well as the risk factors set
forth under "Risk Factors" in the Prospectus) in connection with an
investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. The Offered Certificates will not be listed
on any securities exchange. See "Risk Factors--Limited Liquidity" in the
Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including
principal prepayments) and other principal collections on or in respect of
the Mortgage Loans and the extent to which such amounts are to be applied or
otherwise result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificates belongs, (y)
the rate, timing and severity of losses on or in respect of the Mortgage
Loans and the extent to which such losses result in a reduction of the
Certificate Balance [or Notional Amount] of the Class of Certificates to
which such Certificate belongs, and (z) the timing and severity of any Net
Aggregate Prepayment Interest Shortfalls and the extent to which such
shortfalls are allocated in reduction of the Distributable Certificate
Interest payable on the Class of Certificates to which such Certificate
belongs. It is impossible to predict with certainty any of the factors
described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [THE YIELD TO MATURITY OF THE
CLASS S CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING BY REASON OF PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON OR IN RESPECT OF THE MORTGAGE LOANS, AND INVESTORS IN THE
CLASS S CERTIFICATES SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT AN EXTREMELY RAPID RATE OF AMORTIZATION AND PREPAYMENT OF THE
RELATED NOTIONAL AMOUNT COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO
RECOUP THEIR INITIAL INVESTMENTS.] See "Description of the Mortgage Pool",
"Description of the Certificates--Distributions" and "--Subordination;
Allocation of Collateral Support Deficit" and "Yield and Maturity
Considerations" herein. See also "Yield and Maturity Considerations" in the
Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ] of the Mortgaged Properties during the month period prior
to the Cut-off Date. [Note any special environmental problems.] [Otherwise,]
no such environmental assessment revealed any material adverse environmental
condition or circumstance at any Mortgaged Property[, except for (i) those
cases in which the condition or circumstance was remediated or an escrow for
such remediation has been established and (ii) those cases in which an
operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site
assessment is obtained (or until any required remedial action is thereafter
taken), but will decrease the likelihood that the Trust Fund will become
liable for a material adverse environmental condition at the Mortgaged
Property. However, there can be no assurance that the requirements of the
Pooling and Servicing Agreement will effectively insulate the Trust Fund from
potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements--Realization
Upon Defaulted Mortgage Loans", "Risk Factors--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Risk of Liability
Arising from Environmental Conditions" and "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations" in the Prospectus.
S-12
<PAGE>
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. Mortgage Loans, which represent % of
the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in . In general, that concentration increases the exposure of the
Mortgage Pool to any adverse economic or other developments that may occur in
. In recent periods, (along with other regions of the United States)
has experienced a significant downturn in the market value of real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances
can result in losses that are more severe, relative to the size of the pool,
than would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another
income-producing property that it owns, it could attempt to avert foreclosure
by filing a bankruptcy petition that might have the effect of interrupting
Monthly Payments for an indefinite period on all of the related Mortgage
Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on ARM
Loans in excess of those assumed in the original underwriting of such loans
may result in a default rate higher than that on mortgage loans with fixed
mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment)
due at its stated maturity unless prepaid prior thereto. Loans with Balloon
Payments involve a greater likelihood of default than self-amortizing loans
because the ability of a borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
mortgaged property. See "Risk Factors--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments" in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing
of the Mortgage Loans--Modifications, Waivers and Amendments" herein. There
can be no assurance, however, that any such extension or modification will
increase the present value of recoveries in a given case. Any delay in
collection of a Balloon Payment that would otherwise be distributable in
respect of a Class of Offered Certificates, whether such delay is due to
borrower default or to modification of the related Mortgage Loan by the
Special Servicer, will likely extend the weighted average life of such Class
of Offered Certificates. See "Yield and Maturity Considerations" herein and
in the Prospectus.
Risks Particular to Health Care-Related Facilities. Certain types of
Health Care-Related Facilities (including nursing homes) typically receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Accordingly, there can be
no assurance that payments under government reimbursement programs will be
sufficient to fully reimburse the cost of caring for program beneficiaries.
If such payments are insufficient, net operating income of those Health
Care-Related Facilities that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their obligations
under the Mortgage Loans secured thereby, could be adversely affected.
Health Care-Related Facilities are generally subject to federal and state
laws and licensing requirements that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel,
operating policies and additions to facilities and services. The failure of
an operator
S-13
<PAGE>
to maintain or renew any required license or regulatory approval could
prevent it from continuing operations at a Health Care-Related Facility or,
if applicable, bar it from participation in government reimbursement
programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted
to be made to any person other than the provider who actually furnished the
related medical goods and services. Moreover, where licenses or other
governmental approvals are necessary, such are generally personal to the
operator of the facility. Accordingly, in the event of foreclosure of a
defaulted Mortgage Loan, the purchaser at foreclosure would generally not be
entitled to obtain governmental reimbursement payments relating to services
furnished at the facility prior to foreclosure, and might be required to
obtain new government operating licenses or approvals.
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens
on retail properties can also be adversely affected by changes in consumer
spending patterns, local competitive conditions (such as the supply of retail
space or the existence or construction of new competitive shopping centers),
growth of alternative forms of retailing (such as direct mail and video
shopping networks which need little or no retail space) and the public
perception of the safety of customers at shopping centers. In addition,
significant tenants at a retail property play an important part in generating
customer traffic and making a retail property a desirable location for other
tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons).
Certain tenants at retail properties may be entitled to terminate their
leases if an anchor tenant ceases operations at such property. In such cases,
there can be no assurance that any such anchor tenants will continue to
occupy space in the related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective
tenants consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant
improvements, as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in
a reduction in timely rent payments or a reduction in occupancy levels.
Occupancy and rent levels may also be affected by construction of additional
housing units, local military base closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements. Certain of the Mortgaged Properties may be subject to rent
stabilization or rent control laws. In addition, the level of mortgage
interest rates may encourage tenants to purchase single-family housing.
Further, the cost of operating a multifamily property may increase, including
the costs of utilities and the costs of required capital expenditures. All of
these conditions and events may increase the possibility that a borrower may
be unable to meet its obligation under its Mortgage Loan.
Risks Relating to Lack of Certificateholder Control Over Trust Fund.
Certificateholders generally do not have a right to vote, except with respect
to required consents to certain amendments to the Pooling and Servicing
Agreement. Furthermore, Certificateholders will generally not have the right
to make decisions with respect to the administration of the Trust Fund. Such
decisions are generally made, subject to the express terms of the Pooling and
Servicing Agreement, by the Master Servicer, the Trustee, the Special
Servicer or the REMIC Administrator, as applicable. Any decision made by one
of those parties in respect of the Trust Fund, even if made in the best
interests of the Certificateholders (as determined by such party in its good
faith and reasonable judgment), may be contrary to the decision that would
have been made by the holders of any particular Class of Offered Certificates
and may negatively affect the interests of such holders.
S-14
<PAGE>
Yield Risk Associated With Changes in Concentrations. If and as payments
in respect of principal (including any principal prepayments, liquidations
and the principal portion of the repurchase prices of any Mortgage Loans
repurchased due to breaches of representations) are received with respect to
the Mortgage Loans, the remaining Mortgage Loans as a group may exhibit
increased concentration with respect to the type of properties, property
characteristics, number of Mortgagors and affiliated Mortgagors and
geographic location. Because unscheduled collections of principal on the
Mortgage Loans is payable on the Class A, Class B and Class C Certificates in
sequential order, such Classes that have a lower sequential priority are
relatively more likely to be exposed to any risks associated with changes in
concentrations of loan or property characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or
in respect of the Mortgage Loans will be subordinated to those of the holders
of the Senior Certificates and also, in the case of the holders of the Class
C Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates--Distributions--Priority" and
"--Subordination; Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co.,
as the nominee for DTC, and will not be registered in the names of the
related holders of Certificates or their nominees. As a result, holders of
Class A Certificates will not be recognized as "Certificateholders." Hence,
those beneficial owners will be able to exercise the rights of holders of
Certificates only indirectly through DTC and DTC Participants. See
"Description of the Certificates--General" and "--Book-Entry Registration"
herein and "Description of the Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of conventional, balloon
Mortgage Loans with an Initial Pool Balance of $ . Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in real property (a
"Mortgaged Property") operated as a Health Care-Related Facility, a retail
property, an office building or a multifamily rental property. All
percentages of the Mortgage Loans, or of any specified group of Mortgage
Loans, referred to herein without further description are approximate
percentages by aggregate Cut-off Date Balance. The "Cut-off Date Balance" of
any Mortgage Loan is the unpaid principal balance thereof as of the Cut-off
Date, after application of all payments due on or before such date, whether
or not received.
The Mortgage Loans are not insured or guaranteed by any governmental
entity or private mortgage insurer. The Depositor has not undertaken any
evaluation of the significance of the recourse provisions of any of a number
of the Mortgage Loans that provide for recourse against the related borrower
or another person in the event of a default. Accordingly, investors should
consider all of the Mortgage Loans to be nonrecourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and
will thereupon assign its interests in the Mortgage Loans, without recourse,
to the Trustee for the benefit of the Certificateholders. See "--The Mortgage
Loan Seller" herein and "Description of the Pooling Agreements--Assignment of
Mortgage Loans; Repurchases" in the Prospectus. For purposes of the
Prospectus, the Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19 and 19 . The Mortgage
Loan Seller originated of the Mortgage Loans, which represent % of
the Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "--Underwriting Standards".
S-15
<PAGE>
CERTAIN PAYMENT CHARACTERISTICS
of the Mortgage Loans, which represent % of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The
remaining Mortgage Loans have Due Dates that occur on the , ( % of the
Mortgage Loans), , ( % of the Mortgage Loans), , ( % of the Mortgage
Loans), and , ( % of the Mortgage Loans) day of each month.
of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the
related Index, subject in cases to rounding conventions and lifetime
minimum and/or maximum Mortgage Rates and, in the case of Mortgage Loans,
which represent % of the Initial Pool Balance, to periodic minimum and/or
maximum Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans.
None of the ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on
the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment
Date, or may be based on the value of the related Index as most recently
published as of an Interest Rate Adjustment Date or as of a designated date
preceding an Interest Rate Adjustment Date. of the ARM Loans, which
represent % of the Initial Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly; of the ARM Loans, which represent
% of the Initial Pool Balance, provide for Interest Rate Adjustment Dates
that occur semi-annually; and the remaining ARM Loans provide for Interest
Rate Adjustment Dates that occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule
and pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest
Rate Adjustment Date. None of the ARM Loans provide for negative
amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due
at its stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment
Premiums are payable to the Master Servicer as additional servicing
compensation, to the extent not otherwise applied to offset Prepayment
Interest Shortfalls, and may be waived by the Master Servicer in accordance
with the servicing standard described under "Servicing of the Mortgage
Loans--General" herein.
[THE INDEX]
Describe Index and include 5 year history.
[DELINQUENT AND NONPERFORMING MORTGAGE LOANS]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to
rounding.
S-16
<PAGE>
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
% per annum
Weighted Average
Mortgage Rate (ARM Loans): % per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): % per annum
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
RANGE OF GROSS MARGINS(%) ARM LOANS DATE BALANCE DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ....................
============= ===================== =====================
</TABLE>
Weighted Average
Gross Margin: %
S-17
<PAGE>
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE ARM
LOANS
<TABLE>
<CAPTION>
MONTHLY
MORTGAGE RATE PAYMENT NUMBER OF PERCENT BY
ADJUSTMENT ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
FREQUENCY FREQUENCY LOANS DATE BALANCE DATE BALANCE
----------------- -------------- ------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
Total .....
------------- --------------------- ---------------------
============= ===================== =====================
</TABLE>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
lifetime Mortgage Rates.
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
lifetime Mortgage Rates.
S-18
<PAGE>
MAXIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- -------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
annual Mortgage Rates.
MINIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- -------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
annual Mortgage Rates.
S-19
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
CUT-OFF DATE MORTGAGE CUT-OFF AGGREGATE CUT-OFF
BALANCE RANGE ($) LOANS DATE BALANCE DATE BALANCE
- ------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
------------- ---------------- ---------------------
Total ............
============= ================ =====================
</TABLE>
Average Cut-off Date
Balance (All Mortgage
Loans): $
Average Cut-off Date
Balance (ARM Loans): $
Average Cut-off Date
Balance (Fixed Rate Loans): $
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENT BY
MORTGAGE CUT-OFF AGGREGATE CUT-OFF
PROPERTY TYPE LOANS DATE BALANCE DATE BALANCE
- -------------------------------- ------------- ---------------- ---------------------
<S> <C> <C> <C>
Multifamily......................
Retail...........................
Office...........................
Health Care-Related Facility ....
[other property types] ..........
Total .........................
</TABLE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE WEIGHTED
MORTGAGE CUT-OFF CUT-OFF AVERAGE
JURISDICTION LOANS DATE BALANCE DATE BALANCE DSC RATIO
- ---------------- ------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Total .........
</TABLE>
S-20
<PAGE>
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF ORIGINAL MORTGAGE CUT-OFF CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- --------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ..............
============= ================ ================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): months
REMAINING TERM TO STATED MATURITY (IN MONTHS)
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF REMAINING MORTGAGE CUT-OFF CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ...............
============= ================ ================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): months
S-21
<PAGE>
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ---------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ..
============= ================ ================
</TABLE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
MORTGAGE CUT-OFF CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ---------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ..
============= ================ ================
</TABLE>
S-22
<PAGE>
The following table sets forth a range of Debt Service Coverage Ratios
for the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the
following table for any Mortgage Loan is the ratio of (i) Net Operating
Income produced by the related Mortgaged Property for the period (annualized
if the period was less than one year) covered by the most recent operating
statement available to the Depositor to (ii) the amount of the Monthly
Payment in effect as of the Cut-off Date multiplied by 12. "Net Operating
Income" is the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income and deposit forfeitures),
less operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance), and further less
fixed expenses (such as insurance and real estate taxes). Net Operating
Income generally does not reflect capital expenditures. The following table
was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has
made no attempt to verify its accuracy. In the case of Mortgage Loans (
ARM Loans and Fixed Rate Loans), representing % of the Initial Pool
Balance, operating statements could not be obtained, and accordingly, Debt
Service Coverage Ratios for those Mortgage Loans were not calculated. The
last day of the period (which may not correspond to the end of the calendar
year most recent to the Cut-off Date) covered by each operating statement
from which a Debt Service Coverage Ratio was calculated is set forth in Annex
A with respect to the related Mortgage Loan.
DEBT SERVICE COVERAGE RATIOS(A)
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF NUMBER OF AGGREGATE AGGREGATE
DEBT SERVICE MORTGAGE CUT-OFF CUT-OFF
COVERAGE RATIOS LOANS DATE BALANCE DATE BALANCE
- ---------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
Not Calculated(B) ....
------------- ---------------- ----------------
Total .................
------------- ---------------- ----------------
</TABLE>
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): x(E)
- ------------
(A) The Debt Service Coverage Ratios are based on the most recently
available operating statements obtained from the respective mortgagors
or the related property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
S-23
<PAGE>
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage
Loan, as of any date of determination, is a fraction, expressed as a
percentage, the numerator of which is the original principal balance of such
Mortgage Loan or the Cut-off Date Balance of such Mortgage Loan, as
applicable, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. Because it is based on
the value of a Mortgaged Property determined as of loan origination, the
information set forth in the table below is not necessarily a reliable
measure of the related borrower's current equity in each Mortgaged Property.
In a declining real estate market, the fair market value of a Mortgaged
Property could have decreased from the value determined at origination, and
the current actual loan-to-value ratio of a Mortgage Loan may be higher than
even its LTV Ratio at origination, notwithstanding taking into account
amortization since origination.
LTV RATIOS AT ORIGINATION
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF ORIGINAL MORTGAGE CUT-OFF CUT-OFF
LTV RATIOS(%) LOANS DATE BALANCE DATE BALANCE
- --------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total ..............
============= ================ ================
</TABLE>
Weighted Average Original
LTV Ratio (All Mortgage
Loans): %
Weighted Average Original
LTV Ratio (ARM Loans):
%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): %
S-24
<PAGE>
LTV RATIOS AT CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF LTV MORTGAGE CUT-OFF CUT-OFF
RATIOS(%) AS OF CUT-OFF DATE LOANS DATE BALANCE DATE BALANCE
- ------------------------------ ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total .......................
============= ================ ================
</TABLE>
Weighted Average LTV Ratio
as of Cut-off Date (All
Mortgage Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (ARM
Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (Fixed
Rate Loans): %
OCCUPANCY RATES
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE AGGREGATE
RANGE OF MORTGAGE CUT-OFF CUT-OFF
OCCUPANCY RATES(A) LOANS DATE BALANCE DATE BALANCE
- -------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
------------- ---------------- ----------------
Total .............
============= ================ ================
</TABLE>
Weighted Average Occupancy Rate (All
Mortgage Loans)(A): %
Weighted Average Occupancy Rate
(ARM Loans)(A): %
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): %
- ------------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than months prior to the Cut-off Date.
S-25
<PAGE>
PREPAYMENT RESTRICTIONS IN EFFECT AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% BY CUM.
AGGREGATE AGGREGATE % OF
CUT-OFF CUT-OFF INITIAL
PREPAYMENT NUMBER DATE DATE POOL
RESTRICTIONS OF LOANS BALANCE BALANCE BALANCE
----------........... ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Locked Out (A) .......
Yield Maintenance (B)
Declining Percentage
Premium .............
% Premium ..........
% Premium ..........
No Prepayment
Restrictions ........
TOTALS ..............
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
WEIGHTED AVERAGES
-------------------------------------------------------------------------------
INDICATIVE
STATED REMAINING CUT-OFF
PREPAYMENT MORTGAGE REMAINING AMORT. IMPLIED DATE
RESTRICTIONS RATE TERM(MO.) TERM (MO.) DSCR DSCR LTV
- --------------------- ------------ ------------- ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A) .......
Yield Maintenance (B)
Declining Percentage
Premium .............
% Premium ..........
% Premium ..........
No Prepayment
Restrictions ........
TOTALS ..............
</TABLE>
- ------------
(A) The weighted average term to the expiration of the lock-out periods is
years. of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the
expiration of their lock-out periods; the remaining Mortgage Loans are
subject to a yield maintenance-type Prepayment Premium following such
expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment
Premiums remain subject to payment of the Prepayment Premium until at
least months prior to maturity.
S-26
<PAGE>
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage
Loans is contained herein under "--Underwriting Standards" and
"--Representations and Warranties; Repurchases" and in the Prospectus under
"Description of the Trust Funds--Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than
30 days delinquent in respect of any Monthly Payment.]
THE MORTGAGE LOAN SELLER
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of
,] is a organized in 19 under the laws of . As of December
31, 199 , the Mortgage Loan Seller had a net worth of approximately $ , and
currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $ , of which
approximately $ constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or
as of such other date specifically provided in the representation and
warranty, among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the
Prospectus and if the Mortgage Loan Seller cannot cure such breach within a
period of 90 days following its receipt of such notice, then the Mortgage
Loan Seller will be obligated pursuant to the Purchase Agreement (the
relevant rights under which will be assigned, together with its interests in
the Mortgage Loans, by the Depositor to the Trustee) to repurchase the
affected Mortgage Loan within such 90-day period at a price (the "Purchase
Price") equal to the sum of (i) the unpaid principal balance of such Mortgage
Loan, (ii) unpaid accrued interest on such Mortgage Loan at the Mortgage Rate
from the date to which interest was last paid to the Due Date in the Due
Period in which the purchase is to occur, and (iii) certain servicing
expenses that are reimbursable to the Master Servicer and the Special
Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and none of the Depositor, the Master Servicer or any
of their affiliates [(other than the Mortgage Loan Seller)] will be obligated
to repurchase any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the Depositor will not
include any Mortgage Loan in the Mortgage Pool if anything has come to the
Depositor's attention prior to the Closing Date that would
S-27
<PAGE>
cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling
Agreements--Representations and Warranties; Repurchases" in the Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Depositor deems such removal necessary or
appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Offered
Certificates, unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor
believes that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time
the Offered Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
S-28
<PAGE>
SERVICING OF THE MORTGAGE LOANS
GENERAL
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by
the Master Servicer or the Special Servicer, as the case may be, in its good
faith and reasonable judgment), in accordance with applicable law, the terms
of the Pooling and Servicing Agreement, the terms of the respective Mortgage
Loans and, to the extent consistent with the foregoing, in the same manner as
would prudent institutional mortgage lenders and loan servicers servicing
mortgage loans comparable to the Mortgage Loans in the jurisdictions where
the Mortgaged Properties are located, and with a view to the maximization of
timely and complete recovery of principal and interest, but without regard
to: (i) any relationship that the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof, may have with the related
mortgagor; (ii) the ownership of any Certificate by the Master Servicer or
the Special Servicer, as the case may be, or any affiliate thereof; (iii) the
Master Servicer's or the Special Servicer's, as the case may be, obligation
to make advances, whether in respect of delinquent payments of principal
and/or interest or to cover certain servicing expenses; and (iv) the Master
Servicer's or the Special Servicer's, as the case may be, right to receive
compensation for its services under the Pooling and Servicing Agreement or
with respect to any particular transaction.
Except as otherwise described under "--Inspections; Collection of
Operating Information" below, the Master Servicer initially will be
responsible for the servicing and administration of the entire Mortgage Pool.
With respect to any Mortgage Loan (i) which has a Balloon Payment which is
past due or any other payment which is more than [60] days past due, (ii) as
to which the borrower has entered into or consented to bankruptcy,
appointment of a receiver or conservator or a similar insolvency proceeding,
or the borrower has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have
received notice of the foreclosure or proposed foreclosure of any other lien
on the Mortgaged Property, or (iv) as to which, in the judgment of the Master
Servicer, a payment default has occurred or is imminent and is not likely to
be cured by the borrower within [60] days, and prior to acceleration of
amounts due under the related Mortgage Note or commencement of any
foreclosure or similar proceedings, the Master Servicer will transfer its
servicing responsibilities to the Special Servicer, but will continue to
receive payments on such Mortgage Loan (including amounts collected by the
Special Servicer), to make certain calculations with respect to such Mortgage
Loan and to make remittances and prepare certain reports to the
Certificateholders with respect to such Mortgage Loan. If the related
Mortgaged Property is acquired in respect of any such Mortgage Loan (upon
acquisition, an "REO Property"), whether through foreclosure, deed-in-lieu of
foreclosure or otherwise, the Special Servicer will continue to be
responsible for the operation and management thereof. The Mortgage Loans
serviced by the Special Servicer are referred to herein as the "Specially
Serviced Mortgage Loans" and, together with any REO Properties, constitute
the "Specially Serviced Mortgage Assets". The Master Servicer shall have no
responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special
Servicer will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans.
Reference is also made to the Prospectus, in particular to the section
captioned "Pooling and Servicing Agreements", for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations
of the Master Servicer thereunder.
S-29
<PAGE>
THE MASTER SERVICER
[ , a , will act as Master Servicer with respect to the
Mortgage Pool. Founded in as a , the Master Servicer today
furnishes a variety of wholesale banking services. As of December 31, 19 ,
the Master Servicer had a net worth of approximately $ , and a total
mortgage loan servicing portfolio of approximately $ , of which
approximately $ represented multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at .
[If and to the extent available and relevant to an investment decision:
The following table sets forth the historical prepayment information with
respect to the Master Servicer's multifamily and commercial mortgage loan
servicing portfolio:
PREPAYMENT EXPERIENCE OF MASTER SERVICER'S MULTIFAMILY AND COMMERCIAL
MORTGAGE LOAN SERVICING PORTFOLIO
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
THE SPECIAL SERVICER
[ , a , will be responsible for the servicing and
administration of the Specially Serviced Mortgage Assets. As of December 31,
19 , the Special Servicer had a total mortgage loan servicing portfolio of
approximately $ , of which approximately $ represented multifamily
mortgage loans.
The Special Servicer has offices in states with a total staff of
employees. Its principal executive offices are located at .]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to
% per annum, in the case of Mortgage Loans other than Specially Serviced
Mortgage Loans, and % per annum, in the case of Specially Serviced
Mortgage Loans, and will be computed on the basis of the same principal
amount and for the same period respecting which any related interest payment
on the related Mortgage Loan is computed. [As additional servicing
compensation, the Master Servicer will be entitled to retain all Prepayment
Premiums, assumption and modification fees, late charges and penalty interest
and, as and to the extent described below, Prepayment Interest Excesses
collected from mortgagors. In addition, the Master Servicer is authorized but
not required to invest or direct the investment of funds held in the
Certificate Account in Permitted Investments, and the Master Servicer will be
entitled to retain any interest or other income earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the
Workout Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will
be payable
S-30
<PAGE>
monthly on a loan-by-loan basis from amounts received in respect of interest
on each Mortgage Loan, will accrue in accordance with the terms of the
related Mortgage Note at a rate equal to % per annum, in the case of
Mortgage Loans other than Specially Serviced Mortgage Loans, and % per
annum, in the case of Specially Serviced Mortgage Loans, and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the related Mortgage Loan is computed.
The "Workout Fee" will equal a specified percentage (varying from % to
% (the "Workout Fee Rate") depending on the related unpaid principal
balance) of, and will be payable from, all collections and proceeds received
in respect of principal of each Mortgage Loan which is or has been a
Specially Serviced Mortgage Loan (including those for which servicing has
been returned to the Master Servicer); provided that, in the case of
Liquidation Proceeds, the otherwise fixed Workout Fee Rate will be
proportionately reduced to reflect the extent to which, if at all, the
principal portion of such Liquidation Proceeds is less than the unpaid
principal balance of the related Mortgage Loan immediately prior to the
receipt thereof. As additional servicing compensation, the Special Servicer
will be entitled to retain all assumption and modification fees received on
Mortgage Loans serviced thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "--General" above and, accordingly,
without regard to its right to receive compensation under the Pooling and
Servicing Agreement, additional servicing compensation in the nature of
assumption and modification fees, Prepayment Premiums and Prepayment Interest
Excesses may under certain circumstances provide the Master Servicer or the
Special Servicer, as the case may be, with an economic disincentive to comply
with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such
a principal prepayment occurs during any Due Period after the Due Date for
such Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount
of interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater
than Prepayment Interest Shortfalls incurred, such excess will be paid to the
Master Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--Advances", the Master Servicer will be entitled to receive
interest on Advances, and the Master Servicer and the Special Servicer will
be entitled to receive interest on reimbursable servicing expenses, such
interest to be paid, contemporaneously with the reimbursement of the related
Advance or servicing expense, out of any other collections on the Mortgage
Loans.]
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement, and will not be entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
the Master Servicer will be permitted to pay certain of such expenses
directly out of the Certificate Account and at times without regard to the
relationship between the expense and the funds from which it is being paid.
In connection therewith, the Master Servicer will be responsible for all fees
of any sub-servicers, other than management fees earned in connection with
the operation of an REO Property, which management fees the Master Servicer
will be authorized to pay out of revenues received from such property
(thereby reducing the portion of such revenues that would otherwise be
available for distribution to Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and
"Description of the Pooling Agreements--Certificate Account" and "--Servicing
Compensation and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer may, consistent with its
normal servicing practices, agree to modify, waive or amend any term of any
Mortgage Loan, without the consent of the Trustee or any Certificateholder,
subject, however, to each of the following limitations, conditions and
restrictions:
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(a) with limited exception, the Master Servicer and the Special Servicer
may not agree to any modification, waiver or amendment that will (i)
affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification standards]
The Master Servicer and the Special Servicer will notify the Trustee of
any modification, waiver or amendment of any term of any Mortgage Loan, and
must deliver to the Trustee or the related Custodian, for deposit in the
related Mortgage File, an original counterpart of the agreement related to
such modification, waiver or amendment, promptly (and in any event within
[10] business days) following the execution thereof. Copies of each agreement
whereby any such modification, waiver or amendment of any term of any
Mortgage Loan is effected are to be available for review during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once
per calendar year, commencing in the calendar year , and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related
Mortgage Loan, as soon as practicable thereafter. The Special Servicer will
prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition or value of the
Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review
the annual operating statements of the related Mortgaged Property. [Most] of
the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the
Special Servicer likely to have any practical means of compelling such
delivery in the case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are to be available for review by Certificateholders during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is
not published or is otherwise unavailable, then the Master Servicer is
required to select a comparable alternative index over which it has no direct
control, that is readily verifiable and that is acceptable under the terms of
the related Mortgage Note. If the Mortgage Rate or the Monthly Payment with
respect to any ARM Loan is not properly adjusted by the Master Servicer
pursuant to the terms of such Mortgage Loan and applicable law, the Master
Servicer is required to deposit in the Certificate Account on or prior to the
Due Date of the affected Monthly Payment, an amount equal to the excess, if
any, of (i) the amount that would have been received from the borrower if the
Mortgage Rate or Monthly Payment had been properly adjusted, over (ii) the
amount of such improperly adjusted Monthly Payment, subject to reimbursement
only out of such amounts as are recovered from the borrower in respect of
such excess.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any REO Property; (iii) such funds or assets as from time
to time are deposited in the Certificate Account; (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans;
and (v) certain rights of the Depositor under the Purchase Agreement relating
to Mortgage Loan document delivery requirements and the representations and
warranties of the Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate
Balance of $ , which represents % of the Initial Pool Balance; the
Class B Certificates will have an initial Certificate Balance of $ ,
which represents % of the Initial Pool Balance; the Class C Certificates
will have an initial Certificate Balance of $ , which represents % of
the Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in
the Trust Fund. On each Distribution Date, the Certificate Balance of each
Class of Certificates will be reduced by any distributions of principal
actually made on, and any Collateral Support Deficit actually allocated to,
such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered
hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of
$25,000 and integral multiples of $1 in excess thereof. The Class B
Certificates will be issued in fully registered, certificated form in
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
with one Class B Certificate evidencing an additional amount equal to the
remainder of the initial Certificate Balance of such Class. The Class R
Certificates will be issued in registered, certificated form in minimum
denominations of 20% Percentage Interest in such Class. The "Percentage
Interest" evidenced by any Offered Certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial
Certificate Balance of the Class to which it belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co. No
Class A Certificate Owner will be entitled to receive a Definitive Class A
Certificate representing its interest in such Class, except as set forth
below under "--Book-Entry Registration of the Class A
Certificates--Definitive Class A Certificates". Unless and until Definitive
Class A Certificates are issued, all references to actions by holders of the
Class A Certificates will refer to actions taken by DTC upon instructions
received from Class A Certificate Owners through DTC Participants, and all
references herein to payments, notices, reports and statements to holders of
the Class A Certificates will refer to payments, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to Class A Certificate Owners through its DTC
Participants in accordance with DTC procedures. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC
Participants. Subject to certain restrictions on the transfer of such
Certificates to Plans (see "ERISA Considerations" herein), the Class B and
Class R Certificates may be
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transferred or exchanged at the offices of located at
, without the payment of any service charges, other than any tax
or other governmental charge payable in connection therewith. will
initially serve as registrar (in such capacity, the "Certificate Registrar")
for purposes of recording and otherwise providing for the registration of the
Offered Certificates and of transfers and exchanges of the Class B and, if
issued, the Definitive Class A Certificates.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in
such Certificates will be held by investors through the book-entry facilities
of DTC. Except as described below, no Class A Certificate Owner will be
entitled to receive a physical certificate representing its beneficial
interest in such Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A Certificate will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the related
Class A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the related Class A Certificate Owner's Financial
Intermediary is not a DTC Participant). Therefore, the related Class A
Certificate Owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a
Class A Certificate may only be transferred by compliance with the procedures
of such Financial Intermediaries and DTC Participants. Arrangements may be
made for clearance and settlement through the Euroclear System and CEDEL,
S.A., if they are DTC Participants.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC Participant in the Class A Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Class A Certificates will be subject to the
rules, regulations and procedures governing DTC and DTC Participants as in
effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payments to the Class
A Certificate Owners that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Class A Certificate Owners that it
represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by
the Trustee to DTC. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Class A Certificate Owner to pledge to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Class A Certificates, may be limited due to
the lack of physical certificates for such Class A Certificates. In addition,
issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Class A Certificates.
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Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in
the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates--Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration,
the Trustee will reissue the Class A Certificates as Definitive Class A
Certificates issued in the respective principal amounts owned by individual
Class A Certificate Owners, and thereafter the Trustee and the Master
Servicer will recognize the holders of such Definitive Class A Certificates
as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on
the book-entry records thereof, see "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in 199 (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the
last business day of the month preceding the month in which the related
Distribution Date occurs. Each such distribution will be made by wire
transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the [Trustee] with
wiring instructions [no less than five business days prior to the related
Record Date (which wiring instructions may be in the form of a standing order
applicable to all subsequent distributions) and is the registered owner of
Certificates with an aggregate initial principal amount of at least
$5,000,000], or otherwise by check mailed to such Certificateholder. The
final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will
be specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated
pro rata among the outstanding Certificates of such Class based on their
respective Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and any
REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date subsequent
to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements--Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such
Distribution Date occurs and ends on the [first] day of the
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month in which such Distribution Date occurs. For purposes of the discussion
in the Prospectus, the Due Period is also the Prepayment Period. The
"Determination Date" for each Distribution Date is the [15th] day of the
month in which such Distribution Date occurs or, if any such [15th] day is
not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "--Termination;
Retirement of Certificates" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in
the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an amount
equal to all Distributable Certificate Interest in respect of the Senior
Certificates for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i) the
Senior Certificates' Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the Scheduled Principal
Distribution Amount for such Distribution Date, plus (b) the entire
Unscheduled Principal Distribution Amount for such Distribution Date (but
not more than would be necessary to reduce the aggregate Certificate
Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been reimbursed
in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class B Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i) the
Class B Certificates' Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by (ii) the Scheduled
Principal Distribution Amount for such Distribution Date, plus (b) if the
Certificate Balances of the Senior Certificates have been reduced to zero,
then to the extent not distributed in reduction of such Certificate
Balances on such Distribution Date, the entire Unscheduled Principal
Distribution Amount for such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the Class B Certificates to
zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been reimbursed
in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class C Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been reimbursed
in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
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The distributions of principal to the holders of the Senior Certificates
as described in clause (2) above will be paid first to the holders of the
Class R Certificates until the Certificate Balance of such Certificates is
reduced to zero, and then to the holders of the Class A Certificates.
Accordingly, it is expected that the Certificate Balance of the Class R
Certificates would be reduced to zero on the initial Distribution Date and
that no other distributions of interest or principal would thereafter be made
on the Class R Certificates except pursuant to subparagraph (10) immediately
above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in
an additional reduction in the Certificate Balance of the Class of
Certificates in respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal % per annum.
With respect to any Distribution Date subsequent to the initial Distribution
Date, the Pass-Through Rate for each Class of Certificates will equal the
weighted average of the applicable Effective Net Mortgage Rates for the
Mortgage Loans, weighted on the basis of their respective Stated Principal
Balances immediately prior to such Distribution Date. For purposes of
calculating the Pass-Through Rate for any Class of Certificates and any
Distribution Date, the "applicable Effective Net Mortgage Rate" for each
Mortgage Loan is: (a) if such Mortgage Loan accrues interest on the basis of
a 360-day year consisting of twelve 30-day months (a "30/360 basis", which is
the basis of accrual for interest on the Certificates), the Net Mortgage Rate
in effect for such Mortgage Loan as of the commencement of the related Due
Period; and (b) if such Mortgage Loan does not accrue interest on a 30/360
basis, the annualized rate at which interest would have to accrue during the
one month period preceding the Due Date for such Mortgage Loan during the
related Due Period on a 30/360 basis in order to produce the aggregate amount
of interest (adjusted to the actual Net Mortgage Rate) accrued during such
period. The "Net Mortgage Rate" for each Mortgage Loan is equal to the
related Mortgage Rate in effect from time to time less the Servicing Fee
Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of
such Class of Certificates for such Distribution Date that is net of such
Class's allocable share (calculated as described below) of the aggregate of
any Prepayment Interest Shortfalls resulting from voluntary principal
prepayments made on the Mortgage Loans during the related Due Period that are
not offset by Prepayment Interest Excesses collected during the related Due
Period (the aggregate of such Prepayment Interest Shortfalls that are not so
offset or covered, as to such Distribution Date, the "Net Aggregate
Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of
Certificates for each Distribution Date is equal to one month's interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date. Accrued Certificate Interest
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal
the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such Class of Certificates for such
Distribution Date, and the denominator of which is equal to the Accrued
Certificate Interest in respect of all the Classes of Certificates for such
Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout
Fees payable therefrom to the Special Servicer], due during or, if and to the
extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related borrower or advanced
by the Master Servicer and included in the Available Distribution Amount for
such Distribution Date. The Scheduled Principal
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Distribution Amount from time to time will include all late payments of
principal made by a borrower, including late payments in respect of a
delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the
Master Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period [, net of any
related Workout Fees payable therefrom to the Special Servicer]; and (b) any
other collections (exclusive of payments by borrowers) received on the
Mortgage Loans and any REO Properties during the related Due Period, whether
in the form of Liquidation Proceeds, Insurance Proceeds, Condemnation
Proceeds, net income from REO Property or otherwise, that were identified and
applied by the Master Servicer as recoveries of previously unadvanced
principal of the related Mortgage Loan [, net of any related Workout Fees
payable therefrom to the Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as
the "Distributable Principal".
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed
as a percentage, the numerator of which is the then Certificate Balance(s) of
such Class(es) of Certificates, and the denominator of which is the then
aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders subject to the Special Servicer's right to
receive any Workout Fee with respect to such Mortgage Loan. The Stated
Principal Balance of each Mortgage Loan will initially equal the Cut-off Date
Balance thereof and, on each Distribution Date, will be reduced by the
portion of the Distributable Principal for such date that is attributable to
such Mortgage Loan. The Stated Principal Balance of a Mortgage Loan may also
be reduced in connection with any forced reduction of the actual unpaid
principal balance thereof imposed by a court presiding over a bankruptcy
proceeding wherein the related borrower is the debtor. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure--Bankruptcy Laws" in the Prospectus.
If any Mortgage Loan is paid in full or such Mortgage Loan (or any Mortgaged
Property acquired in respect thereof) is otherwise liquidated, then, as of
the first Distribution Date that follows the end of the Due Period in which
such payment in full or liquidation occurred, and notwithstanding that a loss
may have occurred in connection with any such liquidation, the Stated
Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of
Collateral Support Deficit to, the Certificates, as well as for purposes of
calculating the amount of Servicing Fees payable each month, each REO
Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan", "Mortgage Loans" and "Mortgage Pool" herein and in the Prospectus,
when used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage
Loan, including the same adjustable or fixed Mortgage Rate (and, accordingly,
the same Net Mortgage Rate and Effective Net Mortgage Rate) and the same
unpaid principal balance and Stated Principal Balance. Amounts due on such
predecessor Mortgage Loan, including any portion thereof payable or
reimbursable to the Master Servicer, will continue to be "due" in respect of
the REO Loan; and amounts received in respect of the related REO Property,
net of payments to be made, or reimbursement to the Master Servicer or the
Special Servicer for payments previously advanced, in connection with the
operation and management of such property, generally will be applied by the
Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly
Payment "due" on an REO Loan will in all cases, for so long as the related
Mortgaged Property is part of the Trust Fund, be deemed to equal one month's
interest thereon at the applicable Mortgage Rate.
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SUBORDINATION; ALLOCATION OF COLLATERAL SUPPORT DEFICIT
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of
the Class C Certificates to receive distributions of amounts collected or
advanced on the Mortgage Loans will be subordinated, to the extent described
herein, to the rights of holders of the Class B Certificates. This
subordination is intended to enhance the likelihood of timely receipt by the
holders of the Senior Certificates of the full amount of all Distributable
Certificate Interest payable in respect of such Certificates on each
Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser degree, this subordination is also
intended to enhance the likelihood of timely receipt by the holders of the
Class B Certificates of the full amount of all Distributable Certificate
Interest payable in respect of such Certificates on each Distribution Date,
and the ultimate receipt by such holders of principal in an amount equal to
the entire Certificate Balance of the Class B Certificates. This
subordination will be accomplished by the application of the Available
Distribution Amount on each Distribution Date in accordance with the order of
priority described under "--Distributions--Priority" above. No other form of
Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Senior Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of such
Certificates relative to the actual amortization of the Mortgage Loans. To
the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, the percentage interest evidenced by the Senior Certificates
in the Trust Fund will be decreased (with a corresponding increase in the
interest in the Trust Fund evidenced by the Class B and Class C
Certificates), thereby increasing, relative to their respective Certificate
Balances, the subordination afforded the Senior Certificates by the Class B
and Class C Certificates. Following retirement of the Class A Certificates,
allocation to the Class B Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will provide a similar benefit to such Class of Certificates as regards
the relative amount of subordination afforded thereto by the Class C
Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate
the amount, if any, by which (i) the aggregate Stated Principal Balance of
the Mortgage Pool expected to be outstanding immediately following such
Distribution Date is less than (ii) the then aggregate Certificate Balance of
the REMIC Regular Certificates (any such deficit, "Collateral Support
Deficit"). The [Trustee] will be required to allocate any such Collateral
Support Deficit among the respective Classes of Certificates as follows:
first, to the Class C Certificates, until the remaining Certificate Balance
of such Class of Certificates is reduced to zero; second, to the Class B
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; and last, to the Class A Certificates, until
the remaining Certificate Balance of such Class of Certificates has been
reduced to zero. Any allocation of Collateral Support Deficit to a Class of
Certificates will be made by reducing the Certificate Balance thereof by the
amount so allocated. Any Collateral Support Deficit allocated to a Class of
REMIC Regular Certificates will be allocated among the respective
Certificates of such Class in proportion to the Percentage Interests
evidenced thereby. In general, Collateral Support Deficit will result from
the occurrence of: (i) losses and other shortfalls on or in respect of the
Mortgage Loans, including as a result of defaults and delinquencies thereon,
Nonrecoverable Advances made in respect thereof and the payment to the Master
Servicer of interest on Advances and certain servicing expenses; and (ii)
certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee as described under
"Description of the Pooling Agreements--Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling
Agreements--Certain Matters Regarding the Master Servicer and the Depositor"
in the Prospectus and certain federal, state and local taxes, and certain
tax-related expenses, payable out of the Trust Fund as described under
"Certain Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax
and Other Taxes" in the Prospectus. Accordingly, the allocation of Collateral
Support Deficit as described above will constitute an allocation of losses
and other shortfalls experienced by the Trust Fund.
S-39
<PAGE>
ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability
determination described in the next paragraph, to make advances (each, an
"Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, funds held in the
Certificate Account that are not required to be part of the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of: (i) all Monthly Payments (net of the related Servicing Fee),
other than Balloon Payments, which were due on the Mortgage Loans during the
related Due Period and delinquent as of the related Determination Date; (ii)
in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount equal to one month's
interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee),
but only to the extent that the related mortgagor has not made a payment
sufficient to cover such amount under any forbearance arrangement or
otherwise that has been included in the Available Distribution Amount for
such Distribution Date; and (iii) in the case of each REO Property, an amount
equal to thirty days' imputed interest with respect thereto at the related
Mortgage Rate in effect as of the commencement of the related Due Period (net
of the related Servicing Fee), but only to the extent that such amount is not
covered by any net income from such REO Property included in the Available
Distribution Amount for such Distribution Date. The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan or REO Property
will continue through liquidation of such Mortgage Loan or disposition of
such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of
its own funds from any amounts collected in respect of the Mortgage Loan as
to which such Advance was made, whether in the form of late payments,
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds or otherwise
("Related Proceeds"). Notwithstanding the foregoing, the Master Servicer will
not be obligated to make any Advance that it determines in its reasonable
good faith judgment would, if made, not be recoverable out of Related
Proceeds (a "Nonrecoverable Advance"), and the Master Servicer will be
entitled to recover any Advance that it so determines to be a Nonrecoverable
Advance out of general funds on deposit in the Certificate Account.
Nonrecoverable Advances will represent a portion of the losses to be borne by
the Certificateholders. See "Description of the Certificates--Advances in
Respect of Delinquencies" and "Description of the Pooling
Agreements--Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be
entitled to be paid, out of any amounts then on deposit in the Certificate
Account, interest at % per annum (the "Reimbursement Rate") accrued on the
amount of such Advance or expense from the date made to but not including the
date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in
a reduction in amounts payable on the Class B Certificates; and to the extent
not offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that
any holder of an Offered Certificate must bear the cost of the Master
Servicer's and/or Special Servicer's Advances, the benefits of such Advances
to such holder will be contingent on the ability of such holder to reinvest
the amounts received as a result of such Advances at a rate of return equal
to or greater than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of
Advances made with respect to the related Distribution Date. See "Description
of the Certificates--Reports to Certificateholders; Certain Available
Information" herein and "Description of Certificates--Reports to
Certificateholders" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution
Date Statement") providing various items of information relating to
distributions made on such date with respect to the relevant Class and the
recent status of the
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<PAGE>
Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were
holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the
Trust Fund], during normal business hours, for review by any holder of an
Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the
Pooling Agreements--Evidence as to Compliance" in the Prospectus, (e) the
most recent property inspection report prepared by or on behalf of the
Special Servicer and delivered to the Trustee in respect of each Mortgaged
Property, (f) the most recent annual operating statements, if any, collected
by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, and (g) any and all modifications,
waivers and amendments of the terms of a Mortgage Loan entered into by the
Master Servicer or the Special Servicer and delivered to the Trustee. Copies
of any and all of the foregoing items will be available from the [Trustee]
upon request; however, the [Trustee] will be permitted to require payment of
a sum sufficient to cover the reasonable costs and expenses of providing such
copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory
or regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee
for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO
Property subject thereto, and (ii) the purchase of all of the assets of the
Trust Fund by the Master Servicer or the Depositor. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the
Certificate Registrar or other location specified in such notice of
termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and
(ii) the aggregate fair market value of all REO Properties then included in
the Trust Fund (which fair market
S-41
<PAGE>
value for any REO Property may be less than the Purchase Price for the
corresponding REO Loan), as determined by an appraiser mutually agreed upon
by the Master Servicer and the Trustee, over (b) the aggregate of amounts
payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the
then aggregate Stated Principal Balance of the Mortgage Pool be less than 5%
of the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and
other assets in the Trust Fund (if the Trust Fund is to be terminated as a
result of the purchase described in the preceding paragraph), together with
all other amounts on deposit in the Certificate Account and not otherwise
payable to a person other than the Certificateholders (see "Description of
the Pooling Agreements--Certificate Account" in the Prospectus), will be
applied generally as described above under "--Distributions--Priority",
except that the distributions of principal described thereunder will, in the
case of each Class of Certificates, be made, subject to available funds, in
an amount equal to the related Certificate Balance then outstanding.
THE TRUSTEE
, a , will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at
. See "Description of the Pooling Agreements--the Trustee",
"--Duties of the Trustee", "--Certain Matters Regarding the Trustee" and
"--Resignation and Removal of the Trustee" in the Prospectus.
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the
rate and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted
average of the applicable Effective Net Mortgage Rates. Accordingly, the
yield on the Offered Certificates will be sensitive to (x) adjustments to the
Mortgage Rates on the ARM Loans and (y) changes in the relative composition
of the Mortgage Pool as a result of scheduled amortization, voluntary
prepayments and involuntary liquidations of the Mortgage Loans. See
"Description of the Mortgage Pool" herein and "--Yield Considerations--Rate
and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on the Mortgage Loans (including
principal prepayments on the Mortgage Loans resulting from both voluntary
prepayments by the mortgagors and involuntary liquidations). The rate and
timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments
are due and the rate and timing of principal prepayments and other
unscheduled collections thereon (including for this purpose, collections made
in connection with liquidations of Mortgage Loans due to defaults, casualties
or condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans
S-42
<PAGE>
(and, accordingly, on the Offered Certificates) while work-outs are
negotiated or foreclosures are completed. See "Servicing of the Mortgage
Loans--Modifications, Waivers and Amendments" herein and "Description of the
Pooling Agreements--Realization Upon Defaulted Mortgage Loans" and "Certain
Legal Aspects of Mortgage Loans--Foreclosure" in the Prospectus. Because the
rate of principal payments on the Mortgage Loans will depend on future events
and a variety of factors (as described below), no assurance can be given as
to such rate or the rate of principal prepayments in particular. The
Depositor is not aware of any relevant publicly available or authoritative
statistics with respect to the historical prepayment experience of a large
group of mortgage loans comparable to the Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which such Certificates are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans are in turn
distributed on such Certificates. An investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield and,
in the case of any Offered Certificate purchased at a premium, the risk that
a faster than anticipated rate of principal payments on such Certificate
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a payment of principal is made on
an Offered Certificate purchased at a discount or premium, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on
an investor's yield of principal payments on such investor's Offered
Certificates occurring at a rate higher (or lower) than the rate anticipated
by the investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Class C Certificates, to the extent of amounts otherwise
distributable in respect of their Certificates; second, by the holders of the
Class B Certificates, to the extent of amounts otherwise distributable in
respect of their Certificates; and last, by the holders of the Senior
Certificates. As more fully described herein under "Description of the
Certificates--Distributions--Distributable Certificate Interest", Net
Aggregate Prepayment Interest Shortfalls will generally be borne by the
respective Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by
a number of factors, including, without limitation, prevailing interest
rates, the terms of the Mortgage Loans (for example, Prepayment Premiums,
adjustable Mortgage Rates and amortization terms that require Balloon
Payments), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand
for rental properties, retail shopping space, office space or beds in a
Health Care-Related Facility, as the case may be, in such areas, the quality
of management of the Mortgaged Properties, the servicing of the Mortgage
Loans, possible changes in tax laws and other opportunities for investment.
See "Risk Factors" and "Description of the Mortgage Pool" herein and "Risk
Factors" and "Yield and Maturity Considerations--Yield and Prepayment
Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related
Index (which may not rise and fall consistently with mortgage interest rates
then available) plus the related Gross Margin (which may be different from
margins then offered on adjustable rate mortgage loans). See "Description of
the Mortgage Pool--Certain Payment Characteristics" and "--The Index" herein.
As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on the ARM Loans decline in a manner consistent therewith, related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a
S-43
<PAGE>
fixed rate loan and thereby "locking in" such rate, or (ii) taking advantage
of a different index, margin or rate cap or floor on another adjustable rate
mortgage loan. The Mortgage Loans may be prepaid at any time and, in
cases (approximately % of the Initial Pool Balance), may be prepaid in
whole or in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by Federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to
which a default will have occurred as of any date or as to the overall rate
of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
days and as many as days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of
the Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming
such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any
Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans is paid or otherwise collected, which may be in the form of
scheduled amortization, voluntary prepayments, Insurance Proceeds,
Condemnation Proceeds and Liquidation Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of
the then scheduled principal balance of the pool of mortgage loans. As used
in each of the following tables, the column headed "0%" assumes that none of
the Mortgage Loans is prepaid before maturity. The columns headed " %",
" %", " %" and " %" assume that prepayments on the Mortgage Loans are made
at those levels of CPR. There is no assurance, however, that prepayments of
the Mortgage Loans will conform to any level of CPR, and no representation is
made that the Mortgage Loans will prepay at the levels of CPR shown or at any
other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the
Mortgage Loans, in each case prior to any prepayment of the loan, will be
timely received (with no defaults) and will be distributed on the 25th day of
each month commencing in 199 ; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan,
until
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<PAGE>
its next Interest Rate Adjustment Date, when a new Mortgage Rate that is to
remain in effect to maturity will be calculated reflecting the value of the
related Index as of , 199 , subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the
Cut-off Date will continue to be due (a) in the case of each Fixed Rate Loan,
on each Due Date until maturity and (b) in the case of each ARM Loan, until
its next Payment Adjustment Date, when a new payment that is to be due on
each Due Date until maturity will be calculated reflecting the appropriate
Mortgage Rate and remaining amortization term; (v) any principal prepayments
on the Mortgage Loans will be received on their respective Due Dates at the
respective levels of CPR set forth in the tables, and there will be no Net
Aggregate Prepayment Interest Shortfalls in connection therewith; and (vi)
the Mortgage Loan Seller will not be required to repurchase any Mortgage
Loan, and neither the Master Servicer nor the Depositor will exercise its
option to purchase all the Mortgage Loans and thereby cause an early
termination of the Trust Fund. To the extent that the Mortgage Loans have
characteristics that differ from those assumed in preparing the tables set
forth below, the Class A Certificates or the Class B Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all
the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate
Balances (and weighted average lives) shown in the following tables. Such
variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage
Loans may be expected to prepay. Based on the foregoing assumptions, the
following table indicates the resulting weighted average lives of the Class A
Certificates and sets forth the percentage of the initial Certificate Balance
of the Class A Certificates that would be outstanding after each of the dates
shown at the indicated CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- ------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date .................. 100.0 100.0 100.0 100.0 100.0
25, 1997 ................
25, 1998 ................
25, 1999 ................
25, 2000 ................
25, 2001 ................
25, 2002 ................
25, 2003 ................
25, 2004 ................
25, 2005 ................
Weighted Average Life
(years)(A).....................
</TABLE>
- ------------
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
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<PAGE>
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth
the percentage of the initial Certificate Balance of the Class B Certificates
that would be outstanding after each of the dates shown at the indicated
CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- ------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date .................. 100.0 100.0 100.0 100.0 100.0
25, 1997 ................
25, 1998 ................
25, 1999 ................
25, 2000 ................
25, 2001 ................
25, 2002 ................
25, 2003 ................
25, 2004 ................
25, 2005 ................
Weighted Average Life
(years)(A).....................
</TABLE>
- ------------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates,
when offered...
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<PAGE>
YIELD SENSITIVITY OF THE CLASS S CERTIFICATES
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the
Mortgage Loans, which may fluctuate significantly from time to time. A rapid
rate of principal payments will have a material negative effect on the yield
to maturity of the Class S Certificates. There can be no assurance that the
Mortgage Loans will prepay at any particular rate. Prospective investors in
the Class S Certificates should fully consider the associated risks,
including the risk that such investors may not fully recover their initial
investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of
interest on the Class S Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
assumptions described in the third paragraph under the heading "--Weighted
Average Life" above, including the assumptions regarding the characteristics
and performance of the Mortgage Loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price set forth below. Any differences between such assumptions and the
actual characteristics and performance of the Mortgage Loans and of the Class
S Certificates may result in yields being different from those shown in such
table. Discrepancies between assumed and actual characteristics and
performance underscore the hypothetical nature of the table, which is
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE CLASS S CERTIFICATES
AT THE FOLLOWING CPRS
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE 0% % % % % %
- -------------------------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
$ ................... % % % % % %
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to
the assumed stream of cash flows to be paid on the Class S Certificates,
would cause the discounted present value of such assumed stream of cash flows
to equal the assumed purchase price listed in the table. Accrued interest is
included in the assumed purchase price and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class S Certificates, and thus do
not reflect the return on any investment in the Class S Certificates when any
reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing
of cash flows is critical to determining yields, the pre-tax yield to
maturity on the Class S Certificates is likely to differ from those shown in
the tables, even if all of the Mortgage Loans prepay at the indicated CPRs
over any given time period or over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based on the determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class S Certificates should
fully consider the risk that a rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.]
S-47
<PAGE>
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R
CERTIFICATES
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of
Class R Certificates may have tax liabilities with respect to their
Certificates during the early years of the Trust Fund's term that
substantially exceed any distributions payable thereon during any such
period. In addition, holders of Class R Certificates may have tax liabilities
with respect to their Certificates the present value of which substantially
exceeds the present value of distributions payable thereon and of any tax
benefits that may arise with respect thereto. Accordingly, the after-tax rate
of return on the Class R Certificates may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Class R Certificates will depend on, among other things,
the timing and amounts of prepayments and losses experienced with respect to
the Mortgage Pool.
The Class R Certificateholders should consult their tax advisors as to the
effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates
of return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
S-48
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986
(the "Code"), and (i) the Class A, Class B and Class C Certificates will
evidence "regular interests" in such REMIC and (ii) the Class R Certificates
will be the sole class of "residual interests" in such REMIC, each within the
meaning of the REMIC Provisions in effect on the date hereof.] [Assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will be classified as a grantor trust under Subpart
E, part I of subchapter J of the Code, and not as an association taxable as a
corporation or as a partnership.]
The Certificates [may] [will] [will not] be treated as having been
issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate
of accrual of [original issue discount,] market discount and premium, if any,
for Federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at
a rate equal to [a CPR of %]. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" in
the Prospectus.
The Certificates may be treated for Federal income tax purposes as
having been issued at a premium. Whether any holder of [either] such Class of
Certificates will be treated as holding a Certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and interest (including original
issue discount, if any) on the Offered Certificates will be interest
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860(G)(a)(3) of the Code. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Status
of REMIC Certificates" in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests
to United States persons. Pursuant to the Pooling and Servicing Agreement,
the Class R Certificates may not be transferred to non-United States persons.
See "Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating
to "excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly,
S-49
<PAGE>
thrift institutions and their affiliates will be prevented from using their
unrelated losses or loss carryovers to offset any excess inclusions with
respect to the Class R Certificates, which will be in an amount equal to all
or virtually all of the taxable income includable by holders of the Class R
Certificates. See "Certain Federal Income Tax Consequences--Federal Income
Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income" in the
Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all
federal income tax purposes, and that the purported transferor of
"noneconomic" residual interests will continue to remain liable for any taxes
due with respect to the income on such residual interests, if "a significant
purpose of the transfer was to impede the assessment or collection of tax."
Based on the REMIC Regulations, the Class R Certificates may constitute
noneconomic residual interests during some or all of their terms for purposes
of the REMIC Regulations and, accordingly, if a significant purpose of a
transfer is to impede the assessment or collection of tax, transfers of the
Class R Certificates may be disregarded and purported transferors may remain
liable for any taxes due with respect to the income on the Class R
Certificates. All transfers of the Class R Certificates will be subject to
certain restrictions under the terms of the Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Class R Certificates constitute
noneconomic residual interests. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions
received by such Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash
distributions with respect to such periods. Consequently, Class R
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Fund's term as a
result of their ownership of the Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the Trust Fund's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or
disposition of a Class R Certificate (or possibly later under the "wash sale"
rules of Section 1091 of the Code) may cause the Class R Certificateholders'
after-tax rate of return to be zero or negative even if the Class R
Certificateholders' pre-tax rate of return is positive. That is, on a present
value basis, the Class R Certificateholders' resulting tax liabilities could
substantially exceed the sum of any tax benefits and the amount of any cash
distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Class R Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the Master Servicer as its agent
to perform all of the duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in
such Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the
Class R Certificates" herein and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates" in the Prospectus.
S-50
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated , 199 (the "Underwriting Agreement"),
(the "Underwriter") has agreed to purchase and the Depositor has agreed to
sell to the Underwriter each class of the Offered Certificates. It is
expected that delivery of the Class A Certificates will be made only in
book-entry form through the Same Day Funds Settlement System of DTC, and that
the delivery of the Class B and Class R Certificates will be made at the
offices of the Underwriter, , on or about , 199 against
payment therefor in immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds
to the Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately % of the
aggregate Certificate Balance of the Offered Certificates plus accrued
interest thereon from the Cut-off Date. The Underwriter may effect such
transactions by selling its Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent.
In connection with the sale of the Offered Certificates, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate
with such Underwriter in the distribution of the Offered Certificates may be
deemed to be underwriters and any profit on the resale of the Offered
Certificates positioned by them may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the
Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the
applicable form of credit enhancement. Except as described herein under
"Description of the Certificates--Reports to Certificateholders; Certain
Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by . Certain federal income tax matters and other
matters will be passed upon for the Depositor by Cadwalader, Wickersham &
Taft.
S-51
<PAGE>
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than " ", and the Class B Certificates be rated not lower than " ",
by .
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood
or frequency of prepayments (whether voluntary or involuntary) on the
Mortgage Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated
yield or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class
of Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization [and are secured by liens on real property], the Senior
Certificates will constitute "mortgage related securities" within the meaning
of SMMEA.]
[The Class B Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. As a result, the appropriate
characterization of the Class B Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase the Class B Certificates, is subject to significant interpretive
uncertainties.]
[Except as to the status of the Senior Certificates as "mortgage related
securities," no] [No] representation is made as to the proper
characterization of any class of Offered Certificates for legal investment,
financial institution regulatory or other purposes, or as to the ability of
particular investors to purchase the Offered Certificates under applicable
legal investment or other restrictions. All institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Certificates constitute legal investments for them or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
S-52
<PAGE>
CERTAIN ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, including insurance company
general accounts, that is subject to ERISA, or Section 4975 of the Code
(each, a "Plan") should review with its legal advisors whether the purchase
or holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975
of the Code or whether there exists any statutory or administrative exemption
applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Sections 4975(a) and (b) of the
Code and Section 501(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools, such as the
Mortgage Pool, and the purchase, sale and holding of mortgage pass-through
certificates, such as the Class A Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this Section "Certain
ERISA Considerations", the term "Underwriter" shall include (a)
[Underwriter], (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager
with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class A Certificates must not be subordinated to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class A Certificates at the time of acquisition by the Plan must be rated
in one of the three highest generic rating categories by Standard & Poor's
Ratings Services ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA,
Inc. ("Fitch"). Fourth, the Trustee cannot be an affiliate of any other
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, the Special Servicer, any
sub-servicer, and any mortgagor with respect to Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Class A Certificates. Fifth,
the sum of all payments made to and retained by the Underwriter must
represent not more than reasonable compensation for underwriting the Class A
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund must
represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer, the Special
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other Class
of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than " " by . As
of the Delivery Date, the fourth general condition set forth above will be
satisfied with respect to the Class A Certificates. A fiduciary of a Plan
contemplating purchasing a Class A Certificate in the secondary market must
make its own determination that, at the time of such purchase, the Class A
Certificates continue to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan contemplating purchasing a Class A
Certificate, whether in the initial issuance of such Certificates or in the
secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to
such Class A Certificate.
S-53
<PAGE>
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Class A Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Class A Certificates.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code)
in connection with (i) the direct or indirect sale, exchange or transfer of
Class A Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the Depositor, the Underwriter,
the Trustee, the Master Servicer, the Special Servicer, a Sub-Servicer or a
mortgagor is a Party in Interest with respect to the investing Plan, (ii) the
direct or indirect acquisition or disposition in the secondary market of the
Class A Certificates by a Plan and (iii) the holding of Class A Certificates
by a Plan. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E)
of the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Mortgage Pool.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D)
of the Code if such restrictions are deemed to otherwise apply merely because
a person is deemed to be a Party in Interest with respect to an investing
Plan by virtue of providing services to the Plan (or by virtue of having
certain specified relationships to such a person) solely as a result of the
Plan's ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates"
for purposes of the Exemption and (ii) the specific and general conditions
and the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the
exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. See
"Certain ERISA Considerations" in the Prospectus. A purchaser of a Class A
Certificate should be aware, however, that even if the conditions specified
in one or more exemptions are satisfied, the scope of relief provided by an
exemption may not cover all acts which might be construed as prohibited
transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions
or the imposition of excise taxes or civil penalties. As a result, no
transfer of a Class B Certificate [or Class R Certificate] or any interest
therein may be made to a Plan or to any person who is directly or indirectly
purchasing such Certificate or interest therein on behalf of, as named
fiduciary
S-54
<PAGE>
of, as trustee of, or with assets of a Plan, unless the prospective
transferee provides the Certificate Registrar with an opinion of counsel
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer and which establishes to the satisfaction of the Certificate
Registrar that such transfer will not result in a violation of Section 406 of
ERISA or Section 4975 of the Code or cause the Master Servicer, the Special
Servicer or the Trustee to be deemed a fiduciary of such Plan or result in
the imposition of an excise tax under Section 4975 of the Code.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Part I
and II have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates. See "Certain ERISA
Considerations" in the Prospectus. Any Plan fiduciary considering whether to
purchase an Offered Certificate on behalf of a Plan should consult with its
counsel regarding the applicability of the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to such investment.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
S-55
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
30/360 basis ........................... S-37
Accrued Certificate Interest ........... S-37
Advance ................................ S-7, S-40
ARM Loans .............................. S-2
Available Distribution Amount .......... S-35
Balloon Payment ........................ S-3
Certain ERISA Considerations ........... S-53
Certificate Balance .................... ii
Certificate Registrar .................. S-34
Certificates ........................... i
Class .................................. i
Class A Certificate Owner .............. S-1
Class B Available Distribution Amount . S-5
Class S Certificates ................... ii
Code ................................... S-49
Collateral Support Deficit ............. S-9, S-39
Constant Prepayment Rate ............... S-44
CPR .................................... S-44
Cut-off Date ........................... ii
Cut-off Date Balance ................... S-15
Debt Service Coverage Ratio ............ S-23
Definitive Class A Certificate ......... S-2, S-34
Delivery Date .......................... ii
Determination Date ..................... S-36
Distributable Certificate Interest .... S-37
Distributable Principal ................ S-38
Distribution Date ...................... ii, S-35
Distribution Date Statement ............ S-40
Due Date ............................... S-2
Due Period ............................. S-35
Duff & Phelps .......................... S-53
ERISA .................................. S-10
ERISA Considerations ................... S-33
Exemption .............................. S-53
Financial Intermediary ................. S-34
Fitch .................................. S-53
Fixed Rate Loans ....................... S-3
Form 8-K ............................... S-28
Gross Margin ........................... S-3
Index .................................. S-3
Initial Pool Balance ................... ii
Interest Rate Adjustment Date .......... S-3
LTV Ratio .............................. S-24
Master Servicing Fee ................... S-30
Monthly Payments ....................... S-2
Mortgage ............................... S-15
Mortgage Loans ......................... ii
Mortgage Note .......................... S-15
Mortgage Pool .......................... ii
Mortgage Rate .......................... S-2
Mortgaged Property ..................... S-2, S-15
Net Aggregate Prepayment Interest
Shortfall ............................. S-37
Net Mortgage Rate ...................... S-4
Net Operating Income ................... S-23
Nonrecoverable Advance ................. S-40
Nonrecoverable Advances ................ S-7
Offered Certificates ................... i, S-33
Ownership Percentage ................... S-38
Pass-Through Rate ...................... ii
Payment Adjustment Date ................ S-3
Percentage Interest .................... S-33
Plan ................................... S-53
Pooling and Servicing Agreement ....... S-3
Prepayment Interest Excess ............. S-31
Prepayment Premiums .................... S-16
Purchase Agreement ..................... S-2
Purchase Price ......................... S-27
Reimbursement Rate ..................... S-40
Related Proceeds ....................... S-40
REMIC .................................. S-49
REMIC Provisions ....................... S-49
REMIC Regular Certificates ............. ii
REO Loan ............................... S-38
REO Property ........................... S-29
Risk Factors ........................... S-12
Senior Certificates .................... i, S-33
Servicing Fees ......................... S-30
Specially Serviced Mortgage Assets .... S-29
Specially Serviced Mortgage Loans ...... S-29
Stated Principal Balance ............... S-38
Trust Fund ............................. ii
Underwriter ............................ i, S-51
Underwriting Agreement ................. S-51
Voting Rights .......................... S-41
Workout Fee ............................ S-31
Workout Fee Rate ....................... S-31
</TABLE>
S-56
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................... S-1
Risk Factors................................ S-12
Description of the Mortgage Pool............ S-15
Servicing of the Mortgage Loans............. S-29
Description of the Certificates............. S-33
Yield and Maturity Considerations........... S-42
Certain Federal Income Tax Consequences .... S-49
Method of Distribution...................... S-51
Legal Matters............................... S-51
Rating...................................... S-52
Legal Investment............................ S-52
Certain ERISA Considerations................ S-53
Index of Principal Definitions.............. S-56
PROSPECTUS
Prospectus Supplement.......................
Available Information.......................
Incorporation of Certain Information by
Reference..................................
Summary of Prospectus.......................
Risk Factors................................
Description of the Trust Funds..............
Yield and Maturity Considerations...........
The Depositor...............................
Description of the Certificates.............
Description of the Pooling Agreements ......
Description of Credit Support...............
Certain Legal Aspects of Mortgage Loans ....
Certain Federal Income Tax Consequences ....
State Tax and Other Considerations..........
ERISA Considerations........................
Legal Investment ...........................
Use of Proceeds.............................
Method of Distribution......................
Legal Matters...............................
Financial Information.......................
Rating......................................
Index of Principal Definitions..............
</TABLE>
DEUTSCHE MORTGAGE &
ASSET RECEIVING CORPORATION
$
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199 -
CLASS A CERTIFICATES VARIABLE RATE $
CLASS B CERTIFICATES VARIABLE RATE $
CLASS R CERTIFICATES VARIABLE RATE $100
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
DATED , 199
<PAGE>
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 BECOME
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 23, 1998
[VERSION 2 -- HEALTH CARE CONCENTRATION]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus
Supplement") will be offered from time to time in series. The Offered
Certificates of any series, together with any other mortgage pass-through
certificates of such series, are collectively referred to herein as the
"Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series,
the "Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving
Corporation (the "Depositor") and including a segregated pool (a "Mortgage
Asset Pool") of various types of multifamily and commercial mortgage loans
("Mortgage Loans"), mortgage-backed securities ("MBS") that evidence
interests in, or that are secured by pledges of, one or more of various types
of multifamily or commercial mortgage loans, or a combination of Mortgage
Loans and MBS (collectively, "Mortgage Assets"). The Mortgage Loans in (and
the mortgage loans underlying the MBS in) any Trust Fund will be secured by
first or junior liens on, or security interests in, one or more of the
following types of real property: (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units and mobile home
parks; and (ii) commercial properties consisting of office buildings, retail
shopping facilities, hotels and motels, Health Care-Related Facilities (as
defined herein), recreational vehicle parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial facilities,
parking lots, restaurants, mixed use properties (that is, any combination of
the foregoing), and unimproved land. To the extent described in the
Prospectus Supplement, Health Care-Related Facilities will represent security
for a material concentration of the Mortgage Loans in (or the mortgage loans
underlying the MBS in) any Trust Fund, based on principal balance at the time
such Trust Fund is formed. However, restaurants will not represent security
for such a material concentration of the Mortgage Loans in (or the mortgage
loans underlying the MBS in) any Trust Fund, based on principal balance at
such time. If so specified in the related Prospectus Supplement, the Trust
Fund for a series of Certificates may also include letters of credit, surety
bonds, insurance policies, guarantees, reserve funds, guaranteed investment
contracts, interest rate exchange agreements or interest rate cap or floor
agreements designed to reduce the effects of interest rate fluctuations on
the Mortgage Assets. See "Description of the Trust Funds", "Description of
the Certificates" and "Description of Credit Support".
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Mortgage Assets in the related Trust Fund and the timing of receipt of
such payments as described herein and in the related Prospectus Supplement.
See "Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR
ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS
AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING ON PAGE 8
HEREIN UNDER THE CAPTION "RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET
FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT
BEFORE PURCHASING ANY OFFERED CERTIFICATE.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described
under "Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a
secondary market for any Offered Certificates will develop or, if it does
develop, that it will continue. Unless otherwise provided in the related
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
The date of this Prospectus is , 199
<PAGE>
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled
to distributions of principal, with disproportionate, nominal or no
distributions of interest; (iv) are entitled to distributions of interest,
with disproportionate, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund; or (vii) provide
for distributions of principal thereof to be made, subject to available
funds, based on a specified principal payment schedule or other methodology.
Distributions in respect of the Certificates of each series will be made on a
monthly, quarterly, semi-annual, annual or other periodic basis as specified
in the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof
as a "real estate mortgage investment conduit" (each, a "REMIC") for federal
income tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of
Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
ii
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth,
as and to the extent appropriate: (i) a description of the class or classes
of such Offered Certificates, including the payment provisions with respect
to each such class, the aggregate principal amount, if any, of each such
class, the rate at which interest accrues from time to time, if at all, with
respect to each such class or the method of determining such rate, and
whether interest with respect to each such class will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all; (ii) information with respect to any other classes of
Certificates of the same series; (iii) the respective dates on which
distributions are to be made; (iv) information as to the assets, including
the Mortgage Assets, constituting the related Trust Fund (all such assets,
with respect to the Certificates of any series, the "Trust Assets"); (v) the
circumstances, if any, under which the related Trust Fund may be subject to
early termination; (vi) additional information with respect to the method of
distribution of such Offered Certificates; (vii) whether one or more REMIC
elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the
person (the "REMIC Administrator") responsible for the various tax-related
duties in respect of each REMIC to be created; (viii) the initial percentage
ownership interest in the related Trust Fund to be evidenced by each class of
Certificates of such series; (ix) information concerning the Trustee (as
defined herein) of the related Trust Fund; (x) if the related Trust Fund
includes Mortgage Loans, information concerning the Master Servicer and any
Special Servicer (each as defined herein) of such Mortgage Loans and the
circumstances under which all or a portion, as specified, of the servicing of
a Mortgage Loan would transfer from the Master Servicer to the Special
Servicer; (xi) information as to the nature and extent of subordination of
any class of Certificates of such series, including a class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the
Offered Certificates. This Prospectus and the Prospectus Supplement relating
to each series of Offered Certificates contain summaries of the material
terms of the documents referred to herein and therein, but do not contain all
of the information set forth in the Registration Statement pursuant to the
rules and regulations of the Commission. For further information, reference
is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison, 14th Floor, Chicago, Illinois 60661; New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http:// www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or any related Prospectus Supplement, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Depositor or any other person. Neither the delivery of this
Prospectus or any related Prospectus Supplement nor any sale made hereunder
or thereunder shall under any circumstances create an implication that there
has been no change in the information herein since the date hereof or therein
since the date thereof. This Prospectus and any related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust
iii
<PAGE>
Fund. If beneficial interests in a class or series of Offered Certificates
are being held and transferred in book-entry format through the facilities of
The Depository Trust Company ("DTC") as described herein, then unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to a nominee of DTC as the
registered holder of the Offered Certificates. Conveyance of notices and
other communications by DTC to its participating organizations, and directly
or indirectly through such participating organizations to the beneficial
owners of the applicable Offered Certificates, will be governed by
arrangements among them, subject to any statutory or regulatory requirements
as may be in effect from time to time. See "Description of the
Certificates--Reports to Certificateholders" and "--Book-Entry Registration
and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder. The Depositor intends to
make a written request to the staff of the Commission that the staff either
(i) issue an order pursuant to Section 12(h) of the Exchange Act exempting
the Depositor from certain reporting requirements under the Exchange Act with
respect to each Trust Fund or (ii) state that the staff will not recommend
that the Commission take enforcement action if the Depositor fulfills its
reporting obligations as described in its written request. If such request is
granted, the Depositor will file or cause to be filed with the Commission as
to each Trust Fund the periodic unaudited reports to holders of the Offered
Certificates referenced in the preceding paragraph; however, because of the
nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Depositor anticipates that a
significant portion of such reporting requirements will be permanently
suspended following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
prior to the termination of an offering of Offered Certificates evidencing
interests therein. The Depositor will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Offered Certificates, upon written or
oral request of such person, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
to the Depositor should be directed in writing to the Depositor at One
International Place, Room 520, Boston, Massachusetts 02110, Attention:
Secretary, or by telephone at (617) 951-7690.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT .................................................................... iii
AVAILABLE INFORMATION .................................................................... iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................................ iv
SUMMARY OF PROSPECTUS .................................................................... 1
RISK FACTORS ............................................................................. 8
Limited Liquidity of Offered Certificates ............................................... 8
Limited Assets .......................................................................... 8
Credit Support Limitations .............................................................. 9
Effect of Prepayments on Average Life of Certificates ................................... 9
Effect of Prepayments on Yield of Certificates .......................................... 11
Limited Nature of Ratings ............................................................... 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans ....... 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool ...... 14
Termination ............................................................................. 15
Risks Associated with Health Care-Related Properties..................................... 15
DESCRIPTION OF THE TRUST FUNDS ........................................................... 16
General.................................................................................. 16
Mortgage Loans .......................................................................... 16
MBS ..................................................................................... 21
Certificate Accounts..................................................................... 22
Credit Support........................................................................... 22
Cash Flow Agreements .................................................................... 23
YIELD AND MATURITY CONSIDERATIONS ........................................................ 23
General.................................................................................. 23
Pass-Through Rate ....................................................................... 23
Payment Delays........................................................................... 23
Certain Shortfalls in Collections of Interest ........................................... 23
Yield and Prepayment Considerations ..................................................... 24
Weighted Average Life and Maturity ...................................................... 25
Other Factors Affecting Yield, Weighted Average Life and Maturity ....................... 26
THE DEPOSITOR ............................................................................ 29
DEUTSCHE BANK AG ......................................................................... 29
DESCRIPTION OF THE CERTIFICATES........................................................... 29
General.................................................................................. 29
Distributions ........................................................................... 30
Distributions of Interest on the Certificates ........................................... 30
v
<PAGE>
PAGE
--------
Distributions of Principal of the Certificates .......................................... 31
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect
of Equity Participations................................................................ 32
Allocation of Losses and Shortfalls...................................................... 32
Advances in Respect of Delinquencies..................................................... 32
Reports to Certificateholders ........................................................... 33
Voting Rights............................................................................ 35
Termination ............................................................................. 35
Book-Entry Registration and Definitive Certificates ..................................... 35
DESCRIPTION OF THE POOLING AGREEMENTS .................................................... 37
General.................................................................................. 37
Assignment of Mortgage Loans; Repurchases................................................ 37
Representations and Warranties; Repurchases.............................................. 39
Collection and Other Servicing Procedures ............................................... 40
Sub-Servicers ........................................................................... 42
Certificate Account ..................................................................... 42
Modifications, Waivers and Amendments of Mortgage Loans.................................. 44
Realization Upon Defaulted Mortgage Loans................................................ 45
Hazard Insurance Policies................................................................ 46
Due-on-Sale and Due-on-Encumbrance Provisions ........................................... 47
Servicing Compensation and Payment of Expenses .......................................... 47
Evidence as to Compliance................................................................ 48
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor......................................................... 49
Events of Default ....................................................................... 50
Rights Upon Event of Default............................................................. 50
Amendment................................................................................ 51
List of Certificateholders............................................................... 52
The Trustee ............................................................................. 52
Duties of the Trustee ................................................................... 52
Certain Matters Regarding the Trustee ................................................... 52
Resignation and Removal of the Trustee................................................... 53
DESCRIPTION OF CREDIT SUPPORT............................................................. 54
General ................................................................................. 54
Subordinate Certificates................................................................. 54
Insurance or Guarantees with Respect to Mortgage Loans .................................. 54
Letter of Credit......................................................................... 54
vi
<PAGE>
PAGE
--------
Certificate Insurance and Surety Bonds .................................................. 55
Reserve Funds............................................................................ 55
Credit Support with respect to MBS....................................................... 55
Interest Rate Exchange, Cap and Floor Agreements ........................................ 55
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS .................................................. 56
General ................................................................................. 56
Types of Mortgage Instruments ........................................................... 56
Leases and Rents ........................................................................ 57
Personalty............................................................................... 57
Foreclosure ............................................................................. 57
Bankruptcy Laws.......................................................................... 60
Environmental Considerations ............................................................ 61
Due-on-Sale and Due-on-Encumbrance Provisions ........................................... 63
Junior Liens; Rights of Holders of Senior Liens.......................................... 63
Subordinate Financing ................................................................... 63
Default Interest and Limitations on Prepayments.......................................... 64
Applicability of Usury Laws ............................................................. 64
Certain Laws and Regulations ............................................................ 64
Americans with Disabilities Act.......................................................... 64
Soldiers' and Sailors' Civil Relief Act of 1940 ......................................... 65
Forfeitures in Drug and RICO Proceedings................................................. 65
CERTAIN FEDERAL INCOME TAX CONSEQUENCES .................................................. 66
Federal Income Tax Consequences for REMIC Certificates................................... 66
Taxation of Regular Certificates......................................................... 69
Taxation of Residual Certificates ....................................................... 76
Taxes That May Be Imposed on the REMIC Pool ............................................. 82
Liquidation of the REMIC Pool............................................................ 83
Administrative Matters................................................................... 83
Limitations on Deduction of Certain Expenses............................................. 83
Taxation of Certain Foreign Investors.................................................... 84
Backup Withholding....................................................................... 85
Reporting Requirements................................................................... 85
Federal Income Tax Consequences For Certificates as to Which No REMIC Election Is Made .. 86
Standard Certificates.................................................................... 86
Stripped Certificates.................................................................... 89
Reporting Requirements and Backup Withholding............................................ 92
Taxation of Certain Foreign Investors.................................................... 92
STATE AND OTHER TAX CONSEQUENCES ......................................................... 93
vii
<PAGE>
PAGE
--------
ERISA CONSIDERATIONS ..................................................................... 93
General ................................................................................. 93
Plan Asset Regulations .................................................................. 93
Prohibited Transaction Exemptions ....................................................... 94
Tax Exempt Investors .................................................................... 97
LEGAL INVESTMENT.......................................................................... 97
USE OF PROCEEDS........................................................................... 99
METHOD OF DISTRIBUTION ................................................................... 99
LEGAL MATTERS............................................................................. 100
FINANCIAL INFORMATION..................................................................... 100
RATING.................................................................................... 100
INDEX OF PRINCIPAL DEFINITIONS............................................................ 101
</TABLE>
viii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
SECURITIES OFFERED ............ Mortgage pass-through certificates.
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
TRUSTEE ....................... The trustee (the "Trustee") for each series
of Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--The Trustee".
MASTER SERVICER ............... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series of
Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--Certain Matters
Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the
Depositor".
SPECIAL SERVICER .............. If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series of
Certificates will be named, or the
circumstances under which a Special Servicer
may be appointed will be described, in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements--Collection and Other Servicing
Procedures".
MBS ADMINISTRATOR ............. If a Trust Fund includes MBS, then the
entity responsible for administering such
MBS (the "MBS Administrator") will be named
in the related Prospectus Supplement. If an
entity other than the Trustee and the Master
Servicer is the MBS Administrator, such
entity will be herein referred to as the
"Manager".
REMIC ADMINISTRATOR ........... The person (the "REMIC Administrator")
responsible for the various tax-related
administration duties for a series of
Certificates as to which one or more REMIC
elections have been made, will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements--Certain Matters Regarding the
Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor".
THE MORTGAGE ASSETS ........... The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist of a
pool of mortgage loans ("Mortgage Loans")
secured by first or junior liens on, or
security interests in, one or more of the
following types of real property: (i)
residential properties ("Multifamily
Properties") consisting of five or more
rental or cooperatively-owned dwelling units
in high-rise, mid-rise or garden apartment
buildings or
1
<PAGE>
other residential structures, and mobile
home parks; and (ii) commercial properties
("Commercial Properties") consisting of
office buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
Health Care-Related Facilities (as defined
herein), recreational vehicle parks,
warehouse facilities, mini-warehouse
facilities, self-storage facilities,
industrial facilities, parking lots,
restaurants, mixed use properties (that is,
any combination of the foregoing), and
unimproved land. However, restaurants will
not represent security for a material
concentration of the Mortgage Loans in any
Trust Fund, based on principal balance at
the time such Trust Fund is formed. The
Mortgage Loans will not be guaranteed or
insured by the Depositor or any of its
affiliates or, unless otherwise provided in
the related Prospectus Supplement, by any
governmental agency or instrumentality or by
any other person. If so specified in the
related Prospectus Supplement, some Mortgage
Loans may be delinquent or nonperforming as
of the date the related Trust Fund is
formed.
As and to the extent described in the
related Prospectus Supplement, a Mortgage
Loan (i) may provide for no accrual of
interest or for accrual of interest thereon
at an interest rate (a "Mortgage Rate") that
is fixed over its term or that adjusts from
time to time, or that may be converted at
the borrower's election from an adjustable
to a fixed Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, (ii) may
provide for level payments to maturity or
for payments that adjust from time to time
to accommodate changes in the Mortgage Rate
or to reflect the occurrence of certain
events, and may permit negative
amortization, (iii) may be fully amortizing
or may be partially amortizing or
nonamortizing, with a balloon payment due on
its stated maturity date, (iv) may prohibit
over its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment in
connection with certain prepayments and (v)
may provide for payments of principal,
interest or both, on due dates that occur
monthly, quarterly, semi-annually or at such
other interval as is specified in the
related Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated by
the Depositor. See "Description of the Trust
Funds--Mortgage Loans".
If any Mortgage Loan, or group of related
Mortgage Loans, constitutes a concentration
of credit risk, financial statements or
other financial information with respect to
the related Mortgaged Property or Mortgaged
Properties will be included in the related
Prospectus Supplement. See "Description of
the Trust Funds--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements".
If and to the extent specified in the
related Prospectus Supplement, the Mortgage
Assets with respect to a series of
Certificates may also include, or consist
of, mortgage participations,
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mortgage pass-through certificates and/or
other mortgage-backed securities
(collectively, "MBS"), that evidence an
interest in, or are secured by a pledge of,
one or more mortgage loans that conform to
the descriptions of the Mortgage Loans
contained herein and which may or may not be
issued, insured or guaranteed by the United
States or an agency or instrumentality
thereof. See "Description of the Trust
Funds--MBS".
THE CERTIFICATES .............. Each series of Certificates will be issued
in one or more classes pursuant to a pooling
and servicing agreement or other agreement
specified in the related Prospectus
Supplement (in any case, a "Pooling
Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
As described in the related Prospectus
Supplement, the Certificates of each series,
including the Offered Certificates of such
series, may consist of one or more classes
of Certificates that, among other things:
(i) are senior (collectively, "Senior
Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more
other classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates"); (iii)
are entitled to distributions of interest,
with disproportionate, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of interest
thereon or principal thereof that commence
only after the occurrence of certain events,
such as the retirement of one or more other
classes of Certificates of such series; (v)
provide for distributions of principal
thereof to be made, from time to time or for
designated periods, at a rate that is faster
(and, in some cases, substantially faster)
or slower (and, in some cases, substantially
slower) than the rate at which payments or
other collections of principal are received
on the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust Fund
attributable to prepayment premiums, yield
maintenance payments or equity
participations.
If so specified in the related Prospectus
Supplement, a series of Certificates may
include one or more "Controlled Amortization
Classes", which will entitle the holders
thereof to receive principal distributions
according to a specified principal payment
schedule. Although prepayment risk cannot be
eliminated entirely for any class of
Certificates, a Controlled Amortization
Class will generally provide a relatively
stable cash flow so long as the actual rate
of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively
constant at the rate, or within the range of
rates, of prepayment used to establish the
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<PAGE>
specific principal payment schedule for such
Certificates. Prepayment risk with respect
to a given Mortgage Asset Pool does not
disappear, however, and the stability
afforded to a Controlled Amortization Class
comes at the expense of one or more other
classes of the same series, any of which
other classes may also be a class of Offered
Certificates. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates"
and "--Effect of Prepayments on Yield of
Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of REMIC
Residual Certificates (as defined herein),
will have an initial stated principal amount
(a "Certificate Balance"); and each class of
Certificates, other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates, will
accrue interest on its Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, on a
notional amount (a "Notional Amount"), based
on a fixed, variable or adjustable interest
rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount and/or
Pass-Through Rate (or, in the case of a
variable or adjustable Pass-Through Rate,
the method for determining such rate), as
applicable, for each class of Offered
Certificates.
If so specified in the related Prospectus
Supplement, a class of Certificates may have
two or more component parts, each having
characteristics that are otherwise described
herein as being attributable to separate and
distinct classes.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person or
entity, unless otherwise provided in the
related Prospectus Supplement. See "Risk
Factors--Limited Assets".
DISTRIBUTIONS OF INTEREST ON
THE CERTIFICATES ............. Interest on each class of Offered
Certificates (other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates) of
each series will accrue at the applicable
Pass-Through Rate on the Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, the Notional
Amount thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of the
specified dates on which distributions are
to be made, a "Distribution Date").
Distributions of interest with respect to
one or more classes of Certificates
(collectively, "Accrual Certificates") may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates, and
interest accrued with respect to a class of
Accrual Certificates prior to the occurrence
of such an event will either be added to the
Certificate Balance thereof or otherwise
deferred as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes
of Certificates may
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<PAGE>
be reduced to the extent of certain
delinquencies, losses and other
contingencies described herein and in the
related Prospectus Supplement. See "Risk
Factors--Effect of Prepayments on Average
Life of Certificates" and "--Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest" and
"Description of the
Certificates--Distributions of Interest on
the Certificates".
DISTRIBUTIONS OF PRINCIPAL OF
THE CERTIFICATES ............. Each class of Certificates of each series
(other than certain classes of Stripped
Interest Certificates and certain classes of
REMIC Residual Certificates) will have a
Certificate Balance. The Certificate Balance
of a class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of principal
from future cash flow on the assets in the
related Trust Fund. The initial aggregate
Certificate Balance of all classes of a
series of Certificates will not be greater
than the outstanding principal balance of
the related Mortgage Assets as of a
specified date (the "Cut-off Date"), after
application of scheduled payments due on or
before such date, whether or not received.
As and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related series
of Certificates will be made on each
Distribution Date to the holders of the
class or classes of Certificates of such
series then entitled thereto until the
Certificate Balances of such Certificates
have been reduced to zero. Distributions of
principal with respect to one or more
classes of Certificates: (i) may be made at
a rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than the
rate at which payments or other collections
of principal are received on the Mortgage
Assets in the related Trust Fund; (ii) may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates of the
same series; (iii) may be made, subject to
certain limitations, based on a specified
principal payment schedule; or (iv) may be
contingent on the specified principal
payment schedule for another class of the
same series and the rate at which payments
and other collections of principal on the
Mortgage Assets in the related Trust Fund
are received. Unless otherwise specified in
the related Prospectus Supplement,
distributions of principal of any class of
Offered Certificates will be made on a pro
rata basis among all of the Certificates of
such class. See "Description of the
Certificates--Distributions of Principal of
the Certificates".
CREDIT SUPPORT AND CASH FLOW
AGREEMENTS ................... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund
may be provided to one or more classes of
Certificates of the related series in the
form of subordination of one or more other
classes of Certificates of
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<PAGE>
such series, which other classes may include
one or more classes of Offered Certificates,
or by one or more other types of credit
support, which may include a letter of
credit, a surety bond, an insurance policy,
a guarantee, a reserve fund, or a
combination thereof (any such coverage with
respect to the Certificates of any series,
"Credit Support"). If so provided in the
related Prospectus Supplement, a Trust Fund
may include: (i) guaranteed investment
contracts pursuant to which moneys held in
the funds and accounts established for the
related series will be invested at a
specified rate; or (ii) interest rate
exchange agreements, interest rate cap or
floor agreements, or other agreements
designed to reduce the effects of interest
rate fluctuations on the Mortgage Assets or
on one or more classes of Certificates (any
such agreement, in the case of clause (i) or
(ii), a "Cash Flow Agreement"). Certain
relevant information regarding any
applicable Credit Support or Cash Flow
Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors--Credit Support Limitations",
"Description of the Trust Funds--Credit
Support" and "--Cash Flow Agreements" and
"Description of Credit Support".
ADVANCES ...................... If and to the extent provided in the related
Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, the Master
Servicer, the Special Servicer, the Trustee,
any provider of Credit Support and/or any
other specified person may be obligated to
make, or have the option of making, certain
advances with respect to delinquent
scheduled payments of principal and/or
interest on such Mortgage Loans. Any such
advances made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related
Prospectus Supplement. See "Description of
the Certificates--Advances in Respect of
Delinquencies". If and to the extent
provided in the Prospectus Supplement for a
series of Certificates, any entity making
such advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such advances
are outstanding, payable from amounts in the
related Trust Fund. See "Description of the
Certificates--Advances in Respect of
Delinquencies". If a Trust Fund includes
MBS, any comparable advancing obligation of
a party to the related Pooling Agreement, or
of a party to the related MBS Agreement,
will be described in the related Prospectus
Supplement.
OPTIONAL TERMINATION .......... If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination
through the repurchase of the Mortgage
Assets in the related Trust Fund by the
party or parties specified therein, under
the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class
or classes of Certificates
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<PAGE>
by a specified percentage or amount or upon
a specified date, a party specified therein
may be authorized or required to solicit
bids for the purchase of all of the Mortgage
Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets
to retire such class or classes, under the
circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. The Certificates of each series will
constitute or evidence ownership of either
(i) "regular interests" ("Regular
Certificates") and "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a designated portion thereof,
treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code"), or (ii) interests
("Standard Certificates" or "Stripped
Certificates") in a Trust Fund treated as a
grantor trust (or a partnership) under
applicable provisions of the Code.
Investors are advised to consult their tax
advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT .............. The Offered Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), only if
so specified in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus
Supplement.
RATING ........................ At their respective dates of issuance, each
class of Offered Certificates will be rated
not lower than investment grade by one or
more nationally recognized statistical
rating agencies (each, a "Rating Agency").
See "Rating" herein and in the related
Prospectus Supplement.
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<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any MBS included in such Trust Fund.
LIMITED LIQUIDITY OF OFFERED CERTIFICATES
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate
that an underwriter specified therein intends to establish a secondary market
in such Offered Certificates; however, no underwriter will be obligated to do
so. Any such secondary market may provide less liquidity to investors than
any comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any
Credit Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement
as described herein under the heading "Description of the
Certificates--Reports to Certificateholders". There can be no assurance that
any additional ongoing information regarding the Offered Certificates of any
series will be available through any other source. The limited nature of such
information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such
Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered
Certificates or class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain classes of Offered Certificates (in particular, a
class with a relatively long average life, a Companion Class (as defined
herein) or a class of Stripped Interest Certificates or Stripped Principal
Certificates) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Certificate
in response to an upward or downward movement in prevailing interest rates
may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid by such
holder. The Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis.
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person
8
<PAGE>
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make
payments on a series of Offered Certificates, no other assets will be
available for payment of the deficiency, and the holders of one or more
classes of such Offered Certificates will be required to bear the consequent
loss. Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, if and to the extent described in the
related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If and to the
extent so provided in the Prospectus Supplement for a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage Assets have been incurred, all or a portion of the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
CREDIT SUPPORT LIMITATIONS
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses; for
example, Credit Support may or may not cover loss by reason of fraud or
negligence by a mortgage loan originator or other parties. Any such losses
not covered by Credit Support may, at least in part, be allocated to one or
more classes of Offered Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates
(which may include Offered Certificates), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the
likelihood of temporary shortfalls and ultimate losses to holders of Senior
Certificates, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Offered Certificates of a series are made in a specified
order of priority, any related Credit Support may be exhausted before the
principal of the later paid classes of Offered Certificates of such series
has been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Mortgage Assets may fall primarily upon those
classes of Offered Certificates having a later right of payment. Moreover, if
a form of Credit Support covers the Offered Certificates of more than one
series and losses on the related Mortgage Assets exceed the amount of such
Credit Support, it is possible that the holders of Offered Certificates of
one (or more) such series will be disproportionately benefited by such Credit
Support to the detriment of the holders of Offered Certificates of one (or
more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level
of defaults, delinquencies and losses on the underlying Mortgage Assets and
certain other factors. There can, however, be no assurance that the loss
experience on the related Mortgage Assets will not exceed such assumed
levels. See "Description of the Certificates--Allocation of Losses and
Shortfalls" and "Description of Credit Support". If the losses on the related
Mortgage Assets do exceed such assumed levels, the holders of one or more
classes of Offered Certificates will be required to bear such additional
losses.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the
Offered Certificates of the related series may be highly unpredictable.
Prepayments on the Mortgage Loans in any Trust Fund will result in a faster
rate of principal payments on one or more classes of the related series of
Certificates than if payments on such
9
<PAGE>
Mortgage Loans were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans in a Trust Fund may affect the average life of one or more
classes of Certificates of the related series, including a class of Offered
Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax and legal factors. For
example, if prevailing interest rates fall significantly below the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then, subject to
the particular terms of the Mortgage Loans (e.g., provisions that prohibit
voluntary prepayments during specified periods or impose penalties in
connection therewith) and the ability of borrowers to obtain new financing,
principal prepayments on such Mortgage Loans are likely to be higher than if
prevailing interest rates remain at or above the rates borne by those
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the Mortgage Rates borne by the Mortgage Loans included in a Trust
Fund, then principal prepayments on such Mortgage Loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those Mortgage Loans. There can be no assurance as to the actual
rate of prepayment on the Mortgage Loans in any Trust Fund or that such rate
of prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for
the Mortgage Loans in any Trust Fund, the retirement of any class of
Certificates of the related series could occur significantly earlier or
later, and the average life thereof could be significantly shorter or longer,
than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the
related series will depend on the terms and provisions of such Certificates.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases,
may be none) of such prepayments. A class of Certificates that entitles the
holders thereof to a disproportionately large share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of early
retirement of such class ("Call Risk") if the rate of prepayment is
relatively fast; while a class of Certificates that entitles the holders
thereof to a disproportionately small share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of an
extended average life of such class ("Extension Risk") if the rate of
prepayment is relatively slow. As and to the extent described in the related
Prospectus Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one
or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates,
a Controlled Amortization Class will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Mortgage Loans in
the related Trust Fund remains relatively constant at the rate, or within the
range of rates, of prepayment used to establish the specific principal
payment schedule for such Certificates. Prepayment risk with respect to a
given Mortgage Asset Pool does not disappear, however, and the stability
afforded to a Controlled Amortization Class comes at the expense of one or
more Companion Classes of the same series, any of which Companion Classes may
also be a class of Offered Certificates. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Mortgage Loans in the related Trust Fund when the rate of prepayment is
relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Controlled Amortization Class if all payments
of principal of the Mortgage Loans in the related Trust Fund were allocated
on a pro rata basis.
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EFFECT OF PREPAYMENTS ON YIELD OF CERTIFICATES
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which such Certificates are purchased at
a discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Certificate purchased at
a discount, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. See "Yield and
Maturity Considerations".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such
Offered Certificates will receive payments to which such Certificateholders
are entitled under the related Pooling Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the related Trust Fund. Furthermore, such
rating will not address the possibility that prepayment of the related
Mortgage Loans at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of the Certificates
of such series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a
large pool of mortgage loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans. In
other cases, such criteria may be based upon determinations of the values of
the Mortgaged Properties that provide security for the Mortgage Loans.
However, no assurance can be given that those values will not decline in the
future. As a result, the Credit Support required in respect of the Offered
Certificates of any series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Description of
Credit Support" and "Rating".
CERTAIN FACTORS AFFECTING DELINQUENCY, FORECLOSURE AND LOSS OF THE MORTGAGE
LOANS
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying
Mortgage Loans. Set forth below is a discussion of certain factors that will
affect the full and timely payment of the Mortgage Loans in any Trust Fund.
In addition, a description of certain material considerations associated with
investments in mortgage loans is included herein under "Certain Legal Aspects
of Mortgage Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans
made on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss
in the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds--Mortgage
Loans--Default and Loss Considerations with
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Respect to the Mortgage Loans". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay
the loan may be impaired. A number of the Mortgage Loans may be secured by
liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants.
Accordingly, a decline in the financial condition of the borrower or a
significant tenant, as applicable, may have a disproportionately greater
effect on the net operating income from such Mortgaged Properties than would
be the case with respect to Mortgaged Properties with multiple tenants.
Furthermore, the value of any Mortgaged Property may be adversely affected by
factors generally incident to interests in real property, including changes
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies,
including environmental legislation; natural disasters and civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots; and other
circumstances, conditions or events beyond the control of a Master Servicer
or a Special Servicer. Additional considerations may be presented by the type
and use of a particular Mortgaged Property. For instance, Mortgaged
Properties that operate as hospitals and nursing homes are subject to
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are
often operated pursuant to franchise, management or operating agreements that
may be terminable by the franchisor or operator, and the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law
requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be
greater than for pools of single-family loans because Mortgage Loans in a
Trust Fund will generally consist of a smaller number of higher balance loans
than would a pool of single-family loans of comparable aggregate unpaid
principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to
any such Mortgage Loan, recourse in the event of borrower default will be
limited to the specific real property and other assets, if any, that were
pledged to secure the Mortgage Loan. However, even with respect to those
Mortgage Loans that provide for recourse against the borrower and its assets
generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. See
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Anti-Deficiency
Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all
of the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated thereby, are
available to support debt service on, and ultimate repayment of, the
aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the
Mortgaged Properties securing any such group of Mortgage Loans to generate
net operating income sufficient to pay debt service will result in defaults
and ultimate losses.
There may not be complete identity of ownership of the Mortgaged
Properties securing a group of cross-collateralized Mortgage Loans. In such
an instance, creditors of one or more of the related borrowers could
challenge the cross-collateralization arrangement as a fraudulent conveyance.
Generally, under federal and state fraudulent conveyance statutes, the
incurring of an obligation or the transfer of property by a person will be
subject to avoidance under certain circumstances if the person did not
receive fair consideration or reasonably equivalent value in exchange for
such obligation or transfer and was then insolvent or was rendered insolvent
by such obligation or transfer. Accordingly, a creditor seeking
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ownership of a Mortgaged Property subject to such cross-collateralization to
repay such creditor's claim against the related borrower could assert (i)
that such borrower was insolvent at the time the cross-collateralized
Mortgage Loans were made and (ii) that such borrower did not, when it allowed
its property to be encumbered by a lien securing the indebtedness represented
by the other Mortgage Loans in the group of cross-collateralized Mortgage
Loans, receive fair consideration or reasonably equivalent value for, in
effect, "guaranteeing" the performance of the other borrowers. Although the
borrower making such "guarantee" will be receiving "guarantees" from each of
the other borrowers in return, there can be no assurance that such exchanged
"guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value, and no unqualified legal opinion to that effect
will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise
of a power of sale and because, in general, foreclosure actions are brought
in state court, and the courts of one state cannot exercise jurisdiction over
property in another state, it may be necessary upon a default under any such
Mortgage Loan to foreclose on the related Mortgaged Properties in a
particular order rather than simultaneously in order to ensure that the lien
of the related Mortgages is not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only
partially amortizing over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater
likelihood of default than self-amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by
a number of factors, including the value of the related Mortgaged Property,
the level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
and operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability
of credit for loans secured by multifamily or commercial, as the case may be,
real properties generally. Neither the Depositor nor any of its affiliates
will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent. See "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". While the Master
Servicer or the Special Servicer generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery than liquidation, taking into account the time value of money, there
can be no assurance that any such extension or modification will in fact
increase the present value of receipts from or proceeds of the affected
Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy
of Borrower. Each Mortgage Loan included in any Trust Fund secured by
Mortgaged Property that is subject to leases typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property
and obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of Mortgage
Loans--Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration
Clauses. Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan
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if the borrower sells, transfers or conveys the related Mortgaged Property or
its interest in the Mortgaged Property. Mortgages also may include a
debt-acceleration clause, which permits the lender to accelerate the debt
upon a monetary or nonmonetary default of the mortgagor. Such clauses are
generally enforceable subject to certain exceptions. The courts of all states
will enforce clauses providing for acceleration in the event of a material
payment default. The equity courts of any state, however, may refuse the
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances at a property, if agents or
employees of the lender have become sufficiently involved in the operations
of the borrower, regardless of whether the environmental damage or threat was
caused by the borrower or a prior owner. A lender also risks such liability
on foreclosure of the mortgage. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and
Special Servicer for the related Trust Fund will be required to cause the
borrower on each Mortgage Loan in such Trust Fund to maintain such insurance
coverage in respect of the related Mortgaged Property as is required under
the related Mortgage, including hazard insurance; provided that, as and to
the extent described herein and in the related Prospectus Supplement, each of
the Master Servicer and the Special Servicer may satisfy its obligation to
cause hazard insurance to be maintained with respect to any Mortgaged
Property through acquisition of a blanket policy. In general, the standard
form of fire and extended coverage policy covers physical damage to or
destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds
of risks. Unless the related Mortgage specifically requires the mortgagor to
insure against physical damage arising from such causes, then, to the extent
any consequent losses are not covered by Credit Support, such losses may be
borne, at least in part, by the holders of one or more classes of Offered
Certificates of the related series. See "Description of the Pooling
Agreements--Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher
rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may
be directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. The
Mortgage Loans securing certain series of Certificates may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration.
INCLUSION OF DELINQUENT AND NONPERFORMING MORTGAGE LOANS IN A MORTGAGE ASSET
POOL
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past
due or are nonperforming. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration
of the Mortgage Loans in
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any Trust Fund, based on principal balance at the time such Trust Fund is
formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however,
the same entity may act as both Master Servicer and Special Servicer. Credit
Support provided with respect to a particular series of Certificates may not
cover all losses related to such delinquent or nonperforming Mortgage Loans,
and investors should consider the risk that the inclusion of such Mortgage
Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments in respect of the subject Mortgage Asset Pool and the yield on
the Offered Certificates of such series. See "Description of the Trust
Funds--Mortgage Loans--General".
TERMINATION
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be
conducted in a commercially reasonable manner and, generally, assets will be
sold at their fair market value. In addition, if so specified in the related
Prospectus Supplement, upon the reduction of the aggregate principal balance
of some or all of the Mortgage Assets by a specified percentage, a party or
parties designated therein may be authorized to purchase such Mortgage
Assets, generally at a price equal to, in the case of any Mortgage Asset, the
unpaid principal balance thereof plus accrued interest (or, in some cases, at
fair market value). However, circumstances may arise in which such fair
market value may be less than the unpaid balance of the related Mortgage
Assets, together with interest thereon, sold and therefore, as a result of
such a sale or purchase, the Certificateholders of one or more Classes of
Certificates may receive an amount less than the Certificate Balance of, and
accrued unpaid interest on, their Certificates. See "Description of the
Certificates--Termination."
RISKS ASSOCIATED WITH HEALTH CARE-RELATED PROPERTIES
Government Reimbursement Programs. Certain types of Health Care-Related
Facilities typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid
and Medicare are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings, policy interpretations, delays by
fiscal intermediaries and government funding restrictions. Accordingly, there
can be no assurance that payments under government reimbursement programs
will, in the future, be sufficient to fully reimburse the cost of caring for
program beneficiaries. If such payments are insufficient, net operating
income of those Health Care-Related Facilities that receive revenues from
those sources, and consequently the ability of the related borrowers to meet
their obligations under any Mortgage Loans secured thereby, could be
adversely affected.
Government Regulation. Health Care-Related Facilities are generally
subject to federal and state laws and licensing requirements that relate to
the adequacy of medical care, distribution of pharmaceuticals, rate setting,
equipment, personnel, operating policies and additions to facilities and
services. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations at
a Health Care-Related Facility or, if applicable, bar it from participation
in government reimbursement programs. Furthermore, under applicable federal
and state laws and regulations, Medicare and Medicaid reimbursements are
generally not permitted to be made to any person other than the provider who
actually furnished the related medical goods and services. Accordingly, in
the event of foreclosure, none of the Trustee, the Master Servicer, the
Special Servicer or a subsequent lessee or operator of a Health Care-Related
Facility securing a defaulted Mortgage Loan would generally be entitled to
obtain from federal or state governments any outstanding reimbursement
payments relating to services furnished at such property prior to such
foreclosure. In those cases where Health Care-Related Facilities constitute
Mortgaged Properties, any of the aforementioned events may adversely affect
the ability of the related borrowers to meet their obligations under the
Mortgage Loans secured thereby.
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DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under
the heading "--Mortgage Loans", unless otherwise noted, applies equally to
mortgage loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of
one or more of the following types of real property: (i) residential
properties ("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office
buildings, retail shopping facilities (such as shopping centers, malls and
individual stores), hotels or motels, Health Care-Related Facilities (as
defined herein), recreational vehicle parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial facilities,
parking lots, restaurants, mixed use properties (that is, any combination of
the foregoing), and unimproved land. However, restaurants will not represent
security for a material concentration of the Mortgage Loans in (or the
mortgage loans underlying the MBS in) any Trust Fund, based on principal
balance at the time such Trust Fund is formed. The Multifamily Properties may
include mixed commercial and residential structures and apartment buildings
owned by private cooperative housing corporations ("Cooperatives"). Unless
otherwise specified in the related Prospectus Supplement, each Mortgage will
create a first priority mortgage lien on a fee estate in a Mortgaged
Property. If a Mortgage creates a lien on a borrower's leasehold estate in a
property, then, unless otherwise specified in the related Prospectus
Supplement, the term of any such leasehold will exceed the term of the
Mortgage Note by at least ten years. Unless otherwise specified in the
related Prospectus Supplement, each Mortgage Loan will have been originated
by a person (the "Originator") other than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to
satisfy fully both the Senior Liens and the Mortgage Loan. In the event that
a holder of a Senior Lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. If the Master Servicer were to foreclose on any Mortgage Loan, it would
do so subject to any related Senior Liens. In order for the debt related to
such Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient
to pay off all sums due under the Mortgage Loan and any Senior
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Liens or purchase the Mortgaged Property subject to such Senior Liens. In the
event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment is not obtained and satisfied. Moreover,
deficiency judgments may not be available in certain jurisdictions, or the
particular Mortgage Loan may be a nonrecourse loan, which means that, absent
special facts, recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
repayment of the Mortgage Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of
the related Mortgaged Property and the ability of the Mortgaged Property to
generate income to service the mortgage debt. However, Mortgage Loans which
are seriously delinquent loans (that is, loans more than 60 days delinquent
or as to which foreclosure has been commenced) will not constitute a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage
Loans. Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful
operation of such property (that is, its ability to generate income).
Moreover, as noted above, some or all of the Mortgage Loans included in a
particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important factor in evaluating the
likelihood of default on such a loan. Unless otherwise defined in the related
Prospectus Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan
at any given time is the ratio of (i) the Net Operating Income derived from
the related Mortgaged Property for a twelve-month period to (ii) the
annualized scheduled payments of principal and/or interest on the Mortgage
Loan and any other loans senior thereto that are secured by the related
Mortgaged Property. Unless otherwise defined in the related Prospectus
Supplement, "Net Operating Income" means, for any given period, the total
operating revenues derived from a Mortgaged Property during such period,
minus the total operating expenses incurred in respect of such Mortgaged
Property during such period other than (i) noncash items such as depreciation
and amortization, (ii) capital expenditures and (iii) debt service on the
related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
generally fluctuate over time and may or may not be sufficient to cover debt
service on the related Mortgage Loan at any given time. As the primary source
of the operating revenues of a nonowner occupied, income-producing property,
rental income (and, with respect to a Mortgage Loan secured by a Cooperative
apartment building, maintenance payments from tenant-stockholders of a
Cooperative) may be affected by the condition of the applicable real estate
market and/or area economy. In addition, properties typically leased,
occupied or used on a short-term basis, such as certain health care-related
facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or a tenant,
and Mortgage Loans secured by liens on such properties may pose a greater
likelihood of default and loss than loans secured by liens on Multifamily
Properties or on multi-tenant Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal
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policies, may also affect the likelihood of default on a Mortgage Loan. As
may be further described in the related Prospectus Supplement, in some cases
leases of Mortgaged Properties may provide that the lessee, rather than the
borrower/landlord, is responsible for payment of operating expenses ("Net
Leases"). However, the existence of such "net of expense" provisions will
result in stable Net Operating Income to the borrower/landlord only to the
extent that the lessee is able to absorb operating expense increases while
continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property must be liquidated
following a default. Unless otherwise defined in the related Prospectus
Supplement, the "Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio (expressed as a percentage) of (i) the then outstanding principal
balance of the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property to (ii) the Value of the related
Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, the "Value" of a Mortgaged Property will be its fair market value
as determined by an appraisal of such property conducted by or on behalf of
the Originator in connection with the origination of such loan. The lower the
Loan-to-Value Ratio, the greater the percentage of the borrower's equity in a
Mortgaged Property, and thus (a) the greater the incentive of the borrower to
perform under the terms of the related Mortgage Loan (in order to protect
such equity) and (b) the greater the cushion provided to the lender against
loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the likelihood of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined
at loan origination, and will likely continue to fluctuate from time to time
based upon certain factors including changes in economic conditions and the
real estate market. Moreover, even when current, an appraisal is not
necessarily a reliable estimate of value. Appraised values of
income-producing properties are generally based on the market comparison
method (recent resale value of comparable properties at the date of the
appraisal), the cost replacement method (the cost of replacing the property
at such date), the income capitalization method (a projection of value based
upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these
appraisal methods can present analytical difficulties. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections
of income and expense and the selection of an appropriate capitalization rate
and discount rate. Where more than one of these appraisal methods are used
and provide significantly different results, an accurate determination of
value and, correspondingly, a reliable analysis of the likelihood of default
and loss, is even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property
performance. As a result, if a Mortgage Loan defaults because the income
generated by the related Mortgaged Property is insufficient to cover
operating costs and expenses and pay debt service, then the value of the
Mortgaged Property will reflect such and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be
no assurance that all of such factors will in fact have been prudently
considered by the Originators of the Mortgage Loans, or that, for a
particular Mortgage Loan, they are complete or relevant. See "Risk
Factors--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--General" and "--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted
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at the borrower's election from an adjustable to a fixed Mortgage Rate, or
from a fixed to an adjustable Mortgage Rate, (ii) may provide for level
payments to maturity or for payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events, and may permit negative amortization, (iii) may be fully
amortizing or may be partially amortizing or nonamortizing, with a balloon
payment due on its stated maturity date, and (iv) may prohibit over its term
or for a certain period prepayments (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Date") and/or
require payment of a premium or a yield maintenance payment (a "Prepayment
Premium") in connection with certain prepayments, in each case as described
in the related Prospectus Supplement. A Mortgage Loan may also contain a
provision that entitles the lender to a share of appreciation of the related
Mortgaged Property, or profits realized from the operation or disposition of
such Mortgaged Property or the benefit, if any, resulting from the
refinancing of the Mortgage Loan (any such provision, an "Equity
Participation"), as described in the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
in the related Trust Fund, which, to the extent then applicable, will
generally include the following: (i) the aggregate outstanding principal
balance and the largest, smallest and average outstanding principal balance
of the Mortgage Loans, (ii) the type or types of property that provide
security for repayment of the Mortgage Loans, (iii) the earliest and latest
origination date and maturity date of the Mortgage Loans, (iv) the original
and remaining terms to maturity of the Mortgage Loans, or the respective
ranges thereof, and the weighted average original and remaining terms to
maturity of the Mortgage Loans, (v) the Loan-to-Value Ratios of the Mortgage
Loans (either at origination or as of a more recent date), or the range
thereof, and the weighted average of such Loan-to-Value Ratios, (vi) the
Mortgage Rates borne by the Mortgage Loans, or the range thereof, and the
weighted average Mortgage Rate borne by the Mortgage Loans, (vii) with
respect to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the
index or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
limits on Mortgage Rate adjustments at the time of any adjustment and over
the life of the ARM Loan, (viii) information regarding the payment
characteristics of the Mortgage Loans, including, without limitation, balloon
payment and other amortization provisions, Lock-out Periods and Prepayment
Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans (either
at origination or as of a more recent date), or the range thereof, and the
weighted average of such Debt Service Coverage Ratios, and (x) the geographic
distribution of the Mortgaged Properties on a state-by-state basis. In
appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the
provisions of leases and the nature of tenants of the Mortgaged Properties.
If the Depositor is unable to provide the specific information described
above at the time Offered Certificates of a series are initially offered,
more general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth
in a report which will be available to purchasers of those Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Commission within fifteen days following such
issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master
Servicer's prepayment experience
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irrelevant. Because of the nature of the assets to be serviced and
administered by a Special Servicer, no comparable prepayment information will
be presented with respect to the Special Servicer's multifamily and/or
commercial mortgage loan servicing portfolio.
Mortgage Loans Secured by Health Care-Related Properties. The Mortgaged
Properties may include Senior Housing, Assisted Living Facilities, Skilled
Nursing Facilities and Acute Care Facilities (any of the foregoing, "Health
Care-Related Facilities"). "Senior Housing" generally consist of facilities
with respect to which the residents are ambulatory, handle their own affairs
and typically are couples whose children have left the home and at which the
accommodations are usually apartment style. "Assisted Living Facilities" are
typically single or double room occupancy, dormitory-style housing facilities
which provide food service, cleaning and some personal care and with respect
to which the tenants are able to medicate themselves but may require
assistance with certain daily routines. "Skilled Nursing Facilities" provide
services to post trauma and frail residents with limited mobility who require
extensive medical treatment. "Acute Care Facilities" generally consist of
hospital and other facilities providing short-term, acute medical care
services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and
Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Moreover, governmental
payors have employed cost-containment measures that limit payments to health
care providers, and there exist various proposals for national health care
reform that could further limit those payments. Accordingly, there can be no
assurance that payments under government reimbursement programs will, in the
future, be sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those Health Care-Related Facilities that receive revenues from those
sources, and consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care
or other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation
in the Medicaid and Medicare reimbursement programs. Providers of assisted
living services are also subject to state licensing requirements in certain
states. The failure of an operator to maintain or renew any required license
or regulatory approval could prevent it from continuing operations at a
Health Care-Related Facility or, if applicable, bar it from participation in
government reimbursement programs. Furthermore, under applicable federal and
state laws and regulations, Medicare and Medicaid reimbursements are
generally not permitted to be made to any person other than the provider who
actually furnished the related medical goods and services. Accordingly, in
the event of foreclosure, none of the Trustee, the Master Servicer, the
Special Servicer or a subsequent lessee or operator of any Health
Care-Related Facility securing a defaulted Mortgage Loan (a "Health
Care-Related Mortgaged Property") would generally be entitled to obtain from
federal or state governments any outstanding reimbursement payments relating
to services furnished at such property prior to such foreclosure. Any of the
aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at
least in part, to regulate the supply of nursing beds. The most common method
of control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility, add
beds to an existing facility or, in some states, take certain other actions
(for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer ownership
of a facility). States also regulate nursing bed supply in other ways. For
example, some states
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have imposed moratoria on the licensing of new beds, or on the certification
of new Medicaid beds, or have discouraged the construction of new nursing
facilities by limiting Medicaid reimbursements allocable to the cost of new
construction and equipment. In general, a CON is site specific and operator
specific; it cannot be transferred from one site to another, or to another
operator, without the approval of the appropriate state agency. Accordingly,
if a Mortgage Loan secured by a lien on such a Health Care-Related Mortgaged
Property were foreclosed upon, the purchaser at foreclosure might be required
to obtain a new CON or an appropriate exemption. In addition, compliance by a
purchaser with applicable regulations may in any case require the engagement
of a new operator and the issuance of a new operating license. Upon a
foreclosure, a state regulatory agency may be willing to expedite any
necessary review and approval process to avoid interruption of care to a
facility's residents, but there can be no assurance that any will do so or
that any necessary licenses or approvals will be issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that
generally prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products or
services. Violation of these restrictions can result in license revocation,
civil and criminal penalties, and exclusion from participation in Medicare or
Medicaid programs. The state law restrictions in this area vary considerably
from state to state. Moreover, the federal anti-kickback law includes broad
language that potentially could be applied to a wide range of referral
arrangements, and regulations designed to create "safe harbors" under the law
provide only limited guidance. Accordingly, there can be no assurance that
such laws will be interpreted in a manner consistent with the practices of
the owners or operators of the Health Care-Related Mortgaged Properties that
are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
local and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered
by such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care-Related Facility will generally depend upon the number of
competing facilities in the local market, as well as upon other factors such
as its age, appearance, reputation and management, the types of services it
provides and, where applicable, the quality of care and the cost of that
care. The inability of a Health Care-Related Mortgaged Property to flourish
in a competitive market may increase the likelihood of foreclosure on the
related Mortgage Loan, possibly affecting the yield on one or more classes of
the related series of Offered Certificates.
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA"), the Governmental National
Mortgage Association ("GNMA") or the Federal Agricultural Mortgage
Corporation ("FAMC"), provided that, unless otherwise specified in the
related Prospectus Supplement, each MBS will evidence an interest in, or will
be secured by a pledge of, mortgage loans that conform to the descriptions of
the Mortgage Loans contained herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage
Asset Pool: (a) either will (i) have been previously registered under the
Securities Act of 1933, as amended, (ii) be exempt from such registration
requirements or (iii) have been held for at least the holding period
specified in Rule 144(k) under the Securities Act of 1933, as amended; and
(b) either (i) will have been acquired (other than from the Depositor or an
affiliate thereof) in bona fide secondary market transactions or (ii) if so
specified in the related Prospectus Supplement, may be derived from the
Depositor's (or an affiliate's) unsold allotments from the Depositor (or an
affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer of the MBS
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(the "MBS Issuer") and/or the servicer of the underlying mortgage loans (the
"MBS Servicer") will be parties to the MBS Agreement, generally together with
a trustee (the "MBS Trustee") or, in the alternative, with the original
purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may
have assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the
Trust Fund, (ii) the original and remaining term(s) to stated maturity of the
MBS, if applicable, (iii) the pass-through or bond rate(s) of the MBS or the
formula for determining such rate(s), (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each
of the MBS, (vi) a description of the related credit support, if any, (vii)
the circumstances under which the related underlying mortgage loans, or the
MBS themselves, may be purchased prior to their maturity, (viii) the terms on
which mortgage loans may be substituted for those originally underlying the
MBS, (ix) the type of mortgage loans underlying the MBS and, to the extent
appropriate under the circumstances, such other information in respect of the
underlying mortgage loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements", and (x) the characteristics of any
cash flow agreements that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports
if such MBS was publicly offered or the reports the related MBS Issuer
provides the related MBS Trustee if such MBS was privately issued.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund will be deposited to the extent described herein and in the related
Prospectus Supplement. See "Description of the Pooling
Agreements--Certificate Account".
CREDIT SUPPORT
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may be provided to one or more
classes of Certificates of such series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other
types of Credit Support, which may include a letter of credit, a surety bond,
an insurance policy, a guarantee, a reserve fund, or any combination thereof.
The amount and types of such Credit Support, the identity of the entity
providing it (if applicable) and related information with respect to each
type of Credit Support, if any, will be set forth in the Prospectus
Supplement for a series of Certificates. See "Risk Factors--Credit Support
Limitations" and "Description of Credit Support".
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CASH FLOW AGREEMENTS
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant
to which moneys held in the funds and accounts established for such series
will be invested at a specified rate. The Trust Fund may also include
interest rate exchange agreements, interest rate cap or floor agreements, or
other agreements designed to reduce the effects of interest rate fluctuations
on the Mortgage Assets on one or more classes of Certificates. The principal
terms of any such Cash Flow Agreement, including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof, will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
identify the obligor under the Cash Flow Agreement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can
generally be expected to have the same effect on the yield to maturity and/or
weighted average life of a class of Certificates as will the characteristics
and behavior of comparable Mortgage Loans, the effect may differ due to the
payment characteristics of the MBS. If a Trust Fund includes MBS, the related
Prospectus Supplement will discuss the effect, if any, that the payment
characteristics of the MBS may have on the yield to maturity and weighted
average lives of the Offered Certificates of the related series.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable
or adjustable Pass-Through Rate, which may or may not be based upon the
interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Certificates will specify
the Pass-Through Rate for each class of Offered Certificates of such series
or, in the case of a class of Offered Certificates with a variable or
adjustable Pass-Through Rate, the method of determining the Pass-Through
Rate; the effect, if any, of the prepayment of any Mortgage Loan on the
Pass-Through Rate of one or more classes of Offered Certificates; and whether
the distributions of interest on the Offered Certificates of any class will
be dependent, in whole or in part, on the performance of any obligor under a
Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related
Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans
were distributed to Certificateholders on the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment
only through the date of such prepayment, instead of through the Due Date for
the next succeeding scheduled payment. However, interest accrued on any
series of Certificates and distributable thereon on any Distribution Date
will generally correspond to interest accrued on the Mortgage Loans to their
respective Due Dates during the related Due Period. A "Due Period" will be a
specified time period (generally corresponding in length to the period
between Distribution Dates) and all scheduled payments on the Mortgage Loans
in the related Trust Fund that are
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due during a given Due Period will, to the extent received by a specified
date (the "Determination Date") or otherwise advanced by the related Master
Servicer, Special Servicer or other specified person, be distributed to the
holders of the Certificates of such series on the next succeeding
Distribution Date. Consequently, if a prepayment on any Mortgage Loan is
distributable to Certificateholders on a particular Distribution Date, but
such prepayment is not accompanied by interest thereon to the Due Date for
such Mortgage Loan in the related Due Period, then the interest charged to
the borrower (net of servicing and administrative fees) may be less (such
shortfall, a "Prepayment Interest Shortfall") than the corresponding amount
of interest accrued and otherwise payable on the Certificates of the related
series. If and to the extent that any such shortfall is allocated to a class
of Offered Certificates, the yield thereon will be adversely affected. The
Prospectus Supplement for each series of Certificates will describe the
manner in which any such shortfalls will be allocated among the classes of
such Certificates. The related Prospectus Supplement will also describe any
amounts available to offset such shortfalls.
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the
Mortgage Loans in any Trust Fund will in turn be affected by the amortization
schedules thereof (which, in the case of ARM Loans, may change periodically
to accommodate adjustments to the Mortgage Rates thereon), the dates on which
any balloon payments are due, and the rate of principal prepayments thereon
(including for this purpose, voluntary prepayments by borrowers and also
prepayments resulting from liquidations of Mortgage Loans due to defaults,
casualties or condemnations affecting the related Mortgaged Properties, or
purchases of Mortgage Loans out of the related Trust Fund). Because the rate
of principal prepayments on the Mortgage Loans in any Trust Fund will depend
on future events and a variety of factors (as described below), no assurance
can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend
upon the degree to which they are purchased at a discount or premium and
when, and to what degree, payments of principal on the Mortgage Loans in the
related Trust Fund are in turn distributed on such Certificates (or, in the
case of a class of Stripped Interest Certificates, result in the reduction of
the Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on such Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield. In addition, if an
investor purchases an Offered Certificate at a discount (or premium), and
principal payments are made in reduction of the principal balance or notional
amount of such investor's Offered Certificates at a rate slower (or faster)
than the rate anticipated by the investor during any particular period, any
consequent adverse effects on such investor's yield would not be fully offset
by a subsequent like increase (or decrease) in the rate of principal
payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal the
Certificate Balances of one or more of the other classes of Certificates of
the same series. Accordingly, the yield on such Stripped Interest
Certificates will be inversely related to the rate at which payments and
other collections of principal are received on such Mortgage Assets or
distributions are made in reduction of the Certificate Balances of such
classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect
the yield to investors in Stripped Interest Certificates. If the Offered
Certificates of a series include any such Certificates, the related
Prospectus Supplement will include a
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table showing the effect of various constant assumed levels of prepayment on
yields on such Certificates. Such tables will be intended to illustrate the
sensitivity of yields to various constant assumed prepayment rates and will
not be intended to predict, or to provide information that will enable
investors to predict, yields or prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation,
the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located, the quality of management
of the Mortgaged Properties, the servicing of the Mortgage Loans, possible
changes in tax laws and other opportunities for investment. In general, those
factors which increase the attractiveness of selling a Mortgaged Property or
refinancing a Mortgage Loan or which enhance a borrower's ability to do so,
as well as those factors which increase the likelihood of default under a
Mortgage Loan, would be expected to cause the rate of prepayment in respect
of any Mortgage Asset Pool to accelerate. In contrast, those factors having
an opposite effect would be expected to cause the rate of prepayment of any
Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the
extent to which such provisions may be practicably enforced. To the extent
enforceable, such provisions could constitute either an absolute prohibition
(in the case of a Lock-out Period) or a disincentive (in the case of a
Prepayment Premium) to a borrower's voluntarily prepaying its Mortgage Loan,
thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest
rate is below a mortgage coupon, a borrower may have an increased incentive
to refinance its mortgage loan. Even in the case of ARM Loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on such ARM Loans decline in a manner consistent therewith, the related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. Therefore, as prevailing market
interest rates decline, prepayment speeds would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average
life of one or more classes of the Certificates of such series. Unless
otherwise specified in the related Prospectus Supplement, weighted average
life refers to the average amount of time that will elapse from the date of
issuance of an instrument until each dollar allocable as principal of such
instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments by
borrowers and also prepayments resulting from liquidations of Mortgage Loans
due to default, casualties or condemnations affecting the related Mortgaged
Properties and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative
to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or
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the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents
an assumed constant rate of prepayment each month (expressed as an annual
percentage) relative to the then outstanding principal balance of a pool of
mortgage loans for the life of such loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of mortgage loans, with
different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA assumes prepayment rates of
0.2% per annum of the then outstanding principal balance of such loans in the
first month of the life of the loans and an additional 0.2% per annum in each
month thereafter until the thirtieth month. Beginning in the thirtieth month,
and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of
the anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family mortgage loans. Thus, it is unlikely
that the prepayment experience of the Mortgage Loans included in any Trust
Fund will conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series with a Certificate
Balance, and the percentage of the initial Certificate Balance of each such
class that would be outstanding on specified Distribution Dates, based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the related Mortgage Loans are made at rates corresponding to
various percentages of CPR or SPA, or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions will illustrate the
sensitivity of the weighted average lives of the Certificates to various
assumed prepayment rates and will not be intended to predict, or to provide
information that will enable investors to predict, the actual weighted
average lives of the Certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments
be made at maturity. Because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan
or to sell the related Mortgaged Property, there is a possibility that
Mortgage Loans that require balloon payments may default at maturity, or that
the maturity of such a Mortgage Loan may be extended in connection with a
workout. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the borrower or adverse conditions in the
market where the property is located. In order to minimize losses on
defaulted Mortgage Loans, the Master Servicer or the Special Servicer, to the
extent and under the circumstances set forth herein and in the related
Prospectus Supplement, may be authorized to modify Mortgage Loans that are in
default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan may
delay distributions of principal on a class of Offered Certificates and
thereby extend the weighted average life of such Certificates and, if such
Certificates were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur (that is, Mortgage Loans that provide for the current
payment of interest calculated at a rate lower than the rate at which
interest accrues thereon, with the unpaid portion of such interest being
added to the related principal balance). Negative amortization on one or more
Mortgage Loans in any Trust Fund may result in negative amortization on the
Offered Certificates of the related series. The related Prospectus Supplement
will describe, if applicable, the manner in which negative amortization in
respect of the Mortgage Loans in any Trust Fund is allocated among the
respective classes of Certificates of the related series. The portion of any
Mortgage Loan negative amortization allocated to a class of Certificates may
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. In
addition, an ARM Loan that permits negative amortization would be expected
during a period of
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increasing interest rates to amortize at a slower rate (and perhaps not at
all) than if interest rates were declining or were remaining constant. Such
slower rate of Mortgage Loan amortization would correspondingly be reflected
in a slower rate of amortization for one or more classes of Certificates of
the related series. Accordingly, the weighted average lives of Mortgage Loans
that permit negative amortization (and that of the classes of Certificates to
which any such negative amortization would be allocated or that would bear
the effects of a slower rate of amortization on such Mortgage Loans) may
increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change
in its Mortgage Rate, (ii) provides that its scheduled payment will adjust
less frequently than its Mortgage Rate or (iii) provides for constant
scheduled payments notwithstanding adjustments to its Mortgage Rate.
Accordingly, during a period of declining interest rates, the scheduled
payment on such a Mortgage Loan may exceed the amount necessary to amortize
the loan fully over its remaining amortization schedule and pay interest at
the then applicable Mortgage Rate, thereby resulting in the accelerated
amortization of such Mortgage Loan. Any such acceleration in amortization of
its principal balance will shorten the weighted average life of such Mortgage
Loan and, correspondingly, the weighted average lives of those classes of
Certificates entitled to a portion of the principal payments on such Mortgage
Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate
was purchased at a premium or a discount and (ii) the extent to which the
payment characteristics of such Mortgage Loans delay or accelerate the
distributions of principal on such Certificate (or, in the case of a Stripped
Interest Certificate, delay or accelerate the reduction of the notional
amount thereof). See "--Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage
Loans and, accordingly, the weighted average lives of and yields on the
Certificates of the related series. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings or otherwise, may also have an effect upon the payment patterns
of particular Mortgage Loans and thus the weighted average lives of and
yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in
the related Trust Fund and the timing of such losses and shortfalls. In
general, the earlier that any such loss or shortfall occurs, the greater will
be the negative effect on yield for any class of Certificates that is
required to bear the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series,
including one or more classes of Offered Certificates of such series, may
provide for distributions of
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principal thereof from (i) amounts attributable to interest accrued but not
currently distributable on one or more classes of Accrual Certificates, (ii)
Excess Funds or (iii) any other amounts described in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement,
"Excess Funds" will, in general, represent that portion of the amounts
distributable in respect of the Certificates of any series on any
Distribution Date that represent (i) interest received or advanced on the
Mortgage Assets in the related Trust Fund that is in excess of the interest
currently accrued on the Certificates of such series, or (ii) Prepayment
Premiums, payments from Equity Participations or any other amounts received
on the Mortgage Assets in the related Trust Fund that do not constitute
interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources is likely to have
any material effect on the rate at which such Certificates are amortized and
the consequent yield with respect thereto.
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THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State
of Delaware on March 22, 1996, for the purpose of engaging in the business,
among other things, of acquiring and depositing mortgage assets in trust in
exchange for certificates evidencing interest in such trusts and selling or
otherwise distributing such certificates. The Depositor is not an affiliate
of Deutsche Bank AG. The principal executive offices of the Depositor are
located at One International Place, Room 520, Boston, Massachusetts 02110.
Its telephone number is (617) 951-7690. The Depositor's capitalization is
nominal. All of the shares of capital stock of the Depositor are held by The
Deutsche Mortgage & Asset Receiving Trust, a Massachusetts charitable lead
trust (the "DMARC Trust") formed by J H Management Corporation and J H
Holdings Corporation, both of which are Massachusetts corporations. J H
Holdings Corporation is the trustee of the DMARC Trust, which holds no assets
other than the stock of the Depositor. All of the stock of J H Holdings
Corporation and of J H Management Corporation is held by the 1960 Trust, an
independent charitable organization qualified under Section 501(c)(3) of the
Code, and operated for the benefit of a Massachusetts charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on
the Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or
an affiliate thereof. Deutsche Bank AG is the largest banking institution in
the Federal Republic of Germany and one of the largest in the world. It is
the parent company of a group (the "Deutsche Bank Group") consisting of
commercial banks, investment banking and fund management companies, mortgage
banks and property finance companies, installment financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies. The Deutsche Bank Group employs over 74,000
staff members at more than 2,400 branches and offices around the world.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement.
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one
or more classes of Certificates that, among other things: (i) provide for the
accrual of interest on the Certificate Balance or Notional Amount thereof at
a fixed, variable or adjustable rate; (ii) constitute Senior Certificates or
Subordinate Certificates; (iii) constitute Stripped Interest Certificates or
Stripped Principal Certificates; (iv) provide for distributions of interest
thereon or principal thereof that commence only after the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (v) provide for distributions of principal
thereof to be made, from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund; (vi) provide for distributions of principal thereof to be made,
subject to available funds, based on a specified principal payment schedule
or other methodology; or (vii) provide for distributions based on collections
on the Mortgage Assets in the related Trust Fund attributable to Prepayment
Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having
characteristics that are otherwise described herein as being attributable to
separate and distinct classes. For example, a class of Certificates may have
a Certificate Balance on which it accrues interest at a fixed, variable or
adjustable rate. Such class of Certificates may also have certain
characteristics attributable to Stripped Interest Certificates insofar as it
may also entitle the holders thereof to distributions of interest accrued on
a Notional Amount at a different fixed, variable or
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adjustable rate. In addition, a class of Certificates may accrue interest on
one portion of its Certificate Balance at one fixed, variable or adjustable
rate and on another portion of its Certificate Balance at a different fixed,
variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of DTC. The Offered Certificates of
each series (if issued as Definitive Certificates) may be transferred or
exchanged, subject to any restrictions on transfer described in the related
Prospectus Supplement, at the location specified in the related Prospectus
Supplement, without the payment of any service charges, other than any tax or
other governmental charge payable in connection therewith. Interests in a
class of Book-Entry Certificates will be transferred on the book-entry
records of DTC and its participating organizations. If so specified in the
related Prospectus Supplement, arrangements may be made for clearance and
settlement through CEDEL, S.A. or the Euroclear System, if they are
participants in DTC.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the holders of Certificates
of such series on such date. The particular components of the Available
Distribution Amount for any series and Distribution Date will be more
specifically described in the related Prospectus Supplement. In general, the
Distribution Date for a series of Certificates will be the 25th day of each
month (or, if any such 25th day is not a business day, the next succeeding
business day), commencing in the month immediately following the month in
which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount
of each distribution will be determined as of the close of business on the
date (the "Determination Date") specified in the related Prospectus
Supplement. All distributions with respect to each class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates in such class in proportion to the respective Percentage
Interests evidenced thereby unless otherwise specified in the related
Prospectus Supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank
or other entity having appropriate facilities therefor, if such
Certificateholder has provided the person required to make such payments with
wiring instructions no later than the related Record Date or such other date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in
the requisite amount or denomination specified therein), or by check mailed
to the address of such Certificateholder as it appears on the Certificate
Register; provided, however, that the final distribution in retirement of any
class of Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance
or notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different
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Pass-Through Rate, which in each case may be fixed, variable or adjustable.
The related Prospectus Supplement will specify the Pass-Through Rate or, in
the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate, for each class of Offered Certificates.
Unless otherwise specified in the related Prospectus Supplement, interest on
the Certificates of each series will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions
of accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates
that is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class
and such Distribution Date, subject to the sufficiency of that portion, if
any, of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof
on each Distribution Date or otherwise deferred as described in the related
Prospectus Supplement. With respect to each class of Certificates (other than
certain classes of Stripped Interest Certificates and certain classes of
REMIC Residual Certificates), the "Accrued Certificate Interest" for each
Distribution Date will be equal to interest at the applicable Pass-Through
Rate accrued for a specified period (generally the most recently ended
calendar month) on the outstanding Certificate Balance of such class of
Certificates immediately prior to such Distribution Date. Unless otherwise
provided in the related Prospectus Supplement, the Accrued Certificate
Interest for each Distribution Date on a class of Stripped Interest
Certificates will be similarly calculated except that it will accrue on a
Notional Amount that is either (i) based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal to the
Certificate Balances of one or more other classes of Certificates of the same
series. Reference to a Notional Amount with respect to a class of Stripped
Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related Prospectus Supplement, the amount
of Accrued Certificate Interest that is otherwise distributable on (or, in
the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) one or more classes of the Certificates of a series
may be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest", exceed the amount of any sums that are applied to
offset the amount of such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on
(or, in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of Offered Certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement,
any reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Certificates by reason of the allocation to such
class of a portion of any deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund will result in a corresponding increase in
the Certificate Balance of such class. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates" and "--Effect of Prepayments on
Yield of Certificates" and "Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will
be entitled to receive as principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a class of Certificates will be reduced by
distributions of principal made thereon from time to time and, if and to the
extent so provided in the related Prospectus Supplement, further by any
losses incurred in respect of the related Mortgage Assets allocated thereto
from time to time. In turn, the outstanding Certificate Balance of a class of
Certificates
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may be increased as a result of any deferred interest on or in respect of the
related Mortgage Assets being allocated thereto from time to time, and will
be increased, in the case of a class of Accrual Certificates prior to the
Distribution Date on which distributions of interest thereon are required to
commence, by the amount of any Accrued Certificate Interest in respect
thereof (reduced as described above). The initial aggregate Certificate
Balance of all classes of a series of Certificates will not be greater than
the aggregate outstanding principal balance of the related Mortgage Assets as
of a specified date (the "Cut-off Date"), after application of scheduled
payments due on or before such date, whether or not received. The initial
Certificate Balance of each class of a series of Certificates will be
specified in the related Prospectus Supplement. As and to the extent
described in the related Prospectus Supplement, distributions of principal
with respect to a series of Certificates will be made on each Distribution
Date to the holders of the class or classes of Certificates of such series
entitled thereto until the Certificate Balances of such Certificates have
been reduced to zero. Distributions of principal with respect to one or more
classes of Certificates may be made at a rate that is faster (and, in some
cases, substantially faster) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund. Distributions of principal with respect to one or more classes of
Certificates may not commence until the occurrence of certain events, such as
the retirement of one or more other classes of Certificates of the same
series, or may be made at a rate that is slower (and, in some cases,
substantially slower) than the rate at which payments or other collections of
principal are received on the Mortgage Assets in the related Trust Fund.
Distributions of principal with respect to one or more classes of
Certificates (each such class, a "Controlled Amortization Class") may be
made, subject to available funds, based on a specified principal payment
schedule. Distributions of principal with respect to one or more other
classes of Certificates (each such class, a "Companion Class") may be
contingent on the specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at which payments and
other collections of principal on the Mortgage Assets in the related Trust
Fund are received. Unless otherwise specified in the related Prospectus
Supplement, distributions of principal of any class of Offered Certificates
will be made on a pro rata basis among all of the Certificates of such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums
or payments in respect of Equity Participations received on or in connection
with the Mortgage Assets in any Trust Fund will be distributed on each
Distribution Date to the holders of the class of Certificates of the related
series entitled thereto in accordance with the provisions described in such
Prospectus Supplement. Alternatively, such items may be retained by the
Depositor or any of its affiliates or by any other specified person and/or
may be excluded as Trust Assets.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates. See "Description of Credit Support".
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special
Servicer, the Trustee, any provider of Credit Support and/or any other
specified person may be obligated to advance, or have the option of
advancing, on or before each Distribution Date, from its or their own funds
or from excess funds held in the related Certificate Account that are not
part of the Available Distribution Amount for the related series of
Certificates for such Distribution Date, an amount up to the aggregate of any
payments of principal (other
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than the principal portion of any balloon payments) and interest that were
due on or in respect of such Mortgage Loans during the related Due Period and
were delinquent on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including
amounts drawn under any fund or instrument constituting Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the
related Prospectus Supplement, including, in the case of a series that
includes one or more classes of Subordinate Certificates, if so identified,
collections on other Mortgage Assets in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously
made by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable
Advance will be reimbursable thereto from any amounts in the related
Certificate Account prior to any distributions being made to the related
series of Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on or prior to
any future Distribution Date to the extent that funds in such Certificate
Account on such Distribution Date are less than payments required to be made
to the related series of Certificateholders on such date. If so specified in
the related Prospectus Supplement, the obligation of a Master Servicer,
Special Servicer, Trustee or other entity to make advances may be secured by
a cash advance reserve fund or a surety bond. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any
such surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all
of such advances for a specified period during which such advances are
outstanding at the rate specified in such Prospectus Supplement, and such
entity will be entitled to payment of such interest periodically from general
collections on the Mortgage Loans in the related Trust Fund prior to any
payment to the related series of Certificateholders or as otherwise provided
in the related Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a
party to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the holders
of each class of the Offered Certificates of a series, a Master Servicer,
Manager or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will
set forth, among other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class
of Offered Certificates that was allocable to (A) Prepayment Premiums and
(B) payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are
entitled;
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(v) if the related Trust Fund includes Mortgage Loans, the aggregate
amount of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if
payable directly out of the related Trust Fund, by any Special Servicer
and any Sub-Servicer) and, if the related Trust Fund includes MBS, the
amount of administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the
related Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage
Loans that are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal
prepayments made with respect to such Mortgage Loans during the related
Prepayment Period (that is, the specified period, generally corresponding
in length to the period between Distribution Dates, during which
prepayments and other unscheduled collections on the Mortgage Loans in the
related Trust Fund must be received in order to be distributed on a
particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of
such class of Certificates at the close of business on such Distribution
Date, separately identifying any reduction in such Certificate Balance or
Notional Amount due to the allocation of any losses in respect of the
related Mortgage Assets, any increase in such Certificate Balance or
Notional Amount due to the allocation of any negative amortization in
respect of the related Mortgage Assets and any increase in the Certificate
Balance of a class of Accrual Certificates, if any, in the event that
Accrued Certificate Interest has been added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through
Rate or an adjustable Pass-Through Rate, the Pass-Through Rate applicable
thereto for such Distribution Date and, if determinable, for the next
succeeding Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve
fund as of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a
surety bond, the amount of coverage under each such instrument as of the
close of business on such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a
percentage. The Prospectus Supplement for each series of Certificates may
describe additional information to be included in reports to the holders of
the Offered Certificates of such series.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, Manager or Trustee for a series of Certificates, as the
case may be, will be required to furnish to each person who at any time
during the calendar year was a holder of an Offered Certificate of such
series a statement containing the information set forth in subclauses
(i)-(iii) above, aggregated for such calendar year or the applicable portion
thereof during which such person was a Certificateholder. Such obligation
will be deemed to have been satisfied to the extent that substantially
comparable information is provided pursuant to any requirements of the Code
as are from time to time in force. See, however, "--Book-Entry Registration
and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability
of the related Master Servicer, Manager or Trustee, as the case may be, to
include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
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such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that
series in connection with distributions made to them. The Depositor will
provide the same information with respect to any MBSs in its own reports that
were publicly offered and the reports the related MBS Issuer provides to the
Trustee if privately issued.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes
of such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement.
See "Description of the Pooling Agreements--Amendment". The holders of
specified amounts of Certificates of a particular series will have the right
to act as a group to remove the related Trustee and also upon the occurrence
of certain events which if continuing would constitute an Event of Default on
the part of the related Master Servicer, Special Servicer or REMIC
Administrator. See "Description of the Pooling Agreements--Events of
Default", "--Rights Upon Event of Default" and "--Resignation and Removal of
the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of
all property acquired upon foreclosure of any Mortgage Loan subject thereto
and (ii) the payment (or provision for payment) to the Certificateholders of
that series of all amounts required to be paid to them pursuant to such
Pooling Agreement. Written notice of termination of a Pooling Agreement will
be given to each Certificateholder of the related series, and the final
distribution will be made only upon presentation and surrender of the
Certificates of such series at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set
forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for
the purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation
of bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in
which such fair market value may be less than the unpaid balance of the
Mortgage Loans sold and therefore, as a result of such a sale, the
Certificateholders of one or more Classes of Certificates may receive an
amount less than the Certificate Balance of, and accrued unpaid interest on,
their Certificates.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be
offered in book-entry format through the facilities of DTC, and each such
class will be represented by one or more global Certificates registered in
the name of The Depository Trust Company ("DTC") or its nominee. If so
provided in the Prospectus Supplement, arrangements may be made for clearance
and settlement through the Euroclear System or CEDEL, S.A., if they are
participants in DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve
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System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participating organizations ("DTC Participants") and
facilitate the clearance and settlement of securities transactions between
DTC Participants through electronic computerized book-entry changes in their
accounts, thereby eliminating the need for physical movement of securities
certificates. DTC Participants that maintain accounts with DTC include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. DTC is owned by a number of
DTC Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as banks, brokers,
dealers and trust companies that directly or indirectly clear through or
maintain a custodial relationship with a DTC Participant that maintains as
account with DTC. The rules applicable to DTC and DTC Participants are on
file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for such
purpose. In turn, the Financial Intermediary's ownership of such Certificates
will be recorded on the records of DTC (or of a participating firm that acts
as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC Participant). Therefore, the beneficial owner must
rely on the foregoing procedures to evidence its beneficial ownership of such
Certificates. The beneficial ownership interest of the owner of a Book-Entry
Certificate (a "Certificate Owner") may only be transferred by compliance
with the rules, regulations and procedures of such Financial Intermediaries
and DTC Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on such
date. Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of each such DTC Participant (and not of DTC, the
Depositor or any Trustee, Master Servicer, Special Servicer or Manager),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Accordingly, under a book-entry system, Certificate Owners may
receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement)
of Book-Entry Certificates will be the nominee of DTC, and the Certificate
Owners will not be recognized as Certificateholders under the Pooling
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly
through the DTC Participants who in turn will exercise their rights through
DTC. The Depositor has been informed that DTC will take action permitted to
be taken by a Certificateholder under a Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC interests
in the Book-Entry Certificates are credited. DTC may take conflicting actions
with respect to the Book-Entry Certificates to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the
ability of a Certificate Owner to pledge its interest in
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Book-Entry Certificates to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of its interest in
Book-Entry Certificates, may be limited due to the lack of a physical
certificate evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) the Depositor advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Certificates and the Depositor is unable
to locate a qualified successor or (ii) the Depositor, at its option, elects
to terminate the book-entry system through DTC with respect to such
Certificates. Upon the occurrence of either of the events described in the
preceding sentence, DTC will be required to notify all DTC Participants of
the availability through DTC of Definitive Certificates. Upon surrender by
DTC of the certificate or certificates representing a class of Book-Entry
Certificates, together with instructions for registration, the Trustee for
the related series or other designated party will be required to issue to the
Certificate Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the holders of such
Definitive Certificates will be recognized as "Certificateholders" under and
within the meaning of the related Pooling Agreement.
DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one
or more REMIC elections have been made with respect to the Trust Fund, the
REMIC Administrator. However, a Pooling Agreement that relates to a Trust
Fund that includes MBS may include a Manager as a party, but may not include
a Master Servicer, Special Servicer or other servicer as a party. All parties
to each Pooling Agreement under which Certificates of a series are issued
will be identified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Mortgage Asset Seller or an affiliate
thereof may perform the functions of Master Servicer, Special Servicer,
Manager or REMIC Administrator. If so specified in the related Prospectus
Supplement, the Master Servicer may also perform the duties of Special
Servicer, and the Master Servicer, the Special Servicer or the Trustee may
also perform the duties of REMIC Administrator. Any party to a Pooling
Agreement or any affiliate thereof may own Certificates issued thereunder;
however, except in limited circumstances (including with respect to required
consents to certain amendments to a Pooling Agreement), Certificates issued
thereunder that are held by the Master Servicer or Special Servicer for the
related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. However,
the provisions of each Pooling Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may
appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize
all of the material provisions of the related Pooling Agreement. The
summaries herein do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each series of Certificates and the description of such
provisions in the related Prospectus Supplement. The Depositor will provide a
copy of the Pooling Agreement (without exhibits) that relates to any series
of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to it at its principal executive offices
specified herein under "The Depositor".
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans
to be included in the related Trust Fund, together with,
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unless otherwise specified in the related Prospectus Supplement, all
principal and interest to be received on or with respect to such Mortgage
Loans after the Cut-off Date, other than principal and interest due on or
before the Cut-off Date. The Trustee will, concurrently with such assignment,
deliver the Certificates to or at the direction of the Depositor in exchange
for the Mortgage Loans and the other assets to be included in the Trust Fund
for such series. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the related Pooling Agreement. Such schedule
generally will include detailed information that pertains to each Mortgage
Loan included in the related Trust Fund, which information will typically
include the address of the related Mortgaged Property and type of such
property; the Mortgage Rate and, if applicable, the applicable index, gross
margin, adjustment date and any rate cap information; the original and
remaining term to maturity; the amortization term; and the original and
outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to
a custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee
(or its nominee), the Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office), an
assignment of the Mortgage in blank or to the Trustee (or its nominee) in
recordable form, together with any intervening assignments of the Mortgage
with evidence of recording thereon (except for any such assignment not
returned from the public recording office), and, if applicable, any riders or
modifications to such Mortgage Note and Mortgage, together with certain other
documents at such times as set forth in the related Pooling Agreement. Such
assignments may be blanket assignments covering Mortgages on Mortgaged
Properties located in the same county, if permitted by law. Notwithstanding
the foregoing, a Trust Fund may include Mortgage Loans where the original
Mortgage Note is not delivered to the Trustee if the Depositor delivers, or
causes to be delivered, to the related Trustee (or such custodian) a copy or
a duplicate original of the Mortgage Note, together with an affidavit
certifying that the original thereof has been lost or destroyed. In addition,
if the Depositor cannot deliver, with respect to any Mortgage Loan, the
Mortgage or any intervening assignment with evidence of recording thereon
concurrently with the execution and delivery of the related Pooling Agreement
because of a delay caused by the public recording office, the Depositor will
deliver, or cause to be delivered, to the related Trustee (or such custodian)
a true and correct photocopy of such Mortgage or assignment as submitted for
recording. The Depositor will deliver, or cause to be delivered, to the
related Trustee (or such custodian) such Mortgage or assignment with evidence
of recording indicated thereon after receipt thereof from the public
recording office. If the Depositor cannot deliver, with respect to any
Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because such Mortgage or assignment has been lost, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment
with evidence of recording thereon. Unless otherwise specified in the related
Prospectus Supplement, assignments of Mortgage to the Trustee (or its
nominee) will be recorded in the appropriate public recording office, except
in states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Depositor or the originator of such Mortgage Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered
to it within a specified period of days after receipt thereof, and the
Trustee (or such custodian) will hold such documents in trust for the benefit
of the Certificateholders of such series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the Certificateholders of the related
series, the Trustee (or such custodian) will be required to notify the Master
Servicer, the Special Servicer and the Depositor, and one of such persons
will be required to notify the relevant Mortgage Asset Seller. In that case,
and if the Mortgage Asset Seller cannot deliver the document or cure the
defect within a specified number of days after receipt of such notice, then,
except as otherwise specified below or in the related Prospectus Supplement,
the Mortgage Asset Seller will be obligated to repurchase the related
Mortgage Loan from
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the Trustee at a price generally equal to the unpaid principal balance
thereof, together with accrued but unpaid interest through a date on or about
the date of purchase, or at such other price as will be specified in the
related Prospectus Supplement (in any event, the "Purchase Price"). If so
provided in the Prospectus Supplement for a series of Certificates, a
Mortgage Asset Seller, in lieu of repurchasing a Mortgage Loan as to which
there is missing or defective loan documentation, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy to holders of the Certificates of any series
or to the related Trustee on their behalf for missing or defective Mortgage
Loan documentation, and neither the Depositor nor, unless it is the Mortgage
Asset Seller, the Master Servicer or the Special Servicer will be obligated
to purchase or replace a Mortgage Loan if a Mortgage Asset Seller defaults on
its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage
Loans in any Trust Fund and to maintain possession of and, if applicable, to
review the documents relating to such Mortgage Loans, in any case as the
agent of the Trustee. The identity of any such custodian to be appointed on
the date of initial issuance of the Certificates will be set forth in the
related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule
of Mortgage Loans appearing as an exhibit to the related Pooling Agreement;
(ii) the enforceability of the related Mortgage Note and Mortgage and the
existence of title insurance insuring the lien priority of the related
Mortgage; (iii) the Warranting Party's title to the Mortgage Loan and the
authority of the Warranting Party to sell the Mortgage Loan; and (iv) the
payment status of the Mortgage Loan. It is expected that in most cases the
Warranting Party will be the Mortgage Asset Seller; however, the Warranting
Party may also be an affiliate of the Mortgage Asset Seller, the Depositor or
an affiliate of the Depositor, the Master Servicer, the Special Servicer or
another person acceptable to the Depositor. The Warranting Party, if other
than the Mortgage Asset Seller, will be identified in the related Prospectus
Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will
be required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of
the related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee at the
applicable Purchase Price. If so provided in the Prospectus Supplement for a
series of Certificates, a Warranting Party, in lieu of repurchasing a
Mortgage Loan as to which a breach has occurred, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy available to holders of the Certificates of
any series or to the related Trustee on their behalf for a breach of
representation and warranty by a Warranting Party, and neither the Depositor
nor the Master Servicer, in either case unless it is the Warranting Party,
will be obligated to purchase or replace a Mortgage Loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the
related series of Certificates is issued, and thus may not address
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events that may occur following the date as of which they were made. However,
the Depositor will not include any Mortgage Loan in the Trust Fund for any
series of Certificates if anything has come to the Depositor's attention that
would cause it to believe that the representations and warranties made in
respect of such Mortgage Loan will not be accurate in all material respects
as of the date of issuance. The date as of which the representations and
warranties regarding the Mortgage Loans in any Trust Fund were made will be
specified in the related Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer for any Mortgage Pool, directly or
through Sub-Servicers, will each be obligated under the related Pooling
Agreement to service and administer the Mortgage Loans in such Mortgage Pool
for the benefit of the related Certificateholders, in accordance with
applicable law and further in accordance with the terms of such Pooling
Agreement, such Mortgage Loans and any instrument of Credit Support included
in the related Trust Fund. Subject to the foregoing, the Master Servicer and
the Special Servicer will each have full power and authority to do any and
all things in connection with such servicing and administration that it may
deem necessary and desirable.
As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that
it services and will be obligated to follow such collection procedures as it
would follow with respect to mortgage loans that are comparable to such
Mortgage Loans and held for its own account, provided (i) such procedures are
consistent with the terms of the related Pooling Agreement and (ii) do not
impair recovery under any instrument of Credit Support included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer and
the Special Servicer will each be permitted, in its discretion, unless
otherwise specified in the related Prospectus Supplement, to waive any
Prepayment Premium, late payment charge or other charge in connection with
any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be
required to perform as to the Mortgage Loans in such Trust Fund various other
customary functions of a servicer of comparable loans, including maintaining
escrow or impound accounts, if required under the related Pooling Agreement,
for payment of taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items; attempting to collect
delinquent payments; supervising foreclosures; negotiating modifications;
conducting property inspections on a periodic or other basis; managing (or
overseeing the management of) Mortgaged Properties acquired on behalf of such
Trust Fund through foreclosure, deed-in-lieu of foreclosure or otherwise
(each, an "REO Property"); and maintaining servicing records relating to such
Mortgage Loans. The related Prospectus Supplement will specify when and the
extent to which servicing of a Mortgage Loan is to be transferred from the
Master Servicer to the Special Servicer. In general, and subject to the
discussion in the related Prospectus Supplement, a Special Servicer will be
responsible for the servicing and administration of: (i) Mortgage Loans that
are delinquent in respect of a specified number of scheduled payments; (ii)
Mortgage Loans as to which the related borrower has entered into or consented
to bankruptcy, appointment of a receiver or conservator or similar insolvency
proceeding, or the related borrower has become the subject of a decree or
order for such a proceeding which shall have remained in force undischarged
or unstayed for a specified number of days; and (iii) REO Properties. If so
specified in the related Prospectus Supplement, a Pooling Agreement also may
provide that if a default on a Mortgage Loan has occurred or, in the judgment
of the related Master Servicer, a payment default is reasonably foreseeable,
the related Master Servicer may elect to transfer the servicing thereof, in
whole or in part, to the related Special Servicer. Unless otherwise provided
in the related Prospectus Supplement, when the circumstances no longer
warrant a Special Servicer's continuing to service a particular Mortgage Loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the Special Servicer and such borrower), the
Master Servicer will resume the servicing duties with respect thereto. If and
to the extent provided in the related Pooling Agreement and described in the
related Prospectus Supplement, a Special Servicer may perform certain limited
duties in respect of Mortgage Loans for which the Master Servicer is
primarily responsible (including, if so specified, performing property
inspections and evaluating financial statements); and a
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Master Servicer may perform certain limited duties in respect of any Mortgage
Loan for which the Special Servicer is primarily responsible (including, if
so specified, continuing to receive payments on such Mortgage Loan (including
amounts collected by the Special Servicer), making certain calculations with
respect to such Mortgage Loan and making remittances and preparing certain
reports to the Trustee and/or Certificateholders with respect to such
Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be responsible for filing and settling
claims in respect of particular Mortgage Loans under any applicable
instrument of Credit Support. See "Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a mortgagor that is unable to make Mortgage Loan payments may
also be unable to make timely payment of taxes and otherwise to maintain and
insure the related Mortgaged Property. In general, the related Special
Servicer will be required to monitor any Mortgage Loan that is in default,
evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related Mortgaged
Property, initiate corrective action in cooperation with the Mortgagor if
cure is likely, inspect the related Mortgaged Property and take such other
actions as it deems necessary and appropriate. A significant period of time
may elapse before the Special Servicer is able to assess the success of any
such corrective action or the need for additional initiatives. The time
within which the Special Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure)
on behalf of the Certificateholders of the related series may vary
considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a mortgagor files a bankruptcy petition, the Special
Servicer may not be permitted to accelerate the maturity of the Mortgage Loan
or to foreclose on the related Mortgaged Property for a considerable period
of time. See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and
other similar matters. In general, the Master Servicer may approve such a
request if it has determined, exercising its business judgment in accordance
with the applicable servicing standard, that such approval will not adversely
affect the security for, or the timely and full collectability of, the
related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be
filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not
require that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer also will be required to notify any superior lienholder
in writing of the existence of the Mortgage Loan and request notification of
any action (as described below) to be taken against the mortgagor or the
Mortgaged Property by the superior lienholder. If the Master Servicer is
notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer and the
Special Servicer will each be required to take, on behalf of the related
Trust Fund, whatever actions are necessary to protect the interests of the
related Certificateholders and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
or Special Servicer, as applicable, will be required to advance the necessary
funds to cure the default or
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reinstate the Senior Lien, if such advance is in the best interests of the
related Certificateholders and the Master Servicer or Special Servicer, as
applicable, determines such advances are recoverable out of payments on or
proceeds of the related Mortgage Loan.
SUB-SERVICERS
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless
otherwise specified in the related Prospectus Supplement, such Master
Servicer or Special Servicer will remain obligated under the related Pooling
Agreement. Unless otherwise provided in the related Prospectus Supplement,
each sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must provide for servicing of the applicable
Mortgage Loans consistent with the related Pooling Agreement. The Master
Servicer and Special Servicer in respect of any Mortgage Asset Pool will each
be required to monitor the performance of Sub-Servicers retained by it and
will have the right to remove a Sub-Servicer retained by it at any time it
considers such removal to be in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master Servicer's or Special
Servicer's compensation pursuant to the related Pooling Agreement is
sufficient to pay such fees. Each Sub-Servicer will be reimbursed by the
Master Servicer or Special Servicer, as the case may be, that retained it for
certain expenditures which it makes, generally to the same extent such Master
Servicer or Special Servicer would be reimbursed under a Pooling Agreement.
See "--Certificate Account" and "--Servicing Compensation and Payment of
Expenses".
CERTIFICATE ACCOUNT
General. The Master Servicer, the Trustee and/or the Special Servicer
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained the corresponding
Certificate Account, which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
as an interest-bearing or a noninterest-bearing account and the funds held
therein may be invested pending each succeeding Distribution Date in United
States government securities and other investment grade obligations that are
acceptable to each Rating Agency that has rated any one or more classes of
Certificates of the related series ("Permitted Investments"). Such Permitted
Investments include federal funds, uncertificated certificates of deposit,
time deposits, bankers' acceptances and repurchase agreements, certain United
States dollar-denominated commercial paper, units of money market funds that
maintain a constant net asset value and any other obligations or security
acceptable to each Rating Agency. Unless otherwise provided in the related
Prospectus Supplement, any interest or other income earned on funds in a
Certificate Account will be paid to the related Master Servicer, Trustee or
Special Servicer as additional compensation. A Certificate Account may be
maintained with the related Master Servicer, Special Servicer, Trustee or
Mortgage Asset Seller or with a depository institution that is an affiliate
of any of the foregoing or of the Depositor, provided that it complies with
applicable Rating Agency standards. If permitted by the applicable Rating
Agency or Agencies, a Certificate Account may contain funds relating to more
than one series of mortgage pass-through certificates and may contain other
funds representing payments on mortgage loans owned by the related Master
Servicer or Special Servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the
Special Servicer subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date) are to be deposited in the Certificate Account
for each Trust Fund that includes Mortgage Loans, within a certain period
following receipt (in the case of collections on or in respect of the
Mortgage Loans) or otherwise as provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
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(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof
retained by the Master Servicer or the Special Servicer as its servicing
compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial
condemnation of a Mortgaged Property (other than proceeds applied to the
restoration of the property or released to the related borrower)
("Insurance Proceeds" and "Condemnation Proceeds", respectively) and all
other amounts received and retained in connection with the liquidation of
defaulted Mortgage Loans or property acquired in respect thereof, by
foreclosure or otherwise (such amounts, together with those amounts listed
in clause (vii) below, "Liquidation Proceeds"), together with the net
operating income (less reasonable reserves for future expenses) derived
from the operation of any Mortgaged Properties acquired by the Trust Fund
through foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller
or any other specified person as described under "--Assignment of Mortgage
Loans; Repurchases" and "--Representations and Warranties; Repurchases",
all proceeds of the purchase of any defaulted Mortgage Loan as described
under "--Realization Upon Defaulted Mortgage Loans", and all proceeds of
any Mortgage Asset purchased as described under "Description of the
Certificates--Termination; Retirement of Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and
is not otherwise retained by the Depositor or another specified person,
any payments on account of modification or assumption fees, late payment
charges, Prepayment Premiums or Equity Participations with respect to the
Mortgage Loans;
(ix) all payments required to be deposited in the Certificate Account
with respect to any deductible clause in any blanket insurance policy as
described under "--Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the
Special Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer, the Special Servicer
or the Trustee, as the case may be, of funds held in the Certificate
Account; and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the
related Pooling Agreement and described in the related Prospectus
Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer,
Trustee or Special Servicer may make withdrawals from the Certificate Account
for each Trust Fund that includes Mortgage Loans for any of the following
purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing
fees not previously retained thereby, such payment to be made out of
payments and other collections of interest on the particular Mortgage
Loans as to which such fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled
payments of principal and interest made by it, and
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certain unreimbursed servicing expenses incurred by it, with respect to
Mortgage Loans in the Trust Fund and properties acquired in respect
thereof, such reimbursement to be made out of amounts that represent late
payments collected on the particular Mortgage Loans, Liquidation Proceeds,
Insurance Proceeds and Condemnation Proceeds collected on the particular
Mortgage Loans and properties, and net income collected on the particular
properties, with respect to which such advances were made or such expenses
were incurred or out of amounts drawn under any form of Credit Support
with respect to such Mortgage Loans and properties, or if in the judgment
of the Master Servicer, the Special Servicer or such other person, as
applicable, such advances and/or expenses will not be recoverable from
such amounts, such reimbursement to be made from amounts collected on
other Mortgage Loans in the same Trust Fund or, if and to the extent so
provided by the related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts collected on such
other Mortgage Loans that is otherwise distributable on one or more
classes of Subordinate Certificates of the related series;
(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified
person interest accrued on the advances and servicing expenses described
in clause (iii) above incurred by it while such remain outstanding and
unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization
Upon Defaulted Mortgage Loans";
(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Master Servicer, the
Special Servicer, the REMIC Administrator and the Depositor" and
"--Certain Matters Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee, the REMIC Administrator and
any provider of Credit Support;
(viii) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts
held in the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced
by the Master Servicer, the Special Servicer or any other specified
person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to
the extent described under "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of
Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard;
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provided that, unless otherwise set forth in the related Prospectus
Supplement, the modification, waiver or amendment (i) will not affect the
amount or timing of any scheduled payments of principal or interest on the
Mortgage Loan, (ii) will not, in the judgment of the Master Servicer or the
Special Servicer, as the case may be, materially impair the security for the
Mortgage Loan or reduce the likelihood of timely payment of amounts due
thereon and (iii) will not adversely affect the coverage under any applicable
instrument of Credit Support. Unless otherwise provided in the related
Prospectus Supplement, the Special Servicer also may agree to any other
modification, waiver or amendment if, in its judgment, (i) a material default
on the Mortgage Loan has occurred or a payment default is imminent, (ii) such
modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Mortgage Loan, taking into account the time
value of money, than would liquidation and (iii) such modification, waiver or
amendment will not adversely affect the coverage under any applicable
instrument of Credit Support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of
the Trustee, may at any time institute foreclosure proceedings, exercise any
power of sale contained in the related Mortgage, obtain a deed in lieu of
foreclosure, or otherwise acquire title to the related Mortgaged Property, by
operation of law or otherwise. Unless otherwise specified in the related
Prospectus Supplement, the Special Servicer may not, however, acquire title
to any Mortgaged Property, have a receiver of rents appointed with respect to
any Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series
of Certificateholders, or any other specified person to be considered to hold
title to, to be a "mortgagee-in-possession" of, or to be an "owner" or an
"operator" of such Mortgaged Property within the meaning of certain federal
environmental laws, unless the Special Servicer has previously received a
report prepared by a person who regularly conducts environmental audits
(which report will be an expense of the Trust Fund) and either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the Mortgaged Property
that have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters and
related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value
of money, than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special
Servicer, a provider of Credit Support and/or the holder or holders of
certain classes of the related series of Certificates a right of first
refusal to purchase from the Trust Fund, at a predetermined price (which, if
less than the Purchase Price, will be specified in the related Prospectus
Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. In addition, unless otherwise specified in the
related Prospectus Supplement, the Special Servicer may offer to sell any
defaulted Mortgage Loan if and when the Special Servicer determines,
consistent with its normal servicing procedures, that such a sale would
produce a greater recovery, taking into account the time value of money, than
would liquidation of the related Mortgaged Property. In the absence of any
such sale, the Special Servicer will generally be required to proceed against
the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service (the "IRS") grants an
extension of time to sell such property or (ii) the Trustee receives an
opinion of independent counsel to the effect that the holding of the property
by the
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Trust Fund beyond the close of the third taxable year following the taxable
year of its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund (or any designated portion thereof) to
fail to qualify as a REMIC under the Code at any time that any Certificate is
outstanding. Subject to the foregoing and any other tax-related limitations,
the Special Servicer will generally be required to attempt to sell any
Mortgaged Property so acquired on the same terms and conditions it would if
it were the owner. Unless otherwise provided in the related Prospectus
Supplement, if title to any Mortgaged Property is acquired by a Trust Fund as
to which a REMIC election has been made, the Special Servicer will also be
required to ensure that the Mortgaged Property is administered so that it
constitutes "foreclosure property" within the meaning of Code Section
860G(a)(8) at all times, that the sale of such property does not result in
the receipt by the Trust Fund of any income from nonpermitted assets as
described in Code Section 860F(a)(2)(B), and that the Trust Fund does not
derive any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), with respect to such property, unless it has determined
that earning such income would result in greater after-tax proceeds to
Certificateholders than other methods of operation of such property or net
leasing such property. If the Trust Fund acquires title to any Mortgaged
Property, the Special Servicer, on behalf of the Trust Fund, may be required
to retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Special
Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
reimbursable expenses incurred by the Special Servicer and/or the Master
Servicer in connection with such Mortgage Loan, then, to the extent that such
shortfall is not covered by any instrument or fund constituting Credit
Support, the Trust Fund will realize a loss in the amount of such shortfall.
The Special Servicer and/or the Master Servicer will be entitled to
reimbursement out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, any and all amounts that represent unpaid servicing
compensation in respect of the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent payments made with respect to the Mortgage Loan. In addition, if
and to the extent set forth in the related Prospectus Supplement, amounts
otherwise distributable on the Certificates may be further reduced by
interest payable to the Master Servicer and/or Special Servicer on such
servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any,
of the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will
be required to expend its own funds to effect such restoration unless (and to
the extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or
amounts drawn on any instrument or fund constituting Credit Support.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer
with respect to Mortgage Loans serviced thereby) to use reasonable efforts to
cause each Mortgage Loan borrower to maintain a hazard insurance policy that
provides for such coverage as is required under the related Mortgage or, if
the Mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related Mortgaged Property, such
coverage as is consistent with the Master Servicer's (or Special Servicer's)
normal servicing procedures. Unless otherwise specified in the related
Prospectus Supplement, such coverage generally will be in an amount equal to
the lesser of the principal balance owing on such Mortgage Loan and the
replacement cost of the related Mortgaged Property. The ability of a Master
Servicer (or Special Servicer) to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance
policy referred to below, or upon the extent to which information concerning
covered
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losses is furnished by borrowers. All amounts collected by a Master Servicer
(or Special Servicer) under any such policy (except for amounts to be applied
to the restoration or repair of the Mortgaged Property or released to the
borrower in accordance with the Master Servicer's (or Special Servicer's)
normal servicing procedures and/or to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the related Certificate
Account. The Pooling Agreement may provide that the Master Servicer (or
Special Servicer) may satisfy its obligation to cause each borrower to
maintain such a hazard insurance policy by maintaining a blanket policy
insuring against hazard losses on the Mortgage Loans in a Trust Fund. If such
blanket policy contains a deductible clause, the Master Servicer (or Special
Servicer) will be required, in the event of a casualty covered by such
blanket policy, to deposit in the related Certificate Account all additional
sums that would have been deposited therein under an individual policy but
were not because of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin and domestic animals.
Accordingly, a Mortgaged Property may not be insured for losses arising from
any such cause unless the related Mortgage specifically requires, or permits
the holder thereof to require, such coverage.
The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser
of (i) the replacement cost of the improvements less physical depreciation
and (ii) such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of such
improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale
or other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer (or Special Servicer) will determine whether to exercise any
right the Trustee may have under any such provision in a manner consistent
with the Master Servicer's (or Special Servicer's) normal servicing
procedures. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer or Special Servicer, as applicable, will be entitled to
retain as additional servicing compensation any fee collected in connection
with the permitted transfer of a Mortgaged Property. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund,
including Mortgage Loans serviced by the related Special Servicer. If and to
the extent described in the related Prospectus Supplement, a Special
Servicer's primary compensation with respect to a series of Certificates may
consist of any or all of the following components: (i) a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund,
whether or not serviced by it; (ii) an additional specified portion of the
interest payments on each Mortgage Loan then currently serviced by it; and
(iii) subject to
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any specified limitations, a fixed percentage of some or all of the
collections and proceeds received with respect to each Mortgage Loan which
was at any time serviced by it, including Mortgage Loans for which servicing
was returned to the Master Servicer. Insofar as any portion of the Master
Servicer's or Special Servicer's compensation consists of a specified portion
of the interest payments on a Mortgage Loan, such compensation will generally
be based on a percentage of the principal balance of such Mortgage Loan
outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master
Servicer or Special Servicer may be entitled to retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned
on funds held in the related Certificate Account. A more detailed description
of each Master Servicer's and Special Servicer's compensation will be
provided in the related Prospectus Supplement. Any Sub-Servicer will receive
as its sub-servicing compensation a portion of the servicing compensation to
be paid to the Master Servicer or Special Servicer that retained such
Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration
of the related Trust Fund, including, without limitation, payment of the fees
and disbursements of independent accountants, payment of fees and
disbursements of the Trustee and any custodians appointed thereby and payment
of expenses incurred in connection with distributions and reports to
Certificateholders. Certain other expenses, including certain expenses
related to Mortgage Loan defaults and liquidations and, to the extent so
provided in the related Prospectus Supplement, interest on such expenses at
the rate specified therein, may be required to be borne by the Trust Fund.
EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-off Date, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that
(i) it has obtained a letter of representation regarding certain matters from
the management of the Master Servicer which includes an assertion that the
Master Servicer has complied with certain minimum mortgage loan servicing
standards (to the extent applicable to commercial and multifamily mortgage
loans), identified in the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers Association of America, with
respect to the Master Servicer's servicing of commercial and multifamily
mortgage loans during the most recently completed calendar year and (ii) on
the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public
Accountants, such representation is fairly stated in all material respects,
subject to such exceptions and other qualifications that, in the opinion of
such firm, such standards require it to report. In rendering its report such
firm may rely, as to the matters relating to the direct servicing of
commercial and multifamily mortgage loans by Sub-Servicers, upon comparable
reports of firms of independent public accountants rendered on the basis of
examinations conducted in accordance the same standards (rendered within one
year of such report) with respect to those Sub-Servicers. The Prospectus
Supplement may provide that additional reports of independent certified
public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed
by one or more officers of the Master Servicer or the Special Servicer, as
the case may be, to the effect that, to the best knowledge of each such
officer, the Master Servicer or the Special Servicer, as the case may be, has
fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material
default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as
to more than one Pooling Agreement.
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Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders
upon written request to the Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE
REMIC ADMINISTRATOR AND THE DEPOSITOR
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer,
the Special Servicer and any REMIC Administrator to resign from its
obligations thereunder only upon (a) the appointment of, and the acceptance
of such appointment by, a successor thereto and receipt by the Trustee of
written confirmation from each applicable Rating Agency that such resignation
and appointment will not have an adverse effect on the rating assigned by
such Rating Agency to any class of Certificates of such series or (b) a
determination that such obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by it. No such resignation will become
effective until the Trustee or other successor has assumed the obligations
and duties of the resigning Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. The Master
Servicer and Special Servicer for each Trust Fund will be required to
maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor or any director,
officer, employee or agent of any of them will be under any liability to the
related Trust Fund or Certificateholders for any action taken, or not taken,
in good faith pursuant to the Pooling Agreement or for errors in judgment;
provided, however, that none of the Master Servicer, the Special Servicer,
the REMIC Administrator, the Depositor or any such person will be protected
against any liability that would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of obligations
or duties thereunder or by reason of reckless disregard of such obligations
and duties. Unless otherwise specified in the related Prospectus Supplement,
each Pooling Agreement will further provide that the Master Servicer, the
Special Servicer, the REMIC Administrator, the Depositor and any director,
officer, employee or agent of any of them will be entitled to indemnification
by the related Trust Fund against any loss, liability or expense incurred in
connection with any legal action that relates to such Pooling Agreement or
the related series of Certificates; provided, however, that such
indemnification will not extend to any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the
performance of obligations or duties under such Pooling Agreement, or by
reason of reckless disregard of such obligations or duties. In addition, each
Pooling Agreement will provide that none of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor will be under any
obligation to appear in, prosecute or defend any legal action that is not
incidental to its respective responsibilities under the Pooling Agreement and
that in its opinion may involve it in any expense or liability. However, each
of the Master Servicer, the Special Servicer, the REMIC Administrator and the
Depositor will be permitted, in the exercise of its discretion, to undertake
any such action that it may deem necessary or desirable with respect to the
enforcement and/or protection of the rights and duties of the parties to the
Pooling Agreement and the interests of the related series of
Certificateholders thereunder. In such event, the legal expenses and costs of
such action, and any liability resulting therefrom, will be expenses, costs
and liabilities of the related series of Certificateholders, and the Master
Servicer, the Special Servicer, the REMIC Administrator or the Depositor, as
the case may be, will be entitled to charge the related Certificate Account
therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or
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any person succeeding to the business of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor, will be the successor of
the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and
the REMIC Administrator will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it
with due care.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such
series, or to remit to the Trustee for distribution to such
Certificateholders, any amount required to be so distributed or remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Master Servicer by any other party to the related
Pooling Agreement, or to the Master Servicer, with a copy to each other party
to the related Pooling Agreement, by Certificateholders entitled to not less
than 25% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series; (ii) any failure by the
Special Servicer to remit to the Master Servicer or the Trustee, as
applicable, any amount required to be so remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Special Servicer by any other party to the related Pooling Agreement, or to
the Special Servicer, with a copy to each other party to the related Pooling
Agreement, by the Certificateholders entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights of such series; (iii) any failure by the Master Servicer or the
Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after written notice thereof has
been given to the Master Servicer or the Special Servicer, as the case may
be, by any other party to the related Pooling Agreement, or to the Master
Servicer or the Special Servicer, as the case may be, with a copy to each
other party to the related Pooling Agreement, by Certificateholders entitled
to not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series; (iv) any failure
by a REMIC Administrator (if other than the Trustee) duly to observe or
perform in any material respect any of its covenants or obligations under the
related Pooling Agreement, which failure continues unremedied for sixty days
after written notice thereof has been given to the REMIC Administrator by any
other party to the related Pooling Agreement, or to the REMIC Administrator,
with a copy to each other party to the related Pooling Agreement, by
Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for such
series; and (v) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities, or similar proceedings in respect of
or relating to the Master Servicer, the Special Servicer or the REMIC
Administrator (if other than the Trustee), and certain actions by or on
behalf of the Master Servicer, the Special Servicer or the REMIC
Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events
of Default (other than to add thereto or shorten cure periods or eliminate
notice requirements) will be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, when a
single entity acts as Master Servicer, Special Servicer and REMIC
Administrator, or in any two of the foregoing capacities, for any Trust Fund,
an Event of Default in one capacity will constitute an Event of Default in
each capacity.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, the Trustee will be required,
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to terminate all of the rights and obligations of the defaulting party as
Master Servicer, Special Servicer or REMIC Administrator, as applicable,
under the Pooling Agreement, whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the defaulting party as Master
Servicer, Special Servicer or REMIC Administrator, as applicable, under the
Pooling Agreement (except that if the defaulting party is required to make
advances thereunder regarding delinquent Mortgage Loans, but the Trustee is
prohibited by law from obligating itself to make such advances, or if the
related Prospectus Supplement so specifies, the Trustee will not be obligated
to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus
Supplement, if the Trustee is unwilling or unable so to act, it may (or, at
the written request of Certificateholders of the related series entitled to
not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights for such series, it will be
required to) appoint, or petition a court of competent jurisdiction to
appoint, a loan servicing institution or other entity that (unless otherwise
provided in the related Prospectus Supplement) is acceptable to each
applicable Rating Agency to act as successor to the Master Servicer, Special
Servicer or REMIC Administrator, as the case may be, under the Pooling
Agreement. Pending such appointment, the Trustee will be obligated to act in
such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "--Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for sixty days
after receipt of such request and indemnity has neglected or refused to
institute any such proceeding. However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Pooling Agreement or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any
of the holders of Certificates covered by such Pooling Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent
of any of the holders of Certificates covered by such Pooling Agreement, (i)
to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the
Certificate Account, provided that (A) such change would not adversely affect
in any material respect the interests of any Certificateholder, as evidenced
by an opinion of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency, (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (A) to such extent as shall be necessary to maintain
the qualification of the Trust Fund (or any designated portion thereof) as a
REMIC or to avoid or minimize the risk of imposition of any tax on the
related Trust Fund, provided that the Trustee has received an opinion of
counsel to the effect that (1) such action is necessary or desirable to
maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Pooling Agreement, or (B) to restrict
the transfer of the REMIC Residual Certificates, provided that the Depositor
has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as
evidenced by a letter from each applicable Rating Agency, and that any such
amendment will not give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee (See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates" herein), (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement or
any other change, provided that such
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action will not adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not
material to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such
Pooling Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a
Certificate of any class without the consent of the holder of such
Certificate or (ii) reduce the aforesaid percentage of Certificates of any
class the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such class covered
by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to
consent to any amendment to a Pooling Agreement without having first received
an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Master Servicer, the Special Servicer, the
Depositor, the Trustee or any other specified person in accordance with such
amendment will not result in the imposition of a tax on the related Trust
Fund or cause such Trust Fund (or any designated portion thereof) to fail to
qualify as a REMIC.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for
purposes of communicating with other holders of Certificates of the same
series with respect to their rights under the related Pooling Agreement, the
Trustee or other specified person will afford such Certificateholders access
during normal business hours to the most recent list of Certificateholders of
that series held by such person. If such list is as of a date more than 90
days prior to the date of receipt of such Certificateholders' request, then
such person, if not the registrar for such series of Certificates, will be
required to request from such registrar a current list and to afford such
requesting Certificateholders access thereto promptly upon receipt.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any
Master Servicer, Special Servicer or REMIC Administrator and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will
not be accountable for the use or application by or on behalf of any Master
Servicer or Special Servicer of any funds paid to the Master Servicer or
Special Servicer in respect of the Certificates or the underlying Mortgage
Assets. If no Event of Default has occurred and is continuing, the Trustee
for each series of Certificates will be required to perform only those duties
specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
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Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to
any loss liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of
its obligations and duties thereunder, or by reason of its reckless disregard
of such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of
its trusts or powers under the related Pooling Agreement or perform any of
this duties thereunder either directly or by or through agents or attorneys,
and the Trustee will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee. Notwithstanding anything herein
to the contrary, if any entity is acting as both Trustee and REMIC
Administrator, then any resignation or removal of such entity as the Trustee
will also constitute the resignation or removal of such entity as REMIC
Administrator, and the successor trustee will serve as successor to the REMIC
Administrator as well.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may
provide credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss
and will not guarantee payment to Certificateholders of all amounts to which
they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the related Credit Support
or that are of a type not covered by such Credit Support, Certificateholders
will bear their allocable share of deficiencies. Moreover, if a form of
Credit Support covers the Offered Certificates of more than one series and
losses on the related Mortgage Assets exceed the amount of such Credit
Support, it is possible that the holders of Offered Certificates of one (or
more) such series will be disproportionately benefited by such Credit Support
to the detriment of the holders of Offered Certificates of one (or more)
other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature
and amount of coverage under such Credit Support, (ii) any conditions to
payment thereunder not otherwise described herein, (iii) the conditions (if
any) under which the amount of coverage under such Credit Support may be
reduced and under which such Credit Support may be terminated or replaced and
(iv) the material provisions relating to such Credit Support. Additionally,
the related Prospectus Supplement will set forth certain information with
respect to the obligor, if any, under any instrument of Credit Support. See
"Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the method and amount of
subordination provided by a class or classes of Subordinate Certificates in a
series and the circumstances under which such subordination will be
available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such
provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of
such coverage.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of
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credit, issued by a bank or other financial institution specified in such
Prospectus Supplement (the "Letter of Credit Bank"). Under a letter of
credit, the Letter of Credit Bank will be obligated to honor draws thereunder
in an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of some or all of the related
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related Prospectus Supplement. The obligations of the
Letter of Credit Bank under the letter of credit for each series of
Certificates will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest or distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. The related
Prospectus Supplement will describe any limitations on the draws that may be
made under any such instrument.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments,
a demand note or a combination thereof will be deposited, in the amounts
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of certain collections received on the related
Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for
the purposes, in the manner, and to the extent specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
reserve funds may be established to provide protection only against certain
types of losses and shortfalls. Following each Distribution Date, amounts in
a reserve fund in excess of any amount required to be maintained therein may
be released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or
other gain from such investments will be credited to the related reserve fund
for such series, and any loss resulting from such investments will be charged
to such reserve fund. However, such income may be payable to any related
Master Servicer or another service provider as additional compensation for
its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
INTEREST RATE EXCHANGE, CAP AND FLOOR AGREEMENTS
If so specified in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include interest rate exchange agreements or
interest rate cap or floor agreements. These types of
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agreements may be used to limit the exposure of the Trust Fund or investors
in the Certificates to fluctuations in interest rates and to situations where
interest rates become higher or lower than specified thresholds. Generally,
an interest rate exchange agreement is a contract between two parties to pay
and receive, with a set frequency, interest payments determined by applying
the differential between two interest rates to an agreed-upon notional
principal. Generally, an interest rate cap agreement is a contract pursuant
to which one party agrees to reimburse another party for a floating rate
interest payment obligation, to the extent that the rate payable at any time
exceeds a specified cap. Generally, an interest rate floor agreement is a
contract pursuant to which one party agrees to reimburse another party in the
event that amounts owing to the latter party under a floating rate interest
payment obligation are payable at a rate which is less than a specified
floor. The specific provisions of these types of agreements will be described
in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable local law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular jurisdiction, or to encompass
the laws of all jurisdictions in which the security for the Mortgage Loans
(or mortgage loans underlying any MBS) is situated. Accordingly, the
summaries are qualified in their entirety by reference to the applicable laws
of those jurisdictions. See "Description of the Trust Funds--Mortgage Loans".
If a significant percentage of Mortgage Loans (or mortgage loans underlying
MBS), by balance, are secured by properties in a particular jurisdiction,
relevant local laws, to the extent they vary materially from this discussion,
will be discussed in the Prospectus Supplement. For purposes of the following
discussion, "Mortgage Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with
a power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal
title to the property is held by a land trustee under a land trust agreement
for the benefit of the borrower. At origination of a mortgage loan involving
a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally
liable for the mortgage note obligation. The
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mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed
by the express provisions of the related instrument, the law of the state in
which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels
or motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
room rates and must file continuation statements, generally every five years,
to maintain perfection of such security interest. In certain cases, Mortgage
Loans secured by hotels or motels may be included in a Trust Fund even if the
security interest in the room rates was not perfected or the requisite UCC
filings were allowed to lapse. Even if the lender's security interest in room
rates is perfected under applicable nonbankruptcy law, it will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to enforce its rights to collect the room rates following a
default. In the bankruptcy setting, however, the lender will be stayed from
enforcing its rights to collect room rates, but those room rates (in light of
certain revisions to the Bankruptcy Code which are effective for all
bankruptcy cases commenced on or after October 22, 1994) constitute "cash
collateral" and therefore cannot be used by the bankruptcy debtor without a
hearing or lender's consent and unless the lender's interest in the room
rates is given adequate protection (e.g., cash payment for otherwise
encumbered funds or a replacement lien on unencumbered property, in either
case equal in value to the amount of room rates that the debtor proposes to
use, or other similar relief). See "--Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years,
to maintain that perfection. In certain cases, Mortgage Loans secured in part
by personal property may be included in a Trust Fund even if the security
interest in such personal property was not perfected or the requisite UCC
filings were allowed to lapse.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal
remedies under the mortgage. If the borrower defaults in payment or
performance of its obligations under the note or mortgage, the lender has the
right to institute foreclosure proceedings to sell the real property at
public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances.
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A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain
Provisions. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects
of mortgage defaults perceived as harsh or unfair. Relying on such
principles, a court may alter the specific terms of a loan to the extent it
considers necessary to prevent or remedy an injustice, undue oppression or
overreaching, or may require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's and have required that lenders
reinstate loans or recast payment schedules in order to accommodate borrowers
who are suffering from a temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain the mortgaged
property or an impermissible further encumbrance of the mortgaged property.
Finally, some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness
of the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the right
of the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained
in any other type of mortgage instrument if applicable law so permits. A
power of sale under a deed of trust allows a nonjudicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable
state law. In some states, prior to such sale, the trustee under the deed of
trust must record a notice of default and notice of sale and send a copy to
the borrower and to any other party who has recorded a request for a copy of
a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record
in the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. The borrower or junior lienholder
may then have the right, during a reinstatement period required in some
states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure
sale. Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other
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things, redemption rights that may exist) and because of the possibility that
physical deterioration of the property may have occurred during the
foreclosure proceedings. Therefore, it is common for the lender to purchase
the mortgaged property for an amount equal to the secured indebtedness and
accrued and unpaid interest plus the expenses of foreclosure, in which event
the borrower's debt will be extinguished, or for a lesser amount in order to
preserve its right to seek a deficiency judgment if such is available under
state law and under the terms of the Mortgage Loan documents. (The Mortgage
Loans, however, may be nonrecourse. See "Risk Factors--Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans--Limited
Recourse Nature of the Mortgage Loans".) Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, the lender will become the owner of the property and have both the
benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance
and to make such repairs as are necessary to render the property suitable for
sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services
of a real estate broker and pay the broker's commission in connection with
the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an
amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of
the foreclosing lender, from exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered
by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate
to that of the foreclosing lender have an equity of redemption and may redeem
the property by paying the entire debt with interest. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be
limited to the Mortgaged Property and such other assets, if any, that were
pledged to secure the Mortgage Loan. However, even if a mortgage loan by its
terms provides for recourse to the borrower's other assets, a lender's
ability to realize upon those assets may be limited by state law. For
example, in some states a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes may require
the lender
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to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists will usually proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess
of the outstanding debt over the fair market value of the property at the
time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks
is that if the borrower's leasehold were to be terminated upon a lease
default, the leasehold mortgagee would lose its security. This risk may be
lessened if the ground lease requires the lessor to give the leasehold
mortgagee notices of lessee defaults and an opportunity to cure them, permits
the leasehold estate to be assigned to and by the leasehold mortgagee or the
purchaser at a foreclosure sale, and contains certain other protective
provisions typically included in a "mortgageable" ground lease. Certain
Mortgage Loans, however, may be secured by ground leases which do not contain
these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest
on the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be
vacant or occupied by nonowner tenants. Such loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate
of a borrower in real property. Such a loan typically is subordinate to the
mortgage, if any, on the Cooperative's building which, if foreclosed, could
extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the Cooperative.
Further, transfer of shares in a Cooperative are subject to various
regulations as well as to restrictions under the governing documents of the
Cooperative, and the shares may be cancelled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the Cooperative
provides, among other things, the lender with an opportunity to cure a
default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given the
debtor and the method, manner, time, place and terms of the sale. Article 9
of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the Cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of
the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a
corresponding partial reduction of the amount
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of lender's security interest) pursuant to a confirmed plan or lien avoidance
proceeding, thus leaving the lender a general unsecured creditor for the
difference between such value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration
of the repayment schedule (with or without affecting the unpaid principal
balance of the loan), and/or by an extension (or shortening) of the term to
maturity. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under the
Bankruptcy Code, a lender may be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. Recent amendments
to the Bankruptcy code, however, may minimize the impairment of the lender's
ability to enforce the borrower's assignment of rents and leases. In addition
to the inclusion of hotel revenues within the definition of "cash collateral"
as noted previously in the section entitled "--Leases and Rents", the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest
in rents is unperfected under the laws of certain states until the lender has
taken some further action, such as commencing foreclosure or obtaining a
receiver prior to activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to
a lessee under such lease. Under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that
occurred prior to the filing of the lessee's petition. In addition, the
Bankruptcy Code generally provides that a trustee or debtor-in-possession
may, subject to approval of the court, (i) assume the lease and retain it or
assign it to a third party or (ii) reject the lease. If the lease is assumed,
the trustee or debtor-in-possession (or assignee, if applicable) must cure
any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for
termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years,
of the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or
disposal activity. Such environmental risks include the possible diminution
of the value of a contaminated property or, as discussed below, potential
liability for clean-up costs or other remedial actions that could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators"
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of contaminated real property for the costs of clean-up. A secured lender may
be liable as an "owner" or "operator" of a contaminated mortgaged property if
agents or employees of the lender have participated in the management of such
mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination and
regardless of whether the lender has actually taken possession of a mortgaged
property through foreclosure, deed in lieu of foreclosure or otherwise.
Moreover, such liability is not limited to the original or unamortized
principal balance of a loan or to the value of the property securing a loan.
Excluded from CERCLA's definition of "owner" or "operator", however, is a
person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest". This is the
so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Act
offers substantial protection to lenders by defining the activities in which
a lender can engage and still have the benefit of the secured creditor
exemption. In order for a lender to be deemed to have participated in the
management of a mortgaged property, the lender must actually participate in
the operational affairs of the property of the borrower. The Act provides
that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or
assumes day-to-day management of all operational functions of the mortgaged
property. The Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time
on commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to
hazardous environmental conditions on a property. While it may be more
difficult to hold a lender liable in such cases, unanticipated or uninsured
liabilities of the borrower may jeopardize the borrower's ability to meet its
loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize
the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable,
it can bring an action for contribution against the owner or operator who
created the environmental hazard, but that individual or entity may be
without substantial assets. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that
neither the Master Servicer nor the Special Servicer, acting on behalf of the
Trustee, may acquire title to a Mortgaged Property or take over its operation
unless the Special Servicer, based solely (as to environmental matters) on a
report prepared by a person who regularly conducts environmental audits, has
made the determination that it is appropriate to do so, as described under
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans".
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If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will
be required to operate the property in accordance with those laws and
regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following
foreclosure). Such disclosure may decrease the amount that prospective buyers
are willing to pay for the affected property, sometimes substantially, and
thereby decrease the ability of the lender to recoup its investment in a loan
upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to
the issuance of the related Certificates. Environmental site assessments,
however, vary considerably in their content, quality and cost. Even when
adhering to good professional practices, environmental consultants will
sometimes not detect significant environmental problems because to do an
exhaustive environmental assessment would be far too costly and
time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate
the maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limitations as set
forth in the Garn Act and the regulations promulgated thereunder.
Accordingly, a Master Servicer may nevertheless have the right to accelerate
the maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, without regard to the Master
Servicer's ability to demonstrate that a sale threatens its legitimate
security interest.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully
both the Senior Liens and the Mortgage Loan. In the event that a holder of a
Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. In the event that such proceeds from a foreclosure or similar sale of
the related Mortgaged Property are insufficient to satisfy all Senior Liens
and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of the
junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained
and (ii) the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain jurisdictions
or the Mortgage Loan may be nonrecourse.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be
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unenforceable. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to additional risk. First,
the borrower may have difficulty servicing and repaying multiple loans.
Moreover, if the subordinate financing permits recourse to the borrower (as
is frequently the case) and the senior loan does not, a borrower may have
more incentive to repay sums due on the subordinate loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In addition, the enforceability of provisions that provide for prepayment
fees or penalties upon an involuntary prepayment is unclear under the laws of
many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply
to certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or
adoption) be eligible for inclusion in a Trust Fund unless (i) such Mortgage
Loan provides for such interest rate, discount points and charges as are
permitted in such state or (ii) such Mortgage Loan provides that the terms
thereof are to be construed in accordance with the laws of another state
under which such interest rate, discount points and charges would not be
usurious and the borrower's counsel has rendered an opinion that such choice
of law provision would be given effect.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply
(together with an inability to remedy any such failure) could result in
material diminution in the value of a Mortgaged Property which could,
together with the possibility of limited alternative uses for a particular
Mortgaged Property (i.e., a nursing or convalescent home or hospital), result
in a failure to realize the full principal amount of the related Mortgage
Loan.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such
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as hotels, restaurants, shopping centers, hospitals, schools and social
service center establishments) must remove architectural and communication
barriers which are structural in nature from existing places of public
accommodation to the extent "readily achievable." In addition, under the ADA,
alterations to a place of public accommodation or a commercial facility are
to be made so that, to the maximum extent feasible, such altered portions are
readily accessible to and usable by disabled individuals. The "readily
achievable" standard takes into account, among other factors, the financial
resources of the affected site, owner, landlord or other applicable person.
In addition to imposing a possible financial burden on the borrower in its
capacity as owner or landlord, the ADA may also impose such requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with
the requirements of the ADA may be subject to more stringent requirements
than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief
Act applies to individuals who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief
Act applies to individuals who enter military service (including reservists
who are called to active duty) after origination of the related mortgage
loan, no information can be provided as to the number of loans with
individuals as borrowers that may be affected by the Relief Act. Application
of the Relief Act would adversely affect, for an indeterminate period of
time, the ability of a Master Servicer or Special Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition,
the Relief Act imposes limitations that would impair the ability of the
Master Servicer or Special Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as
regulations (the "REMIC Regulations") promulgated by the U.S. Department of
Treasury (the "Treasury"). Investors should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool". For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes
of "Regular Certificates" and one Class of "Residual Certificates" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Depositor, has advised the
Depositor that in the firm's opinion, assuming (i) the making of such an
election, (ii) compliance with the Pooling Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect
to the related Trust Fund will be made, in which event references to "REMIC"
or "REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. If
so specified in the applicable Prospectus Supplement, the portion of a Trust
Fund as to which a REMIC election is not made may be treated as a grantor
trust for federal income tax purposes. See "--Federal Income Tax Consequences
for Certificates as to Which No REMIC Election Is Made".
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" (such as
single family or multifamily properties, but not commercial properties)
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C), and otherwise will not qualify for
such treatment. REMIC Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the Regular Certificates and income with
respect to Residual Certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Code Section 856(c)(3)(B) in the same proportion
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that, for both purposes, the assets of the REMIC Pool would be so treated. If
at all times 95% or more of the assets of the REMIC Pool qualify for each of
the foregoing respective treatments, the REMIC Certificates will qualify for
the corresponding status in their entirety. For purposes of Code Section
856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates qualify
for such treatment. Where two REMIC Pools are a part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buy-Down Funds. REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of
Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the
"SBJPA of 1996") repealed the reserve method for bad debts of domestic
building and loan associations and mutual savings banks, and thus has
eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments". The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement is met if
at all times the aggregate adjusted basis of the nonqualified assets is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC
also must provide "reasonable arrangements" to prevent its residual interest
from being held by "disqualified organizations" and must furnish applicable
tax information to transferors or agents that violate this requirement. The
Pooling Agreement for each Series will contain a provision designed to meet
this requirement. See "Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified
Organizations".
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured
by timeshare interests and loans secured by shares held by a tenant
stockholder in a cooperative housing corporation, provided, in general, (i)
the fair market value of the real property security (including buildings and
structural components thereof) is at least 80% of the principal balance of
the related Mortgage Loan or mortgage loan underlying the Mortgage
Certificate either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest
in real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. If the Mortgage Loan has been
substantially modified other than in connection with a default or reasonably
foreseeable default, it must meet the
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loan-to-value test in (i) of the preceding sentence as of the date of the
last such modification or at closing. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by
real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such
90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally not held
beyond the close of the third calendar year following the acquisition of the
property by the REMIC Pool, with an extension that may be granted by the
Internal Revenue Service (the "Service").
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest
in a REMIC Pool that is issued on the Startup Day with fixed terms, is
designated as a regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable
rate, or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. Such a specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a fixed
or qualified variable or inverse variable rate on some or all of the
qualified mortgages minus a different fixed or qualified variable rate. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments
on qualified mortgages may be zero. A residual interest is an interest in a
REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool
may be treated as a regular interest even if payments of principal with
respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on
the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that series will constitute a single class of residual interests
on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for
such year and thereafter. In this event, an entity with multiple classes of
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ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the Tax Reform Act of 1986 (the "1986 Act")
indicates that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income
for the period of time in which the requirements for REMIC status are not
satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless
of the method of accounting otherwise used by such Regular
Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any Class of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable
to such income. The following discussion is based in part on temporary and
final Treasury regulations issued on February 2, 1994, as amended on June 14,
1996 (the "OID Regulations") under Code Sections 1271 through 1273 and 1275
and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent such issues are not addressed in such
regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided
that the Service will not take a different position as to those matters not
currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the Service to apply or depart from the
OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not
be considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price". The
issue price of a Class of Regular Certificates offered pursuant to this
Prospectus generally is the first price at which a substantial amount of
Regular Certificates of that Class is sold to the public (excluding bond
houses, brokers and underwriters). Although unclear under the OID
Regulations, the Depositor intends to treat the issue price of a Class as to
which there is no substantial sale as of the issue date or that is retained
by the Depositor as the fair market value of that Class as of the issue date.
The issue price of a Regular Certificate also includes the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate, unless the Regular
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Certificateholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but
generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest". Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Regular Certificate. Because there
is no penalty or default remedy in the case of nonpayment of interest with
respect to a Regular Certificate, it is possible that no interest on any
Class of Regular Certificates will be treated as qualified stated interest.
However, except as provided in the following three sentences or in the
applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, the Depositor intends to treat
interest with respect to the Regular Certificates as qualified stated
interest. Distributions of interest on an Accrual Certificate, or on other
Regular Certificates with respect to which deferred interest will accrue,
will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the
Depositor intends to treat an "interest only" class, or a class on which
interest is substantially disproportionate to its principal amount (a
so-called "super-premium" class) as having no qualified stated interest.
Where the interval between the issue date and the first Distribution Date on
a Regular Certificate is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The
Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be determined in accordance with the assumed rate
of prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates
will be set forth in the related Prospectus Supplement. Holders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the Regular Certificate
is held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method".
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as
the accrual period. With respect to each Regular Certificate, a calculation
will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based
on the Prepayment Assumption. Other than as discussed below with respect to a
Random Lot Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the
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preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price
of a Regular Certificate at the beginning of any accrual period equals the
issue price of the Regular Certificate, increased by the aggregate amount of
original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity
that were made on the Regular Certificate in such prior periods. The original
issue discount accruing during any accrual period (as determined in this
paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either
an increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Random Lot Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case
of a distribution in retirement of the entire unpaid principal balance of any
Random Lot Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Random Lot Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate", or (d) a single fixed rate and a single
objective
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rate that is a "qualified inverse floating rate". A floating rate is a
qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65, but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate (other than a qualified floating
rate) is a rate that is determined using a single fixed formula and that is
based on objective financial or economic information, provided that such
information is not (i) within the control of the issuer or a related party or
(ii) unique to the circumstances of the issuer or a related party. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified floating rate may nevertheless be an objective rate. A Class of
Regular Certificates may be issued under this Prospectus that does not have a
variable rate under the OID Regulations, for example, a Class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within
the meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular
Certificates. However, if final regulations dealing with contingent interest
with respect to Regular Certificates apply the same principles as the OID
Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed
rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two
or more variable rates), including a rate based on the average cost of funds
of one or more financial institutions, or a positive or negative multiple of
such a rate (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or (ii)
bearing one or more such variable rates for one or more periods or one or
more fixed rates for one or more periods, and a different variable rate or
fixed rate for other periods qualifies as a regular interest in a REMIC.
Accordingly, unless otherwise indicated in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates that qualify
as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity
and future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date) for the relevant Class.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor intends to treat such variable interest as qualified stated
interest, other than variable interest on an interest-only or super-premium
Class, which will be treated as non-qualified stated interest includible in
the stated redemption price at maturity. Ordinary income reportable for any
period will be adjusted based on subsequent changes in the applicable
interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to
create more than de minimis original issue discount. The yield on such
Regular Certificates for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates,
in the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the
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applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each
accrual period either increasing or decreasing the amount of ordinary income
reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues
with respect to a Class of Regular Certificates may constitute income to the
holders of such Regular Certificates prior to the time distributions of cash
with respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Certificate (i) is exceeded by the then-current
principal amount of the Regular Certificate or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received,
in an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to
the 1986 Act provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the end
of such period, or in the case of a Regular Certificate issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such
period. Such purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the
stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid
or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized or
the Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in
which such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should
consult their own tax
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advisors regarding the application of these rules. Investors should also
consult Revenue Procedure 92-67 concerning the elections to include market
discount in income currently and to accrue market discount on the basis of
the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased
at a premium. If the Regular Certificateholder holds such Regular Certificate
as a "capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. See "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest,
original issue discount, de minimis original issue discount, market discount
and de minimis market discount, as adjusted by any amortizable bond premium
or acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply
or if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to
have made elections to amortize bond premium or to report market discount
income currently as it accrues under the constant yield method, respectively,
for all debt instruments acquired by the holder in the same taxable year or
thereafter. The election is made on the holder's federal income tax return
for the year in which the debt instrument is acquired and is irrevocable
except with the approval of the Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Certificate and reduced by
amounts included in the stated redemption price at maturity of the Regular
Certificate that were previously received by the seller, by any amortized
premium and by previously recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion
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transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with
respect to any prior distribution of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if its
yield on such Regular Certificate were 110% of the applicable Federal rate as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans allocable to a particular
class of Regular Certificates, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate may have income, or may incur a diminution in cash flow as a
result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a
subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may
take the position that original issue discount must continue to be accrued in
spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts
are applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection
with a trade or business should in general be allowed to deduct as an
ordinary loss any such loss sustained during the taxable year on account of
any such Regular Certificates becoming wholly or partially worthless, and
that, in general, holders of Regular Certificates that are not corporations
and do not hold the Regular Certificates in connection with a trade or
business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a
portion of any class or subclass of such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate holders
of Regular Certificates should be allowed a bad debt deduction at such time
as the principal balance of any class or subclass of such Regular
Certificates is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all Mortgage Loans remaining in the Trust Fund have been
liquidated or such class of Regular Certificates has been otherwise retired.
The Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original
issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders
of Regular Certificates are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with
respect to such Regular Certificates. While losses attributable to interest
previously reported as income should be deductible as ordinary losses by both
corporate and non-corporate holders, the Internal Revenue Service may take
the position that losses attributable to accrued original issue discount may
only be deducted as short-term capital losses by non-corporate holders not
engaged in a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Such taxpayers are advised to consult their tax advisors regarding the
treatment of losses on Regular Certificates.
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"),
and will not be taxed separately to the REMIC Pool. The daily portions of
REMIC taxable income or net loss of a Residual Certificateholder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Certificateholders in proportion to their
respective holdings of Residual Certificates in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting,
except that (i) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply, (ii) all bad
loans will be deductible as business bad debts and (iii) the limitation on
the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans, plus income
from amortization of issue premium, if any, on the Regular Certificates, plus
income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees
on the Mortgage Loans, other administrative expenses of the REMIC Pool and
realized losses on the Mortgage Loans. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Certificates of any class
of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the
Mortgage Loans, on the one hand, and the timing of deductions for interest
(including original issue discount) on the Regular Certificates or income
from amortization of issue premium on the Regular Certificates, on the other
hand. In the event that an interest in the Mortgage Loans is acquired by the
REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Certificateholder may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon
such distributions on those Regular Certificates on account of any unaccrued
original issue discount relating to those Regular Certificates. When there is
more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly
likely to occur in the early years following issuance of the Regular
Certificates when distributions in reduction of principal are being made in
respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a
series of Regular Certificates, may increase over time as distributions in
reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Certificateholders must have sufficient
other sources of cash to pay any federal, state or local income taxes due as
a result of such mismatching or unrelated deductions against which to offset
such income, subject to the discussion of "excess inclusions" below under
"Limitations on Offset or Exemption of REMIC Income". The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholder's after-tax rate of return. In
addition, a Residual Certificateholder's taxable
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income during certain periods may exceed the income reflected by such
Residual Certificateholder for such periods in accordance with generally
accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in
Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Certificateholder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated
by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration
of the income of Residual Certificateholders described above under "Taxation
of REMIC Income", the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Service may provide future guidance on the proper
tax treatment of payments made by a transferor of such a residual interest to
induce the transferee to acquire the interest, and Residual
Certificateholders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not
so provide. See "Treatment of Certain Items of REMIC Income and
Expense--Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are
subject to differing interpretations. The Depositor makes no representation
as to the specific method that it will use for reporting income with respect
to the Mortgage Loans and expenses with respect to the Regular Certificates,
and different methods could result in different timing of reporting of
taxable income or net loss to Residual Certificateholders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as
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original issue discount income on Regular Certificates as described above
under "Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates", without regard to the de minimis rule
described therein, and "--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the Deferred
Interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal
balances. The REMIC Pool's basis in such Mortgage Loans is generally the fair
market value of the Mortgage Loans immediately after the transfer thereof to
the REMIC Pool. The REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the
REMIC Pool (or the fair market value thereof at the Closing Date, in the case
of a retained Class). In respect of Mortgage Loans that have market discount
to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates--Market Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices (or the fair market value of retained Classes) of the
regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--Premium", a REMIC Pool that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect
under Code Section 171 to amortize premium on whole mortgage loans or
mortgage loans underlying MBS that were originated after September 27, 1985
or MBS that are REMIC regular interests under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. To the extent
that the mortgagors with respect to the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans (including
underlying mortgage loans) originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject
to special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter
allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Code Section 1274(d), multiplied by (ii) the
adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described
in this paragraph for all prior quarters, decreased by any distributions made
with respect to such Residual Certificate prior to the beginning of such
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of such
income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on
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such Residual Certificateholder's return. However, net operating loss
carryovers are determined without regard to excess inclusion income. Further,
if the Residual Certificateholder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual
Certificateholder's excess inclusions will be treated as unrelated business
taxable income of such Residual Certificateholder for purposes of Code
Section 511. In addition, REMIC taxable income is subject to 30% withholding
tax with respect to certain persons who are not U.S. Persons (as defined
below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or a regulated investment company
could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. Persons. The SBJPA of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for
a taxable year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deduction must
be computed without regard to any excess inclusions. These rules are
effective for taxable years beginning after December 31, 1996, unless a
Residual Certificateholder elects to have such rules apply only to taxable
years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals
the applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on
the transferor of the Residual Certificate, except that where such transfer
is through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable
for such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not
have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization, and (ii) the highest
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marginal federal corporate income tax rate. Such tax would be deductible from
the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received
an affidavit from such record holder that it is not a Disqualified
Organization or stating such holder's taxpayer identification number and,
during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if
all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section
521) that is exempt from taxation under the Code unless such organization is
subject to the tax on unrelated business income imposed by Code Section 511,
(ii) "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity, and (iii) an "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
bear a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a U.S.
Person, as defined below under "Foreign Investors") is disregarded for all
federal income tax purposes if a significant purpose of the transferor is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest
at least equals the product of the present value of the
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anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in
the same manner as set forth above under "Disqualified Organizations". The
REMIC Regulations explain that a significant purpose to impede the assessment
or collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of cash flows generated by the
interest and that the transferee intends to pay taxes associated with holding
the residual interest as they become due. The Pooling Agreement with respect
to each series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "Disqualified Organizations".
The transferor must have no actual knowledge or reason to know that such
statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below),
unless such transferee's income is effectively connected with the conduct of
a trade or business within the United States. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer,
(i) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions
accrue and prior to the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will
be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury
regulations) or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to United States federal income tax regardless of the source of its income or
a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates--Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in such Residual
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Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss
includible in the federal income tax returns of Residual Certificateholders,
but rather will be taxed directly to the REMIC Pool at a 100% rate.
Prohibited transactions generally include (i) the disposition of a qualified
mortgage other than for (a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time)
or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible
adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Certificateholder, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call and (v) as
otherwise permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts.
Generally, property acquired by deed in lieu of foreclosure would be treated
as "foreclosure property" for a period ending with the third calendar year
following the year of acquisition of such property, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income
from foreclosure property other than qualifying rents and other qualifying
income for a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material
state income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of
its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts
retained to meet claims) to holders of Regular Certificates and Residual
Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool will be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or
credit in a unified administrative proceeding. The Residual Certificateholder
owning the largest percentage interest in the Residual Certificates will be
obligated to act as "tax matters person", as defined in applicable Treasury
regulations, with respect to the REMIC Pool. Each Residual Certificateholder
will be deemed, by acceptance of such Residual Certificates, to have agreed
(i) to the appointment of the tax matters person as provided in the preceding
sentence and (ii) to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i)
3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
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the case of a married individual filing a separate return) (subject to
adjustments for inflation) or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for the servicing
fee and all administrative and other expenses relating to the REMIC Pool, or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion
of such expenses to holders of Regular Certificates, as well as holders of
Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates. Unless otherwise indicated in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or
other Non-U.S. Persons (as defined below), will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-U.S. Person (i) is not a "10-percent
shareholder" within the meaning of Code Section 871(h)(3)(B) or a controlled
foreign corporation described in Code Section 881(c)(3)(C) and (ii) provides
the Trustee, or the person who would otherwise be required to withhold tax
from such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial
owner and stating, among other things, that the beneficial owner of the
Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless
reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-U.S. Person. In
the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Prepayment Premiums distributable to
Regular Certificateholders who are Non-U.S. Persons may be subject to 30%
United States withholding tax. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Certificate. The term "Non-U.S. Person" means any
person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 1999, although valid withholding certificates that are held on
December 31, 1998, remain valid until the earlier of December 31, 1999 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular
Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply
in the case of
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tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to
the conditions described in "Regular Certificates" above, but only to the
extent that (i) the Mortgage Loans (including mortgage loans underlying MBS)
were issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of
assets therein (as to which a separate REMIC election will be made), to which
the Residual Certificate relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
whole mortgage loans will not be, but MBS and regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent
of that portion of REMIC taxable income that constitutes an "excess
inclusion". See "Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income". If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States
federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential". Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Service or
allowed as a credit against the Regular Certificateholder's federal income
tax liability. The New Regulations change certain of the rules relating to
certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and
information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals,
estates, non-exempt and non-charitable trusts, and partnerships who are
either holders of record of Regular Certificates or beneficial owners who own
Regular Certificates through a broker or middleman as nominee. All brokers,
nominees and all other non-exempt holders of record of Regular Certificates
(including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies,
common trust funds, thrift institutions and charitable trusts) may request
such information for any calendar quarter by telephone or in writing by
contacting the person designated in Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee.
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The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool
to each Residual Certificateholder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS
TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Where there is no fixed retained yield with respect to
the Mortgage Loans underlying the Standard Certificates, the holder of each
such Standard Certificate (a "Standard Certificateholder") in such series
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the Trust Fund represented by its Standard
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees". Accordingly, the holder
of a Standard Certificate of a particular series will be required to report
on its federal income tax return its pro rata share of the entire income from
the Mortgage Loans represented by its Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount
(if any), prepayment fees, assumption fees, and late payment charges received
by the Master Servicer, in accordance with such Standard Certificateholder's
method of accounting. A Standard Certificateholder generally will be able to
deduct its share of the servicing fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Fund. However, investors who are individuals, estates or trusts
who own Standard Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the servicing fee and all such administrative and other
expenses of the Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income.
In addition, Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate
return) (subject to adjustments for inflation), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect
to interest at the pass-through rate on such Standard Certificates. In
addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where the servicing fee is in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees",
respectively.
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Tax Status
Standard Certificates will have the following status for federal income
tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Certificate is of the type described in
such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and
Expense--Premium".
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount
greater than a statutory de minimis exception, including a payment of points
currently deductible by the borrower under applicable Code provisions or,
under certain circumstances, by the presence of "teaser rates" on the
Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than
the sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Loans acquired by a Standard Certificateholder are purchased at a price equal
to the then unpaid principal amount of such Mortgage Loans, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply
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and it is unclear whether a Prepayment Assumption would apply. Rather, the
holder will accrue market discount pro rata over the life of the Mortgage
Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption
will be assumed for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there
are no authoritative guidelines for federal income tax purposes as to either
the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Standard Certificate, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan
basis. If a loan-by-loan basis is appropriate, the likelihood that such
amount would exceed reasonable servicing compensation as to some of the
Mortgage Loans would be increased. Service guidance indicates that a
servicing fee in excess of reasonable compensation ("excess servicing") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess
of such amounts is not greater than the value of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of
the right to receive some or all of the interest payments on an obligation
from the right to receive some or all of the principal payments on the
obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds". Subject to the de minimis rule discussed below
under "--Stripped Certificates", each stripped bond or stripped coupon could
be considered for this purpose as a non-interest bearing obligation issued on
the date of issue of the Standard Certificates, and the original issue
discount rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests
in a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Loans the ownership
of which is attributed to the Master Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Standard Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and the other assets represented by the Standard Certificate.
In general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the
amount of any income previously reported with respect to the Standard
Certificate and decreased by the amount of any losses previously reported
with respect to the Standard Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Loans, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Standard Certificate was held as a capital asset.
However, gain on the sale of a Standard Certificate will be treated as
ordinary income (i) if a Standard Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Standard Certificateholder's net
investment in the conversion transaction at 120% of the appropriate
applicable Federal rate in effect at
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the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of property that was held as a part of such transaction or (ii) in the case
of a non-corporate taxpayer, to the extent such taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates". Stripped Certificates include "Stripped Interest Certificates"
and "Stripped Principal Certificates" (as defined in this Prospectus) as to
which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor or
any of its affiliates retains (for its own account or for purposes of
resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Master
Servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Certificates--Recharacterization of Servicing Fees" above) and
(iii) Certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective entitlements to distributions of
each class (or subclass) of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above
under "Standard Certificates--General", subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part 1 of subchapter J of the Code and
not as an association taxable as a corporation or a "taxable mortgage pool"
within the meaning of Code Section 7701(i), and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Certificates arguably should be
made in one of the ways described below under "Taxation of Stripped
Certificates--Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single
issuer to a single
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investor in a single transaction should be treated as a single debt
instrument for original issue discount purposes. The Pooling Agreement
requires that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents
a right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment suggests that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations.
Further, these final regulations provide that the purchaser of such a
Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under
the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described under "Certain Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt,
counsel has advised the Depositor that Stripped Certificates owned by
applicable holders should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A), "obligation[s] principally
secured by an interest in real property" within the meaning of Code Section
860G(a)(3)(A), and "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by
the 1986 Act, the amount of original issue discount required to be included
in the income of a holder of a Stripped Certificate (referred to in this
discussion as a "Stripped Certificateholder") in any taxable year likely will
be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates". However, with the apparent exception of a Stripped Certificate
qualifying as a market discount obligation, as described above under
"General", the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each
Mortgage Loan represented by such Stripped Certificateholder's Stripped
Certificate. While the matter is not free from doubt, the holder of
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a Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion
of its adjusted basis in such Stripped Certificate to recognize an ordinary
loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead
to different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the
date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more classes
of Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations
less likely to be applicable. The preamble to those regulations states that
they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income
tax purposes.
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REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable
to enable such Certificateholders to prepare their federal income tax
returns. Such information will include the amount of original issue discount
accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amounts required to be reported
by the Trustee may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder,
other than an original Certificateholder that purchased at the issue price.
In particular, in the case of Stripped Certificates, unless provided
otherwise in the applicable Prospectus Supplement, such reporting will be
based upon a representative initial offering price of each class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Service. If a Certificateholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Standard Certificateholder
or Stripped Certificateholder on original issue discount recognized by the
Standard Certificateholder or Stripped Certificateholders on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ
substantially from the corresponding federal law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax
advisors with respect to the various tax consequences of investments in the
Offered Certificates.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and bank collective investment funds and insurance company
general and separate accounts in which such ERISA Plans are invested. Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code and on Individual Retirement Accounts described in Section 408 of
the Code (collectively, "Tax Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Offered Certificates without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and
state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons ("parties in interest" within the meaning of ERISA and
"disqualified persons" within the meaning of the Code; collectively, "Parties
in Interest") who have certain specified relationships to the Plan, unless a
statutory or administrative exemption is available with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in
Interest to a prohibited transaction may be subject to a nondeductible 15%
per annum excise tax on the amount involved in such transaction, which excise
tax increases to 100% if the Party in Interest involved in the transaction
does not correct such transaction during the taxable period. In addition,
such Party in Interest may be subject to a penalty imposed pursuant to
Section 502(i) of ERISA. The United States Department of Labor ("DOL") and
participants, beneficiaries and fiduciaries of ERISA Plans may generally
enforce violations of ERISA, including the prohibited transaction provisions.
If the prohibited transaction amounts to a breach of fiduciary responsibility
under ERISA, a 20% civil penalty may be imposed on the fiduciary or other
person participating in the breach.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund, including a Plan's
investment in Offered Certificates, might be deemed to constitute prohibited
transactions under ERISA and the Code if the underlying Mortgage Assets and
other assets included in a related Trust Fund are deemed to be assets of such
Plan. Section 2510.3-101 of the DOL regulations (the "Plan Asset
Regulations") defines the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the Plan Asset
Regulations, generally, when a Plan acquires an equity interest in an entity,
the Plan's assets include both such equity interest and an undivided interest
in each of the underlying assets of the entity, unless certain exceptions not
applicable here apply,
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or unless the equity participation in the entity by "benefit plan investors"
(i.e., Plans and certain employee benefit plans not subject to ERISA) is not
"significant", both as defined therein. For this purpose, in general, equity
participation by benefit plan investors will be "significant" on any date if
25% or more of the value of any class of equity interests in the entity is
held by benefit plan investors. Equity participation in a Trust Fund will be
significant on any date if immediately after the most recent acquisition of
any Certificate, 25% or more of any class of Certificates is held by benefit
plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the
Master Servicer, any Special Servicer, any Sub-Servicer, any Manager, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with
respect to an investing Plan (or of a Plan holding an interest in an
investing entity). If so, the acquisition or holding of Certificates by or on
behalf of the investing Plan could also give rise to a prohibited transaction
under ERISA and the Code, unless some statutory or administrative exemption
is available. Certificates acquired by a Plan may be assets of that Plan.
Under the Plan Asset Regulations, the Trust Fund, including the Mortgage
Asset Loans and the other assets held in the Trust Fund, may also be deemed
to be Plan Assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in
such circumstances, especially if, with respect to such assets, the
Depositor, the Master Servicer, any Special Servicer, any Sub-Servicer, any
Manager, the Trustee, the obligor under any credit enhancement mechanism or
an affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give
(or regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of
the investing Plan. If the Mortgage Assets and other assets included in a
Trust Fund constitute Plan Assets, then any party exercising management or
discretionary control regarding those assets, such as the Master Servicer,
any Special Servicer, any Sub-Servicer, the Trustee, the obligor under any
credit enhancement mechanism, or certain affiliates thereof may be deemed to
be a Plan "fiduciary" and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the Mortgage Assets and other
assets included in a Trust Fund constitute Plan Assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets
include such certificate but do not solely by reason of the Plan's holdings
of such certificate include any of the mortgages underlying such certificate.
The Plan Asset Regulations include in the definition of a "guaranteed
governmental mortgage pool certificate" FHLMC Certificates, GNMA Certificates
and FNMA Certificates, but do not include FAMC Certificates. Accordingly,
even if such MBS (other than FAMC Certificates) included in a Trust Fund were
deemed to be assets of Plan investors, the mortgages underlying such MBS
(other than FAMC Certificates) would not be treated as assets of such Plans.
Private label mortgage participations, mortgage pass-through certificates,
FAMC Certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations. Potential Plan investors should consult their counsel and review
the ERISA discussion in the related Prospectus Supplement before purchasing
any such Certificates.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL granted an individual exemption, DOL exemption application number
E-0003 (the "Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and
Deutsche Morgan Grenfell Inc. ("DMG") which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through
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certificates underwritten by an Underwriter (as hereinafter defined),
provided that certain conditions set forth in the Exemption are satisfied.
For purposes of this Section "ERISA Considerations," the term "Underwriter"
shall include (a) DBNY and DMG, (b) any person directly or indirectly,
through one or more intermediaries, controlling, controlled by or under
common control with DBNY and DMG and (c) any member of the underwriting
syndicate or selling group of which a person described in (a) or (b) is a
manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan
or with Plan Assets must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the
"Exemption Rating Agencies"). Fourth, the Trustee cannot be an affiliate of
any member of the "Restricted Group" which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, any Sub-Servicer and any obligor
with respect to assets included in the Trust Fund constituting more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund as of the date of initial issuance of the Certificates. Fifth, the sum
of all payments made to and retained by the Underwriter(s) must represent not
more than reasonable compensation for underwriting the Certificates; the sum
of all payments made to and retained by the Depositor pursuant to the
assignment of the assets to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments
made to and retained by the Master Servicer and any Sub-Servicer must
represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the Exemption states that the
investing Plan or Plan Asset investor must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) Certificates
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of Certificates by or on
behalf of a Plan or with Plan Assets; and (iii) Certificates evidencing
interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any acquisition of
Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth
above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA
for the acquisition or holding of a Certificate on behalf of an "Excluded
Plan" by any person who has discretionary authority or renders investment
advice with respect to the assets of such Excluded Plan. For purposes of the
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code,
in connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Depositor or
an Underwriter and a Plan when the person who has
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discretionary authority or renders investment advice with respect to the
investment of Plan Assets in the Certificates is (a) a mortgagor with respect
to 5% or less of the fair market value of the Trust Fund Assets or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Certificates by a Plan and (3) the
holding of Certificates by a Plan or with Plan Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Certificates so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the
servicing, management and operation of the Trust Fund, provided that the
general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to
an investing Plan by virtue of providing services to the Plan (or by virtue
of having certain specified relationships to such a person) solely as a
result of the Plan's ownership of Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three
highest generic rating categories by the Exemption Rating Agencies, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf
of any Plan, or to any other person investing Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion
of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the
Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or
the Master Servicer to any obligation in addition to those undertaken in the
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Part I
and III have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
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There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would
apply to all transactions involving the Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates. Neither the
Depositor, the Trustee, the Master Servicer nor any of their respective
affiliates will make any representation to the effect that the Certificates
satisfy all legal requirements with respect to the investment therein by
Plans generally or any particular Plan or to the effect that the Certificates
are an appropriate investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE (OTHER THAN A SUBORDINATE CERTIFICATE,
RESIDUAL CERTIFICATE OR ANY CERTIFICATE WHICH IS NOT RATED IN ONE OF THE
THREE HIGHEST GENERIC RATING CATEGORIES BY THE EXEMPTION RATING AGENCIES), A
FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND
GENERAL CONDITIONS SET FORTH IN THE EXEMPTION OR ONE OF THE CLASS EXEMPTIONS
WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE
EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION, A PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A
CERTIFICATE ON BEHALF OF A PLAN.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in
one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series evidencing interests in a Trust Fund consisting of
loans secured by first liens on real property and originated by certain types
of Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation, to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the
United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cutoff for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in "mortgage related securities" secured by
liens on residential, or mixed residential and commercial properties, in most
cases by requiring the affected investors to rely solely upon existing state
law, and not SMMEA. Pursuant to Section 347 of the Riegle Community
Development and Regulatory Improvement Act of 1994, which amended the
definition of "mortgage related security" to include, in relevant part,
Offered Certificates satisfying the rating and qualified Originator
requirements for "mortgage related securities," but evidencing interests in a
Trust Fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial
structures, states were authorized to enact legislation, on or before
September 23, 2001, specifically referring to Section 347 and prohibiting or
restricting the purchase, holding or investment by state-regulated entities
in such types of Offered Certificates. Accordingly, the investors affected by
any such state legislation, when and if enacted, will be authorized to invest
in Offered Certificates qualifying as "mortgage related securities" only to
the extent provided in such legislation.
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SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. Section 1.5), certain "Type IV securities," defined in 12 C.F.R.
Section 1.2(1) to include certain "commercial mortgage-related securities"
and "residential mortgage-related securities." As so defined, "commercial
mortgage-related security" and "residential mortgage-related security" mean,
in relevant part, "mortgage related security" within the meaning of SMMEA,
provided that, in the case of a "commercial mortgage-related security," it
"represents ownership of a promissory note or certificate of interest or
participation that is directly secured by a first lien on one or more parcels
of real estate upon which one or more commercial structures are located and
that is fully secured by interests in a pool of loans to numerous obligors."
In the absence of any rule or administrative interpretation by the OCC
defining the term "numerous obligors," no representation is made as to
whether any class of Offered Certificates will qualify as "commercial
mortgage-related securities," and thus as "Type IV securities," for
investment by national banks. Federal credit unions should review National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities, and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot
program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the Office of Thrift Supervision, and by the NCUA
(with certain modifications), prohibits depository institutions from
investing in certain "high-risk mortgage securities" (including securities
such as certain series or classes of the Offered Certificates), except under
limited circumstances, and sets forth certain investment practices deemed to
be unsuitable for regulated institutions. On September 29, 1997, the FFIEC
released for public comment a proposed "Supervisory Policy Statement on
Investment Securities and End-User Derivatives Activities" (the "1997
Statement"), which would replace the Policy Statement. As proposed, the
1997 Statement would delete the specific "high-risk mortgage securities"
tests, and substitute general guidelines which depository institutions should
follow in managing risks (including market, credit, liquidity, operational
(transactional), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
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Except as to the status of certain classes of Offered Certificates as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the Offered Certificates.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor to cover expenses related thereto. The
Depositor expects to sell the Certificates from time to time, but the timing
and amount of offerings of Certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method
of offering being utilized for that series and will state the net proceeds to
the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of
the Offered Certificates of a particular series may be made through a
combination of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related Prospectus
Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of a series may be offered in whole or in part to the
seller of the related Mortgage Assets that would comprise the Trust Fund for
such Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
to be determined at the time of sale or at the time of commitment therefor.
The managing underwriter or underwriters with respect to the offer and sale
of Offered Certificates of a particular series will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the Offered
Certificates may be deemed to be underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
Depositor and any profit on the resale of Offered Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of the Offered Certificates of any series will provide that the obligations
of the underwriters will be subject to certain conditions
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precedent, that the underwriters will be obligated to purchase all such
Certificates if any are purchased (other than in connection with an
underwriting on a best efforts basis) and that, in limited circumstances, the
Depositor will indemnify the several underwriters and the underwriters will
indemnify the Depositor against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, or will contribute
to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with reoffers and sales by
them of Offered Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold
by the Depositor at any time to one or institutional investors.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by the Underwriter in connection with offers and
sales related to market-making transactions in the Offered Certificates with
respect to which the Underwriter acts as principal. The Underwriter may also
act as agent in such transactions. Sales may be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement. The Depositor has determined that its financial statements will
not be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
Stripped Interest Certificates might, in extreme cases fail to recoup their
initial investments. Furthermore, ratings on mortgage pass-through
certificates do not address the price of such certificates or the suitability
of such certificates to the investor.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1986 Act ..................... 69
Act .......................... 62
ADA .......................... 64
ARM Loans .................... 19
Book-Entry Certificates ...... 30
capital asset ................ 74
CERCLA ....................... 61
Certificate Account .......... 22
Certificate Owner ............ 36
Code ......................... 66
Commercial Properties ........ 16
Commission ................... 3
Companion Class .............. 32
CON .......................... 20
Condemnation Proceeds ........ 43
Controlled Amortization Class 32
Cooperatives ................. 16
CPR .......................... 25
Crime Control Act ............ 65
Cut-off Date ................. 32
DBNY ......................... 94
Definitive Certificates ...... 30
Depositor .................... 1
Determination Date ........... 24, 30
Deutsche Bank Group .......... 29
Disqualified Organization .... 80
Disqualified Organizations ... 81
Distribution Date Statement .. 33
DMARC Trust .................. 29
DMG .......................... 94
DOL .......................... 93
DTC .......................... 4, 35
DTC Participants ............. 36
Due Dates .................... 18
Equity Participation ......... 19
ERISA ........................ 93
ERISA Plans .................. 93
Exchange Act ................. 4
Exemption .................... 94
Exemption Rating Agencies .... 95
FAMC ......................... 21
FHLMC ........................ 21
Financial Intermediary ....... 36
FNMA ......................... 21
Foreign Investors ............ 80
Garn Act ..................... 63
GNMA ......................... 21
Health Care-Related Facilities 20
Health Care-Related Mortgaged
Property .................... 20
Insurance Proceeds ........... 43
IRS .......................... 45
Letter of Credit Bank ........ 55
Lock-out Date ................ 19
Lock-out Period .............. 19
Mark to Market Regulations ... 82
Market Discount .............. 73, 74
MBS .......................... 1, 16
MBS Agreement ................ 21
MBS Issuer ................... 22
MBS Servicer ................. 22
MBS Trustee .................. 22
Mortgage Asset Pool .......... 1
Mortgage Asset Seller ........ 16
Mortgage Assets .............. 1, 16
Mortgage Loans ............... 1, 16
Mortgage Notes ............... 16
Mortgaged Properties ......... 16
Mortgages .................... 16
Multifamily Properties ....... 16
Net Leases ................... 18
Nonrecoverable Advance ....... 33
Non-U.S. Person .............. 84
Offered Certificates ......... 1
OID Regulations .............. 69
original issue discount ...... 69
Original Issue Discount ...... 72, 73
Originator ................... 16
Parties in Interest .......... 93
Pass-Through Entity .......... 79, 80
Percentage Interest .......... 30
Permitted Investments ........ 42
Plan Asset Regulations ....... 93
Prepayment Assumption ........ 70
Prepayment Interest Shortfall 24
Prepayment Premium ........... 19
Prospectus Supplement ........ 1
Purchase Price ............... 39
Random Lot Certificates ...... 69
101
<PAGE>
Record Date .............................. 30
Regular Certificateholder ................ 69
Regular Certificates ..................... 66, 85
Related Proceeds ......................... 33
Relief Act ............................... 65
REMIC .................................... 2, 66
REMIC Administrator ...................... 3
REMIC Certificates ....................... 66
REMIC Pool ............................... 66
REMIC Regulations ........................ 66
REO Property ............................. 40
Residual Certificateholders .............. 76
Residual Certificates .................... 66
RICO ..................................... 65
Senior Liens ............................. 16
Service .................................. 68
SPA ...................................... 26
Standard Certificateholder ............... 86
Startup Day .............................. 67
stripped bond ............................ 88
stripped bonds ........................... 88
Stripped Certificateholder ............... 90
Stripped Certificates .................... 86, 88, 89
stripped coupons ......................... 88
Stripped Interest Certificates ........... 89
Stripped Principal Certificates .......... 89
Sub-Servicer ............................. 42
Sub-Servicing Agreement .................. 42
Tax Exempt Investor ...................... 97
Tax Favored Plans ........................ 93
Title V .................................. 64
Treasury ................................. 66
Trust Assets ............................. 3
Trust Fund ............................... 1
UBTI ..................................... 97
UCC ...................................... 57
U.S. Person .............................. 81
Voting Rights ............................ 35
Warranting Party ......................... 39
</TABLE>
102
<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 SUPPLEMMENT AND THE PROSPECTUS TO WHICH IT
RELATES SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
USHC OFFER, SOLICITATION OR SALE WOULD BE UNALWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 199
[Version 3 -Restaurant Concentration]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199 -
$ VARIABLE RATE CLASS A CERTIFICATES
$ VARIABLE RATE CLASS B CERTIFICATES
$100 VARIABLE RATE CLASS R CERTIFICATES
The Series 199 - Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following four classes (each, a "Class"):
(i) the Class A Certificates and Class R Certificates (collectively, the
"Senior Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. Only the Senior Certificates and the Class B Certificates
(collectively, the "Offered Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than , and that the Class B Certificates be rated not lower
than , by .
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS
ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY OF THEIR
AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
DEUTSCHE BANK AG OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE S-12 HEREIN AND PAGE 9 IN THE
PROSPECTUS BEFORE PURCHASING ANY OFFERED CERTIFICATE.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
(the "Underwriter") intends to make a secondary market in the Offered
Certificates, but is not obligated to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. See "Risk Factors--Limited Liquidity" herein.
The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the Depositor estimated to
be approximately $ , will be % of the initial aggregate
[UNDERWRITER]
, 199
<PAGE>
(cover continued)
Certificate Balance of the Offered Certificates[, plus accrued interest on
the Offered Certificates from the Cut-off Date]. The Offered Certificates are
offered by the Underwriter subject to prior sale, when, as and if delivered
to and accepted by the Underwriter and subject to certain other conditions.
It is expected that the Class A Certificates will be delivered in book-entry
form through the Same-Day Funds Settlement System of DTC and that the Class B
and Class R Certificates will be delivered at the offices of the Underwriter,
, on or about , 199 (the "Delivery Date"), against payment
therefor in immediately available funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by
the Depositor, that will consist primarily of a segregated pool (the
"Mortgage Pool") of conventional, fixed-and adjustable-rate, multifamily
or commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage
Loan is secured by a first mortgage lien on a fee simple estate in real
property operated as a restaurant, retail property, office building or
multifamily rental property. As of , 199 (the "Cut-off Date"), the
Mortgage Loans had an aggregate principal balance (the "Initial Pool
Balance") of $ , after application of all payments of principal due
on or before such date, whether or not received. Certain characteristics of
the Mortgage Loans are described herein under "Description of the Mortgage
Pool".
THE RIGHTS OF THE HOLDERS OF THE CLASS B AND CLASS C CERTIFICATES TO
RECEIVE DISTRIBUTIONS WITH RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATE
TO THE RIGHTS OF THE HOLDERS OF THE SENIOR CERTIFICATES, AND THE RIGHTS OF
THE HOLDERS OF THE CLASS C CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT
TO THE MORTGAGE LOANS WILL BE SUBORDINATE TO THE RIGHTS OF THE HOLDERS OF THE
CLASS B CERTIFICATES, IN EACH CASE TO THE EXTENT DESCRIBED HEREIN AND IN THE
PROSPECTUS.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates--Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and
the Class C Certificates (collectively, the "REMIC Regular Certificates")
will constitute "regular interests", and the Class R Certificates will
constitute the sole class of "residual interests", in the Trust Fund. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Transfer of the Class R Certificates will be prohibited to any non-United
States person, and will be subject to certain additional transfer
restrictions described herein under "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to REMIC Residual
Certificates" and in the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business
day, then on the next business day, beginning in 199 (each, a
"Distribution Date"). As described herein, interest distributions on each
Class of Offered Certificates will be made on each Distribution Date based on
the variable pass-through rate (the "Pass-Through Rate") then applicable to
such Class and the stated principal amount (the "Certificate Balance") of
such Class outstanding immediately prior to such Distribution Date. The
Pass-Through Rate for each Class of Offered Certificates applicable to the
first Distribution Date will be % per annum. Subsequent to the initial
Distribution Date, the Pass-Through Rate for each Class of Offered
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates (as defined
herein) on the Mortgage Loans. Principal distributions on each Class of
Offered Certificates will be made in the amounts and in accordance with the
priorities described herein. See "Description of the
Certificates--Distributions" herein.
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, changes in its respective Pass-Through Rate and the
rate and timing of principal payments (including by reason of prepayments,
defaults and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors--Effect of Prepayments on Average Life of Certificates" in the
ii
<PAGE>
Prospectus. [The following disclosure is applicable to Stripped Interest
Certificates ("Class S Certificates"), when offered ... THE YIELD TO MATURITY
ON THE CLASS S CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING BY REASONS OF PREPAYMENTS, DEFAULTS
AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY FLUCTUATE SIGNIFICANTLY
FROM TIME TO TIME. A RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS THAT IS
MORE RAPID THAN EXPECTED BY INVESTORS WILL HAVE A MATERIAL NEGATIVE EFFECT ON
THE YIELD TO MATURITY OF THE CLASS S CERTIFICATES. INVESTORS IN THE CLASS S
CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A
RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF INVESTORS IN SUCH CERTIFICATES TO RECOVER FULLY THEIR INITIAL
INVESTMENTS. SEE "YIELD AND MATURITY CONSIDERATIONS" HEREIN AND "YIELD AND
MATURITY CONSIDERATIONS" AND "RISK FACTORS--EFFECT OF PREPAYMENTS ON AVERAGE
LIFE OF CERTIFICATES" IN THE PROSPECTUS.]
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED , OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
iii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
TITLE OF CERTIFICATES ......... Mortgage Pass-Through Certificates, Series
199 - .
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche Bank
AG or any of their affiliates.
MASTER SERVICER. .............. . See "Servicing of the Mortgage
Loans--The Master Servicer" herein.
SPECIAL SERVICER .............. . See "Servicing of the Mortgage
Loans--The Special Servicer" herein.
TRUSTEE ....................... . See "Description of the
Certificates--The Trustee" herein.
REMIC ADMINISTRATOR ........... . See "Certain Federal Income Tax
Consequences--REMICs--Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements--Events of Default" and "--Rights
Upon Event of Default" in the Prospectus.
MORTGAGE LOAN SELLER .......... . See "Description of the Mortgage
Pool--The Mortgage Loan Seller" herein.
CUT-OFF DATE .................. , 199 .
DELIVERY DATE ................. On or about , 199 .
REGISTRATION; DENOMINATIONS ... The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of DTC in denominations of $25,000
and integral multiples of $1 in excess
thereof. The Class B Certificates will be
issued in fully registered, certificated
form in denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to the
remainder of the initial Certificate Balance
of such Class. The Class R Certificates will
be issued in registered, certificated form
in minimum denominations of 20% percentage
interest in such Class.
The Class A Certificates will be represented
by one or more global Certificates
registered in the name of Cede & Co., as
nominee of DTC. No person acquiring an
interest in the Class A Certificates (any
such person, a "Class A Certificate Owner")
will be entitled to receive a Class A
Certificate in fully registered,
certificated form (a "Definitive Class A
Certificate"), except under the limited
circumstances described herein and in the
Prospectus. See "Description of the
Certificates--Book-
S-1
<PAGE>
Entry Registration of the Class A
Certificates" herein and "Description of the
Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
THE MORTGAGE POOL ............. The Mortgage Pool will consist of
conventional, balloon Mortgage Loans with an
Initial Pool Balance of $ . On or prior
to the Delivery Date, the Depositor will
acquire the Mortgage Loans from the Mortgage
Loan Seller pursuant to a Purchase
Agreement, dated [the date hereof], between
the Depositor and the Mortgage Loan Seller
(the "Purchase Agreement"). In the Purchase
Agreement, the Mortgage Loan Seller has made
certain representations and warranties to
the Depositor regarding the characteristics
and quality of the Mortgage Loans and, as
more particularly described herein, has
agreed to cure any material breach thereof
or repurchase the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign its
rights under the Purchase Agreement insofar
as they relate to or arise out of the
Mortgage Loan Seller's representations and
warranties regarding the Mortgage Loans. See
"Description of the Mortgage
Pool--Representations and Warranties;
Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in real
property (as to such Mortgage Loan, the
"Mortgaged Property") operated as a
restaurant ( Mortgage Loans which
represent % of the Initial Pool
Balance), a retail property ( Mortgage
Loans which represent % of the Initial
Pool Balance), an office building (
Mortgage Loans which represent % of the
Initial Pool Balance) or a multifamily
rental property ( Mortgage Loans which
represent % of the Initial Pool Balance).
of the Mortgage Loans, which represent %
of the Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
. The remaining Mortgaged Properties are
located throughout other states. See
"Description of the Mortgage Pool--Additional
Mortgage Loan Information" and "Risk
Factors--Risks Associated With Multifamily
Properties" and "--Risks Associated with
Properties" and "Description of the Mortgage
Pool--Additional Mortgage Loan Information"
herein. of the Mortgage Loans, which
represent % of the Initial Pool Balance,
provide for scheduled payments of principal \
and/or interest ("Monthly Payments") to be
due on the first day of each month; the
remainder of the Mortgage Loans provide for
Monthly Payments to be due on the , ,
or day of each month (the date in
any month on which a Monthly Payment on a
Mortgage Loan is first due, the "Due Date").
The annualized rate at which interest accrues
(the "Mortgage Rate") on of the
Mortgage Loans (the "ARM Loans"), which
represent % of the Initial Pool Balance,
is subject to adjustment on specified Due
Dates (each such date of adjustment, an
"Interest Rate Adjustment Date") by adding a
fixed
S-2
<PAGE>
number of basis points (a "Gross Margin") to
the value of a base index (an "Index"),
subject, in cases, to lifetime maximum
and/or minimum Mortgage Rates, and in
cases, to periodic maximum and/or
minimum Mortgage Rates, in each case as
described herein; and the remaining Mortgage
Loans (the "Fixed Rate Loans") bear interest
at fixed Mortgage Rates. of the ARM
Loans, which represent % of the Initial
Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while
the remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to occur
semi-annually or annually. [Identify
Mortgage Loan Index] See "Description of the
Mortgage Pool--Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of
the ARM Loans is subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that
would amortize the outstanding principal
balance of the Mortgage Loan over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date
following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly longer
than the remaining terms of such Mortgage
Loans, thereby leaving substantial principal
amounts due and payable (each such payment,
together with the corresponding interest
payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid
prior thereto.
DESCRIPTION OF THE
CERTIFICATES ................. The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer, the Special
Servicer, the Trustee and the REMIC
Administrator (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in the Trust Fund, which will
consist of the Mortgage Pool and certain
related assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. Each Class
of Offered Certificates will have the
initial Certificate Balance set forth on the
cover page, and the Class C Certificates
will have an initial Certificate Balance of
$ . See "Description of the
Certificates--General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal % per
annum. With respect to any Distribution Date
subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of
Certificates will equal the weighted average
of the applicable Effective Net Mortgage
Rates for the Mortgage Loans, weighted on
the basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution Date.
For purposes of calculating the Pass-Through
Rate for any Class
S-3
<PAGE>
of Certificates and any Distribution Date,
the "applicable Effective Net Mortgage Rate"
for each Mortgage Loan is an annualized rate
equal to the Mortgage Rate in effect for
such Mortgage Loan as of the [second] day of
the most recently ended calendar month, (a)
reduced by basis points (the Mortgage
Rate, as so reduced, the "Net Mortgage
Rate"), and (b) if the accrual of interest
on such Mortgage Loan is computed other than
on the basis of a 360-day year consisting of
twelve 30-day months (which is the basis of
accrual for interest on the Certificates),
then adjusted to reflect that difference in
computation. See "Description of the
Certificates--Distributions--Pass-Through
Rates" and "--Distributions--Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
INTEREST DISTRIBUTIONS ON THE
SENIOR CERTIFICATES .......... On each Distribution Date, to the extent of
the Available Distribution Amount, holders
of each Class of Senior Certificates will be
entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
The "Distributable Certificate Interest" in
respect of any Class of Certificates for any
Distribution Date will equal one month's
interest at the then-applicable Pass-Through
Rate accrued on the Certificate Balance of
such Class of Certificates immediately prior
to such Distribution Date, reduced (to not
less than zero) by such Class of
Certificates' allocable share (in each case,
calculated as described herein) of any Net
Aggregate Prepayment Interest Shortfall
(also as described herein) for such
Distribution Date. See "Description of the
Certificates--Distributions--Distributable
Certificate Interest" herein.
The "Available Distribution Amount" for any
Distribution Date is, as described herein
under "Description of the
Certificates--Distributions", the total of
all payments or other collections (or
available advances) on or in respect of the
Mortgage Loans that are available for
distribution on the Certificates on such
date.
PRINCIPAL DISTRIBUTIONS ON THE
SENIOR CERTIFICATES .......... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after the distributions of interest to be
made on the Senior Certificates on such
date, holders of the Senior Certificates
will be entitled to distributions of
principal (until the Certificate Balances of
such Classes of Certificates are reduced to
zero) in an aggregate amount equal to the
sum of (a) such holders' pro rata share of
the Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal Distribution
Amount for such Distribution Date.
Distributions of principal on the Senior
Certificates will be paid first to the
holders of the Class R Certificates until
the Certificate Balance of such Certificates
is
S-4
<PAGE>
reduced to zero, and then to the holders of
the Class A Certificates. See "Description
of the Certificates--Distributions--Scheduled
Principal Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
INTEREST DISTRIBUTIONS ON THE
CLASS B CERTIFICATES ......... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after all distributions to be made on the
Senior Certificates on such date (such
remaining portion, the "Class B Available
Distribution Amount"), holders of the Class
B Certificates will be entitled to receive
distributions of interest in an amount equal
to all Distributable Certificate Interest
with respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
PRINCIPAL DISTRIBUTIONS ON
THE CLASS B CERTIFICATES ..... On each Distribution Date, to the extent of
the Class B Available Distribution Amount
remaining after the distributions of
interest to be made on the Class B
Certificates on such date, holders of the
Class B Certificates will be entitled to
distributions of principal (until the
Certificate Balance of such Class of
Certificates is reduced to zero) in an
amount equal to the sum of (a) such holders'
pro rata share of the Scheduled Principal
Distribution Amount for such Distribution
Date, plus (b) if the Certificate Balances
of the Senior Certificates have been reduced
to zero, then to the extent not distributed
in reduction of such Certificate Balances on
such Distribution Date, the entire
Unscheduled Principal Distribution Amount
for such Distribution Date. See "Description
of the Certificates--Distributions" herein.
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS ............... The yield on the Offered Certificates of any
class will depend on, among other things,
the Pass-Through Rate for such Certificates.
The yield on any Offered Certificate that is
purchased at a discount or premium will also
be affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and (ii)
the extent to which such principal payments
are applied on any Distribution Date in
reduction of the Certificate Balance of the
Class to which such Certificate belongs. See
"Description of the
Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should consider
the risk that a slower than anticipated rate
of principal payments on such Certificate
will result in an actual yield that is lower
than such investor's expected yield. An
investor that purchases any Offered
Certificate at a premium should consider the
risk that a faster than anticipated rate of
S-5
<PAGE>
principal payments on such Certificate will
result in an actual yield that is lower than
such investor's expected yield. Insofar as
an investor's initial investment in any
Offered Certificate is repaid, there can be
no assurance that such amounts can be
reinvested in a comparable alternative
investment with a comparable yield.
The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The Mortgage Loans may be prepaid at any
time, subject, in the case of Mortgage
Loans, to payment of a Prepayment Premium.
The investment performance of the Offered
Certificates may vary materially and
adversely from the investment expectations
of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield
to the holder of an Offered Certificate may
not be equal to the yield anticipated at the
time of purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that time,
the total return on investment expected by
the investor or the expected weighted
average life of the Certificate may not be
realized. For a discussion of certain
factors affecting prepayment of the Mortgage
Loans, including the effect of Prepayment
Premiums, see "Yield and Maturity
Considerations" herein. IN DECIDING WHETHER
TO PURCHASE ANY OFFERED CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT DECISION
AS TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS
TO BE USED.
[The structure of the Offered Certificates
causes the yield of certain Classes to be
particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans
and other factors, as follows:]
[Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each Distribution
Date will be allocated to the Class B
Certificates.]
[The following disclosure is applicable to
Stripped Interest Certificates, when
offered... The Stripped Interest
Certificates. The Class S Certificates are
interest-only Certificates and are not
entitled to any distributions in respect of
principal. The yield to maturity of the
Class S Certificates will be especially
sensitive to the prepayment, repurchase and
default experience on the Mortgage Loans,
which may fluctuate significantly from time
to time. A rate of principal payments that
is more rapid than expected by investors
will have a material negative effect on the
yield to maturity of the Class S
Certificates. See "Yield and Maturity
Considerations--Yield Sensitivity of the
Class S Certificates" herein.]
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<PAGE>
Class R Certificates: Holders of the Class R
Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the
early years of the term of the Trust Fund
that substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "--Additional
Yield Considerations Applicable Solely to
the Class R Certificates," herein and
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ADVANCES ...................... The Master Servicer is required to make
advances (each, an "Advance") of delinquent
principal and interest (net of related
Servicing Fees) on the Mortgage Loans or, in
the case of each Mortgage Loan that is
delinquent in respect of its Balloon Payment
or as to which the related Mortgaged
Property was acquired through foreclosure,
deed in lieu of foreclosure or otherwise,
only of delinquent interest (net of related
Servicing Fees), in any event under the
circumstances and subject to the limitations
set forth herein. Advances are intended to
maintain a regular flow of scheduled
interest and principal payments to the
Certificateholders, rather than to guarantee
or insure against losses. Accordingly,
Advances which cannot be reimbursed out of
collections on or in respect of the related
Mortgage Loans ("Nonrecoverable Advances")
will represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on certain
servicing expenses incurred by it or on its
behalf, such interest accruing at the rate
and payable under the circumstances
described herein. Interest accrued on
outstanding Advances will result in a
reduction in amounts payable on the
Certificates. See "Description of the
Certificates--Advances" and
"--Subordination; Allocation of Collateral
Support Deficit" herein and "Description of
the Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in
the Prospectus.
Each Distribution Date Statement delivered
by the Trustee to the Certificateholders
will contain information relating to the
amounts of Advances made with respect to the
related Distribution Date. See "Description
of the Certificates--Reports to
Certificateholders; Certain Available
Information" herein and "Description of
Certificates--Reports to Certificateholders"
in the Prospectus.
SUBORDINATION; ALLOCATION OF
COLLATERAL SUPPORT DEFICIT ... The rights of the holders of the Class B and
Class C Certificates to receive
distributions with respect to the Mortgage
Loans will be subordinate to the rights of
the holders of the Senior Certificates, and
the rights of the holders of the Class C
Certificates to receive distributions with
respect to the Mort-
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<PAGE>
gage Loans will be subordinate to the rights
of the holders of the Class B Certificates,
in each case to the extent described herein
and in the Prospectus. This subordination is
intended to enhance the likelihood of timely
receipt by the holders of the Senior
Certificates of the full amount of all
Distributable Certificate Interest payable
in respect of such Certificates on each
Distribution Date, and the ultimate receipt
by such holders of principal in an amount
equal to the entire aggregate Certificate
Balance of the Senior Certificates.
Similarly, but to a lesser degree, this
subordination is also intended to enhance
the likelihood of timely receipt by the
holders of the Class B Certificates of the
full amount of all Distributable Certificate
Interest payable in respect of such
Certificates on each Distribution Date, and
the ultimate receipt by such holders of
principal in an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on the
respective Classes of Certificates in the
order described herein under "Description of
the Certificates--Distributions--Priority".
No other form of Credit Support will be
available for the benefit of the holders of
the Offered Certificates.
Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans. To the
extent that the Senior Certificates are
amortized faster than the Mortgage Loans,
the percentage interest evidenced by the
Senior Certificates in the Trust Fund will
be decreased (with a corresponding increase
in the interest in the Trust Fund evidenced
by the Class B and Class C Certificates),
thereby increasing, relative to their
respective Certificate Balances, the
subordination afforded the Senior
Certificates by the Class B and Class C
Certificates. Following retirement of the
Class A Certificates, allocation to the
Class B Certificates, for so long as they
are outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of subordination
afforded thereto by the Class C
Certificates.
As a result of losses and other shortfalls
experienced with respect to the Mortgage
Loans or otherwise with respect to the Trust
Fund (which may include shortfalls arising
both from interest accrued on Advances and
from Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding immediately
following any Distribution Date may be less
than the aggregate Certificate Balance of
the Certificates immediately following the
distributions on such Distribution Date.
Such deficit (the "Collateral Support
Deficit") will be allocated first to the
Class C Certificates, then to the Class B
Certificates and last to the Class A
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<PAGE>
Certificates (in reduction of their
Certificate Balances), in each case until
the related Certificate Balance has been
reduced to zero. See "Description of the
Certificates--Subordination; Allocation of
Collateral Support Deficit" herein.
OPTIONAL TERMINATION .......... At its option, on any Distribution Date on
which the remaining aggregate Stated
Principal Balance of the Mortgage Pool is
less than 5% of the Initial Pool Balance,
the Master Servicer or the Depositor may
purchase all of the Mortgage Loans and REO
Properties, and thereby effect termination
of the Trust Fund and early retirement of
the then outstanding Certificates. See
"Description of the
Certificates--Termination; Retirement of
Certificates" herein and in the Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES ............. An election will be made to treat the Trust
Fund as a REMIC for Federal income tax
purposes. Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham and
Taft, counsel to the Depositor, will deliver
its opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A
through 860G of the Code. For Federal income
tax purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the Class
R Certificates will be the sole class of
"residual interests" in the Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying
the rules relating to "excess inclusions."
In addition, the Class R Certificates may
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will
be restricted under the Pooling and
Servicing Agreement to United States Persons
in a manner designed to prevent a transfer
of a noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates"
herein and "Certain Federal Income Tax
Consequences--Federal Income Tax
Consequences for REMIC
Certificates--Taxation of Residual
Certificates--Limitations on Offset or
Exemption of REMIC Income" and
"--Tax-Related Restrictions on Transfer of
Residual Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the Trust
Fund's term. Accordingly, on a present value
basis, the tax detriments occurring in the
earlier years may substantially exceed the
sum of any tax benefits in the later years.
As a result, the Class R Certificateholders'
after-tax rate of return may be
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<PAGE>
zero or negative, event if their pre-tax
rate of return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain Federal
Income Tax Consequences--Special Tax
Considerations Applicable to REMIC Residual
Certificates" herein.
For further information regarding the
Federal income tax consequences of investing
in the Offered Certificates, see "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
RATING ........................ It is a condition of their issuance that the
Senior Certificates be rated not lower than
" ", and that the Class B Certificates be
rated not lower than " ", by
([collectively,] the "Rating Agenc[ies]"). A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning Rating Agency. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered A security rating
does not address the frequency or likelihood
of prepayments (whether voluntary or
involuntary) of Mortgage Loans, or the
possibility that, as a result of
prepayments, investors in the Class S
Certificates may realize a lower than
anticipated yield or may fail to recover
fully their initial investment.] See
"Rating" herein.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "Certain ERISA
Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT .............. [The Senior Certificates will constitute
"mortgage related securities" for purposes
of SMMEA, for so long as they are rated in
one of the two highest rating categories by
one or more nationally recognized
statistical rating organizations [and are
secured by liens on real estate].
[The Class B Certificates will not contitute
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the Class B
Certificates under various legal investment
restrictions, and thus the ability of
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<PAGE>
investors subject to these restrictions to
purchase the Class B Certificates, may be
subject to significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
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<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following risk factors (as well as the risk factors set
forth under "Risk Factors" in the Prospectus) in connection with an
investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. The Offered Certificates will not be listed
on any securities exchange. See "Risk Factors--Limited Liquidity" in the
Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including
principal prepayments) and other principal collections on or in respect of
the Mortgage Loans and the extent to which such amounts are to be applied or
otherwise result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificates belongs, (y)
the rate, timing and severity of losses on or in respect of the Mortgage
Loans and the extent to which such losses result in a reduction of the
Certificate Balance [or Notional Amount] of the Class of Certificates to
which such Certificate belongs, and (z) the timing and severity of any Net
Aggregate Prepayment Interest Shortfalls and the extent to which such
shortfalls are allocated in reduction of the Distributable Certificate
Interest payable on the Class of Certificates to which such Certificate
belongs. It is impossible to predict with certainty any of the factors
described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [THE YIELD TO MATURITY OF THE
CLASS S CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING BY REASON OF PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON OR IN RESPECT OF THE MORTGAGE LOANS, AND INVESTORS IN THE
CLASS S CERTIFICATES SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT AN EXTREMELY RAPID RATE OF AMORTIZATION AND PREPAYMENT OF THE
RELATED NOTIONAL AMOUNT COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO
RECOUP THEIR INITIAL INVESTMENTS.] See "Description of the Mortgage Pool",
"Description of the Certificates--Distributions" and "--Subordination;
Allocation of Collateral Support Deficit" and "Yield and Maturity
Considerations" herein. See also "Yield and Maturity Considerations" in the
Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ] of the Mortgaged Properties during the month period prior
to the Cut-off Date. [Note any special environmental problems.] [Otherwise,]
no such environmental assessment revealed any material adverse environmental
condition or circumstance at any Mortgaged Property[, except for (i) those
cases in which the condition or circumstance was remediated or an escrow for
such remediation has been established and (ii) those cases in which an
operations and maintenance plan or periodic monitoring of nearby properties
was recommended, which recommendations are consistent with industrywide
practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site
assessment is obtained (or until any required remedial action is thereafter
taken), but will decrease the likelihood that the Trust Fund will become
liable for a material adverse environmental condition at the Mortgaged
Property. However, there can be no assurance that the requirements of the
Pooling and Servicing Agreement will effectively insulate the Trust Fund from
potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements--Realization
Upon Defaulted Mortgage Loans", "Risk Factors--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Risk of Liability
Arising from Environmental Conditions" and "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations" in the Prospectus.
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<PAGE>
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. Mortgage Loans, which represent % of
the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in . In general, that concentration increases the exposure of the
Mortgage Pool to any adverse economic or other developments that may occur in
. In recent periods, (along with other regions of the United
States) has experienced a significant downturn in the market value of real
estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances
can result in losses that are more severe, relative to the size of the pool,
than would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another income-producing
property that it owns, it could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage
Loans. of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. Increases in the required Monthly Payments on ARM
Loans in excess of those assumed in the original underwriting of such loans
may result in a default rate higher than that on mortgage loans with fixed
mortgage rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment)
due at its stated maturity unless prepaid prior thereto. Loans with Balloon
Payments involve a greater likelihood of default than self-amortizing loans
because the ability of a borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
mortgaged property. See "Risk Factors--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments" in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing
of the Mortgage Loans--Modifications, Waivers and Amendments" herein. There
can be no assurance, however, that any such extension or modification will
increase the present value of recoveries in a given case. Any delay in
collection of a Balloon Payment that would otherwise be distributable in
respect of a Class of Offered Certificates, whether such delay is due to
borrower default or to modification of the related Mortgage Loan by the
Special Servicer, will likely extend the weighted average life of such Class
of Offered Certificates. See "Yield and Maturity Considerations" herein and
in the Prospectus.
Risks Particular to Restaurant Properties. Repayment of a mortgage loan
made on the security of a restaurant is dependent primarily on the success of
the restaurant. Various factors may affect the economic viability of
restaurants, including but not limited to competition from other restaurants;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the restaurant; the cost, quality and availability of food
products; changes in demographics, consumer habits and traffic patterns; the
ability to provide or contract for capable management and adequate
maintenance; and retroactive changes to building codes and other legal
requirements. Additional factors that can affect the success of a restaurant
that is part of a regionally or nationally-known chain of restaurants include
actions and omissions of any franchisor (including management practices that
adversely affect the nature of the business or that require the franchisee to
expend sums for renovation, refurbishment or expansion); the ability of a
franchisor to provide support in the way of advertising and arrangements with
providers of products and services; and the bankruptcy or business
discontinuation of any such franchisor.
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<PAGE>
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens
on retail properties can also be adversely affected by changes in consumer
spending patterns, local competitive conditions (such as the supply of retail
space or the existence or construction of new competitive shopping centers),
growth of alternative forms of retailing (such as direct mail and video
shopping networks which need little or no retail space) and the public
perception of the safety of customers at shopping centers. In addition,
significant tenants at a retail property play an important part in generating
customer traffic and making a retail property a desirable location for other
tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons).
Certain tenants at retail properties may be entitled to terminate their
leases if an anchor tenant ceases operations at such property. In such cases,
there can be no assurance that any such anchor tenants will continue to
occupy space in the related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective
tenants consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant
improvements, as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in
a reduction in timely rent payments or a reduction in occupancy levels.
Occupancy and rent levels may also be affected by construction of additional
housing units, local military base closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements. Certain of the Mortgaged Properties may be subject to rent
stabilization or rent control laws. In addition, the level of mortgage
interest rates may encourage tenants to purchase single-family housing.
Further, the cost of operating a multifamily property may increase, including
the costs of utilities and the costs of required capital expenditures. All of
these conditions and events may increase the possibility that a borrower may
be unable to meet its obligation under its Mortgage Loan.
Risks Relating to Lack of Certificateholder Control Over Trust
Fund. Certificateholders generally do not have a right to vote, except with
respect to required consents to certain amendments to the Pooling and
Servicing Agreement. Furthermore, Certificateholders will generally not have
the right to make decisions with respect to the administration of the Trust
Fund. Such decisions are generally made, subject to the express terms of the
Pooling and Servicing Agreement, by the Master Servicer, the Trustee, the
Special Servicer or the REMIC Administrator, as applicable. Any decision made
by one of those parties in respect of the Trust Fund, even if made in the
best interests of the Certificateholders (as determined by such party in its
good faith and reasonable judgment), may be contrary to the decision that
would have been made by the holders of any particular Class of Offered
Certificates and may negatively affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments
in respect of principal (including any principal prepayments, liquidations
and the principal portion of the repurchase prices of any Mortgage Loans
repurchased due to breaches of representations) are received with respect to
the Mortgage Loans, the remaining Mortgage Loans as a group may exhibit
increased concentration with respect to the type of properties, property
characteristics, number of Mortgagors and affiliated Mortgagors and
geographic location. Because unscheduled collections of principal on the
Mortgage Loans is payable on the Class A, Class B and Class C Certificates in
sequential order, such Classes that have a lower sequential priority are
relatively more likely to be exposed to any risks associated with changes in
concentrations of loan or property characteristics.
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<PAGE>
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or
in respect of the Mortgage Loans will be subordinated to those of the holders
of the Senior Certificates and also, in the case of the holders of the Class
C Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates--Distributions--Priority" and
"--Subordination; Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co.,
as the nominee for DTC, and will not be registered in the names of the
related holders of Certificates or their nominees. As a result, holders of
Class A Certificates will not be recognized as "Certificateholders." Hence,
those beneficial owners will be able to exercise the rights of holders of
Certificates only indirectly through DTC and DTC Participants. See
"Description of the Certificates--General" and "--Book-Entry Registration"
herein and "Description of the Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of conventional, balloon
Mortgage Loans with an Initial Pool Balance of $ . Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in real property (a
"Mortgaged Property") operated as a restaurant, a retail property, an office
building or a multifamily rental property. All percentages of the Mortgage
Loans, or of any specified group of Mortgage Loans, referred to herein
without further description are approximate percentages by aggregate Cut-off
Date Balance. The "Cut-off Date Balance" of any Mortgage Loan is the unpaid
principal balance thereof as of the Cut-off Date, after application of all
payments due on or before such date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental
entity or private mortgage insurer. The Depositor has not undertaken any
evaluation of the significance of the recourse provisions of any of a number
of the Mortgage Loans that provide for recourse against the related borrower
or another person in the event of a default. Accordingly, investors should
consider all of the Mortgage Loans to be nonrecourse loans as to which
recourse in the case of default will be limited to the specific property and
such other assets, if any, as were pledged to secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and
will thereupon assign its interests in the Mortgage Loans, without recourse,
to the Trustee for the benefit of the Certificateholders. See "--The Mortgage
Loan Seller" herein and "Description of the Pooling Agreements--Assignment of
Mortgage Loans; Repurchases" in the Prospectus. For purposes of the
Prospectus, the Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19 and 19 . The Mortgage
Loan Seller originated of the Mortgage Loans, which represent % of
the Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "--Underwriting Standards".
CERTAIN PAYMENT CHARACTERISTICS
of the Mortgage Loans, which represent % of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The
remaining Mortgage Loans have Due Dates that occur on the ( % of the
Mortgage Loans), ( % of the Mortgage Loans), ( % of the Mortgage
Loans), and ( % of the Mortgage Loans) day of each month.
of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically
S-15
<PAGE>
occurring Interest Rate Adjustment Dates by adding the related Gross Margin
to the applicable value of the related Index, subject in cases to rounding
conventions and lifetime minimum and/or maximum Mortgage Rates and, in the
case of Mortgage Loans, which represent % of the Initial Pool Balance,
to periodic minimum and/or maximum Mortgage Rates. The remaining Mortgage
Loans are Fixed Rate Loans. None of the ARM Loans is convertible into a Fixed
Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on
the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment
Date, or may be based on the value of the related Index as most recently
published as of an Interest Rate Adjustment Date or as of a designated date
preceding an Interest Rate Adjustment Date. of the ARM Loans, which
represent % of the Initial Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly; of the ARM Loans, which represent
% of the Initial Pool Balance, provide for Interest Rate Adjustment Dates
that occur semi-annually; and the remaining ARM Loans provide for Interest
Rate Adjustment Dates that occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule
and pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest
Rate Adjustment Date. None of the ARM Loans provide for negative
amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due
at its stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment
Premiums are payable to the Master Servicer as additional servicing
compensation, to the extent not otherwise applied to offset Prepayment
Interest Shortfalls, and may be waived by the Master Servicer in accordance
with the servicing standard described under "Servicing of the Mortgage
Loans--General" herein.
[THE INDEX]
Describe Index and include 5 year history.
[DELINQUENT AND NONPERFORMING MORTGAGE LOANS]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to
rounding.
S-16
<PAGE>
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
RANGE OF MORTGAGE RATES (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
</TABLE>
Weighted Average
Mortgage Rate (All Mortgage Loans):
% per annum
Weighted Average
Mortgage Rate (ARM Loans): % per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): % per annum
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE
RANGE OF GROSS MARGINS (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total.....................
============= ===================== =====================
</TABLE>
Weighted Average
Gross Margin: %
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE ARM
LOANS
<TABLE>
<CAPTION>
MONTHLY
MORTGAGE RATE PAYMENT NUMBER OF
ADJUSTMENT ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
FREQUENCY FREQUENCY LOANS DATE BALANCE CUT-OFF DATE BALANCE
----------------- -------------- ------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
------------- --------------------- ---------------------
Total.....
============= ===================== =====================
</TABLE>
S-17
<PAGE>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE
LIFETIME MORTGAGE RATES (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ......................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
lifetime Mortgage Rates.
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
RANGE OF MINIMUM NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE
LIFETIME MORTGAGE RATES (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ......................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
lifetime Mortgage Rates.
MAXIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
RANGE OF MAXIMUM NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE
ANNUAL MORTGAGE RATES (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ....................
============= ===================== =====================
</TABLE>
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without maximum
annual Mortgage Rates.
S-18
<PAGE>
MINIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
RANGE OF MINIMUM NUMBER OF ARM AGGREGATE CUT-OFF PERCENT BY AGGREGATE
ANNUAL MORTGAGE RATES (%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total.....................
============= ===================== =====================
</TABLE>
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): % per annum (A)
- ------------
(A) This calculation does not include the ARM Loans without minimum
annual Mortgage Rates.
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF
CUT-OFF DATE MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
BALANCE RANGE ($) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ............
============= ===================== =====================
</TABLE>
Average Cut-off Date
Balance (All Mortgage
Loans): $
Average Cut-off Date
Balance (ARM Loans): $
Average Cut-off Date
Balance (Fixed Rate Loans): $
S-19
<PAGE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
PROPERTY TYPE LOANS DATE BALANCE DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Multifamily ................
Retail .....................
Office .....................
Restaurant .................
[other property types] ....
Total.....................
</TABLE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE CUT-OFF PERCENT BY AGGREGATE WEIGHTED AVERAGE
JURISDICTION MORTGAGE LOANS DATE BALANCE CUT-OFF DATE BALANCE DSC RATIO
- ---------------- ------------------ --------------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
Total..........
</TABLE>
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF ORIGINAL MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
TERMS (IN MONTHS) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total...............
============= ===================== =====================
</TABLE>
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): months
S-20
<PAGE>
REMAINING TERM TO STATED MATURITY (IN MONTHS)
AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF REMAINING MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
TERMS (IN MONTHS) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...............
============= ===================== =====================
</TABLE>
Weighted Average Remaining
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): months
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
YEAR LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ------------ ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....
============= ===================== =====================
</TABLE>
S-21
<PAGE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
NUMBER OF
MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
YEAR LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ------------ ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....
============= ===================== =====================
</TABLE>
S-22
<PAGE>
The following table sets forth a range of Debt Service Coverage Ratios
for the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the
following table for any Mortgage Loan is the ratio of (i) Net Operating
Income produced by the related Mortgaged Property for the period (annualized
if the period was less than one year) covered by the most recent operating
statement available to the Depositor to (ii) the amount of the Monthly
Payment in effect as of the Cut-off Date multiplied by 12. "Net Operating
Income" is the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income and deposit forfeitures),
less operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance), and further less
fixed expenses (such as insurance and real estate taxes). Net Operating
Income generally does not reflect capital expenditures. The following table
was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has
made no attempt to verify its accuracy. In the case of Mortgage Loans (
ARM Loans and Fixed Rate Loans), representing % of the Initial Pool
Balance, operating statements could not be obtained, and accordingly, Debt
Service Coverage Ratios for those Mortgage Loans were not calculated. The
last day of the period (which may not correspond to the end of the calendar
year most recent to the Cut-off Date) covered by each operating statement
from which a Debt Service Coverage Ratio was calculated is set forth in Annex
A with respect to the related Mortgage Loan.
DEBT SERVICE COVERAGE RATIOS(A)
<TABLE>
<CAPTION>
RANGE OF NUMBER OF
DEBT SERVICE MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
COVERAGE RATIOS LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ---------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Not Calculated(B) ....
------------- --------------------- ---------------------
Total................
============= ===================== =====================
</TABLE>
Weighted Average
Debt Service Coverage
Ratio (All Mortgage
Loans): x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): x(E)
- ------------
(A) The Debt Service Coverage Ratios are based on the most recently
available operating statements obtained from the respective mortgagors
or the related property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the Fixed Rate Loans as to which
Debt Service Coverage Ratios were not calculated.
S-23
<PAGE>
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage
Loan, as of any date of determination, is a fraction, expressed as a
percentage, the numerator of which is the original principal balance of such
Mortgage Loan or the Cut-off Date Balance of such Mortgage Loan, as
applicable, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. Because it is based on
the value of a Mortgaged Property determined as of loan origination, the
information set forth in the table below is not necessarily a reliable
measure of the related borrower's current equity in each Mortgaged Property.
In a declining real estate market, the fair market value of a Mortgaged
Property could have decreased from the value determined at origination, and
the current actual loan-to-value ratio of a Mortgage Loan may be higher than
even its LTV Ratio at origination, notwithstanding taking into account
amortization since origination.
LTV RATIOS AT ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF ORIGINAL MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
LTV RATIOS(%) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- --------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total...............
============= ===================== =====================
</TABLE>
Weighted Average Original
LTV Ratio (All Mortgage
Loans): %
Weighted Average Original
LTV Ratio (ARM Loans):
%
Weighted Average Original
LTV Ratio (Fixed Rate
Loans): %
S-24
<PAGE>
LTV RATIOS AT CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF LTV RATIOS(%) MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
AS OF CUT-OFF DATE LOANS DATE BALANCE CUT-OFF DATE BALANCE
- ----------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ................
============= ===================== =====================
</TABLE>
Weighted Average LTV Ratio
as of Cut-off Date (All
Mortgage Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (ARM
Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (Fixed
Rate Loans): %
OCCUPANCY RATES
<TABLE>
<CAPTION>
NUMBER OF
RANGE OF MORTGAGE AGGREGATE CUT-OFF PERCENT BY AGGREGATE
OCCUPANCY RATES(A) LOANS DATE BALANCE CUT-OFF DATE BALANCE
- -------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total..............
============= ===================== =====================
</TABLE>
Weighted Average Occupancy Rate
(All Mortgage Loans)(A): %
Weighted Average Occupancy Rate
(ARM Loans)(A): %
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): %
- ------------
(A) Physical occupancy rates calculated based on rent rolls provided by the
respective Mortgagors or related property managers as of a date no more
than months prior to the Cut-off Date.
S-25
<PAGE>
PREPAYMENT RESTRICTIONS IN EFFECT AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% BY CUM.
AGGREGATE AGGREGATE % OF
CUT-OFF CUT-OFF INITIAL
PREPAYMENT NUMBER DATE DATE POOL
RESTRICTIONS OF LOANS BALANCE BALANCE BALANCE
--------------------------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
Locked Out (A) ...................
Yield Maintenance (B) ............
Declining Percentage Premium ....
% Premium ......................
% Premium ......................
No Prepayment Restrictions ......
TOTALS ...........................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
-------------------------------------------------------------------------------
INDICATIVE
STATED REMAINING CUT-OFF
PREPAYMENT MORTGAGE REMAINING AMORT. IMPLIED DATE
RESTRICTIONS RATE TERM (MO.) TERM (MO.) DSCR DSCR LTV
- --------------------------------- ------------ ------------- ------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A) ...................
Yield Maintenance (B) ............
Declining Percentage Premium ....
% Premium ......................
% Premium ......................
No Prepayment Restrictions ......
TOTALS ...........................
</TABLE>
- ------------
(A) The weighted average term to the expiration of the lock-out periods is
years. of the Mortgage Loans within their lock-out periods are
subject to declining percentage Prepayment Premiums after the
expiration of their lock-out periods; the remaining Mortgage Loans are
subject to a yield maintenance-type Prepayment Premium following such
expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment
Premiums remain subject to payment of the Prepayment Premium until at
least months prior to maturity.
S-26
<PAGE>
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage
Loans is contained herein under "--Underwriting Standards" and
"--Representations and Warranties; Repurchases" and in the Prospectus under
"Description of the Trust Funds--Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than
30 days delinquent in respect of any Monthly Payment.]
THE MORTGAGE LOAN SELLER
General. [The Mortgage Loans Seller [ , a wholly-owned subsidiary of
,] is a organized in 19 under the laws of . As of December 31,
199 , the Mortgage Loan Seller had a net worth of approximately $ , and
currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $ , of which
approximately $ constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or
as of such other date specifically provided in the representation and
warranty, among other things, that:
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the
Prospectus and if the Mortgage Loan Seller cannot cure such breach within a
period of 90 days following its receipt of such notice, then the Mortgage
Loan Seller will be obligated pursuant to the Purchase Agreement (the
relevant rights under which will be assigned, together with its interests in
the Mortgage Loans, by the Depositor to the Trustee) to repurchase the
affected Mortgage Loan within such 90-day period at a price (the "Purchase
Price") equal to the sum of (i) the unpaid principal balance of such Mortgage
Loan, (ii) unpaid accrued interest on such Mortgage Loan at the Mortgage Rate
from the date to which interest was last paid to the Due Date in the Due
Period in which the purchase is to occur, and (iii) certain servicing
expenses that are reimbursable to the Master Servicer and the Special
Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and none of the Depositor, the Master Servicer or any
of their affiliates [(other than the Mortgage Loan Seller)] will be obligated
to repurchase any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the Depositor will not
include any Mortgage Loan in the Mortgage Pool if anything has come to the
Depositor's attention prior to the Closing Date that would
S-27
<PAGE>
cause it to believe that the representations and warranties made by the
Mortgage Loan Seller regarding such Mortgage Loan will not be correct in all
material respects. See "Description of the Pooling
Agreements--Representations and Warranties; Repurchases" in the Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Depositor deems such removal necessary or
appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Offered
Certificates, unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor
believes that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time
the Offered Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
S-28
<PAGE>
SERVICING OF THE MORTGAGE LOANS
GENERAL
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by
the Master Servicer or the Special Servicer, as the case may be, in its good
faith and reasonable judgment), in accordance with applicable law, the terms
of the Pooling and Servicing Agreement, the terms of the respective Mortgage
Loans and, to the extent consistent with the foregoing, in the same manner as
would prudent institutional mortgage lenders and loan servicers servicing
mortgage loans comparable to the Mortgage Loans in the jurisdictions where
the Mortgaged Properties are located, and with a view to the maximization of
timely and complete recovery of principal and interest, but without regard
to: (i) any relationship that the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof, may have with the related
mortgagor; (ii) the ownership of any Certificate by the Master Servicer or
the Special Servicer, as the case may be, or any affiliate thereof; (iii) the
Master Servicer's or the Special Servicer's, as the case may be, obligation
to make advances, whether in respect of delinquent payments of principal
and/or interest or to cover certain servicing expenses; and (iv) the Master
Servicer's or the Special Servicer's, as the case may be, right to receive
compensation for its services under the Pooling and Servicing Agreement or
with respect to any particular transaction.
Except as otherwise described under "--Inspections; Collection of
Operating Information" below, the Master Servicer initially will be
responsible for the servicing and administration of the entire Mortgage Pool.
With respect to any Mortgage Loan (i) which has a Balloon Payment which is
past due or any other payment which is more than [60] days past due, (ii) as
to which the borrower has entered into or consented to bankruptcy,
appointment of a receiver or conservator or a similar insolvency proceeding,
or the borrower has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have
received notice of the foreclosure or proposed foreclosure of any other lien
on the Mortgaged Property, or (iv) as to which, in the judgment of the Master
Servicer, a payment default has occurred or is imminent and is not likely to
be cured by the borrower within [60] days, and prior to acceleration of
amounts due under the related Mortgage Note or commencement of any
foreclosure or similar proceedings, the Master Servicer will transfer its
servicing responsibilities to the Special Servicer, but will continue to
receive payments on such Mortgage Loan (including amounts collected by the
Special Servicer), to make certain calculations with respect to such Mortgage
Loan and to make remittances and prepare certain reports to the
Certificateholders with respect to such Mortgage Loan. If the related
Mortgaged Property is acquired in respect of any such Mortgage Loan (upon
acquisition, an "REO Property"), whether through foreclosure, deed-in-lieu of
foreclosure or otherwise, the Special Servicer will continue to be
responsible for the operation and management thereof. The Mortgage Loans
serviced by the Special Servicer are referred to herein as the "Specially
Serviced Mortgage Loans" and, together with any REO Properties, constitute
the "Specially Serviced Mortgage Assets". The Master Servicer shall have no
responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special
Servicer will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans.
Reference is also made to the Prospectus, in particular to the section
captioned "Pooling and Servicing Agreements", for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations
of the Master Servicer thereunder.
S-29
<PAGE>
THE MASTER SERVICER
[ , a , will act as Master Servicer with respect to the
Mortgage Pool. Founded in as a , the Master Servicer today
furnishes a variety of wholesale banking services. As of December 31, 19 ,
the Master Servicer had a net worth of approximately $ , and a total
mortgage loan servicing portfolio of approximately $ , of which
approximately $ represented multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at .
[If and to the extent available and relevant to an investment decision:
The following table sets forth the historical prepayment information with
respect to the Master Servicer's multifamily and commercial mortgage loan
servicing portfolio:
PREPAYMENT EXPERIENCE OF MASTER SERVICER'S MULTIFAMILY AND
COMMERCIAL MORTGAGE LOAN SERVICING PORTFOLIO
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
THE SPECIAL SERVICER
[ , a , will be responsible for the servicing and
administration of the Specially Serviced Mortgage Assets. As of December 31,
19 , the Special Servicer had a total mortgage loan servicing portfolio of
approximately $ , of which approximately $ represented multifamily
mortgage loans.
The Special Servicer has offices in states with a total staff of
employees. Its principal executive offices are located at .]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to %
per annum, in the case of Mortgage Loans other than Specially Serviced
Mortgage Loans, and % per annum, in the case of Specially Serviced Mortgage
Loans, and will be computed on the basis of the same principal amount and for
the same period respecting which any related interest payment on the related
Mortgage Loan is computed. [As additional servicing compensation, the Master
Servicer will be entitled to retain all Prepayment Premiums, assumption and
modification fees, late charges and penalty interest and, as and to the
extent described below, Prepayment Interest Excesses collected from
mortgagors. In addition, the Master Servicer is authorized but not required
to invest or direct the investment of funds held in the Certificate Account
in Permitted Investments, and the Master Servicer will be entitled to retain
any interest or other income earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the
Workout Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will
be payable
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monthly on a loan-by-loan basis from amounts received in respect of interest
on each Mortgage Loan, will accrue in accordance with the terms of the
related Mortgage Note at a rate equal to % per annum, in the case of
Mortgage Loans other than Specially Serviced Mortgage Loans, and % per
annum, in the case of Specially Serviced Mortgage Loans, and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the related Mortgage Loan is computed.
The "Workout Fee" will equal a specified percentage (varying from % to %
(the "Workout Fee Rate") depending on the related unpaid principal balance)
of, and will be payable from, all collections and proceeds received in
respect of principal of each Mortgage Loan which is or has been a Specially
Serviced Mortgage Loan (including those for which servicing has been returned
to the Master Servicer); provided that, in the case of Liquidation Proceeds,
the otherwise fixed Workout Fee Rate will be proportionately reduced to
reflect the extent to which, if at all, the principal portion of such
Liquidation Proceeds is less than the unpaid principal balance of the related
Mortgage Loan immediately prior to the receipt thereof. As additional
servicing compensation, the Special Servicer will be entitled to retain all
assumption and modification fees received on Mortgage Loans serviced thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "--General" above and, accordingly,
without regard to its right to receive compensation under the Pooling and
Servicing Agreement, additional servicing compensation in the nature of
assumption and modification fees, Prepayment Premiums and Prepayment Interest
Excesses may under certain circumstances provide the Master Servicer or the
Special Servicer, as the case may be, with an economic disincentive to comply
with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such
a principal prepayment occurs during any Due Period after the Due Date for
such Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount
of interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater
than Prepayment Interest Shortfalls incurred, such excess will be paid to the
Master Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--Advances", the Master Servicer will be entitled to receive
interest on Advances, and the Master Servicer and the Special Servicer will
be entitled to receive interest on reimbursable servicing expenses, such
interest to be paid, contemporaneously with the reimbursement of the related
Advance or servicing expense, out of any other collections on the Mortgage
Loans.]
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement, and will not be entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
the Master Servicer will be permitted to pay certain of such expenses
directly out of the Certificate Account and at times without regard to the
relationship between the expense and the funds from which it is being paid.
In connection therewith, the Master Servicer will be responsible for all fees
of any sub-servicers, other than management fees earned in connection with
the operation of an REO Property, which management fees the Master Servicer
will be authorized to pay out of revenues received from such property
(thereby reducing the portion of such revenues that would otherwise be
available for distribution to Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and
"Description of the Pooling Agreements--Certificate Account" and "--Servicing
Compensation and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer may, consistent with its
normal servicing practices, agree to modify, waive or amend any term of any
Mortgage Loan, without the consent of the Trustee or any Certificateholder,
subject, however, to each of the following limitations, conditions and
restrictions:
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(a) with limited exception, the Master Servicer and the Special Servicer
may not agree to any modification, waiver or amendment that will (i)
affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification standards]
The Master Servicer and the Special Servicer will notify the Trustee of
any modification, waiver or amendment of any term of any Mortgage Loan, and
must deliver to the Trustee or the related Custodian, for deposit in the
related Mortgage File, an original counterpart of the agreement related to
such modification, waiver or amendment, promptly (and in any event within
[10] business days) following the execution thereof. Copies of each agreement
whereby any such modification, waiver or amendment of any term of any
Mortgage Loan is effected are to be available for review during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once
per calendar year , commencing in the calendar year , and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related
Mortgage Loan, as soon as practicable thereafter. The Special Servicer will
prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition or value of the
Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review
the annual operating statements of the related Mortgaged Property. [Most] of
the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the
Special Servicer likely to have any practical means of compelling such
delivery in the case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are to be available for review by Certificateholders during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is
not published or is otherwise unavailable, then the Master Servicer is
required to select a comparable alternative index over which it has no direct
control, that is readily verifiable and that is acceptable under the terms of
the related Mortgage Note. If the Mortgage Rate or the Monthly Payment with
respect to any ARM Loan is not properly adjusted by the Master Servicer
pursuant to the terms of such Mortgage Loan and applicable law, the Master
Servicer is required to deposit in the Certificate Account on or prior to the
Due Date of the affected Monthly Payment, an amount equal to the excess, if
any, of (i) the amount that would have been received from the borrower if the
Mortgage Rate or Monthly Payment had been properly adjusted, over (ii) the
amount of such improperly adjusted Monthly Payment, subject to reimbursement
only out of such amounts as are recovered from the borrower in respect of
such excess.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any REO Property; (iii) such funds or assets as from time
to time are deposited in the Certificate Account; (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans;
and (v) certain rights of the Depositor under the Purchase Agreement relating
to Mortgage Loan document delivery requirements and the representations and
warranties of the Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate
Balance of $ , which represents % of the Initial Pool Balance; the
Class B Certificates will have an initial Certificate Balance of $ ,
which represents % of the Initial Pool Balance; the Class C Certificates
will have an initial Certificate Balance of $ , which represents % of
the Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in
the Trust Fund. On each Distribution Date, the Certificate Balance of each
Class of Certificates will be reduced by any distributions of principal
actually made on, and any Collateral Support Deficit actually allocated to,
such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered
hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of
$25,000 and integral multiples of $1 in excess thereof. The Class B
Certificates will be issued in fully registered, certificated form in
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
with one Class B Certificate evidencing an additional amount equal to the
remainder of the initial Certificate Balance of such Class. The Class R
Certificates will be issued in registered, certificated form in minimum
denominations of 20% Percentage Interest in such Class. The "Percentage
Interest" evidenced by any Offered Certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial
Certificate Balance of the Class to which it belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co. No
Class A Certificate Owner will be entitled to receive a Definitive Class A
Certificate representing its interest in such Class, except as set forth
below under "--Book-Entry Registration of the Class A
Certificates--Definitive Class A Certificates". Unless and until Definitive
Class A Certificates are issued, all references to actions by holders of the
Class A Certificates will refer to actions taken by DTC upon instructions
received from Class A Certificate Owners through DTC Participants, and all
references herein to payments, notices, reports and statements to holders of
the Class A Certificates will refer to payments, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to Class A Certificate Owners through its DTC
Participants in accordance with DTC procedures. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC
Participants. Subject to certain restrictions on the transfer of such
Certificates to Plans (see "ERISA Considerations" herein), the Class B and
Class R Certificates may be
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transferred or exchanged at the offices of located at
, without the payment of any service charges, other than any
tax or other governmental charge payable in connection therewith.
will initially serve as registrar (in such capacity, the "Certificate
Registrar") for purposes of recording and otherwise providing for the
registration of the Offered Certificates and of transfers and exchanges of
the Class B and, if issued, the Definitive Class A Certificates.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
General. The Class A Certificates will be registered as one or more global
Certificates held by Cede & Co., as nominee of DTC. Beneficial interests in
such Certificates will be held by investors through the book-entry facilities
of DTC. Except as described below, no Class A Certificate Owner will be
entitled to receive a physical certificate representing its beneficial
interest in such Certificates (a "Definitive Class A Certificate").
Beneficial ownership of a Class A Certificate will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the related
Class A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the related Class A Certificate Owner's Financial
Intermediary is not a DTC Participant). Therefore, the related Class A
Certificate Owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a
Class A Certificate may only be transferred by compliance with the procedures
of such Financial Intermediaries and DTC Participants. Arrangements may be
made for clearance and settlement through the Euroclear System and CEDEL,
S.A., if they are DTC Participants.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC Participant in the Class A Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Class A Certificates will be subject to the
rules, regulations and procedures governing DTC and DTC Participants as in
effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payments to the Class
A Certificate Owners that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Class A Certificate Owners that it
represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by
the Trustee to DTC. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Class A Certificate Owner to pledge to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Class A Certificates, may be limited due to
the lack of physical certificates for such Class A Certificates. In addition,
issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Class A Certificates.
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Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in
the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates--Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration,
the Trustee will reissue the Class A Certificates as Definitive Class A
Certificates issued in the respective principal amounts owned by individual
Class A Certificate Owners, and thereafter the Trustee and the Master
Servicer will recognize the holders of such Definitive Class A Certificates
as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on
the book-entry records thereof, see "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in 199 (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the
last business day of the month preceding the month in which the related
Distribution Date occurs. Each such distribution will be made by wire
transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the [Trustee] with
wiring instructions [no less than five business days prior to the related
Record Date (which wiring instructions may be in the form of a standing order
applicable to all subsequent distributions) and is the registered owner of
Certificates with an aggregate initial principal amount of at least
$5,000,000], or otherwise by check mailed to such Certificateholder. The
final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will
be specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated
pro rata among the outstanding Certificates of such Class based on their
respective Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and any
REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date subsequent
to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements--Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such
Distribution Date occurs and ends on the [first] day of the
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month in which such Distribution Date occurs. For purposes of the discussion
in the Prospectus, the Due Period is also the Prepayment Period. The
"Determination Date" for each Distribution Date is the [15th] day of the
month in which such Distribution Date occurs or, if any such [15th] day is
not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "--Termination;
Retirement of Certificates" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in
the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an
amount equal to all Distributable Certificate Interest in respect of
the Senior Certificates for such Distribution Date and, to the extent
not previously paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i)
the Senior Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) the entire Unscheduled Principal Distribution Amount for
such Distribution Date (but not more than would be necessary to
reduce the aggregate Certificate Balance of the Senior Certificates
to zero);
(3) to distributions to the holders of the Class A Certificates, until
all amounts of Collateral Support Deficit previously allocated to
the Class A Certificates, but not previously reimbursed, have been
reimbursed in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class B Certificates for such
Distribution Date and, to the extent not previously paid, for all
prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i)
the Class B Certificates' Ownership Percentage (as calculated
immediately prior to such Distribution Date), multiplied by (ii) the
Scheduled Principal Distribution Amount for such Distribution Date,
plus (b) if the Certificate Balances of the Senior Certificates have
been reduced to zero, then to the extent not distributed in
reduction of such Certificate Balances on such Distribution Date,
the entire Unscheduled Principal Distribution Amount for such
Distribution Date (but not more than would be necessary to reduce
the Certificate Balance of the Class B Certificates to zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to
the Class B Certificates, but not previously reimbursed, have been
reimbursed in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate
Interest in respect of the Class C Certificates for such
Distribution Date and, to the extent not previously distributed, for
all prior Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (b) the Scheduled
Principal Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until
all amounts of Collateral Support Deficit previously allocated to
the Class C Certificates, but not previously reimbursed, have been
reimbursed in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
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The distributions of principal to the holders of the Senior Certificates
as described in clause (2) above will be paid first to the holders of the
Class R Certificates until the Certificate Balance of such Certificates is
reduced to zero, and then to the holders of the Class A Certificates.
Accordingly, it is expected that the Certificate Balance of the Class R
Certificates would be reduced to zero on the initial Distribution Date and
that no other distributions of interest or principal would thereafter be made
on the Class R Certificates except pursuant to subparagraph (10) immediately
above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in
an additional reduction in the Certificate Balance of the Class of
Certificates in respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal % per annum. With
respect to any Distribution Date subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage
Loans, weighted on the basis of their respective Stated Principal Balances
immediately prior to such Distribution Date. For purposes of calculating the
Pass-Through Rate for any Class of Certificates and any Distribution Date,
the "applicable Effective Net Mortgage Rate" for each Mortgage Loan is: (a)
if such Mortgage Loan accrues interest on the basis of a 360-day year
consisting of twelve 30-day months (a "30/360 basis", which is the basis of
accrual for interest on the Certificates), the Net Mortgage Rate in effect
for such Mortgage Loan as of the commencement of the related Due Period; and
(b) if such Mortgage Loan does not accrue interest on a 30/360 basis, the
annualized rate at which interest would have to accrue during the one month
period preceding the Due Date for such Mortgage Loan during the related Due
Period on a 30/360 basis in order to produce the aggregate amount of interest
(adjusted to the actual Net Mortgage Rate) accrued during such period. The
"Net Mortgage Rate" for each Mortgage Loan is equal to the related Mortgage
Rate in effect from time to time less the Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of
such Class of Certificates for such Distribution Date that is net of such
Class's allocable share (calculated as described below) of the aggregate of
any Prepayment Interest Shortfalls resulting from voluntary principal
prepayments made on the Mortgage Loans during the related Due Period that are
not offset by Prepayment Interest Excesses collected during the related Due
Period (the aggregate of such Prepayment Interest Shortfalls that are not so
offset or covered, as to such Distribution Date, the "Net Aggregate
Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of
Certificates for each Distribution Date is equal to one month's interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date. Accrued Certificate Interest
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal
the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such Class of Certificates for such
Distribution Date, and the denominator of which is equal to the Accrued
Certificate Interest in respect of all the Classes of Certificates for such
Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout
Fees payable therefrom to the Special Servicer], due during or, if and to the
extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related borrower or advanced
by the Master Servicer and included in the Available Distribution Amount for
such Distribution Date. The Scheduled Principal
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Distribution Amount from time to time will include all late payments of
principal made by a borrower, including late payments in respect of a
delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the
Master Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period [, net of any
related Workout Fees payable therefrom to the Special Servicer]; and (b) any
other collections (exclusive of payments by borrowers) received on the
Mortgage Loans and any REO Properties during the related Due Period, whether
in the form of Liquidation Proceeds, Insurance Proceeds, Condemnation
Proceeds, net income from REO Property or otherwise, that were identified and
applied by the Master Servicer as recoveries of previously unadvanced
principal of the related Mortgage Loan [, net of any related Workout Fees
payable therefrom to the Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as
the "Distributable Principal".
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed
as a percentage, the numerator of which is the then Certificate Balance(s) of
such Class(es) of Certificates, and the denominator of which is the then
aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders subject to the Special Servicer's right to
receive any Workout Fee with respect to such Mortgage Loan. The Stated
Principal Balance of each Mortgage Loan will initially equal the Cut-off Date
Balance thereof and, on each Distribution Date, will be reduced by the
portion of the Distributable Principal for such date that is attributable to
such Mortgage Loan. The Stated Principal Balance of a Mortgage Loan may also
be reduced in connection with any forced reduction of the actual unpaid
principal balance thereof imposed by a court presiding over a bankruptcy
proceeding wherein the related borrower is the debtor. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure--Bankruptcy Laws" in the Prospectus.
If any Mortgage Loan is paid in full or such Mortgage Loan (or any Mortgaged
Property acquired in respect thereof) is otherwise liquidated, then, as of
the first Distribution Date that follows the end of the Due Period in which
such payment in full or liquidation occurred, and notwithstanding that a loss
may have occurred in connection with any such liquidation, the Stated
Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of
Collateral Support Deficit to, the Certificates, as well as for purposes of
calculating the amount of Servicing Fees payable each month, each REO
Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan", "Mortgage Loans" and "Mortgage Pool" herein and in the Prospectus,
when used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage
Loan, including the same adjustable or fixed Mortgage Rate (and, accordingly,
the same Net Mortgage Rate and Effective Net Mortgage Rate) and the same
unpaid principal balance and Stated Principal Balance. Amounts due on such
predecessor Mortgage Loan, including any portion thereof payable or
reimbursable to the Master Servicer, will continue to be "due" in respect of
the REO Loan; and amounts received in respect of the related REO Property,
net of payments to be made, or reimbursement to the Master Servicer or the
Special Servicer for payments previously advanced, in connection with the
operation and management of such property, generally will be applied by the
Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly
Payment "due" on an REO Loan will in all cases, for so long as the related
Mortgaged Property is part of the Trust Fund, be deemed to equal one month's
interest thereon at the applicable Mortgage Rate.
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SUBORDINATION; ALLOCATION OF COLLATERAL SUPPORT DEFICIT
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of
the Class C Certificates to receive distributions of amounts collected or
advanced on the Mortgage Loans will be subordinated, to the extent described
herein, to the rights of holders of the Class B Certificates. This
subordination is intended to enhance the likelihood of timely receipt by the
holders of the Senior Certificates of the full amount of all Distributable
Certificate Interest payable in respect of such Certificates on each
Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser degree, this subordination is also
intended to enhance the likelihood of timely receipt by the holders of the
Class B Certificates of the full amount of all Distributable Certificate
Interest payable in respect of such Certificates on each Distribution Date,
and the ultimate receipt by such holders of principal in an amount equal to
the entire Certificate Balance of the Class B Certificates. This
subordination will be accomplished by the application of the Available
Distribution Amount on each Distribution Date in accordance with the order of
priority described under "--Distributions--Priority" above. No other form of
Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Senior Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of such
Certificates relative to the actual amortization of the Mortgage Loans. To
the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, the percentage interest evidenced by the Senior Certificates
in the Trust Fund will be decreased (with a corresponding increase in the
interest in the Trust Fund evidenced by the Class B and Class C
Certificates), thereby increasing, relative to their respective Certificate
Balances, the subordination afforded the Senior Certificates by the Class B
and Class C Certificates. Following retirement of the Class A Certificates,
allocation to the Class B Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will provide a similar benefit to such Class of Certificates as regards
the relative amount of subordination afforded thereto by the Class C
Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate
the amount, if any, by which (i) the aggregate Stated Principal Balance of
the Mortgage Pool expected to be outstanding immediately following such
Distribution Date is less than (ii) the then aggregate Certificate Balance of
the REMIC Regular Certificates (any such deficit, "Collateral Support
Deficit"). The [Trustee] will be required to allocate any such Collateral
Support Deficit among the respective Classes of Certificates as follows:
first, to the Class C Certificates, until the remaining Certificate Balance
of such Class of Certificates is reduced to zero; second, to the Class B
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; and last, to the Class A Certificates, until
the remaining Certificate Balance of such Class of Certificates has been
reduced to zero. Any allocation of Collateral Support Deficit to a Class of
Certificates will be made by reducing the Certificate Balance thereof by the
amount so allocated. Any Collateral Support Deficit allocated to a Class of
REMIC Regular Certificates will be allocated among the respective
Certificates of such Class in proportion to the Percentage Interests
evidenced thereby. In general, Collateral Support Deficit will result from
the occurrence of: (i) losses and other shortfalls on or in respect of the
Mortgage Loans, including as a result of defaults and delinquencies thereon,
Nonrecoverable Advances made in respect thereof and the payment to the Master
Servicer of interest on Advances and certain servicing expenses; and (ii)
certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee as described under
"Description of the Pooling Agreements -- Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling Agreements --
Certain Matters Regarding the Master Servicer and the Depositor" in the
Prospectus and certain federal, state and local taxes, and certain
tax-related expenses, payable out of the Trust Fund as described under
"Certain Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax
and Other Taxes " in the Prospectus. Accordingly, the allocation of
Collateral Support Deficit as described above will constitute an allocation
of losses and other shortfalls experienced by the Trust Fund.
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ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability
determination described in the next paragraph, to make advances (each, an
"Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, funds held in the
Certificate Account that are not required to be part of the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of: (i) all Monthly Payments (net of the related Servicing Fee),
other than Balloon Payments, which were due on the Mortgage Loans during the
related Due Period and delinquent as of the related Determination Date; (ii)
in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount equal to one month's
interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee),
but only to the extent that the related mortgagor has not made a payment
sufficient to cover such amount under any forbearance arrangement or
otherwise that has been included in the Available Distribution Amount for
such Distribution Date; and (iii) in the case of each REO Property, an amount
equal to thirty days' imputed interest with respect thereto at the related
Mortgage Rate in effect as of the commencement of the related Due Period (net
of the related Servicing Fee), but only to the extent that such amount is not
covered by any net income from such REO Property included in the Available
Distribution Amount for such Distribution Date. The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan or REO Property
will continue through liquidation of such Mortgage Loan or disposition of
such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of
its own funds from any amounts collected in respect of the Mortgage Loan as
to which such Advance was made, whether in the form of late payments,
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds or otherwise
("Related Proceeds"). Notwithstanding the foregoing, the Master Servicer will
not be obligated to make any Advance that it determines in its reasonable
good faith judgment would, if made, not be recoverable out of Related
Proceeds (a "Nonrecoverable Advance"), and the Master Servicer will be
entitled to recover any Advance that it so determines to be a Nonrecoverable
Advance out of general funds on deposit in the Certificate Account.
Nonrecoverable Advances will represent a portion of the losses to be borne by
the Certificateholders. See "Description of the Certificates--Advances in
Respect of Delinquencies" and "Description of the Pooling
Agreements--Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be
entitled to be paid, out of any amounts then on deposit in the Certificate
Account, interest at % per annum (the "Reimbursement Rate") accrued on the
amount of such Advance or expense from the date made to but not including the
date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in
a reduction in amounts payable on the Class B Certificates; and to the extent
not offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that
any holder of an Offered Certificate must bear the cost of the Master
Servicer's and/or Special Servicer's Advances, the benefits of such Advances
to such holder will be contingent on the ability of such holder to reinvest
the amounts received as a result of such Advances at a rate of return equal
to or greater than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of
Advances made with respect to the related Distribution Date. See "Description
of the Certificates--Reports to Certificateholders; Certain Available
Information" herein and "Description of Certificates--Reports to
Certificateholders" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution
Date Statement") providing various items of information relating to
distributions made on such date with respect to the relevant Class and the
recent status of the
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Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were
holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the
Trust Fund], during normal business hours, for review by any holder of an
Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the
Pooling Agreements--Evidence as to Compliance" in the Prospectus, (e) the
most recent property inspection report prepared by or on behalf of the
Special Servicer and delivered to the Trustee in respect of each Mortgaged
Property, (f) the most recent annual operating statements, if any, collected
by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, and (g) any and all modifications,
waivers and amendments of the terms of a Mortgage Loan entered into by the
Master Servicer or the Special Servicer and delivered to the Trustee. Copies
of any and all of the foregoing items will be available from the [Trustee]
upon request; however, the [Trustee] will be permitted to require payment of
a sum sufficient to cover the reasonable costs and expenses of providing such
copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory
or regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee
for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO
Property subject thereto, and (ii) the purchase of all of the assets of the
Trust Fund by the Master Servicer or the Depositor. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the
Certificate Registrar or other location specified in such notice of
termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and
(ii) the aggregate fair market value of all REO Properties then included in
the Trust Fund (which fair market value for any REO Property may be less than
the Purchase Price for the corresponding REO Loan), as
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determined by an appraiser mutually agreed upon by the Master Servicer and
the Trustee, over (b) the aggregate of amounts payable or reimbursable to the
Master Servicer under the Pooling and Servicing Agreement. Such purchase will
effect early retirement of the then outstanding Offered Certificates, but the
right of the Master Servicer or the Depositor to effect such termination is
subject to the requirement that the then aggregate Stated Principal Balance
of the Mortgage Pool be less than 5% of the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and
other assets in the Trust Fund (if the Trust Fund is to be terminated as a
result of the purchase described in the preceding paragraph), together with
all other amounts on deposit in the Certificate Account and not otherwise
payable to a person other than the Certificateholders (see "Description of
the Pooling Agreements--Certificate Account" in the Prospectus), will be
applied generally as described above under "--Distributions--Priority",
except that the distributions of principal described thereunder will, in the
case of each Class of Certificates, be made, subject to available funds, in
an amount equal to the related Certificate Balance then outstanding.
THE TRUSTEE
, a , will act as Trustee on behalf of the
Certificateholders. [The Master Servicer will be responsible for the fees and
normal disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at .
See "Description of the Pooling Agreements--the Trustee", "--Duties of the
Trustee", "--Certain Matters Regarding the Trustee" and "--Resignation and
Removal of the Trustee" in the Prospectus.
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YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the
rate and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted
average of the applicable Effective Net Mortgage Rates. Accordingly, the
yield on the Offered Certificates will be sensitive to (x) adjustments to the
Mortgage Rates on the ARM Loans and (y) changes in the relative composition
of the Mortgage Pool as a result of scheduled amortization, voluntary
prepayments and involuntary liquidations of the Mortgage Loans. See
"Description of the Mortgage Pool" herein and "--Yield Considerations--Rate
and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on the Mortgage Loans (including
principal prepayments on the Mortgage Loans resulting from both voluntary
prepayments by the mortgagors and involuntary liquidations). The rate and
timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments
are due and the rate and timing of principal prepayments and other
unscheduled collections thereon (including for this purpose, collections made
in connection with liquidations of Mortgage Loans due to defaults, casualties
or condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans (and, accordingly, on the Offered
Certificates) while work-outs are negotiated or foreclosures are completed.
See "Servicing of the Mortgage Loans--Modifications, Waivers and Amendments"
herein and "Description of the Pooling Agreements--Realization Upon Defaulted
Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans--Foreclosure" in
the Prospectus. Because the rate of principal payments on the Mortgage Loans
will depend on future events and a variety of factors (as described below),
no assurance can be given as to such rate or the rate of principal
prepayments in particular. The Depositor is not aware of any relevant
publicly available or authoritative statistics with respect to the historical
prepayment experience of a large group of mortgage loans comparable to the
Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which such Certificates are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans are in turn
distributed on such Certificates. An investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield and,
in the case of any Offered Certificate purchased at a premium, the risk that
a faster than anticipated rate of principal payments on such Certificate
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a payment of principal is made on
an Offered Certificate purchased at a discount or premium, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on
an investor's yield of principal payments on such investor's Offered
Certificates occurring at a rate higher (or lower) than the rate anticipated
by the investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Class C Certificates, to the
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extent of amounts otherwise distributable in respect of their Certificates;
second, by the holders of the Class B Certificates, to the extent of amounts
otherwise distributable in respect of their Certificates; and last, by the
holders of the Senior Certificates. As more fully described herein under
"Description of the Certificates--Distributions--Distributable Certificate
Interest", Net Aggregate Prepayment Interest Shortfalls will generally be
borne by the respective Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by
a number of factors, including, without limitation, prevailing interest
rates, the terms of the Mortgage Loans (for example, Prepayment Premiums,
adjustable Mortgage Rates and amortization terms that require Balloon
Payments), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand
for rental properties, food services, retail shopping space or office space,
as the case may be, in such areas, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. See "Risk Factors" and "Description
of the Mortgage Pool" herein and "Risk Factors" and "Yield and Maturity
Considerations--Yield and Prepayment Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related
Index (which may not rise and fall consistently with mortgage interest rates
then available) plus the related Gross Margin (which may be different from
margins then offered on adjustable rate mortgage loans). See "Description of
the Mortgage Pool--Certain Payment Characteristics" and "--The Index" herein.
As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on the ARM Loans decline in a manner consistent therewith, related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate, or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. The Mortgage Loans may be prepaid at
any time and, in cases (approximately % of the Initial Pool Balance),
may be prepaid in whole or in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by Federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to
which a default will have occurred as of any date or as to the overall rate
of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
days and as many as days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of
the Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming
such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any
Class of Offered Certificates on any Distribution Date is less than the
Distributable Certificate Interest then payable for such Class, the shortfall
will be distributable to holders of such Class of Certificates on subsequent
Distribution Dates, to the extent of available funds. Any such shortfall will
not bear interest, however, and will therefore negatively affect the yield to
maturity of such Class of Certificates for so long as it is outstanding.
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WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans is paid or otherwise collected, which may be in the form of
scheduled amortization, voluntary prepayments, Insurance Proceeds,
Condemnation Proceeds and Liquidation Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of
the then scheduled principal balance of the pool of mortgage loans. As used
in each of the following tables, the column headed "0%" assumes that none of
the Mortgage Loans is prepaid before maturity. The columns headed " %", "
%", " %" and " %" assume that prepayments on the Mortgage Loans are
made at those levels of CPR. There is no assurance, however, that prepayments
of the Mortgage Loans will conform to any level of CPR, and no representation
is made that the Mortgage Loans will prepay at the levels of CPR shown or at
any other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the
Mortgage Loans, in each case prior to any prepayment of the loan, will be
timely received (with no defaults) and will be distributed on the 25th day of
each month commencing in 199 ; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan,
until its next Interest Rate Adjustment Date, when a new Mortgage Rate that
is to remain in effect to maturity will be calculated reflecting the value of
the related Index as of , 199 , subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the
Cut-off Date will continue to be due (a) in the case of each Fixed Rate Loan,
on each Due Date until maturity and (b) in the case of each ARM Loan, until
its next Payment Adjustment Date, when a new payment that is to be due on
each Due Date until maturity will be calculated reflecting the appropriate
Mortgage Rate and remaining amortization term; (v) any principal prepayments
on the Mortgage Loans will be received on their respective Due Dates at the
respective levels of CPR set forth in the tables, and there will be no Net
Aggregate Prepayment Interest Shortfalls in connection therewith; and (vi)
the Mortgage Loan Seller will not be required to repurchase any Mortgage
Loan, and neither the Master Servicer nor the Depositor will exercise its
option to purchase all the Mortgage Loans and thereby cause an early
termination of the Trust Fund. To the extent that the Mortgage Loans have
characteristics that differ from those assumed in preparing the tables set
forth below, the Class A Certificates or the Class B Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all
the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate
Balances (and weighted average lives) shown in the following tables. Such
variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage
Loans may be expected to prepay. Based on the foregoing assumptions, the
following table indicates the resulting weighted average lives of the Class A
Certificates and sets forth the percentage of the initial Certificate Balance
of the Class A Certificates that would be outstanding after each of the dates
shown at the indicated CPRs.
S-45
<PAGE>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- -------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date ................... 100.0 100.0 100.0 100.0 100.0
25, 1997 ..................
25, 1998 ..................
25, 1999 ..................
25, 2000 ..................
25, 2001 ..................
25, 2002 ..................
25, 2003 ..................
25, 2004 ..................
25, 2005 ..................
Weighted Average Life
(years)(A) ..................
</TABLE>
- ------------
(A) The weighted average life of a Class A Certificate is determined by
(i) multiplying the amount of each principal distribution thereon by
the number of years from the date of issuance of the Class A
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth
the percentage of the initial Certificate Balance of the Class B Certificates
that would be outstanding after each of the dates shown at the indicated
CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- ------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date .................. 100.0 100.0 100.0 100.0 100.0
25, 1997 .................
25, 1998 .................
25, 1999 .................
25, 2000 .................
25, 2001 .................
25, 2002 .................
25, 2003 .................
25, 2004 .................
25, 2005 .................
Weighted Average Life
(years)(A).....................
</TABLE>
- ------------
(A) The weighted average life of a Class B Certificate is determined by
(i) multiplying the amount of each principal distribution thereon by
the number of years from the date of issuance of the Class B
Certificates to the related Distribution Date, (ii) summing the
results and (iii) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates,
when offered . . .
YIELD SENSITIVITY OF THE CLASS S CERTIFICATES
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the
Mortgage Loans, which may fluctuate significantly from time to
S-46
<PAGE>
time. A rapid rate of principal payments will have a material negative
effect on the yield to maturity of the Class S Certificates. There can be no
assurance that the Mortgage Loans will prepay at any particular rate.
Prospective investors in the Class S Certificates should fully consider the
associated risks, including the risk that such investors may not fully
recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of
interest on the Class S Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
assumptions described in the third paragraph under the heading "--Weighted
Average Life" above, including the assumptions regarding the characteristics
and performance of the Mortgage Loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price set forth below. Any differences between such assumptions and the
actual characteristics and performance of the Mortgage Loans and of the Class
S Certificates may result in yields being different from those shown in such
table. Discrepancies between assumed and actual characteristics and
performance underscore the hypothetical nature of the table, which is
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE CLASS S CERTIFICATES
AT THE FOLLOWING CPRS
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE 0% % % % % %
- -------------------------- ------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
$ ...................... % % % % % %
</TABLE>
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to
the assumed stream of cash flows to be paid on the Class S Certificates,
would cause the discounted present value of such assumed stream of cash flows
to equal the assumed purchase price listed in the table. Accrued interest is
included in the assumed purchase price and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class S Certificates, and thus do
not reflect the return on any investment in the Class S Certificates when any
reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing
of cash flows is critical to determining yields, the pre-tax yield to
maturity on the Class S Certificates is likely to differ from those shown in
the tables, even if all of the Mortgage Loans prepay at the indicated CPRs
over any given time period or over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based on the determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class S Certificates should
fully consider the risk that a rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.]
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R CERTIFICATES
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of
Class R Certificates may have tax liabilities with respect to their
Certificates during the early years of the Trust Fund's term that
substantially exceed any distributions payable thereon during any such
period. In addition, holders of Class R Certificates may have tax liabilities
with respect to their Certificates the present value of which substantially
exceeds the present value of distributions payable thereon and of any tax
benefits that may arise with respect thereto. Accordingly, the after-tax rate
of return on the Class R Certificates may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Class R Certificates will depend on, among other things,
the timing and amounts of prepayments and losses experienced with respect to
the Mortgage Pool.
S-47
<PAGE>
The Class R Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates
of return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham and
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986
(the "Code"), and (i) the Class A, Class B and Class C Certificates will
evidence "regular interests" in such REMIC and (ii) the Class R Certificates
will be the sole class of "residual interests" in such REMIC, each within the
meaning of the REMIC Provisions in effect on the date hereof.] [Assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will be classified as a grantor trust under Subpart
E, part I of subchapter J of the Code, and not as an association taxable as a
corporation or as a partnership.]
The Certificates [may] [will] [will not] be treated as having been
issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate
of accrual of [original issue discount,] market discount and premium, if any,
for Federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at
a rate equal to [a CPR of %]. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" in
the Prospectus.
The Certificates may be treated for Federal income tax purposes as
having been issued at a premium. Whether any holder of [either] such Class of
Certificates will be treated as holding a Certificate with amortizable bond
premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and interest (including original
issue discount, if any) on the Offered Certificates will be interest
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Certain Federal Income Tax Consequences--Federal
Income Tax Conseuqneces for REMIC Certificates--Status of REMIC Certificates"
in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer
S-48
<PAGE>
of "noneconomic" residual interests to United States persons. Pursuant to
the Pooling and Servicing Agreement, the Class R Certificates may not be
transferred to non-United States persons. See "Certain Federal Income Tax
Consequences--Federal Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating
to "excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess
inclusions with respect to the Class R Certificates, which will be in an
amount equal to all or virtually all of the taxable income includable by
holders of the Class R Certificates. See "Certain Federal Income Tax
Consequences--Federal Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Limitations on Offset or Exemption of REMIC Income" in
the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all
federal income tax purposes, and that the purported transferor of
"noneconomic" residual interests will continue to remain liable for any taxes
due with respect to the income on such residual interests, if "a significant
purpose of the transfer was to impede the assessment or collection of tax."
Based on the REMIC Regulations, the Class R Certificates may constitute
noneconomic residual interests during some or all of their terms for purposes
of the REMIC Regulations and, accordingly, if a significant purpose of a
transfer is to impede the assessment or collection of tax, transfers of the
Class R Certificates may be disregarded and purported transferors may remain
liable for any taxes due with respect to the income on the Class R
Certificates. All transfers of the Class R Certificates will be subject to
certain restrictions under the terms of the Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Class R Certificates constitute
noneconomic residual interests. See "Certain Federal Income Tax
Consequences--Federal Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates-- Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions
received by such Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash
distributions with respect to such periods. Consequently, Class R
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Fund's term as a
result of their ownership of the Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the Trust Fund's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or
disposition of a Class R Certificate (or possibly later under the "wash sale"
rules of Section 1091 of the Code) may cause the Class R Certificateholders'
after-tax rate of return to be zero or negative even if the Class R
Certificateholders' pre-tax rate of return is positive. That is, on a present
value basis, the Class R Certificateholders' resulting tax liabilities could
substantially exceed the sum of any tax benefits and the amount of any cash
distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Class R Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the Master Servicer as its agent
to perform all of the duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in
such Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the
Class R Certificates" herein and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Corporations--Taxation of Residual Certificates" in the Prospectus.
S-49
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated , 199 (the "Underwriting Agreement"), (the
"Underwriter") has agreed to purchase and the Depositor has agreed to sell to
the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, , on or about , 199 against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds
to the Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately % of the
aggregate Certificate Balance of the Offered Certificates plus accrued
interest thereon from the Cut-off Date. The Underwriter may effect such
transactions by selling its Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent.
In connection with the sale of the Offered Certificates, the Underwriter may
be deemed to have received compensation from the Depositor in the form of
underwriting compensation. The Underwriter and any dealers that participate
with such Underwriter in the distribution of the Offered Certificates may be
deemed to be underwriters and any profit on the resale of the Offered
Certificates positioned by them may be deemed to be underwriting discounts
and commissions under the Securities Act of 1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the
Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the
applicable form of credit enhancement. Except as described herein under
"Description of the Certificates--Reports to Certificateholders; Certain
Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by . Certain federal income tax matters and other
matters will be passed upon for the Depositor by Cadwalader, Wickersham &
Taft.
S-50
<PAGE>
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than " ", and the Class B Certificates be rated not lower than " ", by
.
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood
or frequency of prepayments (whether voluntary or involuntary) on the
Mortgage Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated
yield or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class
of Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by .
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization [and are secured by liens on real property], the Senior
Certificates will constitute "mortgage related securities" within the meaning
of SMMEA.]
[The Class B Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. As a result, the appropriate
characterization of the Class B Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase the Class B Certificates, is subject to significant interpretive
uncertainties.]
[Except as to the status of the Senior Certificates as "mortgage related
securities," no] [no] representation is made as to the proper
characterization of any class of Offered Certificates for legal investment,
financial institution regulatory or other purposes, or as to the ability of
particular investors to purchase the Offered Certificates under applicable
legal investment or other restrictions. All institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Certificates constitute legal investments for them or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
S-51
<PAGE>
CERTAIN ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, including insurance company
general accounts, that is subject to ERISA, or Section 4975 of the Code
(each, a "Plan") should review with its legal advisors whether the purchase
or holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975
of the Code or whether there exists any statutory or administrative exemption
applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Sections 4975(a) and (b) of the
Code and Section 501(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools, such as the
Mortgage Pool, and the purchase, sale and holding of mortgage pass-through
certificates, such as the Class A Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this Section "Certain
ERISA Considerations", the term "Underwriter" shall include (a)
[Underwriter], (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager
with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class A Certificates must not be subordinated to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class A Certificates at the time of acquisition by the Plan must be rated
in one of the three highest generic rating categories by Standard & Poor's
Ratings Services ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA,
Inc. ("Fitch"). Fourth, the Trustee cannot be an affiliate of any other
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, the Special Servicer, any
sub-servicer, and any mortgagor with respect to Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Class A Certificates. Fifth,
the sum of all payments made to and retained by the Underwriter must
represent not more than reasonable compensation for underwriting the Class A
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund must
represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer, the Special
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other Class
of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than " " by . As of
the Delivery Date, the fourth general condition set forth above will be
satisfied with respect to the Class A Certificates. A fiduciary of a Plan
contemplating purchasing a Class A Certificate in the secondary market must
make its own determination that, at the time of such purchase, the Class A
Certificates continue to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan contemplating purchasing a Class A
Certificate, whether in the initial issuance of such Certificates or in the
secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to
such Class A Certificate.
S-52
<PAGE>
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Class A Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Class A Certificates.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code)
in connection with (i) the direct or indirect sale, exchange or transfer of
Class A Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the Depositor, the Underwriter,
the Trustee, the Master Servicer, the Special Servicer, a Sub-Servicer or a
mortgagor is a Party in Interest with respect to the investing Plan, (ii) the
direct or indirect acquisition or disposition in the secondary market of the
Class A Certificates by a Plan and (iii) the holding of Class A Certificates
by a Plan. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E)
of the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Mortgage Pool.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D)
of the Code if such restrictions are deemed to otherwise apply merely because
a person is deemed to be a Party in Interest with respect to an investing
Plan by virtue of providing services to the Plan (or by virtue of having
certain specified relationships to such a person) solely as a result of the
Plan's ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates"
for purposes of the Exemption and (ii) the specific and general conditions
and the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the
exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. See
"Certain ERISA Considerations" in the Prospectus. A purchaser of a Class A
Certificate should be aware, however, that even if the conditions specified
in one or more exemptions are satisfied, the scope of relief provided by an
exemption may not cover all acts which might be construed as prohibited
transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions
or the imposition of excise taxes or civil penalties. As a result, no
transfer of a Class B Certificate [or Class R Certificate] or any interest
therein may be made to a Plan or to any person who is directly or indirectly
purchasing such Certificate or interest therein on behalf of, as named
fiduciary
S-53
<PAGE>
of, as trustee of, or with assets of a Plan, unless the prospective
transferee provides the Certificate Registrar with an opinion of counsel
which opinion shall not be at the expense of the Depositor, the Trusteee or
the Master Servicer and which establishes to the satisfaction of the
Certificate Registrar that such transfer will not result in a violation of
Section 406 of ERISA or Section 4975 of the Code or cause the Master
Servicer, the Special Servicer or the Trustee to be deemed a fiduciary of
such Plan or result in the imposition of an excise tax under Section 4975 of
the Code. In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is perimssible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Parts I
and III have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates. See "Certain ERISA
Considerations" in the Prospectus. Any Plan fiduciary considering whether to
purchase an Offered Certificate on behalf of a Plan should consult with its
counsel regarding the applicability of the fiduciary responsibility and
prohibited transaction provisions of ERISA and the Code to such investment.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such certificate, shall be deemed to represent that it is not a
Plan or directly or indirctly purchasing such Certificate or interest therein
on behalf of, as named fiduciary of, as trustee of, or with assets of a Plan.
The Class B Certificates [and Class R Certificates] will contain a legend
describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
S-54
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
30/360 basis ........................ S-37
Accrued Certificate Interest ....... S-37
Advance ............................. S-7, S-40
ARM Loans ........................... S-2
Available Distribution Amount ...... S-35
Balloon Payment ..................... S-3
Certificate Balance ................. ii
Certificate Registrar ............... S-34
Certificates ........................ 1
Class ............................... 1
Class A Certificate Owner ........... S-1
Class B Available Distribution
Amount ............................. S-5
Class S Certificates ................ iii
Code ................................ S-48
Collateral Support Deficit .......... S-8, S-39
Cut-off Date ........................ ii
Definitive Class A Certificate ..... S-1, S-34
Delivery Date ....................... ii
Distribution Date ................... ii, S-35
Distribution Date Statement ......... S-40
Due Date ............................ S-2
Duff & Phelps ....................... S-52
ERISA ............................... S-10
ERISA Considerations ................ S-33
Exemption ........................... S-52
Financial Intermediary .............. S-34
Fitch ............................... S-52
Fixed Rate Loans .................... S-3
Form 8-K ............................ S-28
Gross Margin ........................ S-3
Index ............................... S-3
Initial Pool Balance ................ ii
Interest Rate Adjustment Date ...... S-2
Monthly Payments .................... S-2
Mortgage ............................ S-15
Mortgage Loans ...................... ii
Mortgage Note ....................... S-15
Mortgage Pool ....................... ii
Mortgage Rate ....................... S-2
Mortgaged Property .................. S-2, S-15
Net Aggregate Prepayment Interest
Shortfall .......................... S-37
Net Mortgage Rate ................... S-4
Nonrecoverable Advance .............. S-40
Nonrecoverable Advances ............. S-7
Offered Certificates ................ 1, S-33
Pass-Through Rate ................... ii
Payment Adjustment Date ............. S-3
Plan ................................ S-52
Pooling and Servicing Agreement .... S-3
Prepayment Interest Excess .......... S-31
Prepayment Premiums ................. S-16
Purchase Agreement .................. S-2
Purchase Price ...................... S-27
Reimbursement Rate .................. S-40
Related Proceeds .................... S-40
REMIC ............................... S-48
REMIC Provisions .................... S-48
REMIC Regular Certificates .......... ii
REO Loan ............................ S-38
REO Property ........................ S-29
Risk Factors ........................ S-12
Senior Certificates ................. 1, S-33
Servicing Fees ...................... S-30
The Depositor ....................... S-1
Trust Fund .......................... ii
Underwriter ......................... 1, S-50
Underwriting Agreement .............. S-50
Voting Rights ....................... S-41
Workout Fee Rate .................... S-31
</TABLE>
S-55
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
Sumary ...................................... S-1
Risk Factors ................................ S-12
Description of the Mortgage Pool............. S-15
Servicing of the Mortgage Loans ............. S-29
Description of the Certificates.............. S-33
Yield and Maturity Considerations............ S-43
Certain Federal Income Tax Consequences .... S-48
Method of Distribution....................... S-50
Legal Matters................................ S-50
Rating ...................................... S-51
Legal Investment............................. S-51
Certain ERISA Considerations ................ S-52
Index of Principal Definitions............... S-55
PROSPECTUS
Prospectus Supplement ....................... ii
Available Information........................ iii
Incorporation of Certain Information by
Reference................................... iv
Summary of Prospectus........................ 1
Risk Factors................................. 9
Description of the Trust Funds............... 17
Yield and Maturity Considerations............ 23
The Depositor................................ 28
Description of the Certificates.............. 29
Description of the Pooling Agreements ...... 37
Description of Credit Support................ 53
Certain Legal Aspects of Mortgage Loans .... 55
Certain Federal Income Tax Consequences .... 65
State Tax and Other Considerations .......... 90
ERISA Considerations ........................ 90
Legal Investment ............................ 95
Use of Proceeds ............................. 96
Method of Distribution ...................... 96
Legal Matters ............................... 97
Financial Information ....................... 97
Rating ...................................... 97
Index of Principal Definitions .............. 99
</TABLE>
DEUTSCHE MORTGAGE &
ASSET RECEIVING CORPORATION
$
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 199 -
CLASS A CERTIFICATES VARIABLE RATE $
CLASS B CERTIFICATES VARIABLE RATE $
CLASS R CERTIFICATES VARIABLE RATE $100
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
DATED , 199
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 23, 1997
[VERSION 3 -- RESTAURANT CONCENTRATION]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus
Supplement") will be offered from time to time in series. The Offered
Certificates of any series, together with any other mortgage pass-through
certificates of such series, are collectively referred to herein as the
"Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series,
the "Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving
Corporation (the "Depositor") and including a segregated pool (a "Mortgage
Asset Pool") of various types of multifamily and commercial mortgage loans
("Mortgage Loans"), mortgage-backed securities ("MBS") that evidence
interests in, or that are secured by pledges of, one or more of various types
of multifamily or commercial mortgage loans, or a combination of Mortgage
Loans and MBS (collectively, "Mortgage Assets"). The Mortgage Loans in (and
the mortgage loans underlying the MBS in) any Trust Fund will be secured by
first or junior liens on, or security interests in, one or more of the
following types of real property: (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units and mobile home
parks; and (ii) commercial properties consisting of office buildings, retail
shopping facilities, hotels and motels, health care-related facilities (such
as hospitals, skilled nursing facilities, nursing homes, congregate care
facilities and senior housing), recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, individual restaurants and other establishments
that are part of the food service industry (collectively, "Restaurants"),
mixed use properties (that is, any combination of the foregoing), and
unimproved land. To the extent described in the Prospectus Supplement,
Restaurants will represent security for a material concentration of the
Mortgage Loans in (or the mortgage loans underlying the MBS in) any Trust
Fund, based on principal balance at the time such Trust Fund is formed.
However, health care-related facilities will not represent security for such
a material concentration of the Mortgage Loans (or the mortgage loans
underlying the MBS in) any Trust Fund, based on principal balance at such
time. If so specified in the related Prospectus Supplement, the Trust Fund
for a series of Certificates may also include letters of credit, surety
bonds, insurance policies, guarantees, reserve funds, guaranteed investment
contracts, interest rate exchange agreements or interest rate cap or floor
agreements designed to reduce the effects of interest rate fluctuations on
the Mortgage Assets. See "Description of the Trust Funds", "Description of
the Certificates" and "Description of Credit Support".
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Mortgage Assets in the related Trust Fund and the timing of receipt of
such payments as described herein and in the related Prospectus Supplement.
See "Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR
ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS
AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING ON PAGE 9
HEREIN UNDER THE CAPTION "RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET
FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT
BEFORE PURCHASING ANY OFFERED CERTIFICATE.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described
under "Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a
secondary market for any Offered Certificates will develop or, if it does
develop, that it will continue. Unless otherwise provided in the related
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
The date of this Prospectus is , 199
<PAGE>
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled
to distributions of principal, with disproportionate, nominal or no
distributions of interest; (iv) are entitled to distributions of interest,
with disproportionate, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund; or (vii) provide
for distributions of principal thereof to be made, subject to available
funds, based on a specified principal payment schedule or other methodology.
Distributions in respect of the Certificates of each series will be made on a
monthly, quarterly, semi-annual, annual or other periodic basis as specified
in the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof
as a "real estate mortgage investment conduit" (each, a "REMIC") for federal
income tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of
Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth,
as and to the extent appropriate: (i) a description of the class or classes
of such Offered Certificates, including the payment provisions with respect
to each such class, the aggregate principal amount, if any, of each such
class, the rate at which interest accrues from time to time, if at all, with
respect to each such class or the method of determining such rate, and
whether interest with respect to each such class will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all; (ii) information with respect to any other classes of
Certificates of the same series; (iii) the respective dates on which
distributions are to be made; (iv) information as to the assets, including
the Mortgage Assets, constituting the related Trust Fund (all such assets,
with respect to the Certificates of any series, the "Trust Assets"); (v) the
circumstances, if any, under which the related Trust Fund may be subject to
early termination; (vi) additional information with respect to the method of
distribution of such Offered Certificates; (vii) whether one or more REMIC
elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the
person (the "REMIC Administrator") responsible for the various tax-related
duties in respect of each REMIC to be created; (viii) the initial percentage
ownership interest in the related Trust Fund to be evidenced by each class of
Certificates of such series; (ix) information concerning the Trustee (as
defined herein) of the related Trust Fund; (x) if the related Trust Fund
includes Mortgage Loans, information concerning the Master Servicer and any
Special Servicer (each as defined herein) of such Mortgage Loans and the
circumstances under which all or a portion, as specified, of the servicing of
a Mortgage Loan would transfer from the Master Servicer to the Special
Servicer; (xi) information as to the nature and extent of subordination of
any class of Certificates of such series, including a class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
ii
<PAGE>
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the
Offered Certificates. This Prospectus and the Prospectus Supplement relating
to each series of Offered Certificates contain summaries of the material
terms of the documents referred to herein and therein, but do not contain all
of the information set forth in the Registration Statement pursuant to the
rules and regulations of the Commission. For further information, reference
is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison, 14th Floor, Chicago, Illinois 60661; New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http:// www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or any related Prospectus Supplement, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Depositor or any other person. Neither the delivery of this
Prospectus or any related Prospectus Supplement nor any sale made hereunder
or thereunder shall under any circumstances create an implication that there
has been no change in the information herein since the date hereof or therein
since the date thereof. This Prospectus and any related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository
Trust Company ("DTC") as described herein, then unless otherwise provided in
the related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the
Offered Certificates. Conveyance of notices and other communications by DTC
to its participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable
Offered Certificates, will be governed by arrangements among them, subject to
any statutory or regulatory requirements as may be in effect from time to
time. See "Description of the Certificates--Reports to Certificateholders"
and "--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder. The Depositor intends to
make a written request to the staff of the Commission that the staff either
(i) issue an order pursuant to Section 12(h) of the Exchange Act exempting
the Depositor from certain reporting requirements under the Exchange Act with
respect to each Trust Fund or (ii) state that the staff will not recommend
that the Commission take enforcement action if the Depositor fulfills its
reporting obligations as described in its written request. If such request is
granted, the Depositor will file or cause to be filed with the Commission as
to each Trust Fund the periodic unaudited reports to holders of the Offered
Certificates referenced in the preceding paragraph; however, because of the
nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Depositor anticipates that a
significant portion of such reporting requirements will be permanently
suspended following the first fiscal year for the related Trust Fund.
iii
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
prior to the termination of an offering of Offered Certificates evidencing
interests therein. The Depositor will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Offered Certificates, upon written or
oral request of such person, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
to the Depositor should be directed in writing to the Depositor at One
International Place, Room 520, Boston, Massachusetts 02110, Attention:
Secretary, or by telephone at (617) 951-7690.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT................................................................... ii
AVAILABLE INFORMATION................................................................... iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE....................................... iv
SUMMARY OF PROSPECTUS................................................................... 1
RISK FACTORS............................................................................ 9
Limited Liquidity of Offered Certificates.............................................. 9
Limited Assets ........................................................................ 9
Credit Support Limitations............................................................. 10
Effect of Prepayments on Average Life of Certificates.................................. 10
Effect of Prepayments on Yield of Certificates ........................................ 12
Limited Nature of Ratings.............................................................. 12
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans ..... 12
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool ..... 15
Termination............................................................................ 16
Risks Associated with Restaurants...................................................... 16
DESCRIPTION OF THE TRUST FUNDS.......................................................... 17
General................................................................................ 17
Mortgage Loans......................................................................... 17
MBS.................................................................................... 22
Certificate Accounts................................................................... 23
Credit Support......................................................................... 23
Cash Flow Agreements................................................................... 23
YIELD AND MATURITY CONSIDERATIONS....................................................... 23
General................................................................................ 23
Pass-Through Rate...................................................................... 23
Payment Delays......................................................................... 24
Certain Shortfalls in Collections of Interest.......................................... 24
Yield and Prepayment Considerations.................................................... 24
Weighted Average Life and Maturity..................................................... 26
Other Factors Affecting Yield, Weighted Average Life and Maturity...................... 26
THE DEPOSITOR........................................................................... 28
DEUTSCHE BANK AG........................................................................ 28
DESCRIPTION OF THE CERTIFICATES......................................................... 29
General................................................................................ 29
Distributions.......................................................................... 29
Distributions of Interest on the Certificates.......................................... 30
Distributions of Principal of the Certificates......................................... 31
Distributions on the Certificates in Respect of Prepayment Premiums or in Respect of
Equity Participations................................................................. 32
Allocation of Losses and Shortfalls.................................................... 32
Advances in Respect of Delinquencies................................................... 32
v
<PAGE>
PAGE
--------
Reports to Certificateholders.......................................................... 33
Voting Rights.......................................................................... 34
Termination............................................................................ 34
Book-Entry Registration and Definitive Certificates.................................... 35
DESCRIPTION OF THE POOLING AGREEMENTS................................................... 37
General................................................................................ 37
Assignment of Mortgage Loans; Repurchases.............................................. 37
Representations and Warranties; Repurchases............................................ 39
Collection and Other Servicing Procedures.............................................. 39
Sub-Servicers.......................................................................... 41
Certificate Account.................................................................... 42
Modifications, Waivers and Amendments of Mortgage Loans................................ 44
Realization Upon Defaulted Mortgage Loans.............................................. 44
Hazard Insurance Policies.............................................................. 46
Due-on-Sale and Due-on-Encumbrance Provisions.......................................... 47
Servicing Compensation and Payment of Expenses......................................... 47
Evidence as to Compliance.............................................................. 48
Certain Matters Regarding the Master Servicer, the Special Servicer, the REMIC
Administrator and the Depositor....................................................... 48
Events of Default...................................................................... 49
Rights Upon Event of Default........................................................... 50
Amendment.............................................................................. 51
List of Certificateholders............................................................. 51
The Trustee............................................................................ 52
Duties of the Trustee.................................................................. 52
Certain Matters Regarding the Trustee.................................................. 52
Resignation and Removal of the Trustee................................................. 52
DESCRIPTION OF CREDIT SUPPORT........................................................... 53
General................................................................................ 53
Subordinate Certificates............................................................... 53
Insurance or Guarantees with Respect to Mortgage Loans................................. 53
Letter of Credit....................................................................... 53
Certificate Insurance and Surety Bonds................................................. 54
Reserve Funds.......................................................................... 54
Credit Support with respect to MBS..................................................... 54
Interest Rate Exchange, Cap and Floor Agreements....................................... 54
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS................................................. 55
General................................................................................ 55
Types of Mortgage Instruments.......................................................... 55
Leases and Rents....................................................................... 56
Personalty............................................................................. 56
Foreclosure............................................................................ 56
vi
<PAGE>
PAGE
--------
Bankruptcy Laws........................................................................ 59
Environmental Considerations........................................................... 60
Due-on-Sale and Due-on-Encumbrance Provisions.......................................... 62
Junior Liens; Rights of Holders of Senior Liens........................................ 62
Subordinate Financing.................................................................. 62
Default Interest and Limitations on Prepayments........................................ 63
Applicability of Usury Laws............................................................ 63
Certain Laws and Regulations........................................................... 63
Americans with Disabilities Act........................................................ 63
Soldiers' and Sailors' Civil Relief Act of 1940........................................ 64
Forfeitures in Drug and RICO Proceedings............................................... 64
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................................. 65
Federal Income Tax Consequences for REMIC Certificates................................. 65
Taxation of Regular Certificates ...................................................... 68
Taxation of Residual Certificates ..................................................... 75
Taxes That May Be Imposed on the REMIC Pool............................................ 81
Liquidation of the REMIC Pool.......................................................... 82
Administrative Matters................................................................. 82
Limitations on Deduction of Certain Expenses........................................... 82
Taxation of Certain Foreign Investors.................................................. 83
Backup Withholding..................................................................... 84
Reporting Requirements................................................................. 84
Federal Income Tax Consequences For Certificates as to Which No
REMIC Election Is Made................................................................ 85
Standard Certificates.................................................................. 85
Stripped Certificates.................................................................. 88
Reporting Requirements and Backup Withholding.......................................... 91
Taxation of Certain Foreign Investors.................................................. 91
STATE AND OTHER TAX CONSEQUENCES........................................................ 91
CERTAIN ERISA CONSIDERATIONS............................................................ 91
General................................................................................ 91
Plan Asset Regulations................................................................. 92
Prohibited Transaction Exemptions ..................................................... 93
Tax Exempt Investors................................................................... 96
LEGAL INVESTMENT........................................................................ 96
USE OF PROCEEDS......................................................................... 98
METHOD OF DISTRIBUTION.................................................................. 98
LEGAL MATTERS........................................................................... 99
FINANCIAL INFORMATION................................................................... 99
RATING.................................................................................. 99
INDEX OF PRINCIPAL DEFINITIONS.......................................................... 100
</TABLE>
vii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
SECURITIES OFFERED ............ Mortgage pass-through certificates.
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
TRUSTEE ....................... The trustee (the "Trustee") for each series
of Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--The Trustee".
MASTER SERVICER ............... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series of
Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--Certain Matters
Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the
Depositor".
SPECIAL SERVICER .............. If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series of
Certificates will be named, or the
circumstances under which a Special Servicer
may be appointed will be described, in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements--Collection and Other Servicing
Procedures".
MBS ADMINISTRATOR ............. If a Trust Fund includes MBS, then the
entity responsible for administering such
MBS (the "MBS Administrator") will be named
in the related Prospectus Supplement. If an
entity other than the Trustee and the Master
Servicer is the MBS Administrator, such
entity will be herein referred to as the
"Manager".
REMIC ADMINISTRATOR ........... The person (the "REMIC Administrator")
responsible for the various tax-related
administration duties for a series of
Certificates as to which one or more REMIC
elections have been made, will be named in
the related Prospectus Supplement. See
"Description of the Pooling
Agreements--Certain Matters Regarding the
Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor."
THE MORTGAGE ASSETS ........... The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist of a
pool of mortgage loans ("Mortgage Loans")
secured by first or junior liens on, or
security interests in, one or more of the
following types of real property: (i)
residential properties ("Multifamily
Properties") consisting of five or more
rental or cooperatively-owned dwell-
1
<PAGE>
ing units in high-rise, mid-rise or garden
apartment buildings or other residential
structures, and mobile home parks; and (ii)
commercial properties ("Commercial
Properties") consisting of office buildings,
retail shopping facilities (such as shopping
centers, malls and individual stores),
hotels and motels, health care-related
facilities (such as hospitals, skilled
nursing facilities, nursing homes,
congregate care facilities and senior
housing), recreational vehicle parks,
warehouse facilities, mini-warehouse
facilities, self-storage facilities,
industrial facilities, parking lots,
individual restaurants and other
establishments that are part of the food
service industry (collectively,
"Restaurants"), mixed use properties (that
is, any combination of the foregoing), and
unimproved land. However, health
care-related facilities will not represent
security for a material concentration of the
Mortgage Loans in any Trust Fund, based on
principal balance at the time such Trust
Fund is formed. The Mortgage Loans will not
be guaranteed or insured by the Depositor or
any of its affiliates or, unless otherwise
provided in the related Prospectus
Supplement, by any governmental agency or
instrumentality or by any other person. If
so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or nonperforming as of the date
the related Trust Fund is formed.
As and to the extent described in the
related Prospectus Supplement, a Mortgage
Loan (i) may provide for no accrual of
interest or for accrual of interest thereon
at an interest rate (a "Mortgage Rate") that
is fixed over its term or that adjusts from
time to time, or that may be converted at
the borrower's election from an adjustable
to a fixed Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, (ii) may
provide for level payments to maturity or
for payments that adjust from time to time
to accommodate changes in the Mortgage Rate
or to reflect the occurrence of certain
events, and may permit negative
amortization, (iii) may be fully amortizing
or may be partially amortizing or
nonamortizing, with a balloon payment due on
its stated maturity date, (iv) may prohibit
over its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment in
connection with certain prepayments and (v)
may provide for payments of principal,
interest or both, on due dates that occur
monthly, quarterly, semi-annually or at such
other interval as is specified in the
related Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated by
the Depositor. See "Description of the Trust
Funds--Mortgage Loans".
If any Mortgage Loan, or group of related
Mortgage Loans, constitutes a concentration
of credit risk, financial statements or
other financial information with respect to
the related Mortgaged Property or Mortgaged
Properties will be included in the related
Prospectus Supplement. See "Description of
the Trust Funds--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements".
2
<PAGE>
If and to the extent specified in the
related Prospectus Supplement, the Mortgage
Assets with respect to a series of
Certificates may also include, or consist
of, mortgage participations, mortgage
pass-through certificates and/or other
mortgage-backed securities (collectively,
"MBS"), that evidence an interest in, or are
secured by a pledge of, one or more mortgage
loans that conform to the descriptions of
the Mortgage Loans contained herein and
which may or may not be issued, insured or
guaranteed by the United States or an agency
or instrumentality thereof. See "Description
of the Trust Funds--MBS".
THE CERTIFICATES .............. Each series of Certificates will be issued
in one or more classes pursuant to a pooling
and servicing agreement or other agreement
specified in the related Prospectus
Supplement (in any case, a "Pooling
Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
As described in the related Prospectus
Supplement, the Certificates of each series,
including the Offered Certificates of such
series, may consist of one or more classes
of Certificates that, among other things:
(i) are senior (collectively, "Senior
Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more
other classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates"); (iii)
are entitled to distributions of interest,
with disproportionate, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of interest
thereon or principal thereof that commence
only after the occurrence of certain events,
such as the retirement of one or more other
classes of Certificates of such series; (v)
provide for distributions of principal
thereof to be made, from time to time or for
designated periods, at a rate that is faster
(and, in some cases, substantially faster)
or slower (and, in some cases, substantially
slower) than the rate at which payments or
other collections of principal are received
on the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust Fund
attributable to prepayment premiums, yield
maintenance payments or equity
participations.
If so specified in the related Prospectus
Supplement, a series of Certificates may
include one or more "Controlled Amortization
Classes", which will entitle the holders
thereof to receive principal distributions
according to a specified principal payment
schedule. Although prepayment risk cannot be
eliminated entirely for any class of
Certificates, a Controlled Amortization
Class will generally provide a relatively
stable cash flow so long
3
<PAGE>
as the actual rate of prepayment on the
Mortgage Loans in the related Trust Fund
remains relatively constant at the rate, or
within the range of rates, of prepayment
used to establish the specific principal
payment schedule for such Certificates.
Prepayment risk with respect to a given
Mortgage Asset Pool does not disappear,
however, and the stability afforded to a
Controlled Amortization Class comes at the
expense of one or more other classes of the
same series, any of which other classes may
also be a class of Offered Certificates. See
"Risk Factors--Effect of Prepayments on
Average Life of Certificates" and "--Effect
of Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of REMIC
Residual Certificates (as defined herein),
will have an initial stated principal amount
(a "Certificate Balance"); and each class of
Certificates, other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates, will
accrue interest on its Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, on a
notional amount (a "Notional Amount"), based
on a fixed, variable or adjustable interest
rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount and/or
Pass-Through Rate (or, in the case of a
variable or adjustable Pass-Through Rate,
the method for determining such rate), as
applicable, for each class of Offered
Certificates.
If so specified in the related Prospectus
Supplement, a class of Certificates may have
two or more component parts, each having
characteristics that are otherwise described
herein as being attributable to separate and
distinct classes.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person or
entity, unless otherwise provided in the
related Prospectus Supplement. See "Risk
Factors--Limited Assets".
DISTRIBUTIONS OF INTEREST ON
THE CERTIFICATES ............. Interest on each class of Offered
Certificates (other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates) of
each series will accrue at the applicable
Pass-Through Rate on the Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, the Notional
Amount thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of the
specified dates on which distributions are
to be made, a "Distribution Date").
Distributions of interest with respect to
one or more classes of Certificates
(collectively, "Accrual Certificates") may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates, and
4
<PAGE>
interest accrued with respect to a class of
Accrual Certificates prior to the occurrence
of such an event will either be added to the
Certificate Balance thereof or otherwise
deferred as described in the related
Prospectus Supplement. Distributions of
interest with respect to one or more classes
of Certificates may be reduced to the extent
of certain delinquencies, losses and other
contingencies described herein and in the
related Prospectus Supplement. See "Risk
Factors--Effect of Prepayments on Average
Life of Certificates" and "--Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest" and
"Description of the
Certificates--Distributions of Interest on
the Certificates".
DISTRIBUTIONS OF PRINCIPAL OF
THE CERTIFICATES ............. Each class of Certificates of each series
(other than certain classes of Stripped
Interest Certificates and certain classes of
REMIC Residual Certificates) will have a
Certificate Balance. The Certificate Balance
of a class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of principal
from future cash flow on the assets in the
related Trust Fund. The initial aggregate
Certificate Balance of all classes of a
series of Certificates will not be greater
than the outstanding principal balance of
the related Mortgage Assets as of a
specified date (the "Cut-off Date"), after
application of scheduled payments due on or
before such date, whether or not received.
As and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related series
of Certificates will be made on each
Distribution Date to the holders of the
class or classes of Certificates of such
series then entitled thereto until the
Certificate Balances of such Certificates
have been reduced to zero. Distributions of
principal with respect to one or more
classes of Certificates: (i) may be made at
a rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than the
rate at which payments or other collections
of principal are received on the Mortgage
Assets in the related Trust Fund; (ii) may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates of the
same series; (iii) may be made, subject to
certain limitations, based on a specified
principal payment schedule; or (iv) may be
contingent on the specified principal
payment schedule for another class of the
same series and the rate at which payments
and other collections of principal on the
Mortgage Assets in the related Trust Fund
are received. Unless otherwise specified in
the related Prospectus Supplement,
distributions of principal of any class of
Offered Certificates will be made on a pro
rata basis among all of the Certificates of
such class. See "Description of the
Certificates--Distributions of Principal of
the Certificates".
5
<PAGE>
CREDIT SUPPORT AND CASH FLOW
AGREEMENTS ................... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund
may be provided to one or more classes of
Certificates of the related series in the
form of subordination of one or more other
classes of Certificates of such series,
which other classes may include one or more
classes of Offered Certificates, or by one
or more other types of credit support, which
may include a letter of credit, a surety
bond, an insurance policy, a guarantee, a
reserve fund, or a combination thereof (any
such coverage with respect to the
Certificates of any series, "Credit
Support"). If so provided in the related
Prospectus Supplement, a Trust Fund may
include: (i) guaranteed investment contracts
pursuant to which moneys held in the funds
and accounts established for the related
series will be invested at a specified rate;
or (ii) interest rate exchange agreements,
interest rate cap or floor agreements, or
other agreements designed to reduce the
effects of interest rate fluctuations on the
Mortgage Assets or on one or more classes of
Certificates (any such agreement, in the
case of clause (i) or (ii), a "Cash Flow
Agreement"). Certain relevant information
regarding any applicable Credit Support or
Cash Flow Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors--Credit Support Limitations",
"Description of the Trust Funds--Credit
Support" and "--Cash Flow Agreements" and
"Description of Credit Support".
ADVANCES ...................... If and to the extent provided in the related
Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, the Master
Servicer, the Special Servicer, the Trustee,
any provider of Credit Support and/or any
other specified person may be obligated to
make, or have the option of making, certain
advances with respect to delinquent
scheduled payments of principal and/or
interest on such Mortgage Loans. Any such
advances made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related
Prospectus Supplement. See "Description of
the Certificates--Advances in Respect of
Delinquencies". If and to the extent
provided in the Prospectus Supplement for a
series of Certificates, any entity making
such advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such advances
are outstanding, payable from amounts in the
related Trust Fund. See "Description of the
Certificates--Advances in Respect of
Delinquencies". If a Trust Fund includes
MBS, any comparable advancing obligation of
a party to the related Pooling Agreement, or
of a party to the related MBS Agreement,
will be described in the related Prospectus
Supplement.
6
<PAGE>
OPTIONAL TERMINATION .......... If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination
through the repurchase of the Mortgage
Assets in the related Trust Fund by the
party or parties specified therein, under
the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class
or classes of Certificates by a specified
percentage or amount or upon a specified
date, a party specified therein may be
authorized or required to solicit bids for
the purchase of all of the Mortgage Assets
of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets
to retire such class or classes, under the
circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. The Certificates of each series will
constitute or evidence ownership of either
(i) "regular interests" ("Regular
Certificates") and "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a designated portion thereof,
treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code"), or (ii) interests
("Standard Certificates" or "Stripped
Certificates") in a Trust Fund treated as a
grantor trust (or a partnership) under
applicable provisions of the Code.
Investors are advised to consult their tax
advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT .............. The Offered Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), only if
so specified in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus
Supplement.
7
<PAGE>
RATING ........................ At their respective dates of issuance, each
class of Offered Certificates will be rated
not lower than investment grade by one or
more nationally recognized statistical
rating agencies (each, a "Rating Agency").
See "Rating" herein and in the related
Prospectus Supplement.
8
<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any MBS included in such Trust Fund.
LIMITED LIQUIDITY OF OFFERED CERTIFICATES
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate
that an underwriter specified therein intends to establish a secondary market
in such Offered Certificates; however, no underwriter will be obligated to do
so. Any such secondary market may provide less liquidity to investors than
any comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any
Credit Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement
as described herein under the heading "Description of the
Certificates--Reports to Certificateholders". There can be no assurance that
any additional ongoing information regarding the Offered Certificates of any
series will be available through any other source. The limited nature of such
information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such
Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered
Certificates or class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain classes of Offered Certificates (in particular, a
class with a relatively long average life, a Companion Class (as defined
herein) or a class of Stripped Interest Certificates or Stripped Principal
Certificates) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Certificate
in response to an upward or downward movement in prevailing interest rates
may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid by such
holder. The Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis.
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person
9
<PAGE>
or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make
payments on a series of Offered Certificates, no other assets will be
available for payment of the deficiency, and the holders of one or more
classes of such Offered Certificates will be required to bear the consequent
loss. Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, if and to the extent described in the
related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If and to the
extent so provided in the Prospectus Supplement for a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage Assets have been incurred, all or a portion of the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
CREDIT SUPPORT LIMITATIONS
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses; for
example, Credit Support may or may not cover loss by reason of fraud or
negligence by a mortgage loan originator or other parties. Any such losses
not covered by Credit Support may, at least in part, be allocated to one or
more classes of Offered Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates
(which may include Offered Certificates), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the
likelihood of temporary shortfalls and ultimate losses to holders of Senior
Certificates, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Offered Certificates of a series are made in a specified
order of priority, any related Credit Support may be exhausted before the
principal of the later paid classes of Offered Certificates of such series
has been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Mortgage Assets may fall primarily upon those
classes of Offered Certificates having a later right of payment. Moreover, if
a form of Credit Support covers the Offered Certificates of more than one
series and losses on the related Mortgage Assets exceed the amount of such
Credit Support, it is possible that the holders of Offered Certificates of
one (or more) such series will be disproportionately benefited by such Credit
Support to the detriment of the holders of Offered Certificates of one (or
more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level
of defaults, delinquencies and losses on the underlying Mortgage Assets and
certain other factors. There can, however, be no assurance that the loss
experience on the related Mortgage Assets will not exceed such assumed
levels. See "Description of the Certificates--Allocation of Losses and
Shortfalls" and "Description of Credit Support". If the losses on the related
Mortgage Assets do exceed such assumed levels, the holders of one or more
classes of Offered Certificates will be required to bear such additional
losses.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the
Offered Certificates of the related series may be highly unpredictable.
Prepayments on the Mortgage Loans in any Trust Fund will result in a faster
rate of principal payments on one or more classes of the related series of
Certificates than if payments on such
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Mortgage Loans were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans in a Trust Fund may affect the average life of one or more
classes of Certificates of the related series, including a class of Offered
Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax and legal factors. For
example, if prevailing interest rates fall significantly below the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then, subject to
the particular terms of the Mortgage Loans (e.g., provisions that prohibit
voluntary prepayments during specified periods or impose penalties in
connection therewith) and the ability of borrowers to obtain new financing,
principal prepayments on such Mortgage Loans are likely to be higher than if
prevailing interest rates remain at or above the rates borne by those
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the Mortgage Rates borne by the Mortgage Loans included in a Trust
Fund, then principal prepayments on such Mortgage Loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those Mortgage Loans. There can be no assurance as to the actual
rate of prepayment on the Mortgage Loans in any Trust Fund or that such rate
of prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for
the Mortgage Loans in any Trust Fund, the retirement of any class of
Certificates of the related series could occur significantly earlier or
later, and the average life thereof could be significantly shorter or longer,
than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the
related series will depend on the terms and provisions of such Certificates.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases,
may be none) of such prepayments. A class of Certificates that entitles the
holders thereof to a disproportionately large share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of early
retirement of such class ("Call Risk") if the rate of prepayment is
relatively fast; while a class of Certificates that entitles the holders
thereof to a disproportionately small share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of an
extended average life of such class ("Extension Risk") if the rate of
prepayment is relatively slow. As and to the extent described in the related
Prospectus Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one
or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates,
a Controlled Amortization Class will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Mortgage Loans in
the related Trust Fund remains relatively constant at the rate, or within the
range of rates, of prepayment used to establish the specific principal
payment schedule for such Certificates. Prepayment risk with respect to a
given Mortgage Asset Pool does not disappear, however, and the stability
afforded to a Controlled Amortization Class comes at the expense of one or
more Companion Classes of the same series, any of which Companion Classes may
also be a class of Offered Certificates. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Mortgage Loans in the related Trust Fund when the rate of prepayment is
relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Controlled Amortization Class if all payments
of principal of the Mortgage Loans in the related Trust Fund were allocated
on a pro rata basis.
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EFFECT OF PREPAYMENTS ON YIELD OF CERTIFICATES
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which such Certificates are purchased at
a discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Certificate purchased at
a discount, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. See "Yield and
Maturity Considerations".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such
Offered Certificates will receive payments to which such Certificateholders
are entitled under the related Pooling Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the related Trust Fund. Furthermore, such
rating will not address the possibility that prepayment of the related
Mortgage Loans at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of the Certificates
of such series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a
large pool of mortgage loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans. In
other cases, such criteria may be based upon determinations of the values of
the Mortgaged Properties that provide security for the Mortgage Loans.
However, no assurance can be given that those values will not decline in the
future. As a result, the Credit Support required in respect of the Offered
Certificates of any series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Description of
Credit Support" and "Rating".
CERTAIN FACTORS AFFECTING DELINQUENCY, FORECLOSURE AND LOSS OF THE MORTGAGE
LOANS
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying
Mortgage Loans. Set forth below is a discussion of certain factors that will
affect the full and timely payment of the Mortgage Loans in any Trust Fund.
In addition, a description of certain material considerations associated with
investments in mortgage loans is included herein under "Certain Legal Aspects
of Mortgage Loans."
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans
made on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss
in the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds--Mortgage
Loans--Default and Loss Considerations with
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Respect to the Mortgage Loans". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay
the loan may be impaired. A number of the Mortgage Loans may be secured by
liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants.
Accordingly, a decline in the financial condition of the borrower or a
significant tenant, as applicable, may have a disproportionately greater
effect on the net operating income from such Mortgaged Properties than would
be the case with respect to Mortgaged Properties with multiple tenants.
Furthermore, the value of any Mortgaged Property may be adversely affected by
factors generally incident to interests in real property, including changes
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies,
including environmental legislation; natural disasters and civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots; and other
circumstances, conditions or events beyond the control of a Master Servicer
or a Special Servicer. Additional considerations may be presented by the type
and use of a particular Mortgaged Property. For instance, Mortgaged
Properties that operate as hospitals and nursing homes are subject to
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are
often operated pursuant to franchise, management or operating agreements that
may be terminable by the franchisor or operator, and the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law
requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be
greater than for pools of single-family loans because Mortgage Loans in a
Trust Fund will generally consist of a smaller number of higher balance loans
than would a pool of single-family loans of comparable aggregate unpaid
principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to
any such Mortgage Loan, recourse in the event of borrower default will be
limited to the specific real property and other assets, if any, that were
pledged to secure the Mortgage Loan. However, even with respect to those
Mortgage Loans that provide for recourse against the borrower and its assets
generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. See
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Anti-Deficiency
Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all
of the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated thereby, are
available to support debt service on, and ultimate repayment of, the
aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the
Mortgaged Properties securing any such group of Mortgage Loans to generate
net operating income sufficient to pay debt service will result in defaults
and ultimate losses.
There may not be complete identity of ownership of the Mortgaged
Properties securing a group of cross-collateralized Mortgage Loans. In such
an instance, creditors of one or more of the related borrowers could
challenge the cross-collateralization arrangement as a fraudulent conveyance.
Generally, under federal and state fraudulent conveyance statutes, the
incurring of an obligation or the transfer of property by a person will be
subject to avoidance under certain circumstances if the person did not
receive fair consideration or reasonably equivalent value in exchange for
such obligation or transfer and was then insolvent or was rendered insolvent
by such obligation or transfer. Accordingly, a creditor seeking
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ownership of a Mortgaged Property subject to such cross-collateralization to
repay such creditor's claim against the related borrower could assert (i)
that such borrower was insolvent at the time the cross-collateralized
Mortgage Loans were made and (ii) that such borrower did not, when it allowed
its property to be encumbered by a lien securing the indebtedness represented
by the other Mortgage Loans in the group of cross-collateralized Mortgage
Loans, receive fair consideration or reasonably equivalent value for, in
effect, "guaranteeing" the performance of the other borrowers. Although the
borrower making such "guarantee" will be receiving "guarantees" from each of
the other borrowers in return, there can be no assurance that such exchanged
"guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value, and no unqualified legal opinion to that effect
will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise
of a power of sale and because, in general, foreclosure actions are brought
in state court, and the courts of one state cannot exercise jurisdiction over
property in another state, it may be necessary upon a default under any such
Mortgage Loan to foreclose on the related Mortgaged Properties in a
particular order rather than simultaneously in order to ensure that the lien
of the related Mortgages is not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only
partially amortizing over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater
likelihood of default than self-amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by
a number of factors, including the value of the related Mortgaged Property,
the level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
and operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability
of credit for loans secured by multifamily or commercial, as the case may be,
real properties generally. Neither the Depositor nor any of its affiliates
will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent. See "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". While the Master
Servicer or the Special Servicer generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery than liquidation, taking into account the time value of money, there
can be no assurance that any such extension or modification will in fact
increase the present value of receipts from or proceeds of the affected
Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy
of Borrower. Each Mortgage Loan included in any Trust Fund secured by
Mortgaged Property that is subject to leases typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property
and obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of Mortgage
Loans--Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration
Clauses. Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan
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if the borrower sells, transfers or conveys the related Mortgaged Property or
its interest in the Mortgaged Property. Mortgages also may include a
debt-acceleration clause, which permits the lender to accelerate the debt
upon a monetary or nonmonetary default of the mortgagor. Such clauses are
generally enforceable subject to certain exceptions. The courts of all states
will enforce clauses providing for acceleration in the event of a material
payment default. The equity courts of any state, however, may refuse the
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances at a property, if agents or
employees of the lender have become sufficiently involved in the operations
of the borrower, regardless of whether the environmental damage or threat was
caused by the borrower or a prior owner. A lender also risks such liability
on foreclosure of the mortgage. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and
Special Servicer for the related Trust Fund will be required to cause the
borrower on each Mortgage Loan in such Trust Fund to maintain such insurance
coverage in respect of the related Mortgaged Property as is required under
the related Mortgage, including hazard insurance; provided that, as and to
the extent described herein and in the related Prospectus Supplement, each of
the Master Servicer and the Special Servicer may satisfy its obligation to
cause hazard insurance to be maintained with respect to any Mortgaged
Property through acquisition of a blanket policy. In general, the standard
form of fire and extended coverage policy covers physical damage to or
destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds
of risks. Unless the related Mortgage specifically requires the mortgagor to
insure against physical damage arising from such causes, then, to the extent
any consequent losses are not covered by Credit Support, such losses may be
borne, at least in part, by the holders of one or more classes of Offered
Certificates of the related series. See "Description of the Pooling
Agreements--Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher
rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may
be directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. The
Mortgage Loans securing certain series of Certificates may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration.
INCLUSION OF DELINQUENT AND NONPERFORMING MORTGAGE LOANS IN A MORTGAGE ASSET
POOL
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past
due or are nonperforming. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration
of the Mortgage Loans in
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any Trust Fund, based on principal balance at the time such Trust Fund is
formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however,
the same entity may act as both Master Servicer and Special Servicer. Credit
Support provided with respect to a particular series of Certificates may not
cover all losses related to such delinquent or nonperforming Mortgage Loans,
and investors should consider the risk that the inclusion of such Mortgage
Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments in respect of the subject Mortgage Asset Pool and the yield on
the Offered Certificates of such series. See "Description of the Trust
Funds--Mortgage Loans--General".
TERMINATION
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be
conducted in a commercially reasonable manner and, generally, assets will be
sold at their fair market value. In addition, if so specified in the related
Prospectus Supplement, upon the reduction of the aggregate principal balance
of some or all of the Mortgage Assets by a specified percentage, a party or
parties designated therein may be authorized to purchase such Mortgage
Assets, generally at a price equal to, in the case of any Mortgage Asset, the
unpaid principal balance thereof plus accrued interest (or, in some cases, at
fair market value). However, circumstances may arise in which such fair
market value may be less than the unpaid balance of the related Mortgage
Assets, together with interest thereon, sold and therefore, as a result of
such a sale or purchase, the Certificateholders of one or more Classes of
Certificates may receive an amount less than the Certificate Balance of, and
accrued unpaid interest on, their Certificates. See "Description of the
Certificates--Termination."
RISKS ASSOCIATED WITH RESTAURANTS
Various factors may affect the economic viability of Restaurants,
including but not limited to competition from facilities having businesses
similar to the particular Restaurant; perceptions by prospective customers of
the safety, convenience, services and attractiveness of the Restaurant; the
quality of available food products; changes in demographics, consumer habits
and traffic patterns; the ability to provide or contract for capable
management and adequate maintenance; and retroactive changes to building
codes, similar ordinances and other legal requirements. Additional factors
that can affect the success of a regionally or nationally-known chain
Restaurant include actions and omissions of any franchisor (including
management practices that adversely affect the nature of the business or that
require renovation, refurbishment, expansion or other expenditures); the
degree of support provided or arranged by any such franchisor, its franchisee
organizations and third party providers of products or services; the
bankruptcy or business discontinuation of any such franchisor, franchisee
organization or third party; and increases in operating expenses.
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DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under
the heading "--Mortgage Loans", unless otherwise noted, applies equally to
mortgage loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of
one or more of the following types of real property: (i) residential
properties ("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office
buildings, retail shopping facilities (such as shopping centers, malls and
individual stores), hotels and motels, health care-related facilities (such
as hospitals, skilled nursing facilities, nursing homes, congregate care
facilities and senior housing), recreational vehicle parks, warehouse
facilities, mini-warehouse facilities, self-storage facilities, industrial
facilities, parking lots, individual restaurants and other establishments
that are part of the food service industry (collectively, "Restaurants"),
mixed use properties (that is, any combination of the foregoing), and
unimproved land. However, health care-related facilities will not represent
security for a material concentration of the Mortgage Loans in any Trust
Fund, based on principal balance at the time such Trust Fund is formed. The
Multifamily Properties may include mixed commercial and residential
structures and apartment buildings owned by private cooperative housing
corporations ("Cooperatives"). Unless otherwise specified in the related
Prospectus Supplement, each Mortgage will create a first priority mortgage
lien on a fee estate in a Mortgaged Property. If a Mortgage creates a lien on
a borrower's leasehold estate in a property, then, unless otherwise specified
in the related Prospectus Supplement, the term of any such leasehold will
exceed the term of the Mortgage Note by at least ten years. Unless otherwise
specified in the related Prospectus Supplement, each Mortgage Loan will have
been originated by a person (the "Originator") other than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related senior liens ("Senior Liens") may not be
included in the Mortgage Pool. The primary risk to holders of Mortgage Loans
secured by junior liens is the possibility that adequate funds will not be
received in connection with a foreclosure of the related Senior Liens to
satisfy fully both the Senior Liens and the Mortgage Loan. In the event that
a holder of a Senior Lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. If the Master Servicer were to foreclose on any Mortgage Loan, it would
do so subject to any related Senior Liens. In order for the debt related to
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such Mortgage Loan to be paid in full at such sale, a bidder at the
foreclosure sale of such Mortgage Loan would have to bid an amount sufficient
to pay off all sums due under the Mortgage Loan and any Senior Liens or
purchase the Mortgaged Property subject to such Senior Liens. In the event
that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment is not obtained and satisfied. Moreover,
deficiency judgments may not be available in certain jurisdictions, or the
particular Mortgage Loan may be a nonrecourse loan, which means that, absent
special facts, recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
repayment of the Mortgage Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of
the related Mortgaged Property and the ability of the Mortgaged Property to
generate income to service the mortgage debt. However, Mortgage Loans which
are seriously delinquent loans (that is, loans more than 60 days delinquent
or as to which foreclosure has been commenced) will not constitute a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage
Loans. Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful
operation of such property (that is, its ability to generate income).
Moreover, as noted above, some or all of the Mortgage Loans included in a
particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important factor in evaluating the
likelihood of default on such a loan. Unless otherwise defined in the related
Prospectus Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan
at any given time is the ratio of (i) the Net Operating Income derived from
the related Mortgaged Property for a twelve-month period to (ii) the
annualized scheduled payments of principal and/or interest on the Mortgage
Loan and any other loans senior thereto that are secured by the related
Mortgaged Property. Unless otherwise defined in the related Prospectus
Supplement, "Net Operating Income" means, for any given period, the total
operating revenues derived from a Mortgaged Property during such period,
minus the total operating expenses incurred in respect of such Mortgaged
Property during such period other than (i) noncash items such as depreciation
and amortization, (ii) capital expenditures and (iii) debt service on the
related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
generally fluctuate over time and may or may not be sufficient to cover debt
service on the related Mortgage Loan at any given time. As the primary source
of the operating revenues of a nonowner occupied, income-producing property,
rental income (and, with respect to a Mortgage Loan secured by a Cooperative
apartment building, maintenance payments from tenant-stockholders of a
Cooperative) may be affected by the condition of the applicable real estate
market and/or area economy. In addition, properties typically leased,
occupied or used on a short-term basis, such as certain health care-related
facilities, hotels and motels, and mini-warehouse and self-storage
facilities, tend to be affected more rapidly by changes in market or business
conditions than do properties typically leased for longer periods, such as
warehouses, retail stores, office buildings and industrial facilities.
Commercial Properties may be owner-occupied or leased to a small number of
tenants. Thus, the Net Operating Income of such a Mortgaged Property may
depend substantially on the financial condition of the borrower or a tenant,
and Mortgage Loans secured by liens on such properties may pose a greater
likelihood of default and loss than loans secured by liens on Multifamily
Properties or on multi-tenant Commercial Properties.
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Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage
Loan. As may be further described in the related Prospectus Supplement, in
some cases leases of Mortgaged Properties may provide that the lessee, rather
than the borrower/landlord, is responsible for payment of operating expenses
("Net Leases"). However, the existence of such "net of expense" provisions
will result in stable Net Operating Income to the borrower/landlord only to
the extent that the lessee is able to absorb operating expense increases
while continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property must be liquidated
following a default. Unless otherwise defined in the related Prospectus
Supplement, the "Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio (expressed as a percentage) of (i) the then outstanding principal
balance of the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property to (ii) the Value of the related
Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, the "Value" of a Mortgaged Property will be its fair market value
as determined by an appraisal of such property conducted by or on behalf of
the Originator in connection with the origination of such loan. The lower the
Loan-to-Value Ratio, the greater the percentage of the borrower's equity in a
Mortgaged Property, and thus (a) the greater the incentive of the borrower to
perform under the terms of the related Mortgage Loan (in order to protect
such equity) and (b) the greater the cushion provided to the lender against
loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the likelihood of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined
at loan origination, and will likely continue to fluctuate from time to time
based upon certain factors including changes in economic conditions and the
real estate market. Moreover, even when current, an appraisal is not
necessarily a reliable estimate of value. Appraised values of
income-producing properties are generally based on the market comparison
method (recent resale value of comparable properties at the date of the
appraisal), the cost replacement method (the cost of replacing the property
at such date), the income capitalization method (a projection of value based
upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these
appraisal methods can present analytical difficulties. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections
of income and expense and the selection of an appropriate capitalization rate
and discount rate. Where more than one of these appraisal methods are used
and provide significantly different results, an accurate determination of
value and, correspondingly, a reliable analysis of the likelihood of default
and loss, is even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property
performance. As a result, if a Mortgage Loan defaults because the income
generated by the related Mortgaged Property is insufficient to cover
operating costs and expenses and pay debt service, then the value of the
Mortgaged Property will reflect such and a liquidation loss may occur.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be
no assurance that all of such factors will in fact have been prudently
considered by the Originators of the Mortgage Loans, or that, for a
particular Mortgage Loan, they are complete or relevant. See "Risk
Factors--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--General" and "--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest
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or both, to be made on specified dates ("Due Dates") that occur monthly,
quarterly, semi-annually or annually. A Mortgage Loan (i) may provide for no
accrual of interest or for accrual of interest thereon at a Mortgage Rate
that is fixed over its term or that adjusts from time to time, or that may be
converted at the borrower's election from an adjustable to a fixed Mortgage
Rate, or from a fixed to an adjustable Mortgage Rate, (ii) may provide for
level payments to maturity or for payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence of
certain events, and may permit negative amortization, (iii) may be fully
amortizing or may be partially amortizing or nonamortizing, with a balloon
payment due on its stated maturity date, and (iv) may prohibit over its term
or for a certain period prepayments (the period of such prohibition, a
"Lock-out Period" and its date of expiration, a "Lock-out Date") and/or
require payment of a premium or a yield maintenance payment (a "Prepayment
Premium") in connection with certain prepayments, in each case as described
in the related Prospectus Supplement. A Mortgage Loan may also contain a
provision that entitles the lender to a share of appreciation of the related
Mortgaged Property, or profits realized from the operation or disposition of
such Mortgaged Property or the benefit, if any, resulting from the
refinancing of the Mortgage Loan (any such provision, an "Equity
Participation"), as described in the related Prospectus Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
in the related Trust Fund, which, to the extent then applicable, will
generally include the following: (i) the aggregate outstanding principal
balance and the largest, smallest and average outstanding principal balance
of the Mortgage Loans, (ii) the type or types of property that provide
security for repayment of the Mortgage Loans, (iii) the earliest and latest
origination date and maturity date of the Mortgage Loans, (iv) the original
and remaining terms to maturity of the Mortgage Loans, or the respective
ranges thereof, and the weighted average original and remaining terms to
maturity of the Mortgage Loans, (v) the Loan-to-Value Ratios of the Mortgage
Loans (either at origination or as of a more recent date), or the range
thereof, and the weighted average of such Loan-to-Value Ratios, (vi) the
Mortgage Rates borne by the Mortgage Loans, or the range thereof, and the
weighted average Mortgage Rate borne by the Mortgage Loans, (vii) with
respect to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the
index or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
limits on Mortgage Rate adjustments at the time of any adjustment and over
the life of the ARM Loan, (viii) information regarding the payment
characteristics of the Mortgage Loans, including, without limitation, balloon
payment and other amortization provisions, Lock-out Periods and Prepayment
Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans (either
at origination or as of a more recent date), or the range thereof, and the
weighted average of such Debt Service Coverage Ratios, and (x) the geographic
distribution of the Mortgaged Properties on a state-by-state basis. In
appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the
provisions of leases and the nature of tenants of the Mortgaged Properties.
If the Depositor is unable to provide the specific information described
above at the time Offered Certificates of a series are initially offered,
more general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth
in a report which will be available to purchasers of those Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Commission within fifteen days following such
issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic
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dispersion, property type and/or loan terms (e.g., mortgage rates, terms to
maturity and/or prepayment restrictions) between the two pools of loans could
render the Master Servicer's prepayment experience irrelevant. Because of the
nature of the assets to be serviced and administered by a Special Servicer,
no comparable prepayment information will be presented with respect to the
Special Servicer's multifamily and/or commercial mortgage loan servicing
portfolio.
Mortgage Loans Secured by Restaurants. The Mortgaged Properties that
constitute Restaurants may include those that are individually owned and
operated and those which are part of a regionally-or nationally-known chain
of Restaurants. In each case, the related Mortgage Loan is secured by a first
or junior mortgage lien on the respective Restaurant and is further secured
by a first or junior priority security interest in certain equipment and
other property of the related borrower, which is used in the operation of the
respective Restaurant.
As with loans secured by other income-producing properties, a Mortgage
Loan secured by a Restaurant is dependent on the successful operation of the
Restaurant, which, in turn, is dependent on various factors, many of which
are beyond the control of the Restaurant operator, including but not limited
to competition from facilities having businesses similar to the Restaurant;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the Restaurant; the quality of available food products;
changes in demographics, consumer habits and traffic patterns; the ability to
provide or contract for capable management and adequate maintenance and
retroactive changes to building codes, similar ordinances and other legal
requirements. Adverse economic conditions, either local, regional or
national, may limit the amount that may be charged for food and may result in
a reduction in customers. The construction of competing food establishments
can have similar effects. Because of the nature of the business, Restaurants
tend to respond to adverse economic conditions and competition more quickly
than do other commercial properties.
The restaurant industry is highly competitive. The principal means of
competition are segment, product, price, value, quality, service,
convenience, location and the nature and condition of the Restaurant
facility. A Restaurant operator competes with all operators of comparable
restaurant facilities in the area in which its Restaurant is located. Other
Restaurants could have lower operating costs, more favorable locations, more
effective marketing, more efficient operations or better facilities.
The location and condition of a particular Restaurant will affect the
number of customers and, to a certain extent, the prices that may be charged.
The characteristics of an area or neighborhood in which a Restaurant is
located may change over time or in relation to competing facilities, and the
cleanliness and maintenance at a Restaurant will affect the appeal of the
Restaurant to customers. In addition, the effects of poor construction
quality will increase over time in the form of increased maintenance and
capital improvements. Even good construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. In the case of regionally-or nationally-known chain restaurants,
there may be expenditures for renovation, refurbishment or expansion at a
Restaurant regardless of its condition. While a Restaurant may be renovated,
refurbished or expanded to either maintain its condition or remain
competitive, such renovation, refurbishment or expansion may itself entail
significant risks. In addition, the business conducted at a Restaurant may
face competition from other industries and industry segments.
The success of a Restaurant which is part of either a regionally-or
nationally-known chain of restaurants can be affected by various factors such
as the management practices of the respective franchisor, a lack of support
by such franchisor, its franchisee organizations or third party providers of
products or services or the bankruptcy or business discontinuation of any
such franchisor, franchisee organization or third party may adversely affect
the operating results of the related Restaurants. Furthermore, the
transferability of franchise license agreements may be restricted and, in the
event of foreclosure, there can be no assurance that the related Restaurant
would have the right to continue to use the license. In addition, the ability
of a Restaurant to attract customers, and some of such Restaurant's revenues,
may depend in large part on its having a liquor license. Such a license may
not be transferable (for example, in connection with a foreclosure).
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MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA"), the Governmental National
Mortgage Association ("GNMA") or the Federal Agricultural Mortgage
Corporation ("FAMC"), provided that, unless otherwise specified in the
related Prospectus Supplement, each MBS will evidence an interest in, or will
be secured by a pledge of, mortgage loans that conform to the descriptions of
the Mortgage Loans contained herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage
Asset Pool: (a) either will (i) have been previously registered under the
Securities Act of 1933, as amended, (ii) be exempt from such registration
requirements or (iii) have been held for at least the holding period
specified in Rule 144(k) under the Securities Act of 1933, as amended; and
(b) either (i) will have been acquired (other than from the Depositor or an
affiliate thereof) in bona fide secondary market transactions or (ii) if so
specified in the related Prospectus Supplement, may be derived from the
Depositor's (or an affiliate's) unsold allotments from the Depositor (or an
affiliate's) previous offerings.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer")
and/or the servicer of the underlying mortgage loans (the "MBS Servicer")
will be parties to the MBS Agreement, generally together with a trustee (the
"MBS Trustee") or, in the alternative, with the original purchaser or
purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may
have assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the
Trust Fund, (ii) the original and remaining term(s) to stated maturity of the
MBS, if applicable, (iii) the pass-through or bond rate(s) of the MBS or the
formula for determining such rate(s), (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each
of the MBS, (vi) a description of the related credit support, if any, (vii)
the circumstances under which the related underlying mortgage loans, or the
MBS themselves, may be purchased prior to their maturity, (viii) the terms on
which mortgage loans may be substituted for those originally underlying the
MBS, (ix) the type of mortgage loans underlying the MBS and, to the extent
appropriate under the circumstances, such other information in respect of the
underlying mortgage loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements", and (x) the characteristics of any
cash flow agreements that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports
if such MBS was publicly offered or the reports the related MBS Issuer
provides the related MBS Trustee if such MBS was privately issued.
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CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund will be deposited to the extent described herein and in the related
Prospectus Supplement. See "Description of the Pooling
Agreements--Certificate Account".
CREDIT SUPPORT
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may be provided to one or more
classes of Certificates of such series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other
types of Credit Support, which may include a letter of credit, a surety bond,
an insurance policy, a guarantee, a reserve fund, or any combination thereof.
The amount and types of such Credit Support, the identity of the entity
providing it (if applicable) and related information with respect to each
type of Credit Support, if any, will be set forth in the Prospectus
Supplement for a series of Certificates. See "Risk Factors--Credit Support
Limitations" and "Description of Credit Support".
CASH FLOW AGREEMENTS
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant
to which moneys held in the funds and accounts established for such series
will be invested at a specified rate. The Trust Fund may also include
interest rate exchange agreements, interest rate cap or floor agreements, or
other agreements designed to reduce the effects of interest rate fluctuations
on the Mortgage Assets on one or more classes of Certificates. The principal
terms of any such Cash Flow Agreement, including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof, will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
identify the obligor under the Cash Flow Agreement.
YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can
generally be expected to have the same effect on the yield to maturity and/or
weighted average life of a class of Certificates as will the characteristics
and behavior of comparable Mortgage Loans, the effect may differ due to the
payment characteristics of the MBS. If a Trust Fund includes MBS, the related
Prospectus Supplement will discuss the effect, if any, that the payment
characteristics of the MBS may have on the yield to maturity and weighted
average lives of the Offered Certificates of the related series.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable
or adjustable Pass-Through Rate, which may or may not be based upon the
interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Certificates will specify
the Pass-Through Rate for each class of Offered Certificates of such series
or, in the case of a class of Offered Certificates with a variable or
adjustable Pass-Through Rate, the method of determining the Pass-Through
Rate; the effect, if any, of the prepayment of any Mortgage Loan on the
Pass-Through Rate of one or more classes of Offered Certificates; and whether
the distributions of interest on the Offered Certificates of any class will
be dependent, in whole or in part, on the performance of any obligor under a
Cash Flow Agreement.
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PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related
Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans
were distributed to Certificateholders on the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment
only through the date of such prepayment, instead of through the Due Date for
the next succeeding scheduled payment. However, interest accrued on any
series of Certificates and distributable thereon on any Distribution Date
will generally correspond to interest accrued on the Mortgage Loans to their
respective Due Dates during the related Due Period. A "Due Period" will be a
specified time period (generally corresponding in length to the period
between Distribution Dates) and all scheduled payments on the Mortgage Loans
in the related Trust Fund that are due during a given Due Period will, to the
extent received by a specified date (the "Determination Date") or otherwise
advanced by the related Master Servicer, Special Servicer or other specified
person, be distributed to the holders of the Certificates of such series on
the next succeeding Distribution Date. Consequently, if a prepayment on any
Mortgage Loan is distributable to Certificateholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
to the Due Date for such Mortgage Loan in the related Due Period, then the
interest charged to the borrower (net of servicing and administrative fees)
may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such
shortfall is allocated to a class of Offered Certificates, the yield thereon
will be adversely affected. The Prospectus Supplement for each series of
Certificates will describe the manner in which any such shortfalls will be
allocated among the classes of such Certificates. The related Prospectus
Supplement will also describe any amounts available to offset such
shortfalls.
YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the
Mortgage Loans in any Trust Fund will in turn be affected by the amortization
schedules thereof (which, in the case of ARM Loans, may change periodically
to accommodate adjustments to the Mortgage Rates thereon), the dates on which
any balloon payments are due, and the rate of principal prepayments thereon
(including for this purpose, voluntary prepayments by borrowers and also
prepayments resulting from liquidations of Mortgage Loans due to defaults,
casualties or condemnations affecting the related Mortgaged Properties, or
purchases of Mortgage Loans out of the related Trust Fund). Because the rate
of principal prepayments on the Mortgage Loans in any Trust Fund will depend
on future events and a variety of factors (as described below), no assurance
can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend
upon the degree to which they are purchased at a discount or premium and
when, and to what degree, payments of principal on the Mortgage Loans in the
related Trust Fund are in turn distributed on such Certificates (or, in the
case of a class of Stripped Interest Certificates, result in the reduction of
the Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on such Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield. In addition, if an
investor purchases an Offered Certificate at a discount (or premium), and
principal payments are made in reduction of the principal balance or notional
amount of such investor's Offered Certificates at a rate slower (or faster)
than the rate
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anticipated by the investor during any particular period, any consequent
adverse effects on such investor's yield would not be fully offset by a
subsequent like increase (or decrease) in the rate of principal payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal the
Certificate Balances of one or more of the other classes of Certificates of
the same series. Accordingly, the yield on such Stripped Interest
Certificates will be inversely related to the rate at which payments and
other collections of principal are received on such Mortgage Assets or
distributions are made in reduction of the Certificate Balances of such
classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect
the yield to investors in Stripped Interest Certificates. If the Offered
Certificates of a series include any such Certificates, the related
Prospectus Supplement will include a table showing the effect of various
constant assumed levels of prepayment on yields on such Certificates. Such
tables will be intended to illustrate the sensitivity of yields to various
constant assumed prepayment rates and will not be intended to predict, or to
provide information that will enable investors to predict, yields or
prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation,
the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located, the quality of management
of the Mortgaged Properties, the servicing of the Mortgage Loans, possible
changes in tax laws and other opportunities for investment. In general, those
factors which increase the attractiveness of selling a Mortgaged Property or
refinancing a Mortgage Loan or which enhance a borrower's ability to do so,
as well as those factors which increase the likelihood of default under a
Mortgage Loan, would be expected to cause the rate of prepayment in respect
of any Mortgage Asset Pool to accelerate. In contrast, those factors having
an opposite effect would be expected to cause the rate of prepayment of any
Mortgage Asset Pool to slow.
The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the
extent to which such provisions may be practicably enforced. To the extent
enforceable, such provisions could constitute either an absolute prohibition
(in the case of a Lock-out Period) or a disincentive (in the case of a
Prepayment Premium) to a borrower's voluntarily prepaying its Mortgage Loan,
thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest
rate is below a mortgage coupon, a borrower may have an increased incentive
to refinance its mortgage loan. Even in the case of ARM Loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on such ARM Loans decline in a manner consistent therewith, the related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. Therefore, as prevailing market
interest rates decline, prepayment speeds would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
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WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average
life of one or more classes of the Certificates of such series. Unless
otherwise specified in the related Prospectus Supplement, weighted average
life refers to the average amount of time that will elapse from the date of
issuance of an instrument until each dollar allocable as principal of such
instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments by
borrowers and also prepayments resulting from liquidations of Mortgage Loans
due to default, casualties or condemnations affecting the related Mortgaged
Properties and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative
to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or the Standard Prepayment Assumption ("SPA")
prepayment model. CPR represents an assumed constant rate of prepayment each
month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of mortgage loans for the life of such loans. SPA
represents an assumed variable rate of prepayment each month (expressed as an
annual percentage) relative to the then outstanding principal balance of a
pool of mortgage loans, with different prepayment assumptions often expressed
as percentages of SPA. For example, a prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of such loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month, and in each month thereafter during the
life of the loans, 100% of SPA assumes a constant prepayment rate of 6% per
annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of
the anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family mortgage loans. Thus, it is unlikely
that the prepayment experience of the Mortgage Loans included in any Trust
Fund will conform to any particular level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series with a Certificate
Balance, and the percentage of the initial Certificate Balance of each such
class that would be outstanding on specified Distribution Dates, based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the related Mortgage Loans are made at rates corresponding to
various percentages of CPR or SPA, or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions will illustrate the
sensitivity of the weighted average lives of the Certificates to various
assumed prepayment rates and will not be intended to predict, or to provide
information that will enable investors to predict, the actual weighted
average lives of the Certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments
be made at maturity. Because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan
or to sell the related Mortgaged Property, there is a possibility that
Mortgage Loans that require balloon payments may default at maturity, or that
the maturity of such a Mortgage Loan may be extended in connection with a
workout. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the borrower or adverse conditions in the
market where the property is located. In order to minimize losses on
defaulted Mortgage Loans, the Master Servicer or the Special Servicer, to the
extent and under the circumstances set forth herein and in the related
Prospectus Supplement, may be authorized to modify Mortgage Loans that are in
default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan may
delay
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distributions of principal on a class of Offered Certificates and thereby
extend the weighted average life of such Certificates and, if such
Certificates were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur (that is, Mortgage Loans that provide for the current
payment of interest calculated at a rate lower than the rate at which
interest accrues thereon, with the unpaid portion of such interest being
added to the related principal balance). Negative amortization on one or more
Mortgage Loans in any Trust Fund may result in negative amortization on the
Offered Certificates of the related series. The related Prospectus Supplement
will describe, if applicable, the manner in which negative amortization in
respect of the Mortgage Loans in any Trust Fund is allocated among the
respective classes of Certificates of the related series. The portion of any
Mortgage Loan negative amortization allocated to a class of Certificates may
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. In
addition, an ARM Loan that permits negative amortization would be expected
during a period of increasing interest rates to amortize at a slower rate
(and perhaps not at all) than if interest rates were declining or were
remaining constant. Such slower rate of Mortgage Loan amortization would
correspondingly be reflected in a slower rate of amortization for one or more
classes of Certificates of the related series. Accordingly, the weighted
average lives of Mortgage Loans that permit negative amortization (and that
of the classes of Certificates to which any such negative amortization would
be allocated or that would bear the effects of a slower rate of amortization
on such Mortgage Loans) may increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change
in its Mortgage Rate, (ii) provides that its scheduled payment will adjust
less frequently than its Mortgage Rate or (iii) provides for constant
scheduled payments notwithstanding adjustments to its Mortgage Rate.
Accordingly, during a period of declining interest rates, the scheduled
payment on such a Mortgage Loan may exceed the amount necessary to amortize
the loan fully over its remaining amortization schedule and pay interest at
the then applicable Mortgage Rate, thereby resulting in the accelerated
amortization of such Mortgage Loan. Any such acceleration in amortization of
its principal balance will shorten the weighted average life of such Mortgage
Loan and, correspondingly, the weighted average lives of those classes of
Certificates entitled to a portion of the principal payments on such Mortgage
Loan.
The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate
was purchased at a premium or a discount and (ii) the extent to which the
payment characteristics of such Mortgage Loans delay or accelerate the
distributions of principal on such Certificate (or, in the case of a Stripped
Interest Certificate, delay or accelerate the reduction of the notional
amount thereof). See "--Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage
Loans and, accordingly, the weighted average lives of and yields on the
Certificates of the related series. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings or otherwise, may also have an effect upon the payment patterns
of particular Mortgage Loans and thus the weighted average lives of and
yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in
the related Trust Fund and the timing of such losses and shortfalls. In
general, the earlier that any such loss or shortfall occurs, the greater will
be the negative effect on yield for any class of Certificates that is
required to bear the effects thereof.
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The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series,
including one or more classes of Offered Certificates of such series, may
provide for distributions of principal thereof from (i) amounts attributable
to interest accrued but not currently distributable on one or more classes of
Accrual Certificates, (ii) Excess Funds or (iii) any other amounts described
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, "Excess Funds" will, in general, represent
that portion of the amounts distributable in respect of the Certificates of
any series on any Distribution Date that represent (i) interest received or
advanced on the Mortgage Assets in the related Trust Fund that is in excess
of the interest currently accrued on the Certificates of such series, or (ii)
Prepayment Premiums, payments from Equity Participations or any other amounts
received on the Mortgage Assets in the related Trust Fund that do not
constitute interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources is likely to have
any material effect on the rate at which such Certificates are amortized and
the consequent yield with respect thereto.
THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State
of Delaware on March 22, 1996, for the purpose of engaging in the business,
among other things, of acquiring and depositing mortgage assets in trust in
exchange for certificates evidencing interest in such trusts and selling or
otherwise distributing such certificates. The Depositor is not an affiliate
of Deutsche Bank AG. The principal executive offices of the Depositor are
located at One International Place, Room 520, Boston, Massachusetts 02110.
Its telephone number is (617) 951-7690. The Depositor's capitalization is
nominal. All of the shares of capital stock of the Depositor are held by The
Deutsche Mortgage & Asset Receiving Trust, a Massachusetts charitable lead
trust (the "DMARC Trust") formed by J H Management Corporation and J H
Holdings Corporation, both of which are Massachusetts corporations. J H
Holdings Corporation is the trustee of the DMARC Trust, which holds no assets
other than the stock of the Depositor. All of the stock of J H Holdings
Corporation and of J H Management Corporation is held by the 1960 Trust, an
independent charitable organization qualified under Section 501(c)(3) of the
Code, and operated for the benefit of a Massachusetts charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on
the Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or
an affiliate thereof. Deutsche Bank AG is the largest banking institution in
the Federal Republic of Germany and one of the largest in the world. It is
the parent company of a group (the "Deutsche Bank Group") consisting of
commercial banks, investment banking
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and fund management companies, mortgage banks and property finance companies,
installment financing and leasing companies, insurance companies, research
and consultancy companies and other domestic and foreign companies. The
Deutsche Bank Group employs over 74,000 staff members at more than 2,400
branches and offices around the world.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement.
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one
or more classes of Certificates that, among other things: (i) provide for the
accrual of interest on the Certificate Balance or Notional Amount thereof at
a fixed, variable or adjustable rate; (ii) constitute Senior Certificates or
Subordinate Certificates; (iii) constitute Stripped Interest Certificates or
Stripped Principal Certificates; (iv) provide for distributions of interest
thereon or principal thereof that commence only after the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (v) provide for distributions of principal
thereof to be made, from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund; (vi) provide for distributions of principal thereof to be made,
subject to available funds, based on a specified principal payment schedule
or other methodology; or (vii) provide for distributions based on collections
on the Mortgage Assets in the related Trust Fund attributable to Prepayment
Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having
characteristics that are otherwise described herein as being attributable to
separate and distinct classes. For example, a class of Certificates may have
a Certificate Balance on which it accrues interest at a fixed, variable or
adjustable rate. Such class of Certificates may also have certain
characteristics attributable to Stripped Interest Certificates insofar as it
may also entitle the holders thereof to distributions of interest accrued on
a Notional Amount at a different fixed, variable or adjustable rate. In
addition, a class of Certificates may accrue interest on one portion of its
Certificate Balance at one fixed, variable or adjustable rate and on another
portion of its Certificate Balance at a different fixed, variable or
adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of DTC. The Offered Certificates of
each series (if issued as Definitive Certificates) may be transferred or
exchanged, subject to any restrictions on transfer described in the related
Prospectus Supplement, at the location specified in the related Prospectus
Supplement, without the payment of any service charges, other than any tax or
other governmental charge payable in connection therewith. Interests in a
class of Book-Entry Certificates will be transferred on the book-entry
records of DTC and its participating organizations. If so specified in the
related Prospectus Supplement, arrangements may be made for clearance and
settlement through CEDEL, S.A. or the Euroclear System, if they are
participants in DTC.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust
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Fund that are available for distribution to the holders of Certificates of
such series on such date. The particular components of the Available
Distribution Amount for any series and Distribution Date will be more
specifically described in the related Prospectus Supplement. In general, the
Distribution Date for a series of Certificates will be the 25th day of each
month (or, if any such 25th day is not a business day, the next succeeding
business day), commencing in the month immediately following the month in
which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount
of each distribution will be determined as of the close of business on the
date (the "Determination Date") specified in the related Prospectus
Supplement. All distributions with respect to each class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates in such class in proportion to the respective Percentage
Interests evidenced thereby unless otherwise specified in the related
Prospectus Supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank
or other entity having appropriate facilities therefor, if such
Certificateholder has provided the person required to make such payments with
wiring instructions no later than the related Record Date or such other date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in
the requisite amount or denomination specified therein), or by check mailed
to the address of such Certificateholder as it appears on the Certificate
Register; provided, however, that the final distribution in retirement of any
class of Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance
or notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different
Pass-Through Rate, which in each case may be fixed, variable or adjustable.
The related Prospectus Supplement will specify the Pass-Through Rate or, in
the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate, for each class of Offered Certificates.
Unless otherwise specified in the related Prospectus Supplement, interest on
the Certificates of each series will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions
of accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates
that is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class
and such Distribution Date, subject to the sufficiency of that portion, if
any, of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof
on each Distribution Date or otherwise deferred as described in the related
Prospectus Supplement. With respect to each class of Certificates (other than
certain classes of Stripped Interest Certificates and certain classes of
REMIC Residual Certificates), the "Accrued Certificate Interest" for each
Distribution Date will be equal to interest at the applicable Pass-Through
Rate accrued for a specified period (generally the most recently ended
calendar month) on the outstanding Certificate Balance of such class of
Certificates immediately prior to such Distribution Date. Unless otherwise
provided in the related Prospectus Supplement, the Accrued Certificate
Interest for each Distribution Date on a class of Stripped Interest
Certificates will be similarly calculated except that it will accrue on a
Notional Amount that is either (i) based on the principal
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balances of some or all of the Mortgage Assets in the related Trust Fund or
(ii) equal to the Certificate Balances of one or more other classes of
Certificates of the same series. Reference to a Notional Amount with respect
to a class of Stripped Interest Certificates is solely for convenience in
making certain calculations and does not represent the right to receive any
distributions of principal. If so specified in the related Prospectus
Supplement, the amount of Accrued Certificate Interest that is otherwise
distributable on (or, in the case of Accrual Certificates, that may otherwise
be added to the Certificate Balance of) one or more classes of the
Certificates of a series may be reduced to the extent that any Prepayment
Interest Shortfalls, as described under "Yield and Maturity
Considerations--Certain Shortfalls in Collections of Interest", exceed the
amount of any sums that are applied to offset the amount of such shortfalls.
The particular manner in which such shortfalls will be allocated among some
or all of the classes of Certificates of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that
is otherwise distributable on (or, in the case of Accrual Certificates, that
may otherwise be added to the Certificate Balance of) a class of Offered
Certificates may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund. Unless otherwise provided in the related
Prospectus Supplement, any reduction in the amount of Accrued Certificate
Interest otherwise distributable on a class of Certificates by reason of the
allocation to such class of a portion of any deferred interest on or in
respect of the Mortgage Assets in the related Trust Fund will result in a
corresponding increase in the Certificate Balance of such class. See "Risk
Factors--Effect of Prepayments on Average Life of Certificates" and "--Effect
of Prepayments on Yield of Certificates" and "Yield and Maturity
Considerations--Certain Shortfalls in Collections of Interest".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will
be entitled to receive as principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a class of Certificates will be reduced by
distributions of principal made thereon from time to time and, if and to the
extent so provided in the related Prospectus Supplement, further by any
losses incurred in respect of the related Mortgage Assets allocated thereto
from time to time. In turn, the outstanding Certificate Balance of a class of
Certificates may be increased as a result of any deferred interest on or in
respect of the related Mortgage Assets being allocated thereto from time to
time, and will be increased, in the case of a class of Accrual Certificates
prior to the Distribution Date on which distributions of interest thereon are
required to commence, by the amount of any Accrued Certificate Interest in
respect thereof (reduced as described above). The initial aggregate
Certificate Balance of all classes of a series of Certificates will not be
greater than the aggregate outstanding principal balance of the related
Mortgage Assets as of a specified date (the "Cut-off Date"), after
application of scheduled payments due on or before such date, whether or not
received. The initial Certificate Balance of each class of a series of
Certificates will be specified in the related Prospectus Supplement. As and
to the extent described in the related Prospectus Supplement, distributions
of principal with respect to a series of Certificates will be made on each
Distribution Date to the holders of the class or classes of Certificates of
such series entitled thereto until the Certificate Balances of such
Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund. Distributions of principal with respect to
one or more classes of Certificates may not commence until the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of the same series, or may be made at a rate that is slower
(and, in some cases, substantially slower) than the rate at which payments or
other collections of principal are received on the Mortgage Assets in the
related Trust Fund. Distributions of principal with respect to one or more
classes of Certificates (each such class, a "Controlled Amortization Class")
may be made, subject to available funds, based on a specified principal
payment schedule. Distributions of principal with respect to one or more
other classes of Certificates (each such class, a "Companion Class") may be
contingent on the specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at which payments and
other
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collections of principal on the Mortgage Assets in the related Trust Fund are
received. Unless otherwise specified in the related Prospectus Supplement,
distributions of principal of any class of Offered Certificates will be made
on a pro rata basis among all of the Certificates of such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR
IN RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums
or payments in respect of Equity Participations received on or in connection
with the Mortgage Assets in any Trust Fund will be distributed on each
Distribution Date to the holders of the class of Certificates of the related
series entitled thereto in accordance with the provisions described in such
Prospectus Supplement. Alternatively, such items may be retained by the
Depositor or any of its affiliates or by any other specified person and/or
may be excluded as Trust Assets.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates. See "Description of Credit Support".
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special
Servicer, the Trustee, any provider of Credit Support and/or any other
specified person may be obligated to advance, or have the option of
advancing, on or before each Distribution Date, from its or their own funds
or from excess funds held in the related Certificate Account that are not
part of the Available Distribution Amount for the related series of
Certificates for such Distribution Date, an amount up to the aggregate of any
payments of principal (other than the principal portion of any balloon
payments) and interest that were due on or in respect of such Mortgage Loans
during the related Due Period and were delinquent on the related
Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including
amounts drawn under any fund or instrument constituting Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the
related Prospectus Supplement, including, in the case of a series that
includes one or more classes of Subordinate Certificates, if so identified,
collections on other Mortgage Assets in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously
made by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable
Advance will be reimbursable thereto from any amounts in the related
Certificate Account prior to any distributions being made to the related
series of Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on or prior to
any future Distribution Date to the extent that funds in such Certificate
Account on such Distribution Date are less than payments required to be made
to the related series of Certificateholders on such date. If so
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specified in the related Prospectus Supplement, the obligation of a Master
Servicer, Special Servicer, Trustee or other entity to make advances may be
secured by a cash advance reserve fund or a surety bond. If applicable,
information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all
of such advances for a specified period during which such advances are
outstanding at the rate specified in such Prospectus Supplement, and such
entity will be entitled to payment of such interest periodically from general
collections on the Mortgage Loans in the related Trust Fund prior to any
payment to the related series of Certificateholders or as otherwise provided
in the related Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a
party to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the holders
of each class of the Offered Certificates of a series, a Master Servicer,
Manager or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will
set forth, among other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
(iii) the amount, if any, of such distribution to holders of such class
of Offered Certificates that was allocable to (A) Prepayment Premiums and
(B) payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are
entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate
amount of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if
payable directly out of the related Trust Fund, by any Special Servicer
and any Sub-Servicer) and, if the related Trust Fund includes MBS, the
amount of administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the
related Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage
Loans that are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal
prepayments made with respect to such Mortgage Loans during the related
Prepayment Period (that is, the specified period, generally corresponding
in length to the period between Distribution Dates, during which
prepayments and other unscheduled collections on the Mortgage Loans in the
related Trust Fund must be received in order to be distributed on a
particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of
such class of Certificates at the close of business on such Distribution
Date, separately identifying any reduction in such Certificate Balance or
Notional Amount due to the allocation of any losses in respect of the
related Mortgage Assets, any increase in such Certificate Balance or
Notional Amount due to the allocation
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of any negative amortization in respect of the related Mortgage Assets and
any increase in the Certificate Balance of a class of Accrual
Certificates, if any, in the event that Accrued Certificate Interest has
been added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through
Rate or an adjustable Pass-Through Rate, the Pass-Through Rate applicable
thereto for such Distribution Date and, if determinable, for the next
succeeding Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve
fund as of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a
surety bond, the amount of coverage under each such instrument as of the
close of business on such Distribution Date; and
(xiv) the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a
percentage. The Prospectus Supplement for each series of Certificates may
describe additional information to be included in reports to the holders of
the Offered Certificates of such series.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, Manager or Trustee for a series of Certificates, as the
case may be, will be required to furnish to each person who at any time
during the calendar year was a holder of an Offered Certificate of such
series a statement containing the information set forth in subclauses
(i)-(iii) above, aggregated for such calendar year or the applicable portion
thereof during which such person was a Certificateholder. Such obligation
will be deemed to have been satisfied to the extent that substantially
comparable information is provided pursuant to any requirements of the Code
as are from time to time in force. See, however, "--Book-Entry Registration
and Definitive Certificates" below.
If the Trust Fund for a series of Certificates includes MBS, the ability
of the related Master Servicer, Manager or Trustee, as the case may be, to
include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that
series in connection with distributions made to them. The Depositor will
provide the same information with respect to any MBSs in its own reports that
were publicly offered and the reports the related MBS Issuer provides to the
Trustee if privately issued.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes
of such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement.
See "Description of the Pooling Agreements--Amendment". The holders of
specified amounts of Certificates of a particular series will have the right
to act as a group to remove the related Trustee and also upon the occurrence
of certain events which if continuing would constitute an Event of Default on
the part of the related Master Servicer, Special Servicer or REMIC
Administrator. See "Description of the Pooling Agreements--Events of
Default", "--Rights Upon Event of Default" and "--Resignation and Removal of
the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the
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disposition of all property acquired upon foreclosure of any Mortgage Loan
subject thereto and (ii) the payment (or provision for payment) to the
Certificateholders of that series of all amounts required to be paid to them
pursuant to such Pooling Agreement. Written notice of termination of a
Pooling Agreement will be given to each Certificateholder of the related
series, and the final distribution will be made only upon presentation and
surrender of the Certificates of such series at the location to be specified
in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set
forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for
the purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation
of bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in
which such fair market value may be less than the unpaid balance of the
Mortgage Loans sold and therefore, as a result of such a sale, the
Certificateholders of one or more Classes of Certificates may receive an
amount less than the Certificate Balance of, and accrued unpaid interest on,
their Certificates.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be
offered in book-entry format through the facilities of DTC, and each such
class will be represented by one or more global Certificates registered in
the name of The Depository Trust Company ("DTC") or its nominee. If so
provided in the Prospectus Supplement, arrangements may be made for clearance
and settlement through the Euroclear System or CEDEL, S.A., if they are
participants in DTC.
DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participating organizations
("DTC Participants") and facilitate the clearance and settlement of
securities transactions between DTC Participants through electronic
computerized book-entry changes in their accounts, thereby eliminating the
need for physical movement of securities certificates. DTC Participants that
maintain accounts with DTC include securities brokers and dealers, banks,
trust companies and clearing corporations and may include other
organizations. DTC is owned by a number of DTC Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
directly or indirectly clear through or maintain a custodial relationship
with a DTC Participant that maintains as account with DTC. The rules
applicable to DTC and DTC Participants are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for such
purpose. In turn, the Financial Intermediary's ownership of such Certificates
will be recorded on the records of DTC (or of a participating firm that acts
as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC Participant). Therefore, the beneficial owner must
rely on the foregoing procedures to evidence its beneficial ownership of such
Certificates. The beneficial ownership interest of the owner of a Book-Entry
Certificate (a "Certificate Owner") may only be transferred by compliance
with the rules, regulations and procedures of such Financial Intermediaries
and DTC Participants.
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DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on such
date. Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of each such DTC Participant (and not of DTC, the
Depositor or any Trustee, Master Servicer, Special Servicer or Manager),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Accordingly, under a book-entry system, Certificate Owners may
receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement)
of Book-Entry Certificates will be the nominee of DTC, and the Certificate
Owners will not be recognized as Certificateholders under the Pooling
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly
through the DTC Participants who in turn will exercise their rights through
DTC. The Depositor has been informed that DTC will take action permitted to
be taken by a Certificateholder under a Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC interests
in the Book-Entry Certificates are credited. DTC may take conflicting actions
with respect to the Book-Entry Certificates to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Certificates.
Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the
ability of a Certificate Owner to pledge its interest in Book-Entry
Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of its interest in Book-Entry
Certificates, may be limited due to the lack of a physical certificate
evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) the Depositor advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Certificates and the Depositor is unable
to locate a qualified successor or (ii) the Depositor, at its option, elects
to terminate the book-entry system through DTC with respect to such
Certificates. Upon the occurrence of either of the events described in the
preceding sentence, DTC will be required to notify all DTC Participants of
the availability through DTC of Definitive Certificates. Upon surrender by
DTC of the certificate or certificates representing a class of Book-Entry
Certificates, together with instructions for registration, the Trustee for
the related series or other designated party will be required to issue to the
Certificate Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the holders of such
Definitive Certificates will be recognized as "Certificateholders" under and
within the meaning of the related Pooling Agreement.
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DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one
or more REMIC elections have been made with respect to the Trust Fund, the
REMIC Administrator. However, a Pooling Agreement that relates to a Trust
Fund that includes MBS may include a Manager as a party, but may not include
a Master Servicer, Special Servicer or other servicer as a party. All parties
to each Pooling Agreement under which Certificates of a series are issued
will be identified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Mortgage Asset Seller or an affiliate
thereof may perform the functions of Master Servicer, Special Servicer,
Manager or REMIC Administrator. If so specified in the related Prospectus
Supplement, the Master Servicer may also perform the duties of Special
Servicer, and the Master Servicer, the Special Servicer or the Trustee may
also perform the duties of REMIC Administrator. Any party to a Pooling
Agreement or any affiliate thereof may own Certificates issued thereunder;
however, except in limited circumstances (including with respect to required
consents to certain amendments to a Pooling Agreement), Certificates issued
thereunder that are held by the Master Servicer or Special Servicer for the
related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. However,
the provisions of each Pooling Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may
appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize
all of the material provisions of the related Pooling Agreement. The
summaries herein do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each series of Certificates and the description of such
provisions in the related Prospectus Supplement. The Depositor will provide a
copy of the Pooling Agreement (without exhibits) that relates to any series
of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to it at its principal executive offices
specified herein under "The Depositor".
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans
to be included in the related Trust Fund, together with, unless otherwise
specified in the related Prospectus Supplement, all principal and interest to
be received on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to
or at the direction of the Depositor in exchange for the Mortgage Loans and
the other assets to be included in the Trust Fund for such series. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling Agreement. Such schedule generally will include detailed
information that pertains to each Mortgage Loan included in the related Trust
Fund, which information will typically include the address of the related
Mortgaged Property and type of such property; the Mortgage Rate and, if
applicable, the applicable index, gross margin, adjustment date and any rate
cap information; the original and remaining term to maturity; the
amortization term; and the original and outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to
a custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee
(or its nominee), the Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording
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office), an assignment of the Mortgage in blank or to the Trustee (or its
nominee) in recordable form, together with any intervening assignments of the
Mortgage with evidence of recording thereon (except for any such assignment
not returned from the public recording office), and, if applicable, any
riders or modifications to such Mortgage Note and Mortgage, together with
certain other documents at such times as set forth in the related Pooling
Agreement. Such assignments may be blanket assignments covering Mortgages on
Mortgaged Properties located in the same county, if permitted by law.
Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans where
the original Mortgage Note is not delivered to the Trustee if the Depositor
delivers, or causes to be delivered, to the related Trustee (or such
custodian) a copy or a duplicate original of the Mortgage Note, together with
an affidavit certifying that the original thereof has been lost or destroyed.
In addition, if the Depositor cannot deliver, with respect to any Mortgage
Loan, the Mortgage or any intervening assignment with evidence of recording
thereon concurrently with the execution and delivery of the related Pooling
Agreement because of a delay caused by the public recording office, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment
as submitted for recording. The Depositor will deliver, or cause to be
delivered, to the related Trustee (or such custodian) such Mortgage or
assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office. If the Depositor cannot deliver, with
respect to any Mortgage Loan, the Mortgage or any intervening assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related Pooling Agreement because such Mortgage or assignment has been
lost, the Depositor will deliver, or cause to be delivered, to the related
Trustee (or such custodian) a true and correct photocopy of such Mortgage or
assignment with evidence of recording thereon. Unless otherwise specified in
the related Prospectus Supplement, assignments of Mortgage to the Trustee (or
its nominee) will be recorded in the appropriate public recording office,
except in states where, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interests in the
Mortgage Loan against the claim of any subsequent transferee or any successor
to or creditor of the Depositor or the originator of such Mortgage Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered
to it within a specified period of days after receipt thereof, and the
Trustee (or such custodian) will hold such documents in trust for the benefit
of the Certificateholders of such series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the Certificateholders of the related
series, the Trustee (or such custodian) will be required to notify the Master
Servicer, the Special Servicer and the Depositor, and one of such persons
will be required to notify the relevant Mortgage Asset Seller. In that case,
and if the Mortgage Asset Seller cannot deliver the document or cure the
defect within a specified number of days after receipt of such notice, then,
except as otherwise specified below or in the related Prospectus Supplement,
the Mortgage Asset Seller will be obligated to repurchase the related
Mortgage Loan from the Trustee at a price generally equal to the unpaid
principal balance thereof, together with accrued but unpaid interest through
a date on or about the date of purchase, or at such other price as will be
specified in the related Prospectus Supplement (in any event, the "Purchase
Price"). If so provided in the Prospectus Supplement for a series of
Certificates, a Mortgage Asset Seller, in lieu of repurchasing a Mortgage
Loan as to which there is missing or defective loan documentation, will have
the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation will constitute the sole remedy to holders of the
Certificates of any series or to the related Trustee on their behalf for
missing or defective Mortgage Loan documentation, and neither the Depositor
nor, unless it is the Mortgage Asset Seller, the Master Servicer or the
Special Servicer will be obligated to purchase or replace a Mortgage Loan if
a Mortgage Asset Seller defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage
Loans in any Trust Fund and to maintain possession of and, if
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applicable, to review the documents relating to such Mortgage Loans, in any
case as the agent of the Trustee. The identity of any such custodian to be
appointed on the date of initial issuance of the Certificates will be set
forth in the related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule
of Mortgage Loans appearing as an exhibit to the related Pooling Agreement;
(ii) the enforceability of the related Mortgage Note and Mortgage and the
existence of title insurance insuring the lien priority of the related
Mortgage; (iii) the Warranting Party's title to the Mortgage Loan and the
authority of the Warranting Party to sell the Mortgage Loan; and (iv) the
payment status of the Mortgage Loan. It is expected that in most cases the
Warranting Party will be the Mortgage Asset Seller; however, the Warranting
Party may also be an affiliate of the Mortgage Asset Seller, the Depositor or
an affiliate of the Depositor, the Master Servicer, the Special Servicer or
another person acceptable to the Depositor. The Warranting Party, if other
than the Mortgage Asset Seller, will be identified in the related Prospectus
Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will
be required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of
the related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee at the
applicable Purchase Price. If so provided in the Prospectus Supplement for a
series of Certificates, a Warranting Party, in lieu of repurchasing a
Mortgage Loan as to which a breach has occurred, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy available to holders of the Certificates of
any series or to the related Trustee on their behalf for a breach of
representation and warranty by a Warranting Party, and neither the Depositor
nor the Master Servicer, in either case unless it is the Warranting Party,
will be obligated to purchase or replace a Mortgage Loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the
related series of Certificates is issued, and thus may not address events
that may occur following the date as of which they were made. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any series
of Certificates if anything has come to the Depositor's attention that would
cause it to believe that the representations and warranties made in respect
of such Mortgage Loan will not be accurate in all material respects as of the
date of issuance. The date as of which the representations and warranties
regarding the Mortgage Loans in any Trust Fund were made will be specified in
the related Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer for any Mortgage Pool, directly or
through Sub-Servicers, will each be obligated under the related Pooling
Agreement to service and administer the Mortgage Loans in such Mortgage Pool
for the benefit of the related Certificateholders, in accordance with
applicable law and further in accordance with the terms of such Pooling
Agreement, such Mortgage Loans and any instrument of Credit Support included
in the related Trust Fund. Subject to the foregoing, the Master Servicer and
the Special Servicer will each have full power and authority to do any and
all things in connection with such servicing and administration that it may
deem necessary and desirable.
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As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that
it services and will be obligated to follow such collection procedures as it
would follow with respect to mortgage loans that are comparable to such
Mortgage Loans and held for its own account, provided (i) such procedures are
consistent with the terms of the related Pooling Agreement and (ii) do not
impair recovery under any instrument of Credit Support included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer and
the Special Servicer will each be permitted, in its discretion, unless
otherwise specified in the related Prospectus Supplement, to waive any
Prepayment Premium, late payment charge or other charge in connection with
any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be
required to perform as to the Mortgage Loans in such Trust Fund various other
customary functions of a servicer of comparable loans, including maintaining
escrow or impound accounts, if required under the related Pooling Agreement,
for payment of taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items; attempting to collect
delinquent payments; supervising foreclosures; negotiating modifications;
conducting property inspections on a periodic or other basis; managing (or
overseeing the management of) Mortgaged Properties acquired on behalf of such
Trust Fund through foreclosure, deed-in-lieu of foreclosure or otherwise
(each, an "REO Property"); and maintaining servicing records relating to such
Mortgage Loans. The related Prospectus Supplement will specify when and the
extent to which servicing of a Mortgage Loan is to be transferred from the
Master Servicer to the Special Servicer. In general, and subject to the
discussion in the related Prospectus Supplement, a Special Servicer will be
responsible for the servicing and administration of: (i) Mortgage Loans that
are delinquent in respect of a specified number of scheduled payments; (ii)
Mortgage Loans as to which the related borrower has entered into or consented
to bankruptcy, appointment of a receiver or conservator or similar insolvency
proceeding, or the related borrower has become the subject of a decree or
order for such a proceeding which shall have remained in force undischarged
or unstayed for a specified number of days; and (iii) REO Properties. If so
specified in the related Prospectus Supplement, a Pooling Agreement also may
provide that if a default on a Mortgage Loan has occurred or, in the judgment
of the related Master Servicer, a payment default is reasonably foreseeable,
the related Master Servicer may elect to transfer the servicing thereof, in
whole or in part, to the related Special Servicer. Unless otherwise provided
in the related Prospectus Supplement, when the circumstances no longer
warrant a Special Servicer's continuing to service a particular Mortgage Loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the Special Servicer and such borrower), the
Master Servicer will resume the servicing duties with respect thereto. If and
to the extent provided in the related Pooling Agreement and described in the
related Prospectus Supplement, a Special Servicer may perform certain limited
duties in respect of Mortgage Loans for which the Master Servicer is
primarily responsible (including, if so specified, performing property
inspections and evaluating financial statements); and a Master Servicer may
perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect
to such Mortgage Loan and making remittances and preparing certain reports to
the Trustee and/or Certificateholders with respect to such Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be responsible for filing and settling claims in respect of
particular Mortgage Loans under any applicable instrument of Credit Support.
See "Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a mortgagor that is unable to make Mortgage Loan payments may
also be unable to make timely payment of taxes and otherwise to maintain and
insure the related Mortgaged Property. In general, the related Special
Servicer will be required to monitor any Mortgage Loan that is in default,
evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related Mortgaged
Property, initiate corrective action in cooperation with the Mortgagor if
cure is likely, inspect the related Mortgaged Property and take such
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other actions as it deems necessary and appropriate. A significant period of
time may elapse before the Special Servicer is able to assess the success of
any such corrective action or the need for additional initiatives. The time
within which the Special Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure)
on behalf of the Certificateholders of the related series may vary
considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a mortgagor files a bankruptcy petition, the Special
Servicer may not be permitted to accelerate the maturity of the Mortgage Loan
or to foreclose on the related Mortgaged Property for a considerable period
of time. See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and
other similar matters. In general, the Master Servicer may approve such a
request if it has determined, exercising its business judgment in accordance
with the applicable servicing standard, that such approval will not adversely
affect the security for, or the timely and full collectability of, the
related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be
filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not
require that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer also will be required to notify any superior lienholder
in writing of the existence of the Mortgage Loan and request notification of
any action (as described below) to be taken against the mortgagor or the
Mortgaged Property by the superior lienholder. If the Master Servicer is
notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer and the
Special Servicer will each be required to take, on behalf of the related
Trust Fund, whatever actions are necessary to protect the interests of the
related Certificateholders and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
or Special Servicer, as applicable, will be required to advance the necessary
funds to cure the default or reinstate the Senior Lien, if such advance is in
the best interests of the related Certificateholders and the Master Servicer
or Special Servicer, as applicable, determines such advances are recoverable
out of payments on or proceeds of the related Mortgage Loan.
SUB-SERVICERS
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless
otherwise specified in the related Prospectus Supplement, such Master
Servicer or Special Servicer will remain obligated under the related Pooling
Agreement. Unless otherwise provided in the related Prospectus Supplement,
each sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must provide for servicing of the applicable
Mortgage Loans consistent with the related Pooling Agreement. The Master
Servicer and Special Servicer in respect of any Mortgage Asset Pool will each
be required to monitor the performance of Sub-Servicers retained by it and
will have the right to remove a Sub-Servicer retained by it at any time it
considers such removal to be in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master
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Servicer's or Special Servicer's compensation pursuant to the related Pooling
Agreement is sufficient to pay such fees. Each Sub-Servicer will be
reimbursed by the Master Servicer or Special Servicer, as the case may be,
that retained it for certain expenditures which it makes, generally to the
same extent such Master Servicer or Special Servicer would be reimbursed
under a Pooling Agreement. See "--Certificate Account" and "--Servicing
Compensation and Payment of Expenses".
CERTIFICATE ACCOUNT
General. The Master Servicer, the Trustee and/or the Special Servicer
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained the corresponding
Certificate Account, which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
as an interest-bearing or a noninterest-bearing account and the funds held
therein may be invested pending each succeeding Distribution Date in United
States government securities and other investment grade obligations that are
acceptable to each Rating Agency that has rated any one or more classes of
Certificates of the related series ("Permitted Investments"). Such Permitted
Investments include federal funds, uncertificated certificates of deposit,
time deposits, bankers' acceptances and repurchase agreements, certain United
States dollar-denominated commercial paper, units of money market funds that
maintain a constant net asset value and any other obligations or security
acceptable to each Rating Agency. Unless otherwise provided in the related
Prospectus Supplement, any interest or other income earned on funds in a
Certificate Account will be paid to the related Master Servicer, Trustee or
Special Servicer as additional compensation. A Certificate Account may be
maintained with the related Master Servicer, Special Servicer, Trustee or
Mortgage Asset Seller or with a depository institution that is an affiliate
of any of the foregoing or of the Depositor, provided that it complies with
applicable Rating Agency standards. If permitted by the applicable Rating
Agency or Agencies, a Certificate Account may contain funds relating to more
than one series of mortgage pass-through certificates and may contain other
funds representing payments on mortgage loans owned by the related Master
Servicer or Special Servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the
Special Servicer subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date) are to be deposited in the Certificate Account
for each Trust Fund that includes Mortgage Loans, within a certain period
following receipt (in the case of collections on or in respect of the
Mortgage Loans) or otherwise as provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof
retained by the Master Servicer or the Special Servicer as its servicing
compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation
of a Mortgaged Property (other than proceeds applied to the restoration of
the property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such
amounts, together with those amounts listed in clause (vii) below,
"Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
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(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or
any other specified person as described under "--Assignment of Mortgage
Loans; Repurchases" and "--Representations and Warranties; Repurchases", all
proceeds of the purchase of any defaulted Mortgage Loan as described under
"--Realization Upon Defaulted Mortgage Loans", and all proceeds of any
Mortgage Asset purchased as described under "Description of the
Certificates--Termination; Retirement of Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is
not otherwise retained by the Depositor or another specified person, any
payments on account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations with respect to the Mortgage
Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "--Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the
Special Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer, the Special Servicer or
the Trustee, as the case may be, of funds held in the Certificate Account;
and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the
related Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer,
Trustee or Special Servicer may make withdrawals from the Certificate Account
for each Trust Fund that includes Mortgage Loans for any of the following
purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which
such fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments
of principal and interest made by it, and certain unreimbursed servicing
expenses incurred by it, with respect to Mortgage Loans in the Trust Fund and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent late payments collected on the particular Mortgage
Loans, Liquidation Proceeds, Insurance Proceeds and Condemnation Proceeds
collected on the particular Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such advances
were made or such expenses were incurred or out of amounts drawn under any
form of Credit Support with respect to such Mortgage Loans and properties, or
if in the judgment of the Master Servicer, the Special Servicer or such other
person, as applicable, such advances and/or expenses will not be recoverable
from such amounts, such reimbursement to be made from amounts collected on
other Mortgage Loans in the same Trust Fund or, if and to the extent so
provided by the related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts collected on such
other Mortgage Loans that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified
person interest accrued on the advances and servicing expenses described in
clause (iii) above incurred by it while such remain outstanding and
unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any
containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization Upon
Defaulted Mortgage Loans";
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(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the Depositor" and "--Certain Matters
Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held
in the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood
of timely payment of amounts due thereon and (iii) will not adversely affect
the coverage under any applicable instrument of Credit Support. Unless
otherwise provided in the related Prospectus Supplement, the Special Servicer
also may agree to any other modification, waiver or amendment if, in its
judgment, (i) a material default on the Mortgage Loan has occurred or a
payment default is imminent, (ii) such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Mortgage
Loan, taking into account the time value of money, than would liquidation and
(iii) such modification, waiver or amendment will not adversely affect the
coverage under any applicable instrument of Credit Support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of
the Trustee, may at any time institute foreclosure proceedings, exercise any
power of sale contained in the related Mortgage, obtain a deed in lieu of
foreclosure, or otherwise acquire title to the related Mortgaged Property, by
operation of law or otherwise. Unless otherwise specified in the related
Prospectus Supplement, the Special Servicer may not, however, acquire title
to any Mortgaged Property, have a receiver of rents appointed with respect to
any Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series
of Certificateholders, or any other specified person to be
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considered to hold title to, to be a "mortgagee-in-possession" of, or to be
an "owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Special Servicer has
previously received a report prepared by a person who regularly conducts
environmental audits (which report will be an expense of the Trust Fund) and
either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the Mortgaged Property
that have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters and
related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value
of money, than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special
Servicer, a provider of Credit Support and/or the holder or holders of
certain classes of the related series of Certificates a right of first
refusal to purchase from the Trust Fund, at a predetermined price (which, if
less than the Purchase Price, will be specified in the related Prospectus
Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. In addition, unless otherwise specified in the
related Prospectus Supplement, the Special Servicer may offer to sell any
defaulted Mortgage Loan if and when the Special Servicer determines,
consistent with its normal servicing procedures, that such a sale would
produce a greater recovery, taking into account the time value of money, than
would liquidation of the related Mortgaged Property. In the absence of any
such sale, the Special Servicer will generally be required to proceed against
the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service (the "IRS") grants an
extension of time to sell such property or (ii) the Trustee receives an
opinion of independent counsel to the effect that the holding of the property
by the Trust Fund beyond the close of the third taxable year following the
taxable year of its acquisition will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund (or any designated portion thereof) to
fail to qualify as a REMIC under the Code at any time that any Certificate is
outstanding. Subject to the foregoing and any other tax-related limitations,
the Special Servicer will generally be required to attempt to sell any
Mortgaged Property so acquired on the same terms and conditions it would if
it were the owner. Unless otherwise provided in the related Prospectus
Supplement, if title to any Mortgaged Property is acquired by a Trust Fund as
to which a REMIC election has been made, the Special Servicer will also be
required to ensure that the Mortgaged Property is administered so that it
constitutes "foreclosure property" within the meaning of Code Section
860G(a)(8) at all times, that the sale of such property does not result in
the receipt by the Trust Fund of any income from nonpermitted assets as
described in Code Section 860F(a)(2)(B), and that the Trust Fund does not
derive any "net income from foreclosure property" within the meaning of Code
Section 860G(c)(2), with respect to such property unless it has determined
that earning such income would result in greater after-tax proceeds to
Certificateholders than other methods of operation of such property or not
leasing such property. If the Trust Fund acquires title to any Mortgaged
Property, the Special Servicer, on behalf of the Trust Fund, may be required
to retain an independent contractor to manage and operate such property. The
retention of an independent contractor, however, will not relieve the Special
Servicer of its obligation to manage such Mortgaged Property as required
under the related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
reimbursable expenses incurred by the Special Servicer and/or the Master
Servicer
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in connection with such Mortgage Loan, then, to the extent that such
shortfall is not covered by any instrument or fund constituting Credit
Support, the Trust Fund will realize a loss in the amount of such shortfall.
The Special Servicer and/or the Master Servicer will be entitled to
reimbursement out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, any and all amounts that represent unpaid servicing
compensation in respect of the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent payments made with respect to the Mortgage Loan. In addition, if
and to the extent set forth in the related Prospectus Supplement, amounts
otherwise distributable on the Certificates may be further reduced by
interest payable to the Master Servicer and/or Special Servicer on such
servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any,
of the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will
be required to expend its own funds to effect such restoration unless (and to
the extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or
amounts drawn on any instrument or fund constituting Credit Support.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer
with respect to Mortgage Loans serviced thereby) to use reasonable efforts to
cause each Mortgage Loan borrower to maintain a hazard insurance policy that
provides for such coverage as is required under the related Mortgage or, if
the Mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related Mortgaged Property, such
coverage as is consistent with the Master Servicer's (or Special Servicer's)
normal servicing procedures. Unless otherwise specified in the related
Prospectus Supplement, such coverage generally will be in an amount equal to
the lesser of the principal balance owing on such Mortgage Loan and the
replacement cost of the related Mortgaged Property. The ability of a Master
Servicer (or Special Servicer) to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance
policy referred to below, or upon the extent to which information concerning
covered losses is furnished by borrowers. All amounts collected by a Master
Servicer (or Special Servicer) under any such policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master
Servicer (or Special Servicer) may satisfy its obligation to cause each
borrower to maintain such a hazard insurance policy by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans in a Trust Fund.
If such blanket policy contains a deductible clause, the Master Servicer (or
Special Servicer) will be required, in the event of a casualty covered by
such blanket policy, to deposit in the related Certificate Account all
additional sums that would have been deposited therein under an individual
policy but were not because of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin and domestic animals.
Accordingly, a Mortgaged Property may not be insured for losses arising from
any such cause unless the related Mortgage specifically requires, or permits
the holder thereof to require, such coverage.
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The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser
of (i) the replacement cost of the improvements less physical depreciation
and (ii) such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of such
improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale
or other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer (or Special Servicer) will determine whether to exercise any
right the Trustee may have under any such provision in a manner consistent
with the Master Servicer's (or Special Servicer's) normal servicing
procedures. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer or Special Servicer, as applicable, will be entitled to
retain as additional servicing compensation any fee collected in connection
with the permitted transfer of a Mortgaged Property. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund,
including Mortgage Loans serviced by the related Special Servicer. If and to
the extent described in the related Prospectus Supplement, a Special
Servicer's primary compensation with respect to a series of Certificates may
consist of any or all of the following components: (i) a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund,
whether or not serviced by it; (ii) an additional specified portion of the
interest payments on each Mortgage Loan then currently serviced by it; and
(iii) subject to any specified limitations, a fixed percentage of some or all
of the collections and proceeds received with respect to each Mortgage Loan
which was at any time serviced by it, including Mortgage Loans for which
servicing was returned to the Master Servicer. Insofar as any portion of the
Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master
Servicer or Special Servicer may be entitled to retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned
on funds held in the related Certificate Account. A more detailed description
of each Master Servicer's and Special Servicer's compensation will be
provided in the related Prospectus Supplement. Any Sub-Servicer will receive
as its sub-servicing compensation a portion of the servicing compensation to
be paid to the Master Servicer or Special Servicer that retained such
Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration
of the related Trust Fund, including, without limitation, payment of the fees
and disbursements of independent accountants, payment of fees and
disbursements of the Trustee and any custodians appointed thereby and payment
of expenses incurred in connection with distributions and reports to
Certificateholders. Certain other expenses, including certain expenses
related to Mortgage Loan defaults and liquidations and, to the extent so
provided in the related Prospectus Supplement, interest on such expenses at
the rate specified therein, may be required to be borne by the Trust Fund.
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EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-off Date, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that
(i) it has obtained a letter of representation regarding certain matters from
the management of the Master Servicer which includes an assertion that the
Master Servicer has complied with certain minimum mortgage loan servicing
standards (to the extent applicable to commercial and multifamily mortgage
loans), identified in the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers Association of America, with
respect to the Master Servicer's servicing of commercial and multifamily
mortgage loans during the most recently completed calendar year and (ii) on
the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public
Accountants, such representation is fairly stated in all material respects,
subject to such exceptions and other qualifications that, in the opinion of
such firm, such standards require it to report. In rendering its report such
firm may rely, as to the matters relating to the direct servicing of
commercial and multifamily mortgage loans by Sub-Servicers, upon comparable
reports of firms of independent public accountants rendered on the basis of
examinations conducted in accordance the same standards (rendered within one
year of such report) with respect to those Sub-Servicers. The Prospectus
Supplement may provide that additional reports of independent certified
public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed
by one or more officers of the Master Servicer or the Special Servicer, as
the case may be, to the effect that, to the best knowledge of each such
officer, the Master Servicer or the Special Servicer, as the case may be, has
fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material
default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as
to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders
upon written request to the Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE
REMIC ADMINISTRATOR AND THE DEPOSITOR
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer,
the Special Servicer and any REMIC Administrator to resign from its
obligations thereunder only upon (a) the appointment of, and the acceptance
of such appointment by, a successor thereto and receipt by the Trustee of
written confirmation from each applicable Rating Agency that such resignation
and appointment will not have an adverse effect on the rating assigned by
such Rating Agency to any class of Certificates of such series or (b) a
determination that such obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by it. No such resignation will become
effective until the Trustee or other successor has assumed the obligations
and duties of the resigning Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. The Master
Servicer and Special Servicer for each Trust Fund will be required to
maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the
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Depositor or any director, officer, employee or agent of any of them will be
under any liability to the related Trust Fund or Certificateholders for any
action taken, or not taken, in good faith pursuant to the Pooling Agreement
or for errors in judgment; provided, however, that none of the Master
Servicer, the Special Servicer, the REMIC Administrator, the Depositor or any
such person will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of obligations or duties thereunder or by reason of reckless
disregard of such obligations and duties. Unless otherwise specified in the
related Prospectus Supplement, each Pooling Agreement will further provide
that the Master Servicer, the Special Servicer, the REMIC Administrator, the
Depositor and any director, officer, employee or agent of any of them will be
entitled to indemnification by the related Trust Fund against any loss,
liability or expense incurred in connection with any legal action that
relates to such Pooling Agreement or the related series of Certificates;
provided, however, that such indemnification will not extend to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties under such
Pooling Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling Agreement will provide that none of the
Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective responsibilities under
the Pooling Agreement and that in its opinion may involve it in any expense
or liability. However, each of the Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor will be permitted, in the exercise of
its discretion, to undertake any such action that it may deem necessary or
desirable with respect to the enforcement and/or protection of the rights and
duties of the parties to the Pooling Agreement and the interests of the
related series of Certificateholders thereunder. In such event, the legal
expenses and costs of such action, and any liability resulting therefrom,
will be expenses, costs and liabilities of the related series of
Certificateholders, and the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor, as the case may be, will be entitled to
charge the related Certificate Account therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor, will be the successor of
the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and
the REMIC Administrator will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it
with due care.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such
series, or to remit to the Trustee for distribution to such
Certificateholders, any amount required to be so distributed or remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Master Servicer by any other party to the related
Pooling Agreement, or to the Master Servicer, with a copy to each other party
to the related Pooling Agreement, by Certificateholders entitled to not less
than 25% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series; (ii) any failure by the
Special Servicer to remit to the Master Servicer or the Trustee, as
applicable, any amount required to be so remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Special Servicer by any other party to the related Pooling Agreement, or to
the Special Servicer, with a copy to each other party to the related Pooling
Agreement, by the Certificateholders entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights of such series; (iii) any failure by the Master Servicer or the
Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after
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written notice thereof has been given to the Master Servicer or the Special
Servicer, as the case may be, by any other party to the related Pooling
Agreement, or to the Master Servicer or the Special Servicer, as the case may
be, with a copy to each other party to the related Pooling Agreement, by
Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for such
series; (iv) any failure by a REMIC Administrator (if other than the Trustee)
duly to observe or perform in any material respect any of its covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to the
REMIC Administrator by any other party to the related Pooling Agreement, or
to the REMIC Administrator, with a copy to each other party to the related
Pooling Agreement, by Certificateholders entitled to not less than 25% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series; and (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings in respect of or relating to the Master Servicer, the Special
Servicer or the REMIC Administrator (if other than the Trustee), and certain
actions by or on behalf of the Master Servicer, the Special Servicer or the
REMIC Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events
of Default (other than to add thereto or shorten cure periods or eliminate
notice requirements) will be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, when a
single entity acts as Master Servicer, Special Servicer and REMIC
Administrator, or in any two of the foregoing capacities, for any Trust Fund,
an Event of Default in one capacity will constitute an Event of Default in
each capacity.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, the Trustee will be required, to terminate all
of the rights and obligations of the defaulting party as Master Servicer,
Special Servicer or REMIC Administrator, as applicable, under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement
(except that if the defaulting party is required to make advances thereunder
regarding delinquent Mortgage Loans, but the Trustee is prohibited by law
from obligating itself to make such advances, or if the related Prospectus
Supplement so specifies, the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, if the Trustee is
unwilling or unable so to act, it may (or, at the written request of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, it will be required to) appoint, or petition a
court of competent jurisdiction to appoint, a loan servicing institution or
other entity that (unless otherwise provided in the related Prospectus
Supplement) is acceptable to each applicable Rating Agency to act as
successor to the Master Servicer, Special Servicer or REMIC Administrator, as
the case may be, under the Pooling Agreement. Pending such appointment, the
Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "--Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for sixty days
after receipt of such request and indemnity has neglected or refused to
institute any such proceeding. However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Pooling Agreement or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any
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of the holders of Certificates covered by such Pooling Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent
of any of the holders of Certificates covered by such Pooling Agreement, (i)
to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the
Certificate Account, provided that (A) such change would not adversely affect
in any material respect the interests of any Certificateholder, as evidenced
by an opinion of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency, (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (A) to such extent as shall be necessary to maintain
the qualification of the Trust Fund (or any designated portion thereof) as a
REMIC or to avoid or minimize the risk of imposition of any tax on the
related Trust Fund, provided that the Trustee has received an opinion of
counsel to the effect that (1) such action is necessary or desirable to
maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Pooling Agreement, or (B) to restrict
the transfer of the REMIC Residual Certificates, provided that the Depositor
has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as
evidenced by a letter from each applicable Rating Agency, and that any such
amendment will not give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee (See "Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates" herein), (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement or
any other change, provided that such action will not adversely affect in any
material respect the interests of any Certificateholder, or (vi) to amend
specified provisions that are not material to holders of any class of
Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such
Pooling Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a
Certificate of any class without the consent of the holder of such
Certificate or (ii) reduce the aforesaid percentage of Certificates of any
class the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such class covered
by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to
consent to any amendment to a Pooling Agreement without having first received
an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Master Servicer, the Special Servicer, the
Depositor, the Trustee or any other specified person in accordance with such
amendment will not result in the imposition of a tax on the related Trust
Fund or cause such Trust Fund (or any designated portion thereof) to fail to
qualify as a REMIC.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for
purposes of communicating with other holders of Certificates of the same
series with respect to their rights under the related Pooling Agreement, the
Trustee or other specified person will afford such Certificateholders access
during normal business hours to the most recent
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list of Certificateholders of that series held by such person. If such list
is as of a date more than 90 days prior to the date of receipt of such
Certificateholders' request, then such person, if not the registrar for such
series of Certificates, will be required to request from such registrar a
current list and to afford such requesting Certificateholders access thereto
promptly upon receipt.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any
Master Servicer, Special Servicer or REMIC Administrator and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will
not be accountable for the use or application by or on behalf of any Master
Servicer or Special Servicer of any funds paid to the Master Servicer or
Special Servicer in respect of the Certificates or the underlying Mortgage
Assets. If no Event of Default has occurred and is continuing, the Trustee
for each series of Certificates will be required to perform only those duties
specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to
any loss liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of
its obligations and duties thereunder, or by reason of its reckless disregard
of such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of
its trusts or powers under the related Pooling Agreement or perform any of
this duties thereunder either directly or by or through agents or attorneys,
and the Trustee will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee. Notwithstanding anything herein
to the contrary, if any entity is acting as both Trustee and REMIC
Administrator, then any resignation or removal of such entity as the Trustee
will also constitute the resignation or removal of such entity as REMIC
Administrator, and the successor trustee will serve as successor to the REMIC
Administrator as well.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may
provide credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss
and will not guarantee payment to Certificateholders of all amounts to which
they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the related Credit Support
or that are of a type not covered by such Credit Support, Certificateholders
will bear their allocable share of deficiencies. Moreover, if a form of
Credit Support covers the Offered Certificates of more than one series and
losses on the related Mortgage Assets exceed the amount of such Credit
Support, it is possible that the holders of Offered Certificates of one (or
more) such series will be disproportionately benefited by such Credit Support
to the detriment of the holders of Offered Certificates of one (or more)
other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature
and amount of coverage under such Credit Support, (ii) any conditions to
payment thereunder not otherwise described herein, (iii) the conditions (if
any) under which the amount of coverage under such Credit Support may be
reduced and under which such Credit Support may be terminated or replaced and
(iv) the material provisions relating to such Credit Support. Additionally,
the related Prospectus Supplement will set forth certain information with
respect to the obligor, if any, under any instrument of Credit Support. See
"Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the method and amount of
subordination provided by a class or classes of Subordinate Certificates in a
series and the circumstances under which such subordination will be
available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such
provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of
such coverage.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of
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credit, issued by a bank or other financial institution specified in such
Prospectus Supplement (the "Letter of Credit Bank"). Under a letter of
credit, the Letter of Credit Bank will be obligated to honor draws thereunder
in an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of some or all of the related
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related Prospectus Supplement. The obligations of the
Letter of Credit Bank under the letter of credit for each series of
Certificates will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest or distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. The related
Prospectus Supplement will describe any limitations on the draws that may be
made under any such instrument.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments,
a demand note or a combination thereof will be deposited, in the amounts
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of certain collections received on the related
Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for
the purposes, in the manner, and to the extent specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
reserve funds may be established to provide protection only against certain
types of losses and shortfalls. Following each Distribution Date, amounts in
a reserve fund in excess of any amount required to be maintained therein may
be released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or
other gain from such investments will be credited to the related reserve fund
for such series, and any loss resulting from such investments will be charged
to such reserve fund. However, such income may be payable to any related
Master Servicer or another service provider as additional compensation for
its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
INTEREST RATE EXCHANGE, CAP AND FLOOR AGREEMENTS
If so specified in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include interest rate exchange agreements or
interest rate cap or floor agreements. These types of
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agreements may be used to limit the exposure of the Trust Fund or investors
in the Certificates to fluctuations in interest rates and to situations where
interest rates become higher or lower than specified thresholds. Generally,
an interest rate exchange agreement is a contract between two parties to pay
and receive, with a set frequency, interest payments determined by applying
the differential between two interest rates to an agreed-upon notional
principal. Generally, an interest rate cap agreement is a contract pursuant
to which one party agrees to reimburse another party for a floating rate
interest payment obligation, to the extent that the rate payable at any time
exceeds a specified cap. Generally, an interest rate floor agreement is a
contract pursuant to which one party agrees to reimburse another party in the
event that amounts owing to the latter party under a floating rate interest
payment obligation are payable at a rate which is less than a specified
floor. The specific provisions of these types of agreements will be described
in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable local law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular jurisdiction, or to encompass
the laws of all jurisdictions in which the security for the Mortgage Loans
(or mortgage loans underlying any MBS) is situated. Accordingly, the
summaries are qualified in their entirety by reference to the applicable laws
of those jurisdictions. See "Description of the Trust Funds--Mortgage Loans".
If a significant percentage of Mortgage Loans (or mortgage loans underlying
MBS), by balance, are secured by properties in a particular jurisdiction,
relevant local laws, to the extent they vary materially from this discussion,
will be discussed in the Prospectus Supplement. For purposes of the following
discussion, "Mortgage Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with
a power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal
title to the property is held by a land trustee under a land trust agreement
for the benefit of the borrower. At origination of a mortgage loan involving
a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally
liable for the mortgage note obligation. The
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mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed
by the express provisions of the related instrument, the law of the state in
which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels
or motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
room rates and must file continuation statements, generally every five years,
to maintain perfection of such security interest. In certain cases, Mortgage
Loans secured by hotels or motels may be included in a Trust Fund even if the
security interest in the room rates was not perfected or the requisite UCC
filings were allowed to lapse. Even if the lender's security interest in room
rates is perfected under applicable nonbankruptcy law, it will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to enforce its rights to collect the room rates following a
default. In the bankruptcy setting, however, the lender will be stayed from
enforcing its rights to collect room rates, but those room rates (in light of
certain revisions to the Bankruptcy Code which are effective for all
bankruptcy cases commenced on or after October 22, 1994) constitute "cash
collateral" and therefore cannot be used by the bankruptcy debtor without a
hearing or lender's consent and unless the lender's interest in the room
rates is given adequate protection (e.g., cash payment for otherwise
encumbered funds or a replacement lien on unencumbered property, in either
case equal in value to the amount of room rates that the debtor proposes to
use, or other similar relief). See "--Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years,
to maintain that perfection. In certain cases, Mortgage Loans secured in part
by personal property may be included in a Trust Fund even if the security
interest in such personal property was not perfected or the requisite UCC
filings were allowed to lapse.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal
remedies under the mortgage. If the borrower defaults in payment or
performance of its obligations under the note or mortgage, the lender has the
right to institute foreclosure proceedings to sell the real property at
public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances.
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A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain
Provisions. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects
of mortgage defaults perceived as harsh or unfair. Relying on such
principles, a court may alter the specific terms of a loan to the extent it
considers necessary to prevent or remedy an injustice, undue oppression or
overreaching, or may require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's and have required that lenders
reinstate loans or recast payment schedules in order to accommodate borrowers
who are suffering from a temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain the mortgaged
property or an impermissible further encumbrance of the mortgaged property.
Finally, some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness
of the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the right
of the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained
in any other type of mortgage instrument if applicable law so permits. A
power of sale under a deed of trust allows a nonjudicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable
state law. In some states, prior to such sale, the trustee under the deed of
trust must record a notice of default and notice of sale and send a copy to
the borrower and to any other party who has recorded a request for a copy of
a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record
in the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. The borrower or junior lienholder
may then have the right, during a reinstatement period required in some
states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure
sale. Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other
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things, redemption rights that may exist) and because of the possibility that
physical deterioration of the property may have occurred during the
foreclosure proceedings. Therefore, it is common for the lender to purchase
the mortgaged property for an amount equal to the secured indebtedness and
accrued and unpaid interest plus the expenses of foreclosure, in which event
the borrower's debt will be extinguished, or for a lesser amount in order to
preserve its right to seek a deficiency judgment if such is available under
state law and under the terms of the Mortgage Loan documents. (The Mortgage
Loans, however, may be nonrecourse. See "Risk Factors--Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans--Limited
Recourse Nature of the Mortgage Loans".) Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, the lender will become the owner of the property and have both the
benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance
and to make such repairs as are necessary to render the property suitable for
sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services
of a real estate broker and pay the broker's commission in connection with
the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an
amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of
the foreclosing lender, from exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered
by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate
to that of the foreclosing lender have an equity of redemption and may redeem
the property by paying the entire debt with interest. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be
limited to the Mortgaged Property and such other assets, if any, that were
pledged to secure the Mortgage Loan. However, even if a mortgage loan by its
terms provides for recourse to the borrower's other assets, a lender's
ability to realize upon those assets may be limited by state law. For
example, in some states a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes may require
the lender
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to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists will usually proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess
of the outstanding debt over the fair market value of the property at the
time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks
is that if the borrower's leasehold were to be terminated upon a lease
default, the leasehold mortgagee would lose its security. This risk may be
lessened if the ground lease requires the lessor to give the leasehold
mortgagee notices of lessee defaults and an opportunity to cure them, permits
the leasehold estate to be assigned to and by the leasehold mortgagee or the
purchaser at a foreclosure sale, and contains certain other protective
provisions typically included in a "mortgageable" ground lease. Certain
Mortgage Loans, however, may be secured by ground leases which do not contain
these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest
on the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be
vacant or occupied by nonowner tenants. Such loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate
of a borrower in real property. Such a loan typically is subordinate to the
mortgage, if any, on the Cooperative's building which, if foreclosed, could
extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the Cooperative.
Further, transfer of shares in a Cooperative are subject to various
regulations as well as to restrictions under the governing documents of the
Cooperative, and the shares may be cancelled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the Cooperative
provides, among other things, the lender with an opportunity to cure a
default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given the
debtor and the method, manner, time, place and terms of the sale. Article 9
of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the Cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of
the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a
corresponding partial reduction of the amount
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of lender's security interest) pursuant to a confirmed plan or lien avoidance
proceeding, thus leaving the lender a general unsecured creditor for the
difference between such value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration
of the repayment schedule (with or without affecting the unpaid principal
balance of the loan), and/or by an extension (or shortening) of the term to
maturity. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under the
Bankruptcy Code, a lender may be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. Recent amendments
to the Bankruptcy code, however, may minimize the impairment of the lender's
ability to enforce the borrower's assignment of rents and leases. In addition
to the inclusion of hotel revenues within the definition of "cash collateral"
as noted previously in the section entitled "--Leases and Rents", the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest
in rents is unperfected under the laws of certain states until the lender has
taken some further action, such as commencing foreclosure or obtaining a
receiver prior to activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to
a lessee under such lease. Under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that
occurred prior to the filing of the lessee's petition. In addition, the
Bankruptcy Code generally provides that a trustee or debtor-in-possession
may, subject to approval of the court, (i) assume the lease and retain it or
assign it to a third party or (ii) reject the lease. If the lease is assumed,
the trustee or debtor-in-possession (or assignee, if applicable) must cure
any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for
termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years,
of the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or
disposal activity. Such environmental risks include the possible diminution
of the value of a contaminated property or, as discussed below, potential
liability for clean-up costs or other remedial actions that could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators"
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of contaminated real property for the costs of clean-up. A secured lender may
be liable as an "owner" or "operator" of a contaminated mortgaged property if
agents or employees of the lender have participated in the management of such
mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination and
regardless of whether the lender has actually taken possession of a mortgaged
property through foreclosure, deed in lieu of foreclosure or otherwise.
Moreover, such liability is not limited to the original or unamortized
principal balance of a loan or to the value of the property securing a loan.
Excluded from CERCLA's definition of "owner" or "operator", however, is a
person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest". This is the
so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Act
offers substantial protection to lenders by defining the activities in which
a lender can engage and still have the benefit of the secured creditor
exemption. In order for a lender to be deemed to have participated in the
management of a mortgaged property, the lender must actually participate in
the operational affairs of the property of the borrower. The Act provides
that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or
assumes day-to-day management of all operational functions of the mortgaged
property. The Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time
on commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to
hazardous environmental conditions on a property. While it may be more
difficult to hold a lender liable in such cases, unanticipated or uninsured
liabilities of the borrower may jeopardize the borrower's ability to meet its
loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize
the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable,
it can bring an action for contribution against the owner or operator who
created the environmental hazard, but that individual or entity may be
without substantial assets. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that
neither the Master Servicer nor the Special Servicer, acting on behalf of the
Trustee, may acquire title to a Mortgaged Property or take over its operation
unless the Special Servicer, based solely (as to environmental matters) on a
report prepared by a person who regularly conducts environmental audits, has
made the determination that it is appropriate to do so, as described under
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans".
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If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will
be required to operate the property in accordance with those laws and
regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following
foreclosure). Such disclosure may decrease the amount that prospective buyers
are willing to pay for the affected property, sometimes substantially, and
thereby decrease the ability of the lender to recoup its investment in a loan
upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to
the issuance of the related Certificates. Environmental site assessments,
however, vary considerably in their content, quality and cost. Even when
adhering to good professional practices, environmental consultants will
sometimes not detect significant environmental problems because to do an
exhaustive environmental assessment would be far too costly and
time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate
the maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limitations as set
forth in the Garn Act and the regulations promulgated thereunder.
Accordingly, a Master Servicer may nevertheless have the right to accelerate
the maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, without regard to the Master
Servicer's ability to demonstrate that a sale threatens its legitimate
security interest.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully
both the Senior Liens and the Mortgage Loan. In the event that a holder of a
Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. In the event that such proceeds from a foreclosure or similar sale of
the related Mortgaged Property are insufficient to satisfy all Senior Liens
and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of the
junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained
and (ii) the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain jurisdictions
or the Mortgage Loan may be nonrecourse.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be
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unenforceable. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to additional risk. First,
the borrower may have difficulty servicing and repaying multiple loans.
Moreover, if the subordinate financing permits recourse to the borrower (as
is frequently the case) and the senior loan does not, a borrower may have
more incentive to repay sums due on the subordinate loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In addition, the enforceability of provisions that provide for prepayment
fees or penalties upon an involuntary prepayment is unclear under the laws of
many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply
to certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or
adoption) be eligible for inclusion in a Trust Fund unless (i) such Mortgage
Loan provides for such interest rate, discount points and charges as are
permitted in such state or (ii) such Mortgage Loan provides that the terms
thereof are to be construed in accordance with the laws of another state
under which such interest rate, discount points and charges would not be
usurious and the borrower's counsel has rendered an opinion that such choice
of law provision would be given effect.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply
(together with an inability to remedy any such failure) could result in
material diminution in the value of a Mortgaged Property which could,
together with the possibility of limited alternative uses for a particular
Mortgaged Property (i.e., a nursing or convalescent home or hospital), result
in a failure to realize the full principal amount of the related Mortgage
Loan.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such
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as hotels, restaurants, shopping centers, hospitals, schools and social
service center establishments) must remove architectural and communication
barriers which are structural in nature from existing places of public
accommodation to the extent "readily achievable." In addition, under the ADA,
alterations to a place of public accommodation or a commercial facility are
to be made so that, to the maximum extent feasible, such altered portions are
readily accessible to and usable by disabled individuals. The "readily
achievable" standard takes into account, among other factors, the financial
resources of the affected site, owner, landlord or other applicable person.
In addition to imposing a possible financial burden on the borrower in its
capacity as owner or landlord, the ADA may also impose such requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with
the requirements of the ADA may be subject to more stringent requirements
than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief
Act applies to individuals who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief
Act applies to individuals who enter military service (including reservists
who are called to active duty) after origination of the related mortgage
loan, no information can be provided as to the number of loans with
individuals as borrowers that may be affected by the Relief Act. Application
of the Relief Act would adversely affect, for an indeterminate period of
time, the ability of a Master Servicer or Special Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition,
the Relief Act imposes limitations that would impair the ability of the
Master Servicer or Special Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as
regulations (the "REMIC Regulations") promulgated by the U.S. Department of
Treasury (the "Treasury"). Investors should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool". For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes
of "Regular Certificates" and one Class of "Residual Certificates" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Depositor, has advised the
Depositor that in the firm's opinion, assuming (i) the making of such an
election, (ii) compliance with the Pooling Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect
to the related Trust Fund will be made, in which event references to "REMIC"
or "REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. If
so specified in the applicable Prospectus Supplement, the portion of a Trust
Fund as to which a REMIC election is not made may be treated as a grantor
trust for federal income tax purposes. See "--Federal Income Tax Consequences
for Certificates as to Which No REMIC Election Is Made".
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" (such as
single family or multifamily properties, but not commercial properties)
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C), and otherwise will not qualify for
such treatment. REMIC Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the Regular Certificates and income with
respect to Residual Certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Code Section 856(c)(3)(B) in the same proportion
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that, for both purposes, the assets of the REMIC Pool would be so treated. If
at all times 95% or more of the assets of the REMIC Pool qualify for each of
the foregoing respective treatments, the REMIC Certificates will qualify for
the corresponding status in their entirety. For purposes of Code Section
856(c)(5)(A), payments of principal and interest on the Mortgage Loans that
are reinvested pending distribution to holders of REMIC Certificates qualify
for such treatment. Where two REMIC Pools are a part of a tiered structure
they will be treated as one REMIC for purposes of the tests described above
respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting "loans . . . secured by an interest in
real property which is . . . residential real property" for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related Buy-Down Funds. REMIC Certificates held by a regulated investment
company will not constitute "Government Securities" within the meaning of
Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the
"SBJPA of 1996") repealed the reserve method for bad debts of domestic
building and loan associations and mutual savings banks, and thus has
eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments". The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement is met if
at all times the aggregate adjusted basis of the nonqualified assets is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC
also must provide "reasonable arrangements" to prevent its residual interest
from being held by "disqualified organizations" and must furnish applicable
tax information to transferors or agents that violate this requirement. The
Pooling Agreement for each Series will contain a provision designed to meet
this requirement. See "Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified
Organizations".
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured
by timeshare interests and loans secured by shares held by a tenant
stockholder in a cooperative housing corporation, provided, in general, (i)
the fair market value of the real property security (including buildings and
structural components thereof) is at least 80% of the principal balance of
the related Mortgage Loan or mortgage loan underlying the Mortgage
Certificate either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest
in real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. If the Mortgage Loan has been
substantially modified other than in connection with a default or reasonably
foreseeable default, it must meet the
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loan-to-value test in (i) of the preceding sentence as of the date of the
last such modification or at closing. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by
real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such
90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally not held
beyond the close of the third calendar year following the acquisition of the
property by the REMIC Pool, with an extension that may be granted by the
Internal Revenue Service (the "Service").
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest
in a REMIC Pool that is issued on the Startup Day with fixed terms, is
designated as a regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable
rate, or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. Such a specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a fixed
or qualified variable or inverse variable rate on some or all of the
qualified mortgages minus a different fixed or qualified variable rate. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments
on qualified mortgages may be zero. A residual interest is an interest in a
REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool
may be treated as a regular interest even if payments of principal with
respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on
the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that series will constitute a single class of residual interests
on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for
such year and thereafter. In this event, an entity with multiple classes of
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ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC Pool would
occur absent regulatory relief. Investors should be aware, however, that the
Conference Committee Report to the Tax Reform Act of 1986 (the "1986 Act")
indicates that the relief may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the REMIC Pool's income
for the period of time in which the requirements for REMIC status are not
satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless
of the method of accounting otherwise used by such Regular
Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any Class of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable
to such income. The following discussion is based in part on temporary and
final Treasury regulations issued on February 2, 1994, as amended on June 14,
1996 (the "OID Regulations") under Code Sections 1271 through 1273 and 1275
and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent such issues are not addressed in such
regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided
that the Service will not take a different position as to those matters not
currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the Service to apply or depart from the
OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not
be considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price". The
issue price of a Class of Regular Certificates offered pursuant to this
Prospectus generally is the first price at which a substantial amount of
Regular Certificates of that Class is sold to the public (excluding bond
houses, brokers and underwriters). Although unclear under the OID
Regulations, the Depositor intends to treat the issue price of a Class as to
which there is no substantial sale as of the issue date or that is retained
by the Depositor as the fair market value of that Class as of the issue date.
The issue price of a Regular Certificate also includes the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate, unless the Regular
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Certificateholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but
generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest". Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) provided
that such interest payments are unconditionally payable at intervals of one
year or less during the entire term of the Regular Certificate. Because there
is no penalty or default remedy in the case of nonpayment of interest with
respect to a Regular Certificate, it is possible that no interest on any
Class of Regular Certificates will be treated as qualified stated interest.
However, except as provided in the following three sentences or in the
applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, the Depositor intends to treat
interest with respect to the Regular Certificates as qualified stated
interest. Distributions of interest on an Accrual Certificate, or on other
Regular Certificates with respect to which deferred interest will accrue,
will not constitute qualified stated interest, in which case the stated
redemption price at maturity of such Regular Certificates includes all
distributions of interest as well as principal thereon. Likewise, the
Depositor intends to treat an "interest only" class, or a class on which
interest is substantially disproportionate to its principal amount (a
so-called "super-premium" class) as having no qualified stated interest.
Where the interval between the issue date and the first Distribution Date on
a Regular Certificate is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The
Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be determined in accordance with the assumed rate
of prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates
will be set forth in the related Prospectus Supplement. Holders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the Regular Certificate
is held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method".
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as
the accrual period. With respect to each Regular Certificate, a calculation
will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based
on the Prepayment Assumption. Other than as discussed below with respect to a
Random Lot Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the
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preceding sentence is calculated based on (i) the yield to maturity of the
Regular Certificate at the issue date, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and
(iii) the Prepayment Assumption. For these purposes, the adjusted issue price
of a Regular Certificate at the beginning of any accrual period equals the
issue price of the Regular Certificate, increased by the aggregate amount of
original issue discount with respect to the Regular Certificate that accrued
in all prior accrual periods and reduced by the amount of distributions
included in the Regular Certificate's stated redemption price at maturity
that were made on the Regular Certificate in such prior periods. The original
issue discount accruing during any accrual period (as determined in this
paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either
an increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Random Lot Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case
of a distribution in retirement of the entire unpaid principal balance of any
Random Lot Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Random Lot Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate", or (d) a single fixed rate and a single
objective
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rate that is a "qualified inverse floating rate". A floating rate is a
qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65, but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate (other than a qualified floating
rate) is a rate that is determined using a single fixed formula and that is
based on objective financial or economic information, provided that such
information is not (i) within the control of the issuer or a related party or
(ii) unique to the circumstances of the issuer or a related party. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified floating rate may nevertheless be an objective rate. A Class of
Regular Certificates may be issued under this Prospectus that does not have a
variable rate under the OID Regulations, for example, a Class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within
the meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular
Certificates. However, if final regulations dealing with contingent interest
with respect to Regular Certificates apply the same principles as the OID
Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed
rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two
or more variable rates), including a rate based on the average cost of funds
of one or more financial institutions, or a positive or negative multiple of
such a rate (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or (ii)
bearing one or more such variable rates for one or more periods or one or
more fixed rates for one or more periods, and a different variable rate or
fixed rate for other periods qualifies as a regular interest in a REMIC.
Accordingly, unless otherwise indicated in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates that qualify
as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity
and future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date) for the relevant Class.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor intends to treat such variable interest as qualified stated
interest, other than variable interest on an interest-only or super-premium
Class, which will be treated as non-qualified stated interest includible in
the stated redemption price at maturity. Ordinary income reportable for any
period will be adjusted based on subsequent changes in the applicable
interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to
create more than de minimis original issue discount. The yield on such
Regular Certificates for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates,
in the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the
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applicable index used to compute interest on the Mortgage Loans in effect on
the pricing date (or possibly the issue date) will be deemed to be in effect
beginning with the period in which the first weighted average adjustment date
occurring after the issue date occurs. Adjustments will be made in each
accrual period either increasing or decreasing the amount of ordinary income
reportable to reflect the actual Pass-Through Rate on the Regular
Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues
with respect to a Class of Regular Certificates may constitute income to the
holders of such Regular Certificates prior to the time distributions of cash
with respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Certificate (i) is exceeded by the then-current
principal amount of the Regular Certificate or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received,
in an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to
the 1986 Act provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the end
of such period, or in the case of a Regular Certificate issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such
period. Such purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the
stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid
or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized or
the Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in
which such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should
consult their own tax
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advisors regarding the application of these rules. Investors should also
consult Revenue Procedure 92-67 concerning the elections to include market
discount in income currently and to accrue market discount on the basis of
the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased
at a premium. If the Regular Certificateholder holds such Regular Certificate
as a "capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. See "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest,
original issue discount, de minimis original issue discount, market discount
and de minimis market discount, as adjusted by any amortizable bond premium
or acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply
or if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to
have made elections to amortize bond premium or to report market discount
income currently as it accrues under the constant yield method, respectively,
for all debt instruments acquired by the holder in the same taxable year or
thereafter. The election is made on the holder's federal income tax return
for the year in which the debt instrument is acquired and is irrevocable
except with the approval of the Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Certificate and reduced by
amounts included in the stated redemption price at maturity of the Regular
Certificate that were previously received by the seller, by any amortized
premium and by previously recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of interest that would have accrued on the Regular
Certificateholder's net investment in the conversion
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transaction at 120% of the appropriate applicable Federal rate under Code
Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with
respect to any prior distribution of property that was held as a part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if its
yield on such Regular Certificate were 110% of the applicable Federal rate as
of the date of purchase, over (b) the amount of income actually includible in
the gross income of such holder with respect to the Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans allocable to a particular
class of Regular Certificates, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate may have income, or may incur a diminution in cash flow as a
result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a
subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may
take the position that original issue discount must continue to be accrued in
spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts
are applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection
with a trade or business should in general be allowed to deduct as an
ordinary loss any such loss sustained during the taxable year on account of
any such Regular Certificates becoming wholly or partially worthless, and
that, in general, holders of Regular Certificates that are not corporations
and do not hold the Regular Certificates in connection with a trade or
business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a
portion of any class or subclass of such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate holders
of Regular Certificates should be allowed a bad debt deduction at such time
as the principal balance of any class or subclass of such Regular
Certificates is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all Mortgage Loans remaining in the Trust Fund have been
liquidated or such class of Regular Certificates has been otherwise retired.
The Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original
issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders
of Regular Certificates are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with
respect to such Regular Certificates. While losses attributable to interest
previously reported as income should be deductible as ordinary losses by both
corporate and non-corporate holders, the Internal Revenue Service may take
the position that losses attributable to accrued original issue discount may
only be deducted as short-term capital losses by non-corporate holders not
engaged in a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Such taxpayers are advised to consult their tax advisors regarding the
treatment of losses on Regular Certificates.
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"),
and will not be taxed separately to the REMIC Pool. The daily portions of
REMIC taxable income or net loss of a Residual Certificateholder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Certificateholders in proportion to their
respective holdings of Residual Certificates in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting,
except that (i) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply, (ii) all bad
loans will be deductible as business bad debts and (iii) the limitation on
the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans, plus income
from amortization of issue premium, if any, on the Regular Certificates, plus
income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees
on the Mortgage Loans, other administrative expenses of the REMIC Pool and
realized losses on the Mortgage Loans. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Certificates of any class
of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the
Mortgage Loans, on the one hand, and the timing of deductions for interest
(including original issue discount) on the Regular Certificates or income
from amortization of issue premium on the Regular Certificates, on the other
hand. In the event that an interest in the Mortgage Loans is acquired by the
REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Certificateholder may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon
such distributions on those Regular Certificates on account of any unaccrued
original issue discount relating to those Regular Certificates. When there is
more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly
likely to occur in the early years following issuance of the Regular
Certificates when distributions in reduction of principal are being made in
respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a
series of Regular Certificates, may increase over time as distributions in
reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Certificateholders must have sufficient
other sources of cash to pay any federal, state or local income taxes due as
a result of such mismatching or unrelated deductions against which to offset
such income, subject to the discussion of "excess inclusions" below under
"Limitations on Offset or Exemption of REMIC Income". The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholder's after-tax rate of return. In
addition, a Residual Certificateholder's taxable
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income during certain periods may exceed the income reflected by such
Residual Certificateholder for such periods in accordance with generally
accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in
Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Certificateholder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated
by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration
of the income of Residual Certificateholders described above under "Taxation
of REMIC Income", the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Service may provide future guidance on the proper
tax treatment of payments made by a transferor of such a residual interest to
induce the transferee to acquire the interest, and Residual
Certificateholders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not
so provide. See "Treatment of Certain Items of REMIC Income and
Expense--Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are
subject to differing interpretations. The Depositor makes no representation
as to the specific method that it will use for reporting income with respect
to the Mortgage Loans and expenses with respect to the Regular Certificates,
and different methods could result in different timing of reporting of
taxable income or net loss to Residual Certificateholders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as
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original issue discount income on Regular Certificates as described above
under "Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates", without regard to the de minimis rule
described therein, and "--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the Deferred
Interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal
balances. The REMIC Pool's basis in such Mortgage Loans is generally the fair
market value of the Mortgage Loans immediately after the transfer thereof to
the REMIC Pool. The REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the
REMIC Pool (or the fair market value thereof at the Closing Date, in the case
of a retained Class). In respect of Mortgage Loans that have market discount
to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates--Market Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices (or the fair market value of retained Classes) of the
regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--Premium", a REMIC Pool that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect
under Code Section 171 to amortize premium on whole mortgage loans or
mortgage loans underlying MBS that were originated after September 27, 1985
or MBS that are REMIC regular interests under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. To the extent
that the mortgagors with respect to the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans (including
underlying mortgage loans) originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject
to special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter
allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Code Section 1274(d), multiplied by (ii) the
adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described
in this paragraph for all prior quarters, decreased by any distributions made
with respect to such Residual Certificate prior to the beginning of such
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of such
income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on
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such Residual Certificateholder's return. However, net operating loss
carryovers are determined without regard to excess inclusion income. Further,
if the Residual Certificateholder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual
Certificateholder's excess inclusions will be treated as unrelated business
taxable income of such Residual Certificateholder for purposes of Code
Section 511. In addition, REMIC taxable income is subject to 30% withholding
tax with respect to certain persons who are not U.S. Persons (as defined
below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or a regulated investment company
could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. Persons. The SBJPA of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for
a taxable year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deduction must
be computed without regard to any excess inclusions. These rules are
effective for taxable years beginning after December 31, 1996, unless a
Residual Certificateholder elects to have such rules apply only to taxable
years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals
the applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on
the transferor of the Residual Certificate, except that where such transfer
is through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable
for such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not
have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization, and (ii) the highest
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marginal federal corporate income tax rate. Such tax would be deductible from
the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received
an affidavit from such record holder that it is not a Disqualified
Organization or stating such holder's taxpayer identification number and,
during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if
all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section
521) that is exempt from taxation under the Code unless such organization is
subject to the tax on unrelated business income imposed by Code Section 511,
(ii) "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity, and (iii) an "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
bear a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a U.S.
Person, as defined below under "Foreign Investors") is disregarded for all
federal income tax purposes if a significant purpose of the transferor is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest
at least equals the product of the present value of the
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anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in
the same manner as set forth above under "Disqualified Organizations". The
REMIC Regulations explain that a significant purpose to impede the assessment
or collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of cash flows generated by the
interest and that the transferee intends to pay taxes associated with holding
the residual interest as they become due. The Pooling Agreement with respect
to each series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "Disqualified Organizations".
The transferor must have no actual knowledge or reason to know that such
statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below),
unless such transferee's income is effectively connected with the conduct of
a trade or business within the United States. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer,
(i) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions
accrue and prior to the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will
be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury
regulations) or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to United States federal income tax regardless of the source of its income or
a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates--Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in such Residual
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Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss
includible in the federal income tax returns of Residual Certificateholders,
but rather will be taxed directly to the REMIC Pool at a 100% rate.
Prohibited transactions generally include (i) the disposition of a qualified
mortgage other than for (a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time)
or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible
adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Certificateholder, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call and (v) as
otherwise permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts.
Generally, property acquired by deed in lieu of foreclosure would be treated
as "foreclosure property" for a period ending with the third calendar year
following the year of acquisition of such property, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income
from foreclosure property other than qualifying rents and other qualifying
income for a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material
state income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of
its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts
retained to meet claims) to holders of Regular Certificates and Residual
Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool will be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or
credit in a unified administrative proceeding. The Residual Certificateholder
owning the largest percentage interest in the Residual Certificates will be
obligated to act as "tax matters person", as defined in applicable Treasury
regulations, with respect to the REMIC Pool. Each Residual Certificateholder
will be deemed, by acceptance of such Residual Certificates, to have agreed
(i) to the appointment of the tax matters person as provided in the preceding
sentence and (ii) to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i)
3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
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the case of a married individual filing a separate return) (subject to
adjustments for inflation) or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for the servicing
fee and all administrative and other expenses relating to the REMIC Pool, or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion
of such expenses to holders of Regular Certificates, as well as holders of
Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates. Unless otherwise indicated in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or
other Non-U.S. Persons (as defined below), will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-U.S. Person (i) is not a "10-percent
shareholder" within the meaning of Code Section 871(h)(3)(B) or a controlled
foreign corporation described in Code Section 881(c)(3)(C) and (ii) provides
the Trustee, or the person who would otherwise be required to withhold tax
from such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial
owner and stating, among other things, that the beneficial owner of the
Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless
reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-U.S. Person. In
the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Prepayment Premiums distributable to
Regular Certificateholders who are Non-U.S. Persons may be subject to 30%
United States withholding tax. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Certificate. The term "Non-U.S. Person" means any
person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 1999, although valid withholding certificates that are held on
December 31, 1998, remain valid until the earlier of December 31, 1999 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular
Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply
in the case of
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tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to
the conditions described in "Regular Certificates" above, but only to the
extent that (i) the Mortgage Loans (including mortgage loans underlying MBS)
were issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of
assets therein (as to which a separate REMIC election will be made), to which
the Residual Certificate relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
whole mortgage loans will not be, but MBS and regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent
of that portion of REMIC taxable income that constitutes an "excess
inclusion". See "Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income". If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States
federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential". Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Service or
allowed as a credit against the Regular Certificateholder's federal income
tax liability. The New Regulations change certain of the rules relating to
certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and
information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals,
estates, non-exempt and non-charitable trusts, and partnerships who are
either holders of record of Regular Certificates or beneficial owners who own
Regular Certificates through a broker or middleman as nominee. All brokers,
nominees and all other non-exempt holders of record of Regular Certificates
(including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies,
common trust funds, thrift institutions and charitable trusts) may request
such information for any calendar quarter by telephone or in writing by
contacting the person designated in Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee.
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The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool
to each Residual Certificateholder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates".
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS
TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Where there is no fixed retained yield with respect to
the Mortgage Loans underlying the Standard Certificates, the holder of each
such Standard Certificate (a "Standard Certificateholder") in such series
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the Trust Fund represented by its Standard
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees". Accordingly, the holder
of a Standard Certificate of a particular series will be required to report
on its federal income tax return its pro rata share of the entire income from
the Mortgage Loans represented by its Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount
(if any), prepayment fees, assumption fees, and late payment charges received
by the Master Servicer, in accordance with such Standard Certificateholder's
method of accounting. A Standard Certificateholder generally will be able to
deduct its share of the servicing fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Fund. However, investors who are individuals, estates or trusts
who own Standard Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the servicing fee and all such administrative and other
expenses of the Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income.
In addition, Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate
return) (subject to adjustments for inflation), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect
to interest at the pass-through rate on such Standard Certificates. In
addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where
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the servicing fee is in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "Stripped
Certificates" and "Recharacterization of Servicing Fees", respectively.
Tax Status
Standard Certificates will have the following status for federal income
tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Certificate is of the type described in
such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and
Expense--Premium".
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount
greater than a statutory de minimis exception, including a payment of points
currently deductible by the borrower under applicable Code provisions or,
under certain circumstances, by the presence of "teaser rates" on the
Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than
the sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Loans acquired by a Standard Certificateholder are purchased at a price equal
to the then unpaid principal amount of such Mortgage Loans, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
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Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply and it is
unclear whether a Prepayment Assumption would apply. Rather, the holder will
accrue market discount pro rata over the life of the Mortgage Loans, unless
the constant yield method is elected. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed
for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there
are no authoritative guidelines for federal income tax purposes as to either
the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Standard Certificate, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan
basis. If a loan-by-loan basis is appropriate, the likelihood that such
amount would exceed reasonable servicing compensation as to some of the
Mortgage Loans would be increased. Service guidance indicates that a
servicing fee in excess of reasonable compensation ("excess servicing") will
cause the Mortgage Loans to be treated under the "stripped bond" rules. Such
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess
of such amounts is not greater than the value of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of
the right to receive some or all of the interest payments on an obligation
from the right to receive some or all of the principal payments on the
obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds". Subject to the de minimis rule discussed below
under "--Stripped Certificates", each stripped bond or stripped coupon could
be considered for this purpose as a non-interest bearing obligation issued on
the date of issue of the Standard Certificates, and the original issue
discount rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests
in a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Loans the ownership
of which is attributed to the Master Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Standard Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and the other assets represented by the Standard Certificate.
In general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the
amount of any income previously reported with respect to the Standard
Certificate and decreased by the amount of any losses previously reported
with respect to the Standard Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Loans, and except for certain financial institutions subject to
the provisions of
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Code Section 582(c), any such gain or loss would be capital gain or loss if
the Standard Certificate was held as a capital asset. However, gain on the
sale of a Standard Certificate will be treated as ordinary income (i) if a
Standard Certificate is held as part of a "conversion transaction" as defined
in Code Section 1258(c), up to the amount of interest that would have accrued
on the Standard Certificateholder's net investment in the conversion
transaction at 120% of the appropriate applicable Federal rate in effect at
the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition
of property that was held as a part of such transaction or (ii) in the case
of a non-corporate taxpayer, to the extent such taxpayer has made an election
under Code Section 163(d)(4) to have net capital gains taxed as investment
income at ordinary income rates. Capital gains of certain non-corporate
taxpayers generally are subject to a lower maximum tax rate (28%) than
ordinary income of such taxpayers (39.6%) for property held for more than one
year but not more than 18 months, and a still lower maximum rate (20%) for
property held for more than 18 months. The maximum tax rate for corporations
is the same with respect to both ordinary income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as "Stripped
Certificates". Stripped Certificates include "Stripped Interest Certificates"
and "Stripped Principal Certificates" (as defined in this Prospectus) as to
which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor or
any of its affiliates retains (for its own account or for purposes of
resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Master
Servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Certificates--Recharacterization of Servicing Fees" above) and
(iii) Certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective entitlements to distributions of
each class (or subclass) of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above
under "Standard Certificates--General", subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part 1 of subchapter J of the Code and
not as an association taxable as a corporation or a "taxable mortgage pool"
within the meaning of Code Section 7701(i), and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286
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computations with respect to Stripped Certificates arguably should be made in
one of the ways described below under "Taxation of Stripped
Certificates--Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single
issuer to a single investor in a single transaction should be treated as a
single debt instrument for original issue discount purposes. The Pooling
Agreement requires that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents
a right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment suggests that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations.
Further, these final regulations provide that the purchaser of such a
Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under
the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described under "Certain Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," without regard to the de minimis rule
therein, assuming that a prepayment assumption is employed in such
computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt,
counsel has advised the Depositor that Stripped Certificates owned by
applicable holders should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A), "obligation[s] principally
secured by an interest in real property" within the meaning of Code Section
860G(a)(3)(A), and "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by
the 1986 Act, the amount of original issue discount required to be included
in the income of a holder of a Stripped Certificate (referred to in this
discussion as a "Stripped Certificateholder") in any taxable year likely will
be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates". However, with the apparent exception of a Stripped Certificate
qualifying as a market discount obligation, as described above under
"General", the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated
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or decelerated and the amount of such original issue discount will be either
increased or decreased depending on the relative interests in principal and
interest on each Mortgage Loan represented by such Stripped
Certificateholder's Stripped Certificate. While the matter is not free from
doubt, the holder of a Stripped Certificate should be entitled in the year
that it becomes certain (assuming no further prepayments) that the holder
will not recover a portion of its adjusted basis in such Stripped Certificate
to recognize an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead
to different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the
date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more classes
of Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations
less likely to be applicable. The preamble to those regulations states that
they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
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Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income
tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable
to enable such Certificateholders to prepare their federal income tax
returns. Such information will include the amount of original issue discount
accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amounts required to be reported
by the Trustee may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder,
other than an original Certificateholder that purchased at the issue price.
In particular, in the case of Stripped Certificates, unless provided
otherwise in the applicable Prospectus Supplement, such reporting will be
based upon a representative initial offering price of each class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Service. If a Certificateholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Standard Certificateholder
or Stripped Certificateholder on original issue discount recognized by the
Standard Certificateholder or Stripped Certificateholders on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ
substantially from the corresponding federal law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax
advisors with respect to the various tax consequences of investments in the
Offered Certificates.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement
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plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and bank collective investment funds and insurance
company general and separate accounts in which such ERISA Plans are invested.
Section 4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code and on Individual Retirement Accounts described in Section 408 of
the Code (collectively, "Tax Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Offered Certificates without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and
state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons ("parties in interest" within the meaning of ERISA and
"disqualified persons" within the meaning of the Code; collectively, "Parties
in Interest") who have certain specified relationships to the Plan, unless a
statutory or administrative exemption is available with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in
Interest to a prohibited transaction may be subject to a nondeductible 15%
per annum excise tax on the amount involved in such transaction, which excise
tax increases to 100% if the Party in Interest involved in the transaction
does not correct such transaction during the taxable period. In addition,
such Party in Interest may be subject to a penalty imposed pursuant to
Section 502(i) of ERISA. The United States Department of Labor ("DOL") and
participants, beneficiaries and fiduciaries of ERISA Plans may generally
enforce violations of ERISA, including the prohibited transaction provisions.
If the prohibited transaction amounts to a breach of fiduciary responsibility
under ERISA, a 20% civil penalty may be imposed on the fiduciary or other
person participating in the breach.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund, including a Plan's
investment in Offered Certificates, might be deemed to constitute prohibited
transactions under ERISA and the Code if the underlying Mortgage Assets and
other assets included in a related Trust Fund are deemed to be assets of such
Plan. Section 2510.3-101 of the DOL regulations (the "Plan Asset
Regulations") defines the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the Plan Asset
Regulations, generally, when a Plan acquires an equity interest in an entity,
the Plan's assets include both such equity interest and an undivided interest
in each of the underlying assets of the entity, unless certain exceptions not
applicable here apply, or unless the equity participation in the entity by
"benefit plan investors" (i.e., Plans and certain employee benefit plans not
subject to ERISA) is not "significant", both as defined therein. For this
purpose, in general, equity participation by benefit plan investors will be
"significant" on any date if 25% or more of the value of any class of equity
interests in the entity is held by benefit plan investors. Equity
participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Certificate, 25% or more of any
class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the
Master Servicer, any Special Servicer, any Sub-Servicer, any Manager, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with
respect to an investing Plan (or of a Plan holding an interest in an
investing entity). If so, the acquisition or holding of Certificates by or on
behalf of the investing Plan could also give rise to a prohibited transaction
under ERISA and the Code, unless some statutory or administrative exemption
is available. Certificates acquired by a Plan may be assets of that Plan.
Under the Plan Asset Regulations, the Trust Fund, including the Mortgage
Asset Loans and the other assets held in the Trust Fund, may also be deemed
to be Plan Assets of each Plan
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that acquires Certificates. Special caution should be exercised before Plan
Assets are used to acquire a Certificate in such circumstances, especially
if, with respect to such assets, the Depositor, the Master Servicer, any
Special Servicer, any Sub-Servicer, any Manager, the Trustee, the obligor
under any credit enhancement mechanism or an affiliate thereof either (i) has
investment discretion with respect to the investment of Plan Assets; or (ii)
has authority or responsibility to give (or regularly gives) investment
advice with respect to Plan Assets for a fee pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of
the investing Plan. If the Mortgage Assets and other assets included in a
Trust Fund constitute Plan Assets, then any party exercising management or
discretionary control regarding those assets, such as the Master Servicer,
any Special Servicer, any Sub-Servicer, the Trustee, the obligor under any
credit enhancement mechanism, or certain affiliates thereof may be deemed to
be a Plan "fiduciary" and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the Mortgage Assets and other
assets included in a Trust Fund constitute Plan Assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets
include such certificate but do not solely by reason of the Plan's holdings
of such certificate include any of the mortgages underlying such certificate.
The Plan Asset Regulations include in the definition of a "guaranteed
governmental mortgage pool certificate" FHLMC Certificates, GNMA Certificates
and FNMA Certificates, but do not include FAMC Certificates. Accordingly,
even if such MBS (other than FAMC Certificates) included in a Trust Fund were
deemed to be assets of Plan investors, the mortgages underlying such MBS
(other than FAMC Certificates) would not be treated as assets of such Plans.
Private label mortgage participations, mortgage pass-through certificates,
FAMC Certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations. Potential Plan investors should consult their counsel and review
the ERISA discussion in the related Prospectus Supplement before purchasing
any such Certificates.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL granted an individual exemption, DOL exemption application number
E-0003 (the "Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and
Deutsche Morgan Grenfell Inc. ("DMG") which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that
certain conditions set forth in the Exemption are satisfied. For purposes of
this Section "ERISA Considerations," the term "Underwriter" shall include (a)
DBNY and DMG, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with DBNY
and DMG and (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan
or with Plan Assets must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the
"Exemption Rating Agencies"). Fourth, the Trustee cannot be an affiliate of
any member of the "Restricted Group"
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which consists of any Underwriter, the Depositor, the Trustee, the Master
Servicer, any Sub-Servicer and any obligor with respect to assets included in
the Trust Fund constituting more than 5% of the aggregate unamortized
principal balance of the assets in the Trust Fund as of the date of initial
issuance of the Certificates. Fifth, the sum of all payments made to and
retained by the Underwriter(s) must represent not more than reasonable
compensation for underwriting the Certificates; the sum of all payments made
to and retained by the Depositor pursuant to the assignment of the assets to
the related Trust Fund must represent not more than the fair market value of
such obligations; and the sum of all payments made to and retained by the
Master Servicer and any Sub-Servicer must represent not more than reasonable
compensation for such person's services under the related Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the Exemption states that the investing Plan or Plan Asset investor
must be an accredited investor as defined in Rule 501(a)(1) of Regulation D
of the Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) Certificates
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of Certificates by or on
behalf of a Plan or with Plan Assets; and (iii) Certificates evidencing
interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any acquisition of
Certificates by or on behalf of a Plan or with Plan Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth
above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA
for the acquisition or holding of a Certificate on behalf of an "Excluded
Plan" by any person who has discretionary authority or renders investment
advice with respect to the assets of such Excluded Plan. For purposes of the
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code,
in connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Depositor or
an Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in
the Certificates is (a) a mortgagor with respect to 5% or less of the fair
market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market
of Certificates by a Plan and (3) the holding of Certificates by a Plan or
with Plan Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Certificates so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the
servicing, management and operation of the Trust Fund, provided that the
general conditions of the Exemption are satisfied.
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The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to
an investing Plan by virtue of providing services to the Plan (or by virtue
of having certain specified relationships to such a person) solely as a
result of the Plan's ownership of Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three
highest generic rating categories by the Exemption Rating Agencies, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf
of any Plan, or to any other person investing Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion
of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the
Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or
the Master Servicer to any obligation in addition to those undertaken in the
Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Part I
and III have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would
apply to all transactions involving the Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates. Neither the
Depositor, the Trustee, the Master Servicer nor any of their respective
affiliates will make any representation to the effect that the Certificates
satisfy all legal requirements with respect to the investment therein by
Plans generally or any particular Plan or to the effect that the Certificates
are an appropriate investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE (OTHER THAN A SUBORDINATE CERTIFICATE,
RESIDUAL CERTIFICATE OR ANY CERTIFICATE WHICH IS NOT RATED IN ONE OF THE
THREE HIGHEST GENERIC RATING CATEGORIES BY THE EXEMPTION RATING AGENCIES), A
FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND
GENERAL CONDITIONS SET FORTH IN THE EXEMPTION OR ONE OF THE CLASS EXEMPTIONS
WOULD BE SATISFIED AND (B) IN THE CASE OF A
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CERTIFICATE PURCHASED UNDER THE EXEMPTION, THE CERTIFICATE CONSTITUTES A
"CERTIFICATE" FOR PURPOSES OF THE EXEMPTION. IN ADDITION, A PLAN FIDUCIARY
SHOULD CONSIDER ITS GENERAL FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING
WHETHER TO PURCHASE A CERTIFICATE ON BEHALF OF A PLAN.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitation on Offset or Exemption of REMIC Income Inclusions".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in
one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series evidencing interests in a Trust Fund consisting of
loans secured by first liens on real property and originated by certain types
of Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies and pension funds) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation, to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the
United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, on or before the October 3, 1991 cutoff for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in "mortgage related securities" secured by
liens on residential, or mixed residential and commercial properties, in most
cases by requiring the affected investors to rely solely upon existing state
law, and not SMMEA. Pursuant to Section 347 of the Riegle Community
Development and Regulatory Improvement Act of 1994, which amended the
definition of "mortgage related security" to include, in relevant part,
Offered Certificates satisfying the rating and qualified Originator
requirements for "mortgage related securities," but evidencing interests in a
Trust Fund consisting, in whole or in part, of first liens on one or more
parcels of real estate upon which are located one or more commercial
structures, states were authorized to enact legislation, on or before
September 23, 2001, specifically referring to Section 347 and prohibiting or
restricting the purchase, holding or investment by state-regulated entities
in such types of Offered Certificates. Accordingly, the investors affected by
any such state legislation, when and if enacted, will be authorized to invest
in Offered Certificates qualifying as "mortgage related securities" only to
the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. Section 1.5), certain "Type IV securities," defined in 12 C.F.R.
Section 1.2(1) to include certain "commercial mortgage-related securities"
and "residential mortgage-related securities." As so defined,
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"commercial mortgage-related security" and "residential mortgage-related
security" mean, in relevant part, "mortgage related security" within the
meaning of SMMEA, provided that, in the case of a "commercial
mortgage-related security," it "represents ownership of a promissory note or
certificate of interest or participation that is directly secured by a first
lien on one or more parcels of real estate upon which one or more commercial
structures are located and that is fully secured by interests in a pool of
loans to numerous obligors." In the absence of any rule or administrative
interpretation by the OCC defining the term "numerous obligors," no
representation is made as to whether any class of Offered Certificates will
qualify as "commercial mortgage-related securities," and thus as "Type IV
securities," for investment by national banks. Federal credit unions should
review National Credit Union Administration ("NCUA") Letter to Credit Unions
No. 96, as modified by Letter to Credit Unions No. 108, which includes
guidelines to assist federal credit unions in making investment decisions for
mortgage related securities. The NCUA has adopted rules, codified at 12
C.F.R. Part 703, which permit federal credit unions to invest in "mortgage
related securities" under certain limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related
securities, and commercial mortgage related securities, unless the credit
union has obtained written approval from the NCUA to participate in the
"investment pilot program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the Office of Thrift Supervision, and by the NCUA
(with certain modifications), prohibits depository institutions from investing
in certain "high-risk mortgage securities" (including securities such as
certain series or classes of the Offered Certificates), except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions. On September 29, 1997, the FFIEC
released for public comment a proposed "Supervisory Policy Statement on
Investment Securities and End-User Derivatives Activities" (the "1997
Statement"), which would replace the Policy Statement. As proposed, the 1997
Statement would delete the specific "high-risk mortgage securities" tests,
and substitute general guidelines which depository institutions should follow
in managing risks (including market, credit, liquidity, operational
(transactional), and legal risks) applicable to all securities (including
mortgage pass-through securities and mortgage-derivative products) used for
investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain classes of Offered Certificates as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the Offered Certificates.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their
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legal advisors in determining whether and to what extent the Offered
Certificates of any class constitute legal investments or are subject to
investment, capital or other restrictions and, if applicable, whether SMMEA
has been overridden in any jurisdiction relevant to such investor.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor to cover expenses related thereto. The
Depositor expects to sell the Certificates from time to time, but the timing
and amount of offerings of Certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method
of offering being utilized for that series and will state the net proceeds to
the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of
the Offered Certificates of a particular series may be made through a
combination of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related Prospectus
Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of a series may be offered in whole or in part to the
seller of the related Mortgage Assets that would comprise the Trust Fund for
such Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
to be determined at the time of sale or at the time of commitment therefor.
The managing underwriter or underwriters with respect to the offer and sale
of Offered Certificates of a particular series will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the Offered
Certificates may be deemed to be underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
Depositor and any profit on the resale of Offered Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of the Offered Certificates of any series will provide that the obligations
of the underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several underwriters and the underwriters will indemnify the Depositor
against certain civil liabilities, including liabilities under the Securities
Act of 1933, as amended, or will contribute to payments required to be made
in respect thereof.
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The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with reoffers and sales by
them of Offered Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold
by the Depositor at any time to one or institutional investors.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by the Underwriter in connection with offers and
sales related to market-making transactions in the Offered Certificates with
respect to which the Underwriter acts as principal. The Underwriter may also
act as agent in such transactions. Sales may be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement. The Depositor has determined that its financial statements will
not be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
Stripped Interest Certificates might, in extreme cases fail to recoup their
initial investments. Furthermore, ratings on mortgage pass-through
certificates do not address the price of such certificates or the suitability
of such certificates to the investor.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating.
99
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1986 Act 68
Accrual Certificates 4
Accrued Certificate Interest 30
Act 61
ADA 63
ARM Loans 20
Book-Entry Certificates 29
Call Risk 11
capital asset 73
Cash Flow Agreement 6
CERCLA 60
Certificate Account 23
Certificate Balance 4
Certificate Owner 35
Code 7, 65
Commercial Properties 2, 17
Commission 3
Companion Class 31
Condemnation Proceeds 42
Controlled Amortization Class 31
Controlled Amortization Classes 3
Cooperatives 17
CPR 26
Credit Support 6
Crime Control Act 64
Cut-off Date 5, 31
DBNY 93
Definitive Certificates 29
Depositor 1
Description of Credit Support 6, 12
Determination Date 24, 30
Deutsche Bank Group 28
Disqualified Organization 79
Disqualified Organizations 80
Distribution Date 4
Distribution Date Statement 33
DMARC Trust 28
DMG 93
DOL 92
DTC 3, 35
DTC Participants 35
Due Dates 20
Equity Participation 20
ERISA 7, 91
ERISA Plans 91
Exchange Act 3
Exemption 93
Exemption Rating Agencies 93
Extension Risk 11
FAMC 22
FHLMC 22
Financial Intermediary 35
FNMA 22
Foreign Investors 79
Garn Act 62
GNMA 22
Insurance Proceeds 42
IRS 45
Letter of Credit Bank 54
Lock-out Date 20
Lock-out Period 20
Mark to Market Regulations 81
Market Discount 72, 73
Master Servicer 1
1, 3,
MBS 17
MBS Administrator" 1
MBS Agreement 22
MBS Issuer 22
MBS Servicer 22
MBS Trustee 22
Mortgage Asset Pool 1
Mortgage Asset Seller 17
Mortgage Assets 1, 17
Mortgage Loans 1, 17
Mortgage Notes 17
Mortgage Rate 2
Mortgaged Properties 17
Mortgages 17
Multifamily Properties 1, 17
Net Leases 19
Nonrecoverable Advance 32
Non-U.S. Person 83
Notional Amount 4
Offered Certificates 1
OID Regulations 68
original issue discount 68
Original Issue Discount 71, 72
Originator 17
Parties in Interest 92
Pass-Through Entity 78, 79
Pass-Through Rate 4
100
<PAGE>
Percentage Interest 30
Permitted Investments 42
Plan Asset Regulations 92
Pooling Agreement 3
Prepayment Assumption 69
Prepayment Interest Shortfall 24
Prepayment Premium 20
Prospectus Supplement 1
Purchase Price 38
Random Lot Certificates 68
Rating Agency 8
Record Date 30
Regular Certificateholder 68
7, 65,
Regular Certificates 84
Related Proceeds 32
Relief Act 64
REMIC 2, 65
REMIC Administrator 2, 1
REMIC Certificates 65
REMIC Pool 65
REMIC Regulations 65
REMIC Residual Certificates 7
REO Property 40
Residual Certificateholders 75
Residual Certificates 65
1, 2,
Restaurants 17
RICO 64
Risk Factors 9
Senior Certificates 3
Senior Liens 17
Service 67
SMMEA 7
SPA 26
Special Servicer 1
Standard Certificateholder 85
Standard Certificates 7
Startup Day 66
stripped bond 87
stripped bonds 87
Stripped Certificateholder 89
7, 85,
86, 87,
Stripped Certificates 88
stripped coupons 87
Stripped Interest Certificates 88
Stripped Principal Certificates 3, 88
Subordinate Certificates 3
Sub-Servicer 41
Sub-Servicing Agreement 41
Tax Exempt Investor 96
Tax Favored Plans 92
Title V 63
Treasury 65
Trust Assets 2
Trust Fund 1
Trustee 1
UBTI 96
UCC 56
U.S. Person 80
Voting Rights 34
Warranting Party
</TABLE>
101
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT
RELATES SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 199
[Version 4 -- Health Care and Restaurant Concentration]
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 199 )
$
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 199 -
$ VARIABLE RATE CLASS A CERTIFICATES
$ VARIABLE RATE CLASS B CERTIFICATES
$100 VARIABLE RATE CLASS R CERTIFICATES
The Series 199 - Mortgage Pass-Through Certificates (the
"Certificates") will consist of the following four classes (each, a "Class"):
(i) the Class A Certificates and Class R Certificates (collectively, the
"Senior Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. Only the Senior Certificates and the Class B Certificates
(collectively, the "Offered Certificates") are offered hereby.
It is a condition of their issuance that the Senior Certificates be rated
not lower than , and that the Class B Certificates be rated not lower
than , by .
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF PAYMENTS ON
THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES DO NOT REPRESENT AN
INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR ANY OF THEIR
AFFILIATES.
NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR,
DEUTSCHE BANK AG OR ANY OF THEIR AFFILIATES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE S- HEREIN AND PAGE IN THE
PROSPECTUS BEFORE PURCHASING ANY OFFERED CERTIFICATE.
See "Index of Principal Definitions" in the Prospectus for location of
meanings of capitalized terms used but not defined herein. See "Index of
Principal Definitions" herein for location of meanings of those other
capitalized terms used herein.
There is currently no secondary market for the Offered Certificates.
(the "Underwriter") intends to make a secondary market in the Offered
Certificates, but is not obligated to do so. There can be no assurance that a
secondary market for the Offered Certificates will develop or, if it does
develop, that it will continue. See "Risk Factors--Limited Liquidity" herein.
The Offered Certificates will not be listed on any securities exchange.
The Offered Certificates will be purchased from the Depositor by the
Underwriter and will be offered by the Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates, before deducting expenses payable by the
[UNDERWRITER]
, 199
<PAGE>
(cover continued)
Depositor estimated to be approximately $ , will be % of the initial
aggregate Certificate Balance of the Offered Certificates[, plus accrued
interest on the Offered Certificates from the Cut-off Date]. The Offered
Certificates are offered by the Underwriter subject to prior sale, when, as
and if delivered to and accepted by the Underwriter and subject to certain
other conditions. It is expected that the Class A Certificates will be
delivered in book-entry form through the Same-Day Funds Settlement System of
DTC and that the Class B and Class R Certificates will be delivered at the
offices of the Underwriter, , on or about , 199
(the "Delivery Date"), against payment therefor in immediately available
funds.
The Certificates will represent in the aggregate the entire beneficial
ownership interest in a trust fund (the "Trust Fund"), to be established by
the Depositor, that will consist primarily of a segregated pool (the
"Mortgage Pool") of conventional, fixed-and adjustable-rate, multifamily
or commercial, balloon mortgage loans (the "Mortgage Loans"). Each Mortgage
Loan is secured by a first mortgage lien on a fee simple estate in real
property operated as a restaurant, Health Care-Related Facility (as defined
in the Prospectus), retail property, office building or multifamily rental
property. As of , 199 (the "Cut-off Date"), the Mortgage Loans had an
aggregate principal balance (the "Initial Pool Balance") of $ , after
application of all payments of principal due on or before such date, whether
or not received. Certain characteristics of the Mortgage Loans are described
herein under "Description of the Mortgage Pool".
THE RIGHTS OF THE HOLDERS OF THE CLASS B AND CLASS C CERTIFICATES TO
RECEIVE DISTRIBUTIONS WITH RESPECT TO THE MORTGAGE LOANS WILL BE SUBORDINATE
TO THE RIGHTS OF THE HOLDERS OF THE SENIOR CERTIFICATES, AND THE RIGHTS OF
THE HOLDERS OF THE CLASS C CERTIFICATES TO RECEIVE DISTRIBUTIONS WITH RESPECT
TO THE MORTGAGE LOANS WILL BE SUBORDINATE TO THE RIGHTS OF THE HOLDERS OF THE
CLASS B CERTIFICATES, IN EACH CASE TO THE EXTENT DESCRIBED HEREIN AND IN THE
PROSPECTUS.
The Class A Certificates will be represented initially by certificates
registered in the name of Cede & Co., as nominee of DTC, as described herein.
The interests of the beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Definitive certificates will be available for the Class A Certificates only
under the limited circumstances described herein and in the Prospectus. See
"Description of the Certificates--Book-Entry Registration of the Class A
Certificates" herein and "Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in the Prospectus.
An election will be made to treat the Trust Fund as a REMIC for federal
income tax purposes. The Class A Certificates, the Class B Certificates and
the Class C Certificates (collectively, the "REMIC Regular Certificates")
will constitute "regular interests", and the Class R Certificates will
constitute the sole class of "residual interests", in the Trust Fund. See
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
Transfer of the Class R Certificates will be prohibited to any non-United
States person, and will be subject to certain additional transfer
restrictions described herein under "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to REMIC Residual
Certificates" and in the Prospectus under "Certain Federal Income Tax
Consequences--REMICs--Tax and Restrictions on Transfers of REMIC Residual
Certificates to Certain Organizations".
Distributions on the Certificates will be made, to the extent of available
funds, on the 25th day of each month or, if any such day is not a business
day, then on the next business day, beginning in 199 (each, a
"Distribution Date"). As described herein, interest distributions on each
Class of Offered Certificates will be made on each Distribution Date based on
the variable pass-through rate (the "Pass-Through Rate") then applicable to
such Class and the stated principal amount (the "Certificate Balance") of
such Class outstanding immediately prior to such Distribution Date. The
Pass-Through Rate for each Class of Offered Certificates applicable to the
first Distribution Date will be % per annum. Subsequent to the initial
Distribution Date, the Pass-Through Rate for each Class of Offered
Certificates will equal from time to time the weighted average of, subject to
certain adjustments described herein, the Net Mortgage Rates (as defined
herein) on the Mortgage Loans. Principal distributions on each Class of
Offered Certificates will be made in the amounts and in accordance with the
priorities described herein. See "Description of the
Certificates--Distributions" herein.
<PAGE>
The yield to maturity on each Class of Offered Certificates will depend
on, among other things, changes in its respective Pass-Through Rate and the
rate and timing of principal payments (including by reason of prepayments,
defaults and liquidations) on the Mortgage Loans. See "Yield and Maturity
Considerations" herein and "Yield and Maturity Considerations" and "Risk
Factors--Effect of Prepayments on Average Life of Certificates" in the
Prospectus. [The following disclosure is applicable to Stripped Interest
Certificates ("Class S Certificates"), when offered...THE YIELD TO MATURITY
ON THE CLASS S CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND
TIMING OF PRINCIPAL PAYMENTS (INCLUDING BY REASONS OF PREPAYMENTS, DEFAULTS
AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY FLUCTUATE SIGNIFICANTLY
FROM TIME TO TIME. A RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS THAT IS
MORE RAPID THAN EXPECTED BY INVESTORS WILL HAVE A MATERIAL NEGATIVE EFFECT ON
THE YIELD TO MATURITY OF THE CLASS S CERTIFICATES. INVESTORS IN THE CLASS S
CERTIFICATES SHOULD CONSIDER THE ASSOCIATED RISKS, INCLUDING THE RISK THAT A
RAPID RATE OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD RESULT IN THE
FAILURE OF INVESTORS IN SUCH CERTIFICATES TO RECOVER FULLY THEIR INITIAL
INVESTMENTS. SEE "YIELD AND MATURITY CONSIDERATIONS" HEREIN AND "YIELD AND
MATURITY CONSIDERATIONS" AND "RISK FACTORS--EFFECT OF PREPAYMENTS ON AVERAGE
LIFE OF CERTIFICATES" IN THE PROSPECTUS.]
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
ii
<PAGE>
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF
A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED , OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS
AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL
DEALERS EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
iii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following Summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms that are used in this
Summary may be defined elsewhere in this Prospectus Supplement or in the
Prospectus. An Index of Principal Definitions is included at the end of both
this Prospectus Supplement and the Prospectus. Terms that are used but not
defined in this Prospectus Supplement will have the meanings specified in the
Prospectus.
TITLE OF CERTIFICATES ......... Mortgage Pass-Through Certificates, Series
199 - .
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware Corporation. See
"The Depositor" in the Prospectus. The
Offered Certificates are not insured or
guaranteed by the Depositor, Deutsche Bank
AG or any of their affiliates.
MASTER SERVICER ............... . See "Servicing of the Mortgage
Loans--The Master Servicer" herein.
SPECIAL SERVICER .............. . See "Servicing of the Mortgage
Loans--The Special Servicer" herein.
TRUSTEE ....................... . See "Description of the
Certificates--The Trustee" herein.
REMIC ADMINISTRATOR ........... . See "Certain Federal Income Tax
Consequences--REMICs--Reporting and Other
Administrative Matters" herein and
"Description of the Pooling
Agreements--Events of Default" and "--Rights
Upon Event of Default" in the Prospectus.
MORTGAGE LOAN SELLER .......... . See "Description of the Mortgage
Pool--The Mortgage Loan Seller" herein.
CUT-OFF DATE .................. , 199 .
DELIVERY DATE ................. On or about , 199 .
REGISTRATION; DENOMINATIONS ... The Class A Certificates will be issued,
maintained and transferred on the book-entry
records of DTC in denominations of $25,000
and integral multiples of $1 in excess
thereof. The Class B Certificates will be
issued in fully registered, certificated
form in denominations of $100,000 and in
integral multiples of $1,000 in excess
thereof, with one Class B Certificate
evidencing an additional amount equal to the
remainder of the initial Certificate Balance
of such Class. The Class R Certificates will
be issued in registered, certificated form
in minimum denominations of 20% percentage
interest in such Class.
The Class A Certificates will be represented
by one or more global Certificates
registered in the name of Cede & Co., as
nominee of DTC. No person acquiring an
interest in the Class A Certificates (any
such person, a "Class A Certificate Owner")
will be entitled to receive a Class A
Certificate in fully registered,
certificated form (a "Definitive Class A
Certificate"), except under the limited
circumstances described herein and in the
Prospectus. See "Description of the
Certificates--Book-Entry Registration of the
Class A Certificates" herein and
"Description of the Certificates--Book-Entry
Registration and Definitive Certificates" in
the Prospectus.
S-1
<PAGE>
THE MORTGAGE POOL ............ The Mortgage Pool will consist of
conventional, balloon Mortgage Loans with an
Initial Pool Balance of $ . On or
prior to the Delivery Date, the Depositor
will acquire the Mortgage Loans from the
Mortgage Loan Seller pursuant to a Purchase
Agreement, dated [the date hereof], between
the Depositor and the Mortgage Loan Seller
(the "Purchase Agreement"). In the Purchase
Agreement, the Mortgage Loan Seller has made
certain representations and warranties to
the Depositor regarding the characteristics
and quality of the Mortgage Loans and, as
more particularly described herein, has
agreed to cure any material breach thereof
or repurchase the affected Mortgage Loan. In
connection with the assignment of its
interests in the Mortgage Loans to the
Trustee, the Depositor will also assign its
rights under the Purchase Agreement insofar
as they relate to or arise out of the
Mortgage Loan Seller's representations and
warranties regarding the Mortgage Loans. See
"Description of the Mortgage
Pool--Representations and Warranties;
Repurchases" herein.
Each Mortgage Loan is secured by a first
mortgage lien on a fee simple estate in real
property (as to such Mortgage Loan, the
"Mortgaged Property") operated as a
restaurant ( Mortgage Loans which
represent % of the Initial Pool Balance),
a Health Care-Related Facility ( Mortgage
Loans which represent % of the Initial
Pool Balance), a retail property (
Mortgage Loans which represent % of the
Initial Pool Balance), an office building
( Mortgage Loans which represent % of
the Initial Pool Balance) or a multifamily
rental property ( Mortgage Loans which
represent % of the Initial Pool Balance).
of the Mortgage Loans, which represent %
of the Initial Pool Balance, are secured by
liens on Mortgaged Properties located in
. The remaining Mortgaged Properties
are located throughout other states.
See "Description of the Mortgage
Pool--Additional Mortgage Loan Information"
and "Risk Factors--Risks Associated With
Multifamily Properties" and "--Risks
Associated with Properties" and
"Description of the Mortgage
Pool--Additional Mortgage Loan Information"
herein. of the Mortgage Loans, which
represent % of the Initial Pool Balance,
provide for scheduled payments of principal
and/or interest ("Monthly Payments") to be
due on the first day of each month; the
remainder of the Mortgage Loans provide for
Monthly Payments to be due on the , ,
or day of each month (the date in
any month on which a Monthly Payment on a
Mortgage Loan is first due, the "Due Date").
The annualized rate at which interest
accrues (the "Mortgage Rate") on of the
Mortgage Loans (the "ARM Loans"), which
represent % of the Initial Pool Balance,
is subject to adjustment on specified Due
Dates (each such date of adjustment, an
"Interest Rate Adjustment Date") by adding a
fixed number of basis points (a "Gross
Margin") to the value of a base index (an
"Index"), subject, in cases, to lifetime
S-2
<PAGE>
maximum and/or minimum Mortgage Rates, and
in cases, to periodic maximum and/or
minimum Mortgage Rates, in each case as
described herein; and the remaining Mortgage
Loans (the "Fixed Rate Loans") bear interest
at fixed Mortgage Rates. of the ARM
Loans, which represent % of the Initial
Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly, while
the remainder of the ARM Loans provide for
adjustments of the Mortgage Rate to occur
semi-annually or annually. [Identify
Mortgage Loan Index] See "Description of the
Mortgage Pool--Certain Payment
Characteristics" herein.
The amount of the Monthly Payment on all of
the ARM Loans is subject to adjustment on
specified Due Dates (each such date, a
"Payment Adjustment Date") to an amount that
would amortize the outstanding principal
balance of the Mortgage Loan over its then
remaining amortization schedule and pay
interest at the then applicable Mortgage
Rate. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date
following each related Interest Rate
Adjustment Date.
All of the Mortgage Loans provide for
monthly payments of principal based on
amortization schedules significantly longer
than the remaining terms of such Mortgage
Loans, thereby leaving substantial principal
amounts due and payable (each such payment,
together with the corresponding interest
payment, a "Balloon Payment") on their
respective maturity dates, unless prepaid
prior thereto.
DESCRIPTION OF THE
CERTIFICATES ................. The Certificates will be issued pursuant to
a Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the
Depositor, the Master Servicer, the Special
Servicer, the Trustee and the REMIC
Administrator (the "Pooling and Servicing
Agreement"), and will represent in the
aggregate the entire beneficial ownership
interest in the Trust Fund, which will
consist of the Mortgage Pool and certain
related assets.
The aggregate Certificate Balance of the
Certificates as of the Delivery Date will
equal the Initial Pool Balance. Each Class
of Offered Certificates will have the
initial Certificate Balance set forth on the
cover page, and the Class C Certificates
will have an initial Certificate Balance of
$ . See "Description of the
Certificates--General" herein.
The Pass-Through Rate applicable to each
Class of Certificates for the initial
Distribution Date will equal % per annum.
With respect to any Distribution Date
subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of
Certificates will equal the weighted average
of the applicable Effective Net Mortgage
Rates for the Mortgage Loans, weighted on
the basis of their respective Stated
Principal Balances (as described herein)
immediately prior to such Distribution Date.
For purposes of calculating the Pass-Through
Rate for any Class of Certificates and any
Distribution Date, the "applicable Effective
Net Mortgage Rate" for each Mortgage Loan is
an annualized rate equal to the Mortgage
Rate in effect for such
S-3
<PAGE>
Mortgage Loan as of the [second] day of the
most recently ended calendar month, (a)
reduced by basis points (the Mortgage
Rate, as so reduced, the "Net Mortgage
Rate"), and (b) if the accrual of interest
on such Mortgage Loan is computed other than
on the basis of a 360-day year consisting of
twelve 30-day months (which is the basis of
accrual for interest on the Certificates),
then adjusted to reflect that difference in
computation. See "Description of the
Certificates--Distributions--Pass-Through
Rates" and "--Distributions--Certain
Calculations with Respect to Individual
Mortgage Loans" herein.
INTEREST DISTRIBUTIONS
ON THE SENIOR CERTIFICATES ... On each Distribution Date, to the extent of
the Available Distribution Amount, holders
of each Class of Senior Certificates will be
entitled to receive distributions of
interest in an amount equal to all
Distributable Certificate Interest with
respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
The "Distributable Certificate Interest" in
respect of any Class of Certificates for any
Distribution Date will equal one month's
interest at the then-applicable Pass-Through
Rate accrued on the Certificate Balance of
such Class of Certificates immediately prior
to such Distribution Date, reduced (to not
less than zero) by such Class of
Certificates' allocable share (in each case,
calculated as described herein) of any Net
Aggregate Prepayment Interest Shortfall
(also as described herein) for such
Distribution Date. See "Description of the
Certificates--Distributions--Distributable
Certificate Interest" herein.
The "Available Distribution Amount" for any
Distribution Date is, as described herein
under "Description of the
Certificates--Distributions", the total of
all payments or other collections (or
available advances) on or in respect of the
Mortgage Loans that are available for
distribution on the Certificates on such
date.
PRINCIPAL DISTRIBUTIONS ON
THE SENIOR CERTIFICATES ...... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after the distributions of interest to be
made on the Senior Certificates on such
date, holders of the Senior Certificates
will be entitled to distributions of
principal (until the Certificate Balances of
such Classes of Certificates are reduced to
zero) in an aggregate amount equal to the
sum of (a) such holders' pro rata share of
the Scheduled Principal Distribution Amount
for such Distribution Date, plus (b) the
entire Unscheduled Principal Distribution
Amount for such Distribution Date.
Distributions of principal on the Senior
Certificates will be paid first to the
holders of the Class R Certificates until
the Certificate Balance of such Certificates
is reduced to zero, and then to the holders
of the Class A Certificates. See
"Description of the
Certificates--Distributions--Scheduled
Principal Distribution Amount and
Unscheduled Principal Distribution Amount"
herein.
S-4
<PAGE>
INTEREST DISTRIBUTIONS ON
THE CLASS B CERTIFICATES ..... On each Distribution Date, to the extent of
the Available Distribution Amount remaining
after all distributions to be made on the
Senior Certificates on such date (such
remaining portion, the "Class B Available
Distribution Amount"), holders of the Class
B Certificates will be entitled to receive
distributions of interest in an amount equal
to all Distributable Certificate Interest
with respect to such Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior Distribution
Dates. See "Description of the
Certificates--Distributions" herein.
PRINCIPAL DISTRIBUTIONS ON
THE CLASS B CERTIFICATES ..... On each Distribution Date, to the extent of
the Class B Available Distribution Amount
remaining after the distributions of
interest to be made on the Class B
Certificates on such date, holders of the
Class B Certificates will be entitled to
distributions of principal (until the
Certificate Balance of such Class of
Certificates is reduced to zero) in an
amount equal to the sum of (a) such holders'
pro rata share of the Scheduled Principal
Distribution Amount for such Distribution
Date, plus (b) if the Certificate Balances
of the Senior Certificates have been reduced
to zero, then to the extent not distributed
in reduction of such Certificate Balances on
such Distribution Date, the entire
Unscheduled Principal Distribution Amount
for such Distribution Date. See "Description
of the Certificates--Distributions" herein.
CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS ............... The yield on the Offered Certificates of any
class will depend on, among other things,
the Pass-Through Rate for such Certificates.
The yield on any Offered Certificate that is
purchased at a discount or premium will also
be affected by the rate and timing of
distributions in respect of principal on
such Certificate, which in turn will be
affected by (i) the rate and timing of
principal payments (including principal
prepayments) on the Mortgage Loans and (ii)
the extent to which such principal payments
are applied on any Distribution Date in
reduction of the Certificate Balance of the
Class to which such Certificate belongs. See
"Description of the
Certificates--Distributions--Priority" and
"--Distributions--Scheduled Principal
Distribution Amount and Unscheduled
Principal Distribution Amount" herein.
An investor that purchases an Offered
Certificate at a discount should consider
the risk that a slower than anticipated rate
of principal payments on such Certificate
will result in an actual yield that is lower
than such investor's expected yield. An
investor that purchases any Offered
Certificate at a premium should consider the
risk that a faster than anticipated rate of
principal payments on such Certificate will
result in an actual yield that is lower than
such investor's expected yield. Insofar as
an investor's initial investment in any
Offered Certificate is repaid, there can be
no assurance that such amounts can be
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<PAGE>
reinvested in a comparable alternative
investment with a comparable yield.
The actual rate of prepayment of principal
on the Mortgage Loans cannot be predicted.
The Mortgage Loans may be prepaid at any
time, subject, in the case of Mortgage
Loans, to payment of a Prepayment Premium.
The investment performance of the Offered
Certificates may vary materially and
adversely from the investment expectations
of investors due to prepayments on the
Mortgage Loans being higher or lower than
anticipated by investors. The actual yield
to the holder of an Offered Certificate may
not be equal to the yield anticipated at the
time of purchase of the Certificate or,
notwithstanding that the actual yield is
equal to the yield anticipated at that time,
the total return on investment expected by
the investor or the expected weighted
average life of the Certificate may not be
realized. For a discussion of certain
factors affecting prepayment of the Mortgage
Loans, including the effect of Prepayment
Premiums, see "Yield and Maturity
Considerations" herein. IN DECIDING WHETHER
TO PURCHASE ANY OFFERED CERTIFICATES, AN
INVESTOR SHOULD MAKE AN INDEPENDENT DECISION
AS TO THE APPROPRIATE PREPAYMENT ASSUMPTIONS
TO BE USED.
[The structure of the Offered Certificates
causes the yield of certain Classes to be
particularly sensitive to changes in the
rates of prepayment of the Mortgage Loans
and other factors, as follows:]
[Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans.
Following retirement of the Class A
Certificates, the Unscheduled Principal
Distribution Amount for each Distribution
Date will be allocated to the Class B
Certificates.]
[The following disclosure is applicable to
Stripped Interest Certificates, when offered
. . . The Stripped Interest Certificates.
The Class S Certificates are interest-only
Certificates and are not entitled to any
distributions in respect of principal. The
yield to maturity of the Class S
Certificates will be especially sensitive to
the prepayment, repurchase and default
experience on the Mortgage Loans, which may
fluctuate significantly from time to time. A
rate of principal payments that is more
rapid than expected by investors will have a
material negative effect on the yield to
maturity of the Class S Certificates. See
"Yield and Maturity Considerations--Yield
Sensitivity of the Class S Certificates"
herein.]
Class R Certificates: Holders of the Class R
Certificates are entitled to receive
distributions of principal and interest as
described herein; however, holders of such
Certificates may have tax liabilities with
respect to their Certificates during the
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<PAGE>
early years of the term of the Trust Fund
that substantially exceed the principal and
interest payable thereon during such
periods. See "Yield and Maturity
Considerations", especially "--Additional
Yield Considerations Applicable Solely to
the Class R Certificates," herein and
"Certain Federal Income Tax Consequences"
herein and in the Prospectus.
ADVANCES ...................... The Master Servicer is required to make
advances (each, an "Advance") of delinquent
principal and interest (net of related
Servicing Fees) on the Mortgage Loans or, in
the case of each Mortgage Loan that is
delinquent in respect of its Balloon Payment
or as to which the related Mortgaged
Property was acquired through foreclosure,
deed in lieu of foreclosure or otherwise,
only of delinquent interest (net of related
Servicing Fees), in any event under the
circumstances and subject to the limitations
set forth herein. Advances are intended to
maintain a regular flow of scheduled
interest and principal payments to the
Certificateholders, rather than to guarantee
or insure against losses. Accordingly,
Advances which cannot be reimbursed out of
collections on or in respect of the related
Mortgage Loans ("Nonrecoverable Advances")
will represent a portion of the losses to be
borne by Certificateholders.
The Master Servicer will be entitled to
interest on any Advances made, and the
Master Servicer and the Special Servicer
will each be entitled to interest on certain
servicing expenses incurred by it or on its
behalf, such interest accruing at the rate
and payable under the circumstances
described herein. Interest accrued on
outstanding Advances will result in a
reduction in amounts payable on the
Certificates. See "Description of the
Certificates--Advances" and
"--Subordination; Allocation of Collateral
Support Deficit" herein and "Description of
the Certificates--Advances in Respect of
Delinquencies" and "Description of the
Pooling Agreements--Certificate Account" in
the Prospectus.
Each Distribution Date Statement delivered
by the Trustee to the Certificateholders
will contain information relating to the
amounts of Advances made with respect to the
related Distribution Date. See "Description
of the Certificates--Reports to
Certificateholders; Certain Available
Information" herein and "Description of
Certificates--Reports to Certificateholders"
in the Prospectus.
SUBORDINATION; ALLOCATION OF
COLLATERAL SUPPORT DEFICIT .. The rights of the holders of the Class B and
Class C Certificates to receive
distributions with respect to the Mortgage
Loans will be subordinate to the rights of
the holders of the Senior Certificates, and
the rights of the holders of the Class C
Certificates to receive distributions with
respect to the Mortgage Loans will be
subordinate to the rights of the holders of
the Class B Certificates, in each case to
the extent described herein and in the
Prospectus. This subordination is intended
to enhance the likelihood of timely receipt
by the holders of the
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<PAGE>
Senior Certificates of the full amount of
all Distributable Certificate Interest
payable in respect of such Certificates on
each Distribution Date, and the ultimate
receipt by such holders of principal in an
amount equal to the entire aggregate
Certificate Balance of the Senior
Certificates. Similarly, but to a lesser
degree, this subordination is also intended
to enhance the likelihood of timely receipt
by the holders of the Class B Certificates
of the full amount of all Distributable
Certificate Interest payable in respect of
such Certificates on each Distribution Date,
and the ultimate receipt by such holders of
principal in an amount equal to the entire
Certificate Balance of the Class B
Certificates. Such subordination will be
accomplished by the application of the
Available Distribution Amount on each
Distribution Date to distributions on the
respective Classes of Certificates in the
order described herein under "Description of
the Certificates--Distributions-Priority".
No other form of Credit Support will be
available for the benefit of the holders of
the Offered Certificates.
Allocation to the Senior Certificates, for
so long as they are outstanding, of the
entire Unscheduled Principal Distribution
Amount for each Distribution Date will
generally accelerate the amortization of
such Certificates relative to the actual
amortization of the Mortgage Loans. To the
extent that the Senior Certificates are
amortized faster than the Mortgage Loans,
the percentage interest evidenced by the
Senior Certificates in the Trust Fund will
be decreased (with a corresponding increase
in the interest in the Trust Fund evidenced
by the Class B and Class C Certificates),
thereby increasing, relative to their
respective Certificate Balances, the
subordination afforded the Senior
Certificates by the Class B and Class C
Certificates. Following retirement of the
Class A Certificates, allocation to the
Class B Certificates, for so long as they
are outstanding, of the entire Unscheduled
Principal Distribution Amount for each
Distribution Date will provide a similar
benefit to such Class of Certificates as
regards the relative amount of subordination
afforded thereto by the Class C
Certificates.
As a result of losses and other shortfalls
experienced with respect to the Mortgage
Loans or otherwise with respect to the Trust
Fund (which may include shortfalls arising
both from interest accrued on Advances and
from Nonrecoverable Advances), the aggregate
Stated Principal Balance of the Mortgage
Pool expected to be outstanding immediately
following any Distribution Date may be less
than the aggregate Certificate Balance of
the Certificates immediately following the
distributions on such Distribution Date.
Such deficit (the "Collateral Support
Deficit") will be allocated first to the
Class C Certificates, then to the Class B
Certificates and last to the Class A
Certificates (in reduction of their
Certificate Balances), in each case until
the related Certificate Balance has been
reduced to zero. See "Description of the
Certificates--Subordination; Allocation of
Collateral Support Deficit" herein.
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<PAGE>
OPTIONAL TERMINATION ......... At its option, on any Distribution Date on
which the remaining aggregate Stated
Principal Balance of the Mortgage Pool is
less than 5% of the Initial Pool Balance,
the Master Servicer or the Depositor may
purchase all of the Mortgage Loans and REO
Properties, and thereby effect termination
of the Trust Fund and early retirement of
the then outstanding Certificates. See
"Description of the
Certificates--Termination; Retirement of
Certificates" herein and in the Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES ............. An election will be made to treat the Trust
Fund as a REMIC for Federal income tax
purposes. Upon the issuance of the Offered
Certificates, Cadwalader, Wickersham & Taft,
counsel to the Depositor, will deliver its
opinion generally to the effect that,
assuming compliance with all provisions of
the Pooling and Servicing Agreement, for
Federal income tax purposes, the Trust Fund
will qualify as a REMIC under Sections 860A
through 860G of the Code. For Federal income
tax purposes, the Class A, Class B and Class
C Certificates will be the "regular
interests" in the Trust Fund, and the Class
R Certificates will be the sole class of
"residual interests" in the Trust Fund.
Under the REMIC Regulations, the Class R
Certificates will not be regarded as having
"significant value" for purposes of applying
the rules relating to "excess inclusions."
In addition, the Class R Certificates may
constitute "noneconomic" residual interests
for purposes of the REMIC Regulations.
Transfers of the Class R Certificates will
be restricted under the Pooling and
Servicing Agreement to United States Persons
in a manner designed to prevent a transfer
of a noneconomic residual interest from
being disregarded under the REMIC
Regulations. See "Certain Federal Income Tax
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates"
herein and "Certain Federal Income Tax
Consequences--Federal Income Tax
Consequences for REMIC
Certificates--Taxation of Residual
Certificates--Limitations on Offset or
Exemption of REMIC Income" and
"--Tax-Related Restrictions on Transfer of
Residual Certificates" in the Prospectus.
The Class R Certificateholders may be
required to report an amount of taxable
income with respect to the early years of
the Trust Fund's term that significantly
exceeds distributions on the Class R
Certificates during such years, with
corresponding tax deductions or losses
deferred until the later years of the Trust
Fund's term. Accordingly, on a present value
basis, the tax detriments occurring in the
earlier years may substantially exceed the
sum of any tax benefits in the later years.
As a result, the Class R Certificateholders'
after-tax rate of return may be zero or
negative, event if their pre-tax rate of
return is positive.
See "Yield and Maturity Considerations,"
especially "--Additional Yield
Considerations Applicable Solely to the
Class R Certificates", and "Certain Federal
Income Tax
S-9
<PAGE>
Consequences--Special Tax Considerations
Applicable to REMIC Residual Certificates"
herein.
For further information regarding the
Federal income tax consequences of investing
in the Offered Certificates, see "Certain
Federal Income Tax Consequences" herein and
in the Prospectus.
RATING ........................ It is a condition of their issuance that the
Senior Certificates be rated not lower than
" ", and that the Class B Certificates be
rated not lower than " ", by
([collectively,] the "Rating Agenc[ies]"). A
security rating is not a recommendation to
buy, sell or hold securities and may be
subject to revision or withdrawal at any
time by the assigning Rating Agency. A
security rating does not address the
frequency of prepayments of Mortgage Loans,
or the corresponding effect on yield to
investors. [The following disclosure is
applicable to Stripped Interest
Certificates, when offered A security rating
does not address the frequency or likelihood
of prepayments (whether voluntary or
involuntary) of Mortgage Loans, or the
possibility that, as a result of
prepayments, investors in the Class S
Certificates may realize a lower than
anticipated yield or may fail to recover
fully their initial investment.] See
"Rating" herein.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "Certain ERISA
Considerations" herein and in the
Prospectus.
LEGAL INVESTMENT .............. [The Senior Certificates will constitute
"mortgage related securities" for purposes
of SMMEA, for so long as they are rated in
one of the two highest rating categories by
one or more nationally recognized
statistical rating organizations [and are
secured by liens on real property.]
[The Class B Certificates will not constitute
"mortgage related securities" within the
meaning of SMMEA. As a result, the
appropriate characterization of the Class B
Certificates under various legal investment
restrictions, and thus the ability of
investors subject to these restrictions to
purchase the Class B Certificates, may be
subject to significant interpretative
uncertainties.]
Investors should consult their legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "Legal
Investment" herein and in the Prospectus.
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<PAGE>
RISK FACTORS
Prospective purchasers of Offered Certificates should consider, among
other things, the following risk factors (as well as the risk factors set
forth under "Risk Factors" in the Prospectus) in connection with an
investment therein.
Limited Liquidity. There is currently no secondary market for the Offered
Certificates. The Underwriter has indicated its intention to make a secondary
market in the Offered Certificates, but it is not obligated to do so. There
can be no assurance that a secondary market for the Offered Certificates will
develop or, if it does develop, that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. The Offered Certificates will not be listed
on any securities exchange. See "Risk Factors--Limited Liquidity" in the
Prospectus.
Certain Yield Considerations. The yield on any Offered Certificate will
depend on (a) the price at which such Certificate is purchased by an investor
and (b) the rate, timing and amount of distributions on such Certificate. The
rate, timing and amount of distributions on any Offered Certificate will, in
turn, depend on, among other things, (w) the Pass-Through Rate for such
Certificate, (x) the rate and timing of principal payments (including
principal prepayments) and other principal collections on or in respect of
the Mortgage Loans and the extent to which such amounts are to be applied or
otherwise result in a reduction of the Certificate Balance [or Notional
Amount] of the Class of Certificates to which such Certificates belongs, (y)
the rate, timing and severity of losses on or in respect of the Mortgage
Loans and the extent to which such losses result in a reduction of the
Certificate Balance [or Notional Amount] of the Class of Certificates to
which such Certificate belongs, and (z) the timing and severity of any Net
Aggregate Prepayment Interest Shortfalls and the extent to which such
shortfalls are allocated in reduction of the Distributable Certificate
Interest payable on the Class of Certificates to which such Certificate
belongs. It is impossible to predict with certainty any of the factors
described in the preceding sentence. Accordingly, investors may find it
difficult to analyze the effect that such factors might have on the yield to
maturity of any Class of Offered Certificates. [THE YIELD TO MATURITY OF THE
CLASS S CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING BY REASON OF PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON OR IN RESPECT OF THE MORTGAGE LOANS, AND INVESTORS IN THE
CLASS S CERTIFICATES SHOULD FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT AN EXTREMELY RAPID RATE OF AMORTIZATION AND PREPAYMENT OF THE
RELATED NOTIONAL AMOUNT COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO
RECOUP THEIR INITIAL INVESTMENTS.] See "Description of the Mortgage Pool",
"Description of the Certificates--Distributions" and "--Subordination;
Allocation of Collateral Support Deficit" and "Yield and Maturity
Considerations" herein. See also "Yield and Maturity Considerations" in the
Prospectus.
Potential Liability to the Trust Fund Relating to a Materially Adverse
Environmental Condition. [An environmental site assessment was performed at
[each][all but ] of the Mortgaged Properties during the month period
prior to the Cut-off Date. [Note any special environmental problems.]
[Otherwise,] no such environmental assessment revealed any material adverse
environmental condition or circumstance at any Mortgaged Property[, except
for (i) those cases in which the condition or circumstance was remediated or
an escrow for such remediation has been established and (ii) those cases in
which an operations and maintenance plan or periodic monitoring of nearby
properties was recommended, which recommendations are consistent with
industrywide practices].
The Pooling and Servicing Agreement requires that the Master Servicer
obtain an environmental site assessment of a Mortgaged Property securing a
defaulted Mortgage Loan prior to acquiring title thereto or assuming its
operation. Such prohibition effectively precludes enforcement of the security
for the related Mortgage Note until a satisfactory environmental site
assessment is obtained (or until any required remedial action is thereafter
taken), but will decrease the likelihood that the Trust Fund will become
liable for a material adverse environmental condition at the Mortgaged
Property. However, there can be no assurance that the requirements of the
Pooling and Servicing Agreement will effectively insulate the Trust Fund from
potential liability for a materially adverse environmental condition at any
Mortgaged Property. See "Description of the Pooling Agreements--Realization
Upon Defaulted Mortgage Loans", "Risk Factors--Certain Factors Affecting
Delinquency, Foreclosure and Loss of the Mortgage Loans--Risk of Liability
Arising from Environmental Conditions" and "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations" in the Prospectus.
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<PAGE>
Exposure of the Mortgage Pool to Adverse Economic or other Developments
Based on Geographic Concentration. Mortgage Loans, which represent %
of the Initial Pool Balance, are secured by liens on Mortgaged Properties
located in . In general, that concentration increases the exposure of
the Mortgage Pool to any adverse economic or other developments that may
occur in . In recent periods , (along with other regions of the
United States) has experienced a significant downturn in the market value of
real estate.
Increased Risk of Loss Associated With Concentration of Mortgage Loans and
Borrowers. Several of the Mortgage Loans have Cut-off Date Balances that are
substantially higher than the average Cut-off Date Balance. In general,
concentrations in a mortgage pool of loans with larger-than-average balances
can result in losses that are more severe, relative to the size of the pool,
than would be the case if the aggregate balance of the pool were more evenly
distributed. Concentration of borrowers also poses increased risks. For
instance, if a borrower that owns several Mortgaged Properties experiences
financial difficulty at one Mortgaged Property, or at another
income-producing property that it owns, it could attempt to avert foreclosure
by filing a bankruptcy petition that might have the effect of interrupting
Monthly Payments for an indefinite period on all of the related Mortgage
Loans.
Increased Risk of Default Associated with Adjustable Rate Mortgage Loans.
of the Mortgage Loans, which represent % of the Initial Pool Balance,
are ARM Loans. Increases in the required Monthly Payments on ARM Loans in
excess of those assumed in the original underwriting of such loans may result
in a default rate higher than that on mortgage loans with fixed mortgage
rates.
Increased Risk of Default Associated with Balloon Payments. None of the
Mortgage Loans is fully amortizing over its term to maturity. Thus, each
Mortgage Loan will have a substantial payment (that is, a Balloon Payment)
due at its stated maturity unless prepaid prior thereto. Loans with Balloon
Payments involve a greater likelihood of default than self-amortizing loans
because the ability of a borrower to make a Balloon Payment typically will
depend upon its ability either to refinance the loan or to sell the related
mortgaged property. See "Risk Factors--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments" in the Prospectus.
Extension Risk Associated With Modification of Mortgage Loans with Balloon
Payments. In order to maximize recoveries on defaulted Mortgage Loans, the
Pooling and Servicing Agreement enables the Special Servicer to extend and
modify Mortgage Loans that are in material default or as to which a payment
default (including the failure to make a Balloon Payment) is reasonably
foreseeable; subject, however, to the limitations described under "Servicing
of the Mortgage Loans--Modifications, Waivers and Amendments" herein. There
can be no assurance, however, that any such extension or modification will
increase the present value of recoveries in a given case. Any delay in
collection of a Balloon Payment that would otherwise be distributable in
respect of a Class of Offered Certificates, whether such delay is due to
borrower default or to modification of the related Mortgage Loan by the
Special Servicer, will likely extend the weighted average life of such Class
of Offered Certificates. See "Yield and Maturity Considerations" herein and
in the Prospectus.
Risks Particular to Restaurant Properties. Repayment of a mortgage loan
made on the security of a restaurant is dependent primarily on the success of
the restaurant. Various factors may affect the economic viability of
restaurants, including but not limited to competition from other restaurants;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the restaurant; the cost, quality and availability of food
products; changes in demographics, consumer habits and traffic patterns; the
ability to provide or contract for capable management and adequate
maintenance; and retroactive changes to building codes and other legal
requirements. Additional factors that can affect the success of a restaurant
that is part of a regionally or nationally-known chain of restaurants include
actions and omissions of any franchisor (including management practices that
adversely affect the nature of the business or that require the franchisee to
expend sums for renovation, refurbishment or expansion); the ability of a
franchisor to provide support in the way of advertising and arrangements with
providers of products and services; and the bankruptcy or business
discontinuation of any such franchisor.
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<PAGE>
Risks Particular to Health Care-Related Facilities. Certain types of
Health Care-Related Facilities (including nursing homes) typically receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to
statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Accordingly, there can be
no assurance that payments under government reimbursement programs will be
sufficient to fully reimburse the cost of caring for program beneficiaries.
If such payments are insufficient, net operating income of those Health
Care-Related Facilities that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their obligations
under the Mortgage Loans secured thereby, could be adversely affected.
Health Care-Related Facilities are generally subject to federal and state
laws and licensing requirements that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel,
operating policies and additions to facilities and services. The failure of
an operator to maintain or renew any required license or regulatory approval
could prevent it from continuing operations at a Health Care-Related Facility
or, if applicable, bar it from participation in government reimbursement
programs. Furthermore, under applicable federal and state laws and
regulations, Medicare and Medicaid reimbursements are generally not permitted
to be made to any person other than the provider who actually furnished the
related medical goods and services. Moreover, where licenses or other
governmental approvals are necessary, such are generally personal to the
operator of the facility. Accordingly, in the event of foreclosure of a
defaulted Mortgage Loan, the purchaser at foreclosure would generally not be
entitled to obtain governmental reimbursement payments relating to services
furnished at the facility prior to foreclosure, and might be required to
obtain new government operating licenses or approvals.
Risks Particular to Retail Properties. In addition to risks generally
associated with income producing real estate, mortgage loans secured by liens
on retail properties can also be adversely affected by changes in consumer
spending patterns, local competitive conditions (such as the supply of retail
space or the existence or construction of new competitive shopping centers),
growth of alternative forms of retailing (such as direct mail and video
shopping networks which need little or no retail space) and the public
perception of the safety of customers at shopping centers. In addition,
significant tenants at a retail property play an important part in generating
customer traffic and making a retail property a desirable location for other
tenants at such property.
A retail property may also be adversely affected if a significant tenant
ceases operations at such location (which may occur on account of a voluntary
decision not to renew a lease, bankruptcy or insolvency of such tenant, such
tenant's general cessation of business activities or for other reasons).
Certain tenants at retail properties may be entitled to terminate their
leases if an anchor tenant ceases operations at such property. In such cases,
there can be no assurance that any such anchor tenants will continue to
occupy space in the related shopping centers.
Risks Particular to Office Properties. Mortgage loans secured by liens on
office properties can be adversely affected by local competitive conditions,
including the overall supply of office space and the existence of competitive
buildings. For example, office buildings that are not equipped to accommodate
the needs of modern businesses may become functionally obsolete and unable to
attract tenants. Similarly, a property will likely suffer if prospective
tenants consider it less attractive, or less well-located, than nearby office
properties. Accordingly, office properties generally require their owners to
expend significant sums to pay for capital improvements and tenant
improvements, as well as costs related to re-leasing space.
Risks Particular to Multifamily Properties. In the case of multifamily
lending in particular, adverse economic conditions, either local, regional or
national, may limit the amount of rent that can be charged and may result in
a reduction in timely rent payments or a reduction in occupancy levels.
Occupancy and rent levels may also be affected by construction of additional
housing units, local military base closings and national and local politics,
including current or future rent stabilization and rent control laws and
agreements. Certain of the Mortgaged Properties may be subject to rent
stabilization or rent control laws.
S-13
<PAGE>
In addition, the level of mortgage interest rates may encourage tenants to
purchase single-family housing. Further, the cost of operating a multifamily
property may increase, including the costs of utilities and the costs of
required capital expenditures. All of these conditions and events may
increase the possibility that a borrower may be unable to meet its obligation
under its Mortgage Loan.
Risks Relating to Lack of Certificateholder Control Over Trust
Fund. Certificateholders generally do not have a right to vote, except with
respect to required consents to certain amendments to the Pooling and
Servicing Agreement. Furthermore, Certificateholders will generally not have
the right to make decisions with respect to the administration of the Trust
Fund. Such decisions are generally made, subject to the express terms of the
Pooling and Servicing Agreement, by the Master Servicer, the Trustee, the
Special Servicer or the REMIC Administrator, as applicable. Any decision made
by one of those parties in respect of the Trust Fund, even if made in the
best interests of the Certificateholders (as determined by such party in its
good faith and reasonable judgment), may be contrary to the decision that
would have been made by the holders of any particular Class of Offered
Certificates and may negatively affect the interests of such holders.
Yield Risk Associated With Changes in Concentrations. If and as payments
in respect of principal (including any principal prepayments, liquidations
and the principal portion of the repurchase prices of any Mortgage Loans
repurchased due to breaches of representations) are received with respect to
the Mortgage Loans, the remaining Mortgage Loans as a group may exhibit
increased concentration with respect to the type of properties, property
characteristics, number of Mortgagors and affiliated Mortgagors and
geographic location. Because unscheduled collections of principal on the
Mortgage Loans is payable on the Class A, Class B and Class C Certificates in
sequential order, such Classes that have a lower sequential priority are
relatively more likely to be exposed to any risks associated with changes in
concentrations of loan or property characteristics.
Subordination of Class B and Class C Certificates. As and to the extent
described herein, the rights of the holders of the Class B and Class C
Certificates to receive distributions of amounts collected or advanced on or
in respect of the Mortgage Loans will be subordinated to those of the holders
of the Senior Certificates and also, in the case of the holders of the Class
C Certificates, also to those of the holders of the Class B Certificates. See
"Description of the Certificates--Distributions--Priority" and
"--Subordination; Allocation of Collateral Support Deficit" herein.
Book-Entry Registration. The Class A Certificates will be initially
represented by one or more certificates registered in the name of Cede & Co.,
as the nominee for DTC, and will not be registered in the names of the
related holders of Certificates or their nominees. As a result, holders of
Class A Certificates will not be recognized as "Certificateholders." Hence,
those beneficial owners will be able to exercise the rights of holders of
Certificates only indirectly through DTC and DTC Participants. See
"Description of the Certificates--General" and "--Book-Entry Registration"
herein and "Description of the Certificates--Book-Entry Registration and
Definitive Certificates" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of conventional, balloon
Mortgage Loans with an Initial Pool Balance of $ . Each Mortgage Loan is
evidenced by a promissory note (a "Mortgage Note") and secured by a mortgage,
deed of trust or other similar security instrument (a "Mortgage") that
creates a first mortgage lien on a fee simple estate in real property (a
"Mortgaged Property") operated as a restaurant, a Health Care-Related
Facility, a retail property, an office building or a multifamily rental
property. All percentages of the Mortgage Loans, or of any specified group of
Mortgage Loans, referred to herein without further description are
approximate percentages by aggregate Cut-off Date Balance. The "Cut-off Date
Balance" of any Mortgage Loan is the unpaid principal balance thereof as of
the Cut-off Date, after application of all payments due on or before such
date, whether or not received.
The Mortgage Loans are not insured or guaranteed by any governmental
entity or private mortgage insurer. The Depositor has not undertaken any
evaluation of the significance of the recourse provisions
S-14
<PAGE>
of any of a number of the Mortgage Loans that provide for recourse against
the related borrower or another person in the event of a default.
Accordingly, investors should consider all of the Mortgage Loans to be
nonrecourse loans as to which recourse in the case of default will be limited
to the specific property and such other assets, if any, as were pledged to
secure a Mortgage Loan.
On or prior to the Delivery Date, the Depositor will acquire the Mortgage
Loans from the Mortgage Loan Seller pursuant to the Purchase Agreement and
will thereupon assign its interests in the Mortgage Loans, without recourse,
to the Trustee for the benefit of the Certificateholders. See "--The Mortgage
Loan Seller" herein and "Description of the Pooling Agreements--Assignment of
Mortgage Loans; Repurchases" in the Prospectus. For purposes of the
Prospectus, the Mortgage Loan Seller constitutes a "Mortgage Asset Seller".
The Mortgage Loans were originated between 19 and 19 . The Mortgage
Loan Seller originated of the Mortgage Loans, which represent % of the
Initial Pool Balance, and acquired the remaining Mortgage Loans from the
respective originators thereof, generally in accordance with the underwriting
criteria described below under "--Underwriting Standards".
CERTAIN PAYMENT CHARACTERISTICS
of the Mortgage Loans, which represent % of the Initial Pool
Balance, have Due Dates that occur on the first day of each month. The
remaining Mortgage Loans have Due Dates that occur on the ( % of the
Mortgage Loans), ( % of the Mortgage Loans), ( % of the
Mortgage Loans), and ( % of the Mortgage Loans) day of each month.
of the Mortgage Loans, which represent % of the Initial Pool
Balance, are ARM Loans. The ARM Loans bear interest at Mortgage Rates that
are subject to adjustment on periodically occurring Interest Rate Adjustment
Dates by adding the related Gross Margin to the applicable value of the
related Index, subject in cases to rounding conventions and lifetime
minimum and/or maximum Mortgage Rates and, in the case of Mortgage Loans,
which represent % of the Initial Pool Balance, to periodic minimum and/or
maximum Mortgage Rates. The remaining Mortgage Loans are Fixed Rate Loans.
None of the ARM Loans is convertible into a Fixed Rate Loan.
[Identify Mortgage Loan Index] The adjustments to the Mortgage Rates on
the ARM Loans may in each case be based on the value of the related Index as
available a specified number of days prior to an Interest Rate Adjustment
Date, or may be based on the value of the related Index as most recently
published as of an Interest Rate Adjustment Date or as of a designated date
preceding an Interest Rate Adjustment Date. of the ARM Loans, which
represent % of the Initial Pool Balance, provide for Interest Rate
Adjustment Dates that occur monthly; of the ARM Loans, which represent
% of the Initial Pool Balance, provide for Interest Rate Adjustment Dates
that occur semi-annually; and the remaining ARM Loans provide for Interest
Rate Adjustment Dates that occur annually.
The Monthly Payments on each ARM Loan are subject to adjustment on each
Payment Adjustment Date to an amount that would amortize fully the principal
balance of the Mortgage Loan over its then remaining amortization schedule
and pay interest at the Mortgage Rate in effect during the one month period
preceding such Payment Adjustment Date. The ARM Loans provide for Payment
Adjustment Dates that occur on the Due Date following each related Interest
Rate Adjustment Date. None of the ARM Loans provide for negative
amortization.
All of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules significantly longer than the remaining terms of
such Mortgage Loans. Thus, each Mortgage Loan will have a Balloon Payment due
at its stated maturity date, unless prepaid prior thereto.
No Mortgage Loan currently prohibits principal prepayments; however,
[certain] of the Mortgage Loans impose fees or penalties ("Prepayment
Premiums") in connection with full or partial prepayments. Prepayment
Premiums are payable to the Master Servicer as additional servicing
compensation, to the extent not otherwise applied to offset Prepayment
Interest Shortfalls, and may be waived by the Master Servicer in accordance
with the servicing standard described under "Servicing of the Mortgage
Loans--General" herein.
S-15
<PAGE>
[THE INDEX]
Describe Index and include 5 year history.
[DELINQUENT AND NONPERFORMING MORTGAGE LOANS]
[Describe those delinquent and nonperforming Mortgage Loans, if any,
included in the Trust Fund.]
ADDITIONAL MORTGAGE LOAN INFORMATION
The following tables set forth the specified characteristics of, in each
case as indicated, the ARM Loans, the Fixed Rate Loans or all the Mortgage
Loans. The sum in any column may not equal the indicated total due to
rounding.
MORTGAGE RATES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
RANGE OF MORTGAGE RATES(%) LOANS DATE BALANCE DATE BALANCE
- --------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .............................................
============= ===================== =====================
Weighted Average
Mortgage Rate (All Mortgage Loans):
% per annum
Weighted Average
Mortgage Rate (ARM Loans): % per annum
Weighted Average
Mortgage Rate (Fixed Rate Loans): % per annum
</TABLE>
GROSS MARGINS FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
RANGE OF GROSS MARGINS(%) ARM LOANS DATE BALANCE DATE BALANCE
- --------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total .....................
============= ===================== =====================
Weighted Average
Gross Margin: %
</TABLE>
S-16
<PAGE>
FREQUENCY OF ADJUSTMENTS TO MORTGAGE RATES AND MONTHLY PAYMENTS FOR THE ARM
LOANS
<TABLE>
<CAPTION>
MONTHLY
MORTGAGE RATE PAYMENT NUMBER OF PERCENT BY
ADJUSTMENT ADJUSTMENT MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
FREQUENCY FREQUENCY LOANS DATE BALANCE DATE BALANCE
----------------- -------------- ------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C>
------------- --------------------- ---------------------
Total ....
============= ===================== =====================
</TABLE>
MAXIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total ...........................................
============= ===================== =====================
Weighted Average Maximum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
</TABLE>
- ------------
(A) This calculation does not include the ARM Loans without maximum
lifetime Mortgage Rates.
MINIMUM LIFETIME MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LIFETIME MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total ...........................................
============= ===================== =====================
Weighted Average Minimum Lifetime
Mortgage Rate (ARM Loans): % per annum (A)
</TABLE>
- ------------
(A) This calculation does not include the ARM Loans without minimum
lifetime Mortgage Rates.
S-17
<PAGE>
MAXIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MAXIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total ...........................................
============= ===================== =====================
Weighted Average Maximum Annual
Mortgage Rate (ARM Loans): % per annum (A)
</TABLE>
- ------------
(A) This calculation does not include the ARM Loans without maximum
annual Mortgage Rates.
MINIMUM ANNUAL MORTGAGE RATES FOR THE ARM LOANS
<TABLE>
<CAPTION>
PERCENT BY
RANGE OF MINIMUM NUMBER OF AGGREGATE CUT-OFF AGGREGATE CUT-OFF
ANNUAL MORTGAGE RATES(%) ARM LOANS DATE BALANCE DATE BALANCE
- ------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Total ...........................................
============= ===================== =====================
Weighted Average Minimum Annual
Mortgage Rate (ARM Loans): % per annum (A)
</TABLE>
- ------------
(A) This calculation does not include the ARM Loans without minimum
annual Mortgage Rates.
S-18
<PAGE>
CUT-OFF DATE BALANCES
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
CUT-OFF DATE MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
BALANCE RANGE ($) LOANS DATE BALANCE DATE BALANCE
- ------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...............................
============= ===================== =====================
Average Cut-off Date
Balance (All Mortgage
Loans): $
Average Cut-off Date
Balance (ARM Loans): $
Average Cut-off Date
Balance (Fixed Rate Loans): $
</TABLE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
NUMBER OF CUT-OFF DATE AGGREGATE CUT-OFF
PROPERTY TYPE MORTGAGE LOANS BALANCE DATE BALANCE
- --------------------------------- ------------------ ---------------- ---------------------
<S> <C> <C> <C>
Multifamily ......................
Retail ...........................
Office ...........................
Health Care-Related Facility ....
Restaurant .......................
[other property types] ...........
------------------ ---------------- ---------------------
Total ...........................
================== ================
</TABLE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE WEIGHTED
NUMBER OF CUT-OFF CUT-OFF DATE AVERAGE
JURISDICTION MORTGAGE LOANS DATE BALANCE BALANCE DSC RATIO
- ---------------- ------------------ ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
------------------ ---------------- ---------------- -------------
Total ..........
================== ================ ================ =============
</TABLE>
S-19
<PAGE>
ORIGINAL TERM TO STATED MATURITY (IN MONTHS)
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
RANGE OF ORIGINAL MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- ----------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ..............................
============= ===================== =====================
Weighted Average Original
Term to Stated Maturity
(All Mortgage Loans): months
Weighted Average Original
Term to Stated Maturity
(ARM Loans): months
Weighted Average Original
Term to Stated Maturity
(Fixed Rate Loans): months
</TABLE>
REMAINING TERM TO STATED MATURITY (IN MONTHS) AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
RANGE OF REMAINING MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
TERMS (IN MONTHS) LOANS DATE BALANCE DATE BALANCE
- ------------------------------------ ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...............................
============= ===================== =====================
Weighted Average Remaining
Term to Stated Maturity .............
(All Mortgage Loans): months
Weighted Average Remaining
Term to Stated Maturity
(ARM Loans): months
Weighted Average Remaining
Term to Stated Maturity
(Fixed Rate Loans): months
</TABLE>
S-20
<PAGE>
YEAR OF ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ---------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ....
============= ===================== =====================
</TABLE>
YEAR OF SCHEDULED MATURITY
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
YEAR LOANS DATE BALANCE DATE BALANCE
- ---------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ....
============= ===================== =====================
</TABLE>
S-21
<PAGE>
The following table sets forth a range of Debt Service Coverage Ratios
for the Mortgage Loans. The "Debt Service Coverage Ratio" set forth in the
following table for any Mortgage Loan is the ratio of (i) Net Operating
Income produced by the related Mortgaged Property for the period (annualized
if the period was less than one year) covered by the most recent operating
statement available to the Depositor to (ii) the amount of the Monthly
Payment in effect as of the Cut-off Date multiplied by 12. "Net Operating
Income" is the revenue derived from the use and operation of a Mortgaged
Property (consisting primarily of rental income and deposit forfeitures),
less operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance), and further less
fixed expenses (such as insurance and real estate taxes). Net Operating
Income generally does not reflect capital expenditures. The following table
was prepared using operating statements obtained from the respective
mortgagors or the related property managers. In each case, the information
contained in such operating statements was unaudited, and the Depositor has
made no attempt to verify its accuracy. In the case of Mortgage Loans
( ARM Loans and Fixed Rate Loans), representing % of the Initial
Pool Balance, operating statements could not be obtained, and accordingly,
Debt Service Coverage Ratios for those Mortgage Loans were not calculated.
The last day of the period (which may not correspond to the end of the
calendar year most recent to the Cut-off Date) covered by each operating
statement from which a Debt Service Coverage Ratio was calculated is set
forth in Annex A with respect to the related Mortgage Loan.
DEBT SERVICE COVERAGE RATIOS(A)
<TABLE>
<CAPTION>
RANGE OF NUMBER OF PERCENT BY
DEBT SERVICE MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
COVERAGE RATIOS LOANS DATE BALANCE DATE BALANCE
- ------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
Not Calculated(B) ....................
------------- --------------------- ---------------------
Total ................................
============= ===================== =====================
Weighted Average
Debt Service Coverage Ratio
(All Mortgage Loans): x(C)
Weighted Average
Debt Service Coverage
Ratio (ARM Loans): x(D)
Weighted Average
Debt Service Coverage
Ratio (Fixed Rate Loans): x(E)
</TABLE>
- ------------
(A) The Debt Service Coverage Ratios are based on the most recently
available operating statements obtained from the respective
mortgagors or the related property managers.
(B) The Debt Service Coverage Ratios for these Mortgage Loans were not
calculated due to a lack of available operating statements.
(C) This calculation does not include the Mortgage Loans as to which
Debt Service Coverage Ratios were not calculated.
(D) This calculation does not include the ARM Loans as to which Debt
Service Coverage Ratios were not calculated.
(E) This calculation does not include the Fixed Rate Loans as to
which Debt Service Coverage Ratios were not calculated.
S-22
<PAGE>
The following tables set forth the range of LTV Ratios of the Mortgage
Loans at origination and the Cut-off Date. An "LTV Ratio" for any Mortgage
Loan, as of any date of determination, is a fraction, expressed as a
percentage, the numerator of which is the original principal balance of such
Mortgage Loan or the Cut-off Date Balance of such Mortgage Loan, as
applicable, and the denominator of which is the appraised value of the
related Mortgaged Property as determined by an appraisal thereof obtained in
connection with the origination of such Mortgage Loan. Because it is based on
the value of a Mortgaged Property determined as of loan origination, the
information set forth in the table below is not necessarily a reliable
measure of the related borrower's current equity in each Mortgaged Property.
In a declining real estate market, the fair market value of a Mortgaged
Property could have decreased from the value determined at origination, and
the current actual loan-to-value ratio of a Mortgage Loan may be higher than
even its LTV Ratio at origination, notwithstanding taking into account
amortization since origination.
LTV RATIOS AT ORIGINATION
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
RANGE OF ORIGINAL MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
LTV RATIOS(%) LOANS DATE BALANCE DATE BALANCE
- ---------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ...................................
============= ===================== =====================
Weighted Average Original
LTV Ratio (All Mortgage Loans): %
Weighted Average Original
LTV Ratio (ARM Loans): %
Weighted Average Original
LTV Ratio (Fixed Rate Loans): %
</TABLE>
S-23
<PAGE>
LTV RATIOS AT CUT-OFF DATE
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
RANGE OF LTV RATIOS(%) MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
AS OF CUT-OFF DATE LOANS DATE BALANCE DATE BALANCE
- ------------------------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ............................................
============= ===================== =====================
Weighted Average LTV Ratio
as of Cut-off Date (All Mortgage Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (ARM Loans): %
Weighted Average LTV Ratio
as of Cut-off Date (Fixed Rate Loans): %
</TABLE>
OCCUPANCY RATES
<TABLE>
<CAPTION>
NUMBER OF PERCENT BY
RANGE OF MORTGAGE AGGREGATE CUT-OFF AGGREGATE CUT-OFF
OCCUPANCY RATES(A) LOANS DATE BALANCE DATE BALANCE
- ----------------------------------- ------------- --------------------- ---------------------
<S> <C> <C> <C>
------------- --------------------- ---------------------
Total ..............................
============= ===================== =====================
Weighted Average Occupancy Rate
(All Mortgage Loans)(A): %
Weighted Average Occupancy Rate
(ARM Loans)(A): % ..................
Weighted Average Occupancy Rate
(Fixed Rate Loans)(A): % ...........
</TABLE>
- ------------
(A) Physical occupancy rates calculated based on rent rolls provided by
the respective Mortgagors or related property managers as of a date
no more than months prior to the Cut-off Date.
S-24
<PAGE>
PREPAYMENT RESTRICTIONS IN EFFECT AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
% BY CUM.
AGGREGATE AGGREGATE % OF
CUT-OFF CUT-OFF INITIAL
PREPAYMENT NUMBER DATE DATE POOL
RESTRICTIONS OF LOANS BALANCE BALANCE BALANCE
- ------------------------------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
LOCKED OUT (A) .................
Yield
Maintenance (B) ...............
Declining Percentage Premium
% Premium ......................
% Premium ......................
No Prepayment Restrictions ....
TOTALS .........................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
WEIGHTED AVERAGES
----------------------------------------------------------------------------------
INDICATIVE
STATED REMAINING CUT-OFF
PREPAYMENT MORTGAGE REMAINING AMORT. IMPLIED DATE
RESTRICTIONS RATE TERM (MO.) TERM (MO.) DSCR DSCR LTV
- -------------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Locked Out (A) ...........
Yield
Maintenance (B) .........
Declining Percentage
Premium
% Premium ................
% Premium ................
No Prepayment Restrictions
TOTALS ...................
</TABLE>
- ------------
(A) The weighted average term to the expiration of the lock-out periods
is years. of the Mortgage Loans within their lock-out
periods are subject to declining percentage Prepayment Premiums after
the expiration of their lock-out periods; the remaining Mortgage
Loans are subject to a yield maintenance-type Prepayment Premium
following such expiration.
(B) All Mortgage Loans subject to yield maintenance-type Prepayment
Premiums remain subject to payment of the Prepayment Premium until at
least months prior to maturity.
Specified in Annex A to this Prospectus Supplement are the foregoing and
certain additional characteristics of the Mortgage Loans set forth on a
loan-by-loan basis. Certain additional information regarding the Mortgage
Loans is contained herein under "--Underwriting Standards" and
"--Representations and Warranties; Repurchases" and in the Prospectus under
"Description of the Trust Funds--Mortgage Loans" and "Certain Legal Aspects
of Mortgage Loans".
[Delinquencies. As of the Cut-off Date, [no] Mortgage Loan was more than
30 days delinquent in respect of any Monthly Payment.]
THE MORTGAGE LOAN SELLER
General. [The Mortgage Loans Seller [, a wholly-owned subsidiary of ,]
is a organized in 19 under the laws of . As of December 31,
199 , the Mortgage Loan Seller had a net worth of approximately $ , and
currently holds and services for its own account a total residential and
commercial mortgage loan portfolio of approximately $ , of which
approximately $ constitutes multifamily mortgage loans.]
The information set forth herein concerning the Mortgage Loan Seller and
its underwriting standards has been provided by the Mortgage Loan Seller, and
neither the Depositor nor the Underwriter makes any representation or
warranty as to the accuracy or completeness of such information.
UNDERWRITING STANDARDS
[All of the Mortgage Loans were originated or acquired by the Mortgage
Loan Seller, generally in accordance with the underwriting criteria described
herein.
[Description of underwriting standards.]
The Depositor believes that the Mortgage Loans selected for inclusion in
the Mortgage Pool from the Mortgage Loan Seller's portfolio were not so
selected on any basis which would have a material adverse effect on the
Certificateholders.]
<PAGE>
REPRESENTATIONS AND WARRANTIES; REPURCHASES
In the Purchase Agreement, the Mortgage Loan Seller has represented and
warranted with respect to each Mortgage Loan, as of [the Delivery Date], or
as of such other date specifically provided in the representation and
warranty, among other things, that:
S-25
<PAGE>
[Specify significant representations and warranties.]
If the Mortgage Loan Seller has been notified of a material breach of any
of the foregoing representations and warranties as described in the
Prospectus and if the Mortgage Loan Seller cannot cure such breach within a
period of 90 days following its receipt of such notice, then the Mortgage
Loan Seller will be obligated pursuant to the Purchase Agreement (the
relevant rights under which will be assigned, together with its interests in
the Mortgage Loans, by the Depositor to the Trustee) to repurchase the
affected Mortgage Loan within such 90-day period at a price (the "Purchase
Price") equal to the sum of (i) the unpaid principal balance of such Mortgage
Loan, (ii) unpaid accrued interest on such Mortgage Loan at the Mortgage Rate
from the date to which interest was last paid to the Due Date in the Due
Period in which the purchase is to occur, and (iii) certain servicing
expenses that are reimbursable to the Master Servicer and the Special
Servicer.
The foregoing repurchase obligation will constitute the sole remedy
available to the Certificateholders and the Trustee for any breach of the
Mortgage Loan Seller's representations and warranties regarding the Mortgage
Loans. The Mortgage Loan Seller will be the sole Warranting Party in respect
of the Mortgage Loans, and none of the Depositor, the Master Servicer or any
of their affiliates [(other than the Mortgage Loan Seller)] will be obligated
to repurchase any affected Mortgage Loan in connection with a breach of the
Mortgage Loan Seller's representations and warranties if the Mortgage Loan
Seller defaults on its obligation to do so. However, the Depositor will not
include any Mortgage Loan in the Mortgage Pool if anything has come to the
Depositor's attention prior to the Closing Date that would cause it to
believe that the representations and warranties made by the Mortgage Loan
Seller regarding such Mortgage Loan will not be correct in all material
respects. See "Description of the Pooling Agreements--Representations and
Warranties; Repurchases" in the Prospectus.
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the time the Offered Certificates are issued, as adjusted for
the scheduled principal payments due on or before the Cut-off Date. Prior to
the issuance of the Offered Certificates, a Mortgage Loan may be removed from
the Mortgage Pool if the Depositor deems such removal necessary or
appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Offered
Certificates, unless including such Mortgage Loans would materially alter the
characteristics of the Mortgage Pool as described herein. The Depositor
believes that the information set forth herein will be representative of the
characteristics of the Mortgage Pool as it will be constituted at the time
the Offered Certificates are issued, although the range of Mortgage Rates and
maturities and certain other characteristics of the Mortgage Loans in the
Mortgage Pool may vary.
A Current Report on Form 8-K (the "Form 8-K") will be available to
purchasers of the Offered Certificates on or shortly after the Delivery Date
and will be filed, together with the Pooling and Servicing Agreement, with
the Securities and Exchange Commission within fifteen days after the initial
issuance of the Offered Certificates. In the event Mortgage Loans are removed
from or added to the Mortgage Pool as set forth in the preceding paragraph,
such removal or addition will be noted in the Form 8-K.
S-26
<PAGE>
SERVICING OF THE MORTGAGE LOANS
GENERAL
Each of the Master Servicer and the Special Servicer will be required to
service and administer the Mortgage Loans for which it is responsible, either
directly or through sub-servicers, on behalf of the Trustee and in the best
interests of and for the benefit of the Certificateholders (as determined by
the Master Servicer or the Special Servicer, as the case may be, in its good
faith and reasonable judgment), in accordance with applicable law, the terms
of the Pooling and Servicing Agreement, the terms of the respective Mortgage
Loans and, to the extent consistent with the foregoing, in the same manner as
would prudent institutional mortgage lenders and loan servicers servicing
mortgage loans comparable to the Mortgage Loans in the jurisdictions where
the Mortgaged Properties are located, and with a view to the maximization of
timely and complete recovery of principal and interest, but without regard
to: (i) any relationship that the Master Servicer or the Special Servicer, as
the case may be, or any affiliate thereof, may have with the related
mortgagor; (ii) the ownership of any Certificate by the Master Servicer or
the Special Servicer, as the case may be, or any affiliate thereof; (iii) the
Master Servicer's or the Special Servicer's, as the case may be, obligation
to make advances, whether in respect of delinquent payments of principal
and/or interest or to cover certain servicing expenses; and (iv) the Master
Servicer's or the Special Servicer's, as the case may be, right to receive
compensation for its services under the Pooling and Servicing Agreement or
with respect to any particular transaction.
Except as otherwise described under "--Inspections; Collection of
Operating Information" below, the Master Servicer initially will be
responsible for the servicing and administration of the entire Mortgage Pool.
With respect to any Mortgage Loan (i) which has a Balloon Payment which is
past due or any other payment which is more than [60] days past due, (ii) as
to which the borrower has entered into or consented to bankruptcy,
appointment of a receiver or conservator or a similar insolvency proceeding,
or the borrower has become the subject of a decree or order for such a
proceeding which shall have remained in force undischarged or unstayed for a
period of [60] days, (iii) as to which the Master Servicer shall have
received notice of the foreclosure or proposed foreclosure of any other lien
on the Mortgaged Property, or (iv) as to which, in the judgment of the Master
Servicer, a payment default has occurred or is imminent and is not likely to
be cured by the borrower within [60] days, and prior to acceleration of
amounts due under the related Mortgage Note or commencement of any
foreclosure or similar proceedings, the Master Servicer will transfer its
servicing responsibilities to the Special Servicer, but will continue to
receive payments on such Mortgage Loan (including amounts collected by the
Special Servicer), to make certain calculations with respect to such Mortgage
Loan and to make remittances and prepare certain reports to the
Certificateholders with respect to such Mortgage Loan. If the related
Mortgaged Property is acquired in respect of any such Mortgage Loan (upon
acquisition, an "REO Property"), whether through foreclosure, deed-in-lieu of
foreclosure or otherwise, the Special Servicer will continue to be
responsible for the operation and management thereof. The Mortgage Loans
serviced by the Special Servicer are referred to herein as the "Specially
Serviced Mortgage Loans" and, together with any REO Properties, constitute
the "Specially Serviced Mortgage Assets". The Master Servicer shall have no
responsibility for the performance by the Special Servicer of its duties
under the Pooling and Servicing Agreement.
If any Specially Serviced Mortgage Loan, in accordance with its original
terms or as modified in accordance with the Pooling and Servicing Agreement,
becomes a performing Mortgage Loan for at least [90] days, the Special
Servicer will return servicing of such Mortgage Loan to the Master Servicer.
Set forth below, following the subsection captioned "--The Master
Servicer", is a description of certain pertinent provisions of the Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans.
Reference is also made to the Prospectus, in particular to the section
captioned "Pooling and Servicing Agreements", for important information in
addition to that set forth herein regarding the terms and conditions of the
Pooling and Servicing Agreement as they relate to the rights and obligations
of the Master Servicer thereunder.
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THE MASTER SERVICER
[ , a , will act as Master Servicer with respect to the Mortgage
Pool. Founded in as a , the Master Servicer today furnishes a
variety of wholesale banking services. As of December 31, 19, the Master
Servicer had a net worth of approximately $ , and a total mortgage loan
servicing portfolio of approximately $ , of which approximately $
represented multifamily mortgage loans.
The offices of the Master Servicer that will be primarily responsible for
servicing and administering the Mortgage Pool are located at .
[If and to the extent available and relevant to an investment decision:
The following table sets forth the historical prepayment information with
respect to the Master Servicer's multifamily and commercial mortgage loan
servicing portfolio:
PREPAYMENT EXPERIENCE OF MASTER SERVICER'S MULTIFAMILY AND COMMERCIAL
MORTGAGE LOAN SERVICING PORTFOLIO
[Table to include relevant information regarding the size of the Master
Servicer's multifamily and commercial mortgage loan servicing portfolio (by
number and/or balance) and the portion of such loans that was subject to
prepayment.]]
The information set forth herein concerning the Master Servicer has been
provided by the Master Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
THE SPECIAL SERVICER
[ , a , will be responsible for the servicing and administration
of the Specially Serviced Mortgage Assets. As of December 31, 19 , the
Special Servicer had a total mortgage loan servicing portfolio of
approximately $ , of which approximately $ represented multifamily
mortgage loans.
The Special Servicer has offices in states with a total staff of
employees. Its principal executive offices are located at .]
The information set forth herein concerning the Special Servicer has been
provided by the Special Servicer, and neither the Depositor nor the
Underwriter makes any representation or warranty as to the accuracy or
completeness of such information.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its master servicing activities will be the Master Servicing Fee. The "Master
Servicing Fee" will be payable monthly on a loan-by-loan basis from amounts
received in respect of interest on each Mortgage Loan, will accrue in
accordance with the terms of the related Mortgage Note at a rate equal to %
per annum, in the case of Mortgage Loans other than Specially Serviced
Mortgage Loans, and % per annum, in the case of Specially Serviced Mortgage
Loans, and will be computed on the basis of the same principal amount and for
the same period respecting which any related interest payment on the related
Mortgage Loan is computed. [As additional servicing compensation, the Master
Servicer will be entitled to retain all Prepayment Premiums, assumption and
modification fees, late charges and penalty interest and, as and to the
extent described below, Prepayment Interest Excesses collected from
mortgagors. In addition, the Master Servicer is authorized but not required
to invest or direct the investment of funds held in the Certificate Account
in Permitted Investments, and the Master Servicer will be entitled to retain
any interest or other income earned on such funds.]
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will consist of the Special Servicing Fee
(together with the Master Servicing Fee, the "Servicing Fees") and the
Workout Fee. Like the Master Servicing Fee, the "Special Servicing Fee" will
be payable
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monthly on a loan-by-loan basis from amounts received in respect of interest
on each Mortgage Loan, will accrue in accordance with the terms of the
related Mortgage Note at a rate equal to % per annum, in the case of
Mortgage Loans other than Specially Serviced Mortgage Loans, and % per
annum, in the case of Specially Serviced Mortgage Loans, and will be computed
on the basis of the same principal amount and for the same period respecting
which any related interest payment on the related Mortgage Loan is computed.
The "Workout Fee" will equal a specified percentage (varying from % to %
(the "Workout Fee Rate") depending on the related unpaid principal balance)
of, and will be payable from, all collections and proceeds received in
respect of principal of each Mortgage Loan which is or has been a Specially
Serviced Mortgage Loan (including those for which servicing has been returned
to the Master Servicer); provided that, in the case of Liquidation Proceeds,
the otherwise fixed Workout Fee Rate will be proportionately reduced to
reflect the extent to which, if at all, the principal portion of such
Liquidation Proceeds is less than the unpaid principal balance of the related
Mortgage Loan immediately prior to the receipt thereof. As additional
servicing compensation, the Special Servicer will be entitled to retain all
assumption and modification fees received on Mortgage Loans serviced thereby.
Although the Master Servicer and Special Servicer are each required to
service and administer the Mortgage Pool in accordance with the general
servicing standard described under "--General" above and, accordingly,
without regard to its right to receive compensation under the Pooling and
Servicing Agreement, additional servicing compensation in the nature of
assumption and modification fees, Prepayment Premiums and Prepayment Interest
Excesses may under certain circumstances provide the Master Servicer or the
Special Servicer, as the case may be, with an economic disincentive to comply
with such standard.
[If a borrower voluntarily prepays a Mortgage Loan in whole or in part
during any Due Period (as defined herein) on a date that is prior to its Due
Date in such Due Period, a Prepayment Interest Shortfall may result. If such
a principal prepayment occurs during any Due Period after the Due Date for
such Mortgage Loan in such Due Period, the amount of interest (net of related
Servicing Fees) that accrues on the amount of such principal prepayment may
exceed (such excess, a "Prepayment Interest Excess") the corresponding amount
of interest accruing on the Certificates. As to any Due Period, to the extent
Prepayment Interest Excesses collected for all Mortgage Loans are greater
than Prepayment Interest Shortfalls incurred, such excess will be paid to the
Master Servicer as additional servicing compensation.]
[As and to the extent described herein under "Description of the
Certificates--Advances", the Master Servicer will be entitled to receive
interest on Advances, and the Master Servicer and the Special Servicer will
be entitled to receive interest on reimbursable servicing expenses, such
interest to be paid, contemporaneously with the reimbursement of the related
Advance or servicing expense, out of any other collections on the Mortgage
Loans.]
The Master Servicer generally will be required to pay all expenses
incurred by it in connection with its servicing activities under the Pooling
and Servicing Agreement, and will not be entitled to reimbursement therefor
except as expressly provided in the Pooling and Servicing Agreement. However,
the Master Servicer will be permitted to pay certain of such expenses
directly out of the Certificate Account and at times without regard to the
relationship between the expense and the funds from which it is being paid.
In connection therewith, the Master Servicer will be responsible for all fees
of any sub-servicers, other than management fees earned in connection with
the operation of an REO Property, which management fees the Master Servicer
will be authorized to pay out of revenues received from such property
(thereby reducing the portion of such revenues that would otherwise be
available for distribution to Certificateholders). See "Description of the
Certificates--Distributions--Method, Timing and Amount" herein and
"Description of the Pooling Agreements--Certificate Account" and "--Servicing
Compensation and Payment of Expenses" in the Prospectus.
MODIFICATIONS, WAIVERS AND AMENDMENTS
The Master Servicer or the Special Servicer may, consistent with its
normal servicing practices, agree to modify, waive or amend any term of any
Mortgage Loan, without the consent of the Trustee or any Certificateholder,
subject, however, to each of the following limitations, conditions and
restrictions:
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(a) with limited exception, the Master Servicer and the Special Servicer
may not agree to any modification, waiver or amendment that will (i)
affect the amount or timing of any scheduled payments of principal or
interest on the Mortgage Loan or (ii) in its judgment, materially impair
the security for the Mortgage Loan or reduce the likelihood of timely
payment of amounts due thereon; unless, in any such case, in the Master
Servicer's or the Special Servicer's judgment, as the case may be, a
material default on the Mortgage Loan has occurred or a payment default is
reasonably foreseeable, and such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the
Mortgage Loan, taking into account the time value of money, than would
liquidation.
(b) [describe additional limitations to permitted modification standards]
The Master Servicer and the Special Servicer will notify the Trustee of
any modification, waiver or amendment of any term of any Mortgage Loan, and
must deliver to the Trustee or the related Custodian, for deposit in the
related Mortgage File, an original counterpart of the agreement related to
such modification, waiver or amendment, promptly (and in any event within
[10] business days) following the execution thereof. Copies of each agreement
whereby any such modification, waiver or amendment of any term of any
Mortgage Loan is effected are to be available for review during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
INSPECTIONS; COLLECTION OF OPERATING INFORMATION
The Special Servicer will perform physical inspections of each Mortgaged
Property at such times and in such manner as are consistent with the Special
Servicer's normal servicing procedures, but in any event (i) at least once
per calendar year, commencing in the calendar year , and (ii), if any
scheduled payment becomes more than 60 days delinquent on the related
Mortgage Loan, as soon as practicable thereafter. The Special Servicer will
prepare a written report of each such inspection describing the condition of
the Mortgaged Property and specifying the existence of any material vacancies
in the Mortgaged Property, of any sale, transfer or abandonment of the
Mortgaged Property, of any material change in the condition or value of the
Mortgaged Property, or of any waste committed thereon.
With respect to each Mortgage Loan that requires the borrower to deliver
such statements, the Special Servicer is also required to collect and review
the annual operating statements of the related Mortgaged Property. [Most] of
the Mortgages obligate the related borrower to deliver annual property
operating statements. However, there can be no assurance that any operating
statements required to be delivered will in fact be delivered, nor is the
Special Servicer likely to have any practical means of compelling such
delivery in the case of an otherwise performing Mortgage Loan.
Copies of the inspection reports and operating statements referred to
above are to be available for review by Certificateholders during normal
business hours at the offices of the [Trustee]. See "Description of the
Certificates--Reports to Certificateholders; Certain Available Information"
herein.
ADDITIONAL OBLIGATIONS OF THE MASTER SERVICER WITH RESPECT TO ARM LOANS
The Master Servicer is responsible for calculating adjustments in the
Mortgage Rate and the Monthly Payment for each ARM Loan and for notifying the
related borrower of such adjustments. If the base index for any ARM Loan is
not published or is otherwise unavailable, then the Master Servicer is
required to select a comparable alternative index over which it has no direct
control, that is readily verifiable and that is acceptable under the terms of
the related Mortgage Note. If the Mortgage Rate or the Monthly Payment with
respect to any ARM Loan is not properly adjusted by the Master Servicer
pursuant to the terms of such Mortgage Loan and applicable law, the Master
Servicer is required to deposit in the Certificate Account on or prior to the
Due Date of the affected Monthly Payment, an amount equal to the excess, if
any, of (i) the amount that would have been received from the borrower if the
Mortgage Rate or Monthly Payment had been properly adjusted, over (ii) the
amount of such improperly adjusted Monthly Payment, subject to reimbursement
only out of such amounts as are recovered from the borrower in respect of
such excess.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all
payments under and proceeds of the Mortgage Loans received after the Cut-off
Date (exclusive of payments of principal and interest due on or before the
Cut-off Date); (ii) any REO Property; (iii) such funds or assets as from time
to time are deposited in the Certificate Account; (iv) the rights of the
mortgagee under all insurance policies with respect to the Mortgage Loans;
and (v) certain rights of the Depositor under the Purchase Agreement relating
to Mortgage Loan document delivery requirements and the representations and
warranties of the Mortgage Loan Seller regarding the Mortgage Loans.
The Certificates will consist of the following four Classes: (i) the Class
A Certificates and the Class R Certificates (collectively, the "Senior
Certificates"); (ii) the Class B Certificates; and (iii) the Class C
Certificates. The Class A Certificates will have an initial Certificate
Balance of $ , which represents % of the Initial Pool Balance; the Class
B Certificates will have an initial Certificate Balance of $ , which
represents % of the Initial Pool Balance; the Class C Certificates will
have an initial Certificate Balance of $ , which represents % of the
Initial Pool Balance; and the Class R Certificates will have an initial
Certificate Balance of $100. The Certificate Balance of any Class of
Certificates outstanding at any time represents the maximum amount which the
holders thereof are entitled to receive as distributions allocable to
principal from the cash flow on the Mortgage Loans and the other assets in
the Trust Fund. On each Distribution Date, the Certificate Balance of each
Class of Certificates will be reduced by any distributions of principal
actually made on, and any Collateral Support Deficit actually allocated to,
such Class of Certificates on such Distribution Date.
Only the Senior Certificates and the Class B Certificates (collectively,
the "Offered Certificates") are offered hereby. The Class C Certificates have
not been registered under the Securities Act of 1933 and are not offered
hereby.
The Class A Certificates will be issued, maintained and transferred on the
book-entry records of DTC and its DTC Participants in denominations of
$25,000 and integral multiples of $1 in excess thereof. The Class B
Certificates will be issued in fully registered, certificated form in
denominations of $100,000 and integral multiples of $1,000 in excess thereof,
with one Class B Certificate evidencing an additional amount equal to the
remainder of the initial Certificate Balance of such Class. The Class R
Certificates will be issued in registered, certificated form in minimum
denominations of 20 % Percentage Interest in such Class. The "Percentage
Interest" evidenced by any Offered Certificate is equal to the initial
denomination thereof as of the Delivery Date, divided by the initial
Certificate Balance of the Class to which it belongs.
The Class A Certificates will initially be represented by one or more
global Certificates registered in the name of the nominee of DTC. The
Depositor has been informed by DTC that DTC's nominee will be Cede & Co. No
Class A Certificate Owner will be entitled to receive a Definitive Class A
Certificate representing its interest in such Class, except as set forth
below under "--Book-Entry Registration of the Class A
Certificates--Definitive Class A Certificates". Unless and until Definitive
Class A Certificates are issued, all references to actions by holders of the
Class A Certificates will refer to actions taken by DTC upon instructions
received from Class A Certificate Owners through DTC Participants, and all
references herein to payments, notices, reports and statements to holders of
the Class A Certificates will refer to payments, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Class A
Certificates, for distribution to Class A Certificate Owners through its DTC
Participants in accordance with DTC procedures. See "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
Until Definitive Class A Certificates are issued, interests in such Class
will be transferred on the book-entry records of DTC and its DTC
Participants. Subject to certain restrictions on the transfer of such
Certificates to Plans (see "ERISA Considerations" herein), the Class B and
Class R Certificates may be
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transferred or exchanged at the offices of located at
, without the payment of any service charges, other than any tax or
other governmental charge payable in connection therewith.
will initially serve as registrar (in such capacity, the "Certificate
Registrar") for purposes of recording and otherwise providing for the
registration of the Offered Certificates and of transfers and exchanges of
the Class B and, if issued, the Definitive Class A Certificates.
BOOK-ENTRY REGISTRATION OF THE CLASS A CERTIFICATES
General. The Class A Certificates will be registered as one or more
global Certificates held by Cede & Co., as nominee of DTC. Beneficial
interests in such Certificates will be held by investors through the
book-entry facilities of DTC. Except as described below, no Class A
Certificate Owner will be entitled to receive a physical certificate
representing its beneficial interest in such Certificates (a "Definitive
Class A Certificate").
Beneficial ownership of a Class A Certificate will be recorded on the
records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the related
Class A Certificate Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Class A Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the
Financial Intermediary, whose interest will in turn be recorded on the
records of DTC, if the related Class A Certificate Owner's Financial
Intermediary is not a DTC Participant). Therefore, the related Class A
Certificate Owner must rely on the foregoing procedures to evidence its
beneficial ownership of a Class A Certificate. Beneficial ownership of a
Class A Certificate may only be transferred by compliance with the procedures
of such Financial Intermediaries and DTC Participants. Arrangements may be
made for clearance and settlement through the Euroclear System and CEDEL,
S.A., if they are DTC Participants.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives)
own DTC. In accordance with its normal procedures, DTC is expected to record
the positions held by each DTC Participant in the Class A Certificates,
whether held for its own account or as a nominee for another person. In
general, beneficial ownership of Class A Certificates will be subject to the
rules, regulations and procedures governing DTC and DTC Participants as in
effect from time to time.
Distributions of principal of and interest on the Book-Entry Certificates
will be made on each Distribution Date by the Trustee to DTC. DTC will be
responsible for crediting the amount of such payments to the accounts of the
applicable DTC Participants in accordance with DTC's normal procedures. Each
DTC Participant will be responsible for disbursing such payments to the Class
A Certificate Owners that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be
responsible for disbursing funds to the Class A Certificate Owners that it
represents.
Under a book-entry format, Class A Certificate Owners may experience some
delay in their receipt of payments, since such payments will be forwarded by
the Trustee to DTC. Because DTC can only act on behalf of Financial
Intermediaries, the ability of a Class A Certificate Owner to pledge to
persons or entities that do not participate in the DTC system, or otherwise
take actions in respect of such Class A Certificates, may be limited due to
the lack of physical certificates for such Class A Certificates. In addition,
issuance of the Class A Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain
potential investors may be unwilling to purchase Certificates for which they
cannot obtain physical certificates.
DTC has advised the Depositor and the Trustee that, unless and until
Definitive Class A Certificates are issued, DTC will take any action
permitted to be taken by a Certificateholder under the Pooling and Servicing
Agreement only at the direction of one or more Financial Intermediaries to
whose depository accounts the Class A Certificates are credited. DTC may take
conflicting actions with respect to other Class A Certificates to the extent
that such actions are taken on behalf of Financial Intermediaries whose
holdings include such Class A Certificates.
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Definitive Class A Certificates. Definitive Class A Certificates will be
issued to Class A Certificate Owners or their nominees, respectively, rather
than to DTC or its nominee, only under the limited conditions set forth in
the Prospectus under "Description of the Certificates--Book-Entry
Registration and Definitive Certificates."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates--Book-Entry Registration and
Definitive Certificates," the Trustee is required to notify, through DTC, DTC
Participants who have ownership of Class A Certificates as indicated on the
records of DTC of the availability of Definitive Class A Certificates. Upon
surrender by DTC of the definitive certificates representing the Class A
Certificates and upon receipt of instructions from DTC for re-registration,
the Trustee will reissue the Class A Certificates as Definitive Class A
Certificates issued in the respective principal amounts owned by individual
Class A Certificate Owners, and thereafter the Trustee and the Master
Servicer will recognize the holders of such Definitive Class A Certificates
as Certificateholders under the Pooling and Servicing Agreement.
For additional information regarding DTC and Certificates maintained on
the book-entry records thereof, see "Description of the
Certificates--Book-Entry Registration and Definitive Certificates" in the
Prospectus.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made
by the [Trustee], to the extent of available funds, on the 25th day of each
month or, if any such 25th day is not a business day, then on the next
succeeding business day, commencing in 199 (each, a "Distribution
Date"). All such distributions (other than the final distribution on any
Certificate) will be made to the persons in whose names the Certificates are
registered at the close of business on each Record Date, which will be the
last business day of the month preceding the month in which the related
Distribution Date occurs. Each such distribution will be made by wire
transfer in immediately available funds to the account specified by the
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder will have provided the [Trustee] with
wiring instructions [no less than five business days prior to the related
Record Date (which wiring instructions may be in the form of a standing order
applicable to all subsequent distributions) and is the registered owner of
Certificates with an aggregate initial principal amount of at least
$5,000,000], or otherwise by check mailed to such Certificateholder. The
final distribution on any Certificate will be made in like manner, but only
upon presentation and surrender of such Certificate at the location that will
be specified in a notice of the pendency of such final distribution. All
distributions made with respect to a Class of Certificates will be allocated
pro rata among the outstanding Certificates of such Class based on their
respective Percentage Interests.
The aggregate amount available for distribution to Certificateholders on
each Distribution Date (the "Available Distribution Amount") will, in
general, equal the sum of the following amounts:
(a) the total amount of all cash received on the Mortgage Loans and any
REO Properties that is on deposit in the Certificate Account as of the
related Determination Date, exclusive of:
(i) all Monthly Payments collected but due on a Due Date subsequent
to the related Due Period,
(ii) all principal prepayments (together with related payments of
interest thereon and related Prepayment Premiums), Liquidation
Proceeds, Insurance Proceeds, Condemnation Proceeds and other
unscheduled recoveries received subsequent to the related Due Period,
and
(iii) all amounts in the Certificate Account that are due or
reimbursable to any person other than the Certificateholders; and
(b) all Advances made by the Master Servicer with respect to such
Distribution Date. See "Description of the Pooling Agreements--Certificate
Account" in the Prospectus.
The "Due Period" for each Distribution Date will be the period that begins
on the [second] day of the month preceding the month in which such
Distribution Date occurs and ends on the [first] day of the
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month in which such Distribution Date occurs. For purposes of the discussion
in the Prospectus, the Due Period is also the Prepayment Period. The
"Determination Date" for each Distribution Date is the [15th] day of the
month in which such Distribution Date occurs or, if any such [15th] day is
not a business day, then the next preceding business day.
Priority. On each Distribution Date, for so long as the Certificate
Balances of the Offered Certificates have not been reduced to zero, the
[Trustee] will (except as otherwise described under "--Termination;
Retirement of Certificates" below) apply amounts on deposit in the
Certificate Account, to the extent of the Available Distribution Amount, in
the following order of priority:
(1) to distributions of interest to the holders of the Senior
Certificates, pro rata among the respective Classes thereof, in an amount
equal to all Distributable Certificate Interest in respect of the Senior
Certificates for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates;
(2) to distributions of principal to the holders of the Senior
Certificates in an amount equal to the sum of (a) the product of (i) the
Senior Certificates' Ownership Percentage (as calculated immediately prior
to such Distribution Date), multiplied by (ii) the Scheduled Principal
Distribution Amount for such Distribution Date, plus (b) the entire
Unscheduled Principal Distribution Amount for such Distribution Date (but
not more than would be necessary to reduce the aggregate Certificate
Balance of the Senior Certificates to zero);
(3) to distributions to the holders of the Class A Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class A Certificates, but not previously reimbursed, have been reimbursed
in full;
(4) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class B Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(5) to distributions of principal to the holders of the Class B
Certificates in an amount equal to the sum of (a) the product of (i) the
Class B Certificates' Ownership Percentage (as calculated immediately
prior to such Distribution Date), multiplied by (ii) the Scheduled
Principal Distribution Amount for such Distribution Date, plus (b) if the
Certificate Balances of the Senior Certificates have been reduced to zero,
then to the extent not distributed in reduction of such Certificate
Balances on such Distribution Date, the entire Unscheduled Principal
Distribution Amount for such Distribution Date (but not more than would be
necessary to reduce the Certificate Balance of the Class B Certificates to
zero);
(6) to distributions to the holders of the Class B Certificates , until
all amounts of Collateral Support Deficit previously allocated to the
Class B Certificates, but not previously reimbursed, have been reimbursed
in full;
(7) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class C Certificates for such Distribution Date and, to
the extent not previously distributed, for all prior Distribution Dates;
(8) to distributions of principal to the holders of the Class C
Certificates in an amount equal to the product of (a) the Class C
Certificates' Ownership Percentage (as calculated immediately prior to
such Distribution Date), multiplied by (b) the Scheduled Principal
Distribution Amount for such Distribution Date;
(9) to distributions to the holders of the Class C Certificates, until
all amounts of Collateral Support Deficit previously allocated to the
Class C Certificates, but not previously reimbursed, have been reimbursed
in full; and
(10) to distributions to the holders of the Class R Certificates in an
amount equal to the remaining balance, if any, of the Available
Distribution Amount.
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The distributions of principal to the holders of the Senior Certificates
as described in clause (2) above will be paid first to the holders of the
Class R Certificates until the Certificate Balance of such Certificates is
reduced to zero, and then to the holders of the Class A Certificates.
Accordingly, it is expected that the Certificate Balance of the Class R
Certificates would be reduced to zero on the initial Distribution Date and
that no other distributions of interest or principal would thereafter be made
on the Class R Certificates except pursuant to subparagraph (10) immediately
above.
Reimbursement of previously allocated Collateral Support Deficit will not
constitute distributions of principal for any purpose and will not result in
an additional reduction in the Certificate Balance of the Class of
Certificates in respect of which any such reimbursement is made.
Pass-Through Rates. The Pass-Through Rate applicable to each Class of
Certificates for the initial Distribution Date will equal % per annum. With
respect to any Distribution Date subsequent to the initial Distribution Date,
the Pass-Through Rate for each Class of Certificates will equal the weighted
average of the applicable Effective Net Mortgage Rates for the Mortgage
Loans, weighted on the basis of their respective Stated Principal Balances
immediately prior to such Distribution Date. For purposes of calculating the
Pass-Through Rate for any Class of Certificates and any Distribution Date,
the "applicable Effective Net Mortgage Rate" for each Mortgage Loan is: (a)
if such Mortgage Loan accrues interest on the basis of a 360-day year
consisting of twelve 30-day months (a "30/360 basis", which is the basis of
accrual for interest on the Certificates), the Net Mortgage Rate in effect
for such Mortgage Loan as of the commencement of the related Due Period; and
(b) if such Mortgage Loan does not accrue interest on a 30/360 basis, the
annualized rate at which interest would have to accrue during the one month
period preceding the Due Date for such Mortgage Loan during the related Due
Period on a 30/360 basis in order to produce the aggregate amount of interest
(adjusted to the actual Net Mortgage Rate) accrued during such period. The
"Net Mortgage Rate" for each Mortgage Loan is equal to the related Mortgage
Rate in effect from time to time less the Servicing Fee Rate.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of each Class of Certificates for each Distribution Date
represents that portion of the Accrued Certificate Interest in respect of
such Class of Certificates for such Distribution Date that is net of such
Class's allocable share (calculated as described below) of the aggregate of
any Prepayment Interest Shortfalls resulting from voluntary principal
prepayments made on the Mortgage Loans during the related Due Period that are
not offset by Prepayment Interest Excesses collected during the related Due
Period (the aggregate of such Prepayment Interest Shortfalls that are not so
offset or covered, as to such Distribution Date, the "Net Aggregate
Prepayment Interest Shortfall").
The "Accrued Certificate Interest" in respect of each Class of
Certificates for each Distribution Date is equal to one month's interest at
the Pass-Through Rate applicable to such Class of Certificates for such
Distribution Date accrued on the related Certificate Balance outstanding
immediately prior to such Distribution Date. Accrued Certificate Interest
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
The portion of the Net Aggregate Prepayment Interest Shortfall for any
Distribution Date that is allocable to each Class of Certificates will equal
the product of (a) such Net Aggregate Prepayment Interest Shortfall,
multiplied by (b) a fraction, the numerator of which is equal to the Accrued
Certificate Interest in respect of such Class of Certificates for such
Distribution Date, and the denominator of which is equal to the Accrued
Certificate Interest in respect of all the Classes of Certificates for such
Distribution Date.
Scheduled Principal Distribution Amount and Unscheduled Principal
Distribution Amount. The "Scheduled Principal Distribution Amount" for each
Distribution Date will equal the aggregate of the principal portions of all
Monthly Payments, including Balloon Payments [, net of any related Workout
Fees payable therefrom to the Special Servicer], due during or, if and to the
extent not previously received or advanced and distributed to
Certificateholders on a preceding Distribution Date, prior to the related Due
Period, in each case to the extent paid by the related borrower or advanced
by the Master Servicer and included in the Available Distribution Amount for
such Distribution Date. The Scheduled Principal
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Distribution Amount from time to time will include all late payments of
principal made by a borrower, including late payments in respect of a
delinquent Balloon Payment, regardless of the timing of such late payments,
except to the extent such late payments are otherwise reimbursable to the
Master Servicer for prior Advances.
The "Unscheduled Principal Distribution Amount" for each Distribution Date
will equal the aggregate of: (a) all voluntary prepayments of principal
received on the Mortgage Loans during the related Due Period [, net of any
related Workout Fees payable therefrom to the Special Servicer]; and (b) any
other collections (exclusive of payments by borrowers) received on the
Mortgage Loans and any REO Properties during the related Due Period, whether
in the form of Liquidation Proceeds, Insurance Proceeds, Condemnation
Proceeds, net income from REO Property or otherwise, that were identified and
applied by the Master Servicer as recoveries of previously unadvanced
principal of the related Mortgage Loan [, net of any related Workout Fees
payable therefrom to the Special Servicer].
The respective amounts which constitute the Scheduled Principal
Distribution Amount and Unscheduled Principal Distribution Amount for any
Distribution Date are herein collectively referred to from time to time as
the "Distributable Principal".
The "Ownership Percentage" evidenced by any Class or Classes of
Certificates as of any date of determination will equal a fraction, expressed
as a percentage, the numerator of which is the then Certificate Balance(s) of
such Class(es) of Certificates, and the denominator of which is the then
aggregate Stated Principal Balance of the Mortgage Pool.
Certain Calculations with Respect to Individual Mortgage Loans. The
"Stated Principal Balance" of each Mortgage Loan outstanding at any time
represents the principal balance of such Mortgage Loan ultimately due and
payable to the Certificateholders subject to the Special Servicer's right to
receive any Workout Fee with respect to such Mortgage Loan. The Stated
Principal Balance of each Mortgage Loan will initially equal the Cut-off Date
Balance thereof and, on each Distribution Date, will be reduced by the
portion of the Distributable Principal for such date that is attributable to
such Mortgage Loan. The Stated Principal Balance of a Mortgage Loan may also
be reduced in connection with any forced reduction of the actual unpaid
principal balance thereof imposed by a court presiding over a bankruptcy
proceeding wherein the related borrower is the debtor. See "Certain Legal
Aspects of Mortgage Loans--Foreclosure--Bankruptcy Laws" in the Prospectus.
If any Mortgage Loan is paid in full or such Mortgage Loan (or any Mortgaged
Property acquired in respect thereof) is otherwise liquidated, then, as of
the first Distribution Date that follows the end of the Due Period in which
such payment in full or liquidation occurred, and notwithstanding that a loss
may have occurred in connection with any such liquidation, the Stated
Principal Balance of such Mortgage Loan shall be zero.
For purposes of calculating distributions on, and allocations of
Collateral Support Deficit to, the Certificates, as well as for purposes of
calculating the amount of Servicing Fees payable each month, each REO
Property will be treated as if there exists with respect thereto an
outstanding mortgage loan (an "REO Loan"), and all references to "Mortgage
Loan", "Mortgage Loans" and "Mortgage Pool" herein and in the Prospectus,
when used in such context, will be deemed to also be references to or to also
include, as the case may be, any "REO Loans". Each REO Loan will generally be
deemed to have the same characteristics as its actual predecessor Mortgage
Loan, including the same adjustable or fixed Mortgage Rate (and, accordingly,
the same Net Mortgage Rate and Effective Net Mortgage Rate) and the same
unpaid principal balance and Stated Principal Balance. Amounts due on such
predecessor Mortgage Loan, including any portion thereof payable or
reimbursable to the Master Servicer, will continue to be "due" in respect of
the REO Loan; and amounts received in respect of the related REO Property,
net of payments to be made, or reimbursement to the Master Servicer or the
Special Servicer for payments previously advanced, in connection with the
operation and management of such property, generally will be applied by the
Master Servicer as if received on the predecessor Mortgage Loan. However,
notwithstanding the terms of the predecessor Mortgage Loan, the Monthly
Payment "due" on an REO Loan will in all cases, for so long as the related
Mortgaged Property is part of the Trust Fund, be deemed to equal one month's
interest thereon at the applicable Mortgage Rate.
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SUBORDINATION; ALLOCATION OF COLLATERAL SUPPORT DEFICIT
The rights of holders of the Class B Certificates and the Class C
Certificates to receive distributions of amounts collected or advanced on the
Mortgage Loans will be subordinated, to the extent described herein, to the
rights of holders of the Senior Certificates; and the rights of holders of
the Class C Certificates to receive distributions of amounts collected or
advanced on the Mortgage Loans will be subordinated, to the extent described
herein, to the rights of holders of the Class B Certificates. This
subordination is intended to enhance the likelihood of timely receipt by the
holders of the Senior Certificates of the full amount of all Distributable
Certificate Interest payable in respect of such Certificates on each
Distribution Date, and the ultimate receipt by such holders of principal in
an amount equal to the entire aggregate Certificate Balance of the Senior
Certificates. Similarly, but to a lesser degree, this subordination is also
intended to enhance the likelihood of timely receipt by the holders of the
Class B Certificates of the full amount of all Distributable Certificate
Interest payable in respect of such Certificates on each Distribution Date,
and the ultimate receipt by such holders of principal in an amount equal to
the entire Certificate Balance of the Class B Certificates. This
subordination will be accomplished by the application of the Available
Distribution Amount on each Distribution Date in accordance with the order of
priority described under "--Distributions--Priority" above. No other form of
Credit Support will be available for the benefit of the holders of the
Offered Certificates.
Allocation to the Senior Certificates, for so long as they are
outstanding, of the entire Unscheduled Principal Distribution Amount for each
Distribution Date will generally accelerate the amortization of such
Certificates relative to the actual amortization of the Mortgage Loans. To
the extent that the Senior Certificates are amortized faster than the
Mortgage Loans, the percentage interest evidenced by the Senior Certificates
in the Trust Fund will be decreased (with a corresponding increase in the
interest in the Trust Fund evidenced by the Class B and Class C
Certificates), thereby increasing, relative to their respective Certificate
Balances, the subordination afforded the Senior Certificates by the Class B
and Class C Certificates. Following retirement of the Class A Certificates,
allocation to the Class B Certificates, for so long as they are outstanding,
of the entire Unscheduled Principal Distribution Amount for each Distribution
Date will provide a similar benefit to such Class of Certificates as regards
the relative amount of subordination afforded thereto by the Class C
Certificates.
On each Distribution Date, immediately following the distributions to be
made to the Certificateholders on such date, the [Trustee] is to calculate
the amount, if any, by which (i) the aggregate Stated Principal Balance of
the Mortgage Pool expected to be outstanding immediately following such
Distribution Date is less than (ii) the then aggregate Certificate Balance of
the REMIC Regular Certificates (any such deficit, "Collateral Support
Deficit"). The [Trustee] will be required to allocate any such Collateral
Support Deficit among the respective Classes of Certificates as follows:
first, to the Class C Certificates, until the remaining Certificate Balance
of such Class of Certificates is reduced to zero; second, to the Class B
Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; and last, to the Class A Certificates, until
the remaining Certificate Balance of such Class of Certificates has been
reduced to zero. Any allocation of Collateral Support Deficit to a Class of
Certificates will be made by reducing the Certificate Balance thereof by the
amount so allocated. Any Collateral Support Deficit allocated to a Class of
REMIC Regular Certificates will be allocated among the respective
Certificates of such Class in proportion to the Percentage Interests
evidenced thereby. In general, Collateral Support Deficit will result from
the occurrence of: (i) losses and other shortfalls on or in respect of the
Mortgage Loans, including as a result of defaults and delinquencies thereon,
Nonrecoverable Advances made in respect thereof and the payment to the Master
Servicer of interest on Advances and certain servicing expenses; and (ii)
certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee as described under
"Description of the Pooling Agreements--Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Servicer and
the Depositor as described under "Description of the Pooling
Agreements--Certain Matters Regarding the Master Servicer and the Depositor"
in the Prospectus and certain federal, state and local taxes, and certain
tax-related expenses, payable out of the Trust Fund as described under
"Certain Federal Income Tax Consequences--REMICs--Prohibited Transactions Tax
and Other Taxes " in the Prospectus. Accordingly, the allocation of
Collateral Support Deficit as described above will constitute an allocation
of losses and other shortfalls experienced by the Trust Fund.
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ADVANCES
[On the business day immediately preceding each Distribution Date, the
Master Servicer will be obligated, subject to the recoverability
determination described in the next paragraph, to make advances (each, an
"Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, funds held in the
Certificate Account that are not required to be part of the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of: (i) all Monthly Payments (net of the related Servicing Fee),
other than Balloon Payments, which were due on the Mortgage Loans during the
related Due Period and delinquent as of the related Determination Date; (ii)
in the case of each Mortgage Loan delinquent in respect of its Balloon
Payment as of the related Determination Date, an amount equal to one month's
interest thereon at the related Mortgage Rate in effect as of the
commencement of the related Due Period (net of the related Servicing Fee),
but only to the extent that the related mortgagor has not made a payment
sufficient to cover such amount under any forbearance arrangement or
otherwise that has been included in the Available Distribution Amount for
such Distribution Date; and (iii) in the case of each REO Property, an amount
equal to thirty days' imputed interest with respect thereto at the related
Mortgage Rate in effect as of the commencement of the related Due Period (net
of the related Servicing Fee), but only to the extent that such amount is not
covered by any net income from such REO Property included in the Available
Distribution Amount for such Distribution Date. The Master Servicer's
obligations to make Advances in respect of any Mortgage Loan or REO Property
will continue through liquidation of such Mortgage Loan or disposition of
such REO Property, as the case may be.
The Master Servicer will be entitled to recover any Advance made out of
its own funds from any amounts collected in respect of the Mortgage Loan as
to which such Advance was made, whether in the form of late payments,
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds or otherwise
("Related Proceeds"). Notwithstanding the foregoing, the Master Servicer will
not be obligated to make any Advance that it determines in its reasonable
good faith judgment would, if made, not be recoverable out of Related
Proceeds (a "Nonrecoverable Advance"), and the Master Servicer will be
entitled to recover any Advance that it so determines to be a Nonrecoverable
Advance out of general funds on deposit in the Certificate Account.
Nonrecoverable Advances will represent a portion of the losses to be borne by
the Certificateholders. See "Description of the Certificates--Advances in
Respect of Delinquencies" and "Description of the Pooling
Agreements--Certificate Account" in the Prospectus.
In connection with its recovery of any Advance or reimbursable servicing
expense, each of the Master Servicer and the Special Servicer will be
entitled to be paid, out of any amounts then on deposit in the Certificate
Account, interest at % per annum (the "Reimbursement Rate") accrued on the
amount of such Advance or expense from the date made to but not including the
date of reimbursement.
To the extent not offset or covered by amounts otherwise payable on the
Class C Certificates, interest accrued on outstanding Advances will result in
a reduction in amounts payable on the Class B Certificates; and to the extent
not offset or covered by amounts otherwise payable on the Class B and Class C
Certificates, interest accrued on outstanding Advances will result in a
reduction in amounts payable on the Senior Certificates. To the extent that
any holder of an Offered Certificate must bear the cost of the Master
Servicer's and/or Special Servicer's Advances, the benefits of such Advances
to such holder will be contingent on the ability of such holder to reinvest
the amounts received as a result of such Advances at a rate of return equal
to or greater than the Reimbursement Rate.]
Each Distribution Date Statement delivered by the Trustee to the
Certificateholders will contain information relating to the amounts of
Advances made with respect to the related Distribution Date. See "Description
of the Certificates--Reports to Certificateholders; Certain Available
Information" herein and "Description of Certificates--Reports to
Certificateholders" in the Prospectus.
REPORTS TO CERTIFICATEHOLDERS; CERTAIN AVAILABLE INFORMATION
On each Distribution Date, the [Trustee] will be required to forward by
mail to each holder of an Offered Certificate a statement (a "Distribution
Date Statement") providing various items of information relating to
distributions made on such date with respect to the relevant Class and the
recent status of the
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Mortgage Pool. For a more detailed discussion of the particular items of
information to be provided in each Distribution Date Statement, as well as a
discussion of certain annual information reports to be furnished by the
[Trustee] to persons who at any time during the prior calendar year were
holders of the Offered Certificates, see "Description of the
Certificates--Reports to Certificateholders" in the Prospectus.
The Pooling and Servicing Agreement requires that the [Trustee] make
available at its offices primarily responsible for [administration of the
Trust Fund], during normal business hours, for review by any holder of an
Offered Certificate, originals or copies of, among other things, the
following items: (a) the Pooling and Servicing Agreement and any amendments
thereto, (b) all Distribution Date Statements delivered to holders of the
relevant Class of Offered Certificates since the Delivery Date, (c) all
officer's certificates delivered to the Trustee since the Delivery Date as
described under "Description of the Pooling Agreements--Evidence as to
Compliance" in the Prospectus, (d) all accountants' reports delivered to the
Trustee since the Delivery Date as described under "Description of the
Pooling Agreements--Evidence as to Compliance" in the Prospectus, (e) the
most recent property inspection report prepared by or on behalf of the
Special Servicer and delivered to the Trustee in respect of each Mortgaged
Property, (f) the most recent annual operating statements, if any, collected
by or on behalf of the Special Servicer and delivered to the Trustee in
respect of each Mortgaged Property, and (g) any and all modifications,
waivers and amendments of the terms of a Mortgage Loan entered into by the
Master Servicer or the Special Servicer and delivered to the Trustee. Copies
of any and all of the foregoing items will be available from the [Trustee]
upon request; however, the [Trustee] will be permitted to require payment of
a sum sufficient to cover the reasonable costs and expenses of providing such
copies.
Until such time as Definitive Class A Certificates are issued, the
foregoing information will be available to Class A Certificate Owners only to
the extent it is forwarded by or otherwise available through DTC and DTC
Participants. Conveyance of notices and other communications by DTC to DTC
Participants, by DTC Participants to Financial Intermediaries and Class A
Certificate Owners, and by Financial Intermediaries to Class A Certificate
Owners, will be governed by arrangements among them, subject to any statutory
or regulatory requirements as may be in effect from time to time. The Master
Servicer, the Special Servicer, the Trustee, the Depositor, the REMIC
Administrator and the Certificate Registrar are required to recognize as
Certificateholders only those persons in whose names the Certificates are
registered on the books and records of the Certificate Registrar. The initial
registered holder of the Class A Certificates will be Cede & Co. as nominee
for DTC.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, the
voting rights for the series offered hereby (the "Voting Rights") shall be
allocated among the respective Classes of Certificateholders in proportion to
the Certificate Balances of their Certificates. Voting Rights allocated to a
Class of Certificateholders shall be allocated among such Certificateholders
in proportion to the Percentage Interests evidenced by their respective
Certificates.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling and Servicing Agreement will
terminate following the earliest of (i) the final payment (or advance in
respect thereof) or other liquidation of the last Mortgage Loan or REO
Property subject thereto, and (ii) the purchase of all of the assets of the
Trust Fund by the Master Servicer or the Depositor. Written notice of
termination of the Pooling and Servicing Agreement will be given to each
Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at the office of the
Certificate Registrar or other location specified in such notice of
termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and other assets in the Trust Fund is required to be made at a
price equal to (a) the sum of (i) the aggregate Purchase Price of all the
Mortgage Loans (exclusive of REO Loans) then included in the Trust Fund and
(ii) the aggregate fair market value of all REO Properties then included in
the Trust Fund (which fair market
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value for any REO Property may be less than the Purchase Price for the
corresponding REO Loan), as determined by an appraiser mutually agreed upon
by the Master Servicer and the Trustee, over (b) the aggregate of amounts
payable or reimbursable to the Master Servicer under the Pooling and
Servicing Agreement. Such purchase will effect early retirement of the then
outstanding Offered Certificates, but the right of the Master Servicer or the
Depositor to effect such termination is subject to the requirement that the
then aggregate Stated Principal Balance of the Mortgage Pool be less than 5%
of the Initial Pool Balance.
On the final Distribution Date, the aggregate amount paid by the Master
Servicer or the Depositor, as the case may be, for the Mortgage Loans and
other assets in the Trust Fund (if the Trust Fund is to be terminated as a
result of the purchase described in the preceding paragraph), together with
all other amounts on deposit in the Certificate Account and not otherwise
payable to a person other than the Certificateholders (see "Description of
the Pooling Agreements--Certificate Account" in the Prospectus), will be
applied generally as described above under "--Distributions--Priority",
except that the distributions of principal described thereunder will, in the
case of each Class of Certificates, be made, subject to available funds, in
an amount equal to the related Certificate Balance then outstanding.
THE TRUSTEE
, a , will act as Trustee on behalf of the Certificateholders.
[The Master Servicer will be responsible for the fees and normal
disbursements of the Trustee.] The offices of the Trustee primarily
responsible for the administration of the Trust Fund are located at . See
"Description of the Pooling Agreements--the Trustee", "--Duties of the
Trustee", "--Certain Matters Regarding the Trustee" and "--Resignation and
Removal of the Trustee" in the Prospectus.
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YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on: (i) the
Pass-Through Rate in effect from time to time for such Certificate; (ii) the
price paid for such Certificate and, if the price was other than par, the
rate and timing of payments of principal on such Certificate; and (iii) the
aggregate amount of distributions on such Certificate.
Pass-Through Rate. The Pass-Through Rate applicable to each Class of
Offered Certificates for any Distribution Date will equal the weighted
average of the applicable Effective Net Mortgage Rates. Accordingly, the
yield on the Offered Certificates will be sensitive to (x) adjustments to the
Mortgage Rates on the ARM Loans and (y) changes in the relative composition
of the Mortgage Pool as a result of scheduled amortization, voluntary
prepayments and involuntary liquidations of the Mortgage Loans. See
"Description of the Mortgage Pool" herein and "--Yield Considerations--Rate
and Timing of Principal Payments" below.
Rate and Timing of Principal Payments. The yield to holders of Offered
Certificates that are purchased at a discount or premium will be affected by
the rate and timing of principal payments on the Mortgage Loans (including
principal prepayments on the Mortgage Loans resulting from both voluntary
prepayments by the mortgagors and involuntary liquidations). The rate and
timing of principal payments on the Mortgage Loans will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments
are due and the rate and timing of principal prepayments and other
unscheduled collections thereon (including for this purpose, collections made
in connection with liquidations of Mortgage Loans due to defaults, casualties
or condemnations affecting the Mortgaged Properties, or purchases of Mortgage
Loans out of the Trust Fund). Prepayments and, assuming the respective stated
maturity dates therefor have not occurred, liquidations and purchases of the
Mortgage Loans, will result in distributions on the Offered Certificates of
amounts that would otherwise be distributed over the remaining terms of the
Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near their
stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans (and, accordingly, on the Offered
Certificates) while work-outs are negotiated or foreclosures are completed.
See "Servicing of the Mortgage Loans--Modifications, Waivers and Amendments"
herein and "Description of the Pooling Agreements--Realization Upon Defaulted
Mortgage Loans" and "Certain Legal Aspects of Mortgage Loans--Foreclosure" in
the Prospectus. Because the rate of principal payments on the Mortgage Loans
will depend on future events and a variety of factors (as described below),
no assurance can be given as to such rate or the rate of principal
prepayments in particular. The Depositor is not aware of any relevant
publicly available or authoritative statistics with respect to the historical
prepayment experience of a large group of mortgage loans comparable to the
Mortgage Loans.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which such Certificates are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans are in turn
distributed on such Certificates. An investor should consider, in the case of
any Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on such Certificate could result in an
actual yield to such investor that is lower than the anticipated yield and,
in the case of any Offered Certificate purchased at a premium, the risk that
a faster than anticipated rate of principal payments on such Certificate
could result in an actual yield to such investor that is lower than the
anticipated yield. In general, the earlier a payment of principal is made on
an Offered Certificate purchased at a discount or premium, the greater will
be the effect on an investor's yield to maturity. As a result, the effect on
an investor's yield of principal payments on such investor's Offered
Certificates occurring at a rate higher (or lower) than the rate anticipated
by the investor during any particular period would not be fully offset by a
subsequent like reduction (or increase) in the rate of principal payments.
Losses and Shortfalls. The yield to holders of the Offered Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne: first, by the
holders of the Class C Certificates, to the
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extent of amounts otherwise distributable in respect of their Certificates;
second, by the holders of the Class B Certificates, to the extent of amounts
otherwise distributable in respect of their Certificates; and last, by the
holders of the Senior Certificates. As more fully described herein under
"Description of the Certificates--Distributions--Distributable Certificate
Interest", Net Aggregate Prepayment Interest Shortfalls will generally be
borne by the respective Classes of Certificateholders on a pro rata basis.
Certain Relevant Factors. The rate and timing of principal payments and
defaults and the severity of losses on the Mortgage Loans may be affected by
a number of factors, including, without limitation, prevailing interest
rates, the terms of the Mortgage Loans (for example, Prepayment Premiums,
adjustable Mortgage Rates and amortization terms that require Balloon
Payments), the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located and the general supply and demand
for rental properties, food services, retail shopping space, office space or
beds in a Health Care-Related Facility, as the case may be, in such areas,
the quality of management of the Mortgaged Properties, the servicing of the
Mortgage Loans, possible changes in tax laws and other opportunities for
investment. See "Risk Factors" and "Description of the Mortgage Pool" herein
and "Risk Factors" and "Yield and Maturity Considerations--Yield and
Prepayment Considerations" in the Prospectus.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type,
term and risk level. When the prevailing market interest rate is below a
mortgage coupon, a borrower may have an increased incentive to refinance its
mortgage loan. Although most of the Mortgage Loans are ARM Loans, adjustments
to the Mortgage Rates thereon will generally be limited by lifetime and/or
periodic caps and floors and, in each case, will be based on the related
Index (which may not rise and fall consistently with mortgage interest rates
then available) plus the related Gross Margin (which may be different from
margins then offered on adjustable rate mortgage loans). See "Description of
the Mortgage Pool--Certain Payment Characteristics" and "--The Index" herein.
As a result, the Mortgage Rates on the ARM Loans at any time may not be
comparable to prevailing market interest rates. In addition, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on the ARM Loans decline in a manner consistent therewith, related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate, or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. The Mortgage Loans may be prepaid at
any time and, in cases (approximately % of the Initial Pool Balance),
may be prepaid in whole or in part without payment of a Prepayment Premium.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by Federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing of prepayments and defaults on the Mortgage
Loans, as to the relative importance of such factors, as to the percentage of
the principal balance of the Mortgage Loans that will be prepaid or as to
which a default will have occurred as of any date or as to the overall rate
of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
days and as many as days following the Due Dates for the Mortgage
Loans during the related Due Period, the effective yield to the holders of
the Offered Certificates will be lower than the yield that would otherwise be
produced by the applicable Pass-Through Rates and purchase prices (assuming
such prices did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "Description
of the Certificates--Distributions--Priority" herein, if the portion of the
Available Distribution Amount distributable in respect of interest on any
Class of Offered Certificates on any Distribution Date is less than the
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<PAGE>
Distributable Certificate Interest then payable for such Class, the
shortfall will be distributable to holders of such Class of Certificates on
subsequent Distribution Dates, to the extent of available funds. Any such
shortfall will not bear interest, however, and will therefore negatively
affect the yield to maturity of such Class of Certificates for so long as it
is outstanding.
WEIGHTED AVERAGE LIFE
The weighted average life of an Offered Certificate refers to the average
amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of an Offered Certificate will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans is paid or otherwise collected, which may be in the form of
scheduled amortization, voluntary prepayments, Insurance Proceeds,
Condemnation Proceeds and Liquidation Proceeds.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the ["Constant
Prepayment Rate" or "CPR" model. The CPR model represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of
the then scheduled principal balance of the pool of mortgage loans. As used
in each of the following tables, the column headed "0%" assumes that none of
the Mortgage Loans is prepaid before maturity. The columns headed " %",
" %", " %" and " %" assume that prepayments on the Mortgage Loans are made
at those levels of CPR. There is no assurance, however, that prepayments of
the Mortgage Loans will conform to any level of CPR, and no representation is
made that the Mortgage Loans will prepay at the levels of CPR shown or at any
other prepayment rate.]
The following tables indicate the percentage of the initial Certificate
Balance of each of the Class A Certificates and the Class B Certificates that
would be outstanding after each of the dates shown at various CPRs and the
corresponding weighted average life of each such Class of Certificates. The
tables have been prepared on the basis of the following assumptions, among
others: (i) scheduled monthly payments of principal and interest on the
Mortgage Loans, in each case prior to any prepayment of the loan, will be
timely received (with no defaults) and will be distributed on the 25th day of
each month commencing in 199 ; (ii) the Mortgage Rate in effect for each
Mortgage Loan as of the Cut-off Date will remain in effect (a) in the case of
each Fixed Rate Loan, to maturity and, (b) in the case of each ARM Loan,
until its next Interest Rate Adjustment Date, when a new Mortgage Rate that
is to remain in effect to maturity will be calculated reflecting the value of
the related Index as of , 199 , subject to such Mortgage Loan's lifetime
and/or periodic rate caps and floors, if any; (iii) all Mortgage Loans accrue
and pay interest on a 30/360 basis; (iv) the monthly principal and interest
payment due for each Mortgage Loan on the first Due Date following the
Cut-off Date will continue to be due (a) in the case of each Fixed Rate Loan,
on each Due Date until maturity and (b) in the case of each ARM Loan, until
its next Payment Adjustment Date, when a new payment that is to be due on
each Due Date until maturity will be calculated reflecting the appropriate
Mortgage Rate and remaining amortization term; (v) any principal prepayments
on the Mortgage Loans will be received on their respective Due Dates at the
respective levels of CPR set forth in the tables, and there will be no Net
Aggregate Prepayment Interest Shortfalls in connection therewith; and (vi)
the Mortgage Loan Seller will not be required to repurchase any Mortgage
Loan, and neither the Master Servicer nor the Depositor will exercise its
option to purchase all the Mortgage Loans and thereby cause an early
termination of the Trust Fund. To the extent that the Mortgage Loans have
characteristics that differ from those assumed in preparing the tables set
forth below, the Class A Certificates or the Class B Certificates may mature
earlier or later than indicated by the tables. It is highly unlikely that the
Mortgage Loans will prepay at any constant rate until maturity or that all
the Mortgage Loans will prepay at the same rate. In addition, variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentages of initial Certificate
Balances (and weighted average lives) shown in the following tables. Such
variations may occur even if the average prepayment experience of the
Mortgage Loans were to equal any of the specified CPR percentages. Investors
are urged to conduct their own analyses of the rates at which the Mortgage
Loans may be expected to prepay. Based on the foregoing assumptions, the
following table indicates the resulting weighted average lives of the Class A
Certificates and sets forth the percentage of the initial Certificate Balance
of the Class A Certificates that would be outstanding after each of the dates
shown at the indicated CPRs.
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<PAGE>
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS A CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- ------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date .................. 100.0 100.0 100.0 100.0 100.0
25, 1997 ................
25, 1998 ................
25, 1999 ................
25, 2000 ................
25, 2001 ................
25, 2002 ................
25, 2003 ................
25, 2004 ................
25, 2005 ................
Weighted Average Life
(years)(A).....................
</TABLE>
- ------------
(A) The weighted average life of a Class A Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class A Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class A Certificate.
Based on the foregoing assumptions, the following table indicates the
resulting weighted average lives of the Class B Certificates and sets forth
the percentage of the initial Certificate Balance of the Class B Certificates
that would be outstanding after each of the dates shown at the indicated
CPRs.
PERCENT OF THE INITIAL CERTIFICATE BALANCE OF THE
CLASS B CERTIFICATES AT THE RESPECTIVE CPRS
SET FORTH BELOW:
<TABLE>
<CAPTION>
DATE 0% % % % %
- ------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Delivery Date .................. 100.0 100.0 100.0 100.0 100.0
25, 1997 ................
25, 1998 ................
25, 1999 ................
25, 2000 ................
25, 2001 ................
25, 2002 ................
25, 2003 ................
25, 2004 ................
25, 2005 ................
Weighted Average Life
(years)(A).....................
</TABLE>
- ------------
(A) The weighted average life of a Class B Certificate is determined by (i)
multiplying the amount of each principal distribution thereon by the
number of years from the date of issuance of the Class B Certificates
to the related Distribution Date, (ii) summing the results and (iii)
dividing the sum by the aggregate amount of the reductions in the
principal balance of such Class B Certificate.
[The following disclosure is applicable to Stripped Interest Certificates,
when offered . . .
YIELD SENSITIVITY OF THE CLASS S CERTIFICATES
The yield to maturity of the Class S Certificates will be especially
sensitive to the prepayment, repurchase and default experience on the
Mortgage Loans, which may fluctuate significantly from time to
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<PAGE>
time. A rapid rate of principal payments will have a material negative
effect on the yield to maturity of the Class S Certificates. There can be no
assurance that the Mortgage Loans will prepay at any particular rate.
Prospective investors in the Class S Certificates should fully consider the
associated risks, including the risk that such investors may not fully
recover their initial investment.
The following table indicates the sensitivity of the pre-tax yield to
maturity on the Class S Certificates to various constant rates of prepayment
on the Mortgage Loans by projecting the monthly aggregate payments of
interest on the Class S Certificates and computing the corresponding pre-tax
yields to maturity on a corporate bond equivalent basis, based on the
assumptions described in the third paragraph under the heading "--Weighted
Average Life" above, including the assumptions regarding the characteristics
and performance of the Mortgage Loans which differ from the actual
characteristics and performance thereof and assuming the aggregate purchase
price set forth below. Any differences between such assumptions and the
actual characteristics and performance of the Mortgage Loans and of the Class
S Certificates may result in yields being different from those shown in such
table. Discrepancies between assumed and actual characteristics and
performance underscore the hypothetical nature of the table, which is
provided only to give a general sense of the sensitivity of yields in varying
prepayment scenarios.
PRE-TAX YIELD TO MATURITY OF THE CLASS S CERTIFICATES
AT THE FOLLOWING CPRS
ASSUMED PURCHASE PRICE 0% % % % % %
- -------------------------- ------- ------- ------- ------- ------- -------
$ .................... % % % % % %
Each pre-tax yield to maturity set forth in the preceding table was
calculated by determining the monthly discount rate which, when applied to
the assumed stream of cash flows to be paid on the Class S Certificates,
would cause the discounted present value of such assumed stream of cash flows
to equal the assumed purchase price listed in the table. Accrued interest is
included in the assumed purchase price and is used in computing the corporate
bond equivalent yields shown. These yields do not take into account the
different interest rates at which investors may be able to reinvest funds
received by them as distributions on the Class S Certificates, and thus do
not reflect the return on any investment in the Class S Certificates when any
reinvestment rates other than the discount rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing
of cash flows is critical to determining yields, the pre-tax yield to
maturity on the Class S Certificates is likely to differ from those shown in
the tables, even if all of the Mortgage Loans prepay at the indicated CPRs
over any given time period or over the entire life of the Certificates.
There can be no assurance that the Mortgage Loans will prepay at any
particular rate or that the yield on the Class S Certificates will conform to
the yields described herein. Investors are urged to make their investment
decisions based on the determinations as to anticipated rates of prepayment
under a variety of scenarios. Investors in the Class S Certificates should
fully consider the risk that a rapid rate of prepayments on the Mortgage
Loans could result in the failure of such investors to fully recover their
investments.]
ADDITIONAL YIELD CONSIDERATIONS APPLICABLE SOLELY TO THE CLASS R CERTIFICATES
The Class R Certificateholders' after-tax rate of return on the Class R
Certificates will reflect their pre-tax rate of return, reduced by the taxes
required to be paid with respect to the Class R Certificates. Holders of
Class R Certificates may have tax liabilities with respect to their
Certificates during the early years of the Trust Fund's term that
substantially exceed any distributions payable thereon during any such
period. In addition, holders of Class R Certificates may have tax liabilities
with respect to their Certificates the present value of which substantially
exceeds the present value of distributions payable thereon and of any tax
benefits that may arise with respect thereto. Accordingly, the after-tax rate
of return on the Class R Certificates may be negative or may otherwise be
significantly adversely affected. The timing and amount of taxable income
attributable to the Class R Certificates will depend on, among other things,
the timing and amounts of prepayments and losses experienced with respect to
the Mortgage Pool.
S-45
<PAGE>
The Class R Certificateholders should consult their tax advisors as to
the effect of taxes and the receipt of any payments made to such holders in
connection with the purchase of the Class R Certificates on after-tax rates
of return on such Certificates. See "Certain Federal Income Tax Consequences"
herein and in the Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, will deliver the following opinion: [Assuming
compliance with the provisions of the Pooling and Servicing Agreement, for
federal income tax purposes, the Trust Fund will qualify as a "real estate
mortgage investment conduit" (a "REMIC") within the meaning of Sections 860A
through 860G (the "REMIC Provisions") of the Internal Revenue Code of 1986
(the "Code"), and (i) the Class A, Class B and Class C Certificates will
evidence "regular interests" in such REMIC and (ii) the Class R Certificates
will be the sole class of "residual interests" in such REMIC, each within the
meaning of the REMIC Provisions in effect on the date hereof.] [Assuming
compliance with the Pooling and Servicing Agreement, for federal income tax
purposes, the Trust Fund will be classified as a grantor trust under Subpart
E, part I of subchapter J of the Code, and not as an association taxable as a
corporation or as a partnership.]
The Certificates [may] [will] [will not] be treated as having been
issued with original issue discount for Federal income tax reporting
purposes. The prepayment assumption that will be used in determining the rate
of accrual of [original issue discount,] market discount and premium, if any,
for Federal income tax purposes will be based on the assumption that
subsequent to the date of any determination the Mortgage Loans will prepay at
a rate equal to [a CPR of %]. No representation is made that the Mortgage
Loans will prepay at that rate or at any other rate. See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" in
the Prospectus.
The Certificates may be treated for Federal income tax purposes
as having been issued at a premium. Whether any holder of [either] such Class
of Certificates will be treated as holding a Certificate with amortizable
bond premium will depend on such Certificateholder's purchase price and the
distributions remaining to be made on such Certificate at the time of its
acquisition by such Certificateholder. Holders of [each] such Class of
Certificates should consult their tax advisors regarding the possibility of
making an election to amortize such premium. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" within the meaning of Section 593(d) of the Code, assets described in
Section 7701(a)(19)(C) of the Code and "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code, and interest (including original
issue discount, if any) on the Offered Certificates will be interest
described in Section 856(c)(3)(B) of the Code. Moreover, the Offered
Certificates will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Status of REMIC Certificates"
in the Prospectus.
For further information regarding the Federal income tax consequences of
investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates" in the
Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO REMIC RESIDUAL CERTIFICATES
The IRS has issued REMIC Regulations that significantly affect holders of
REMIC Residual Certificates. The REMIC Regulations impose restrictions on the
transfer or acquisition of certain residual interests, including the Class R
Certificates. In addition, the REMIC Regulations provide special rules
applicable to: (i) thrift institutions holding residual interests having
"significant value" and (ii) the transfer of "noneconomic" residual interests
to United States persons. Pursuant to the Pooling and Servicing Agreement,
the Class R Certificates may not be transferred to non-United States persons.
See "Certain
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<PAGE>
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates" in the Prospectus.
The REMIC Regulations provide for the determination of whether a residual
interest has "significant value" for purposes of applying the rules relating
to "excess inclusions" with respect to residual interests. Based on the REMIC
Regulations, the Class R Certificates do not have significant value and,
accordingly, thrift institutions and their affiliates will be prevented from
using their unrelated losses or loss carryovers to offset any excess
inclusions with respect to the Class R Certificates, which will be in an
amount equal to all or virtually all of the taxable income includable by
holders of the Class R Certificates. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all
federal income tax purposes, and that the purported transferor of
"noneconomic" residual interests will continue to remain liable for any taxes
due with respect to the income on such residual interests, if "a significant
purpose of the transfer was to impede the assessment or collection of tax."
Based on the REMIC Regulations, the Class R Certificates may constitute
noneconomic residual interests during some or all of their terms for purposes
of the REMIC Regulations and, accordingly, if a significant purpose of a
transfer is to impede the assessment or collection of tax, transfers of the
Class R Certificates may be disregarded and purported transferors may remain
liable for any taxes due with respect to the income on the Class R
Certificates. All transfers of the Class R Certificates will be subject to
certain restrictions under the terms of the Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded to the extent that the Class R Certificates constitute
noneconomic residual interests. See "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates" in the Prospectus.
The Class R Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the term of the
Trust Fund that significantly exceeds the amount of cash distributions
received by such Certificateholders from the Trust Fund with respect to such
periods. Furthermore, the tax on such income may exceed the cash
distributions with respect to such periods. Consequently, Class R
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Fund's term as a
result of their ownership of the Class R Certificates. In addition, the
required inclusion of this amount of taxable income during the Trust Fund's
earlier accrual periods and the deferral of corresponding tax losses or
deductions until later accrual periods or until the ultimate sale or
disposition of a Class R Certificate (or possibly later under the "wash sale"
rules of Section 1091 of the Code) may cause the Class R Certificateholders'
after-tax rate of return to be zero or negative even if the Class R
Certificateholders' pre-tax rate of return is positive. That is, on a present
value basis, the Class R Certificateholders' resulting tax liabilities could
substantially exceed the sum of any tax benefits and the amount of any cash
distributions on the Class R Certificates over their life.
Potential investors in Class R Certificates should be aware that under the
Pooling and Servicing Agreement, the holder of the largest Percentage
Interest in the Class R Certificates shall, by its acceptance of such
Certificates, agree to irrevocably appoint the Master Servicer as its agent
to perform all of the duties of the tax matters person for the REMIC.
Purchasers of the Class R Certificates are strongly advised to consult
their tax advisors as to the economic and tax consequences of investment in
such Certificates.
For further information regarding the federal income tax consequences of
investing in the Class R Certificates, see "Yield and Maturity
Considerations--Additional Yield Considerations Applicable Solely to the
Class R Certificates" herein and "Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Residual Certificates" in the Prospectus.
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<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an Underwriting
Agreement, dated , 199 (the "Underwriting Agreement"), (the
"Underwriter") has agreed to purchase and the Depositor has agreed to sell to
the Underwriter each class of the Offered Certificates. It is expected that
delivery of the Class A Certificates will be made only in book-entry form
through the Same Day Funds Settlement System of DTC, and that the delivery of
the Class B and Class R Certificates will be made at the offices of the
Underwriter, , on or about , 199 against payment therefor in
immediately available funds.
The Underwriting Agreement provides that the obligation of the Underwriter
to pay for and accept delivery of its Certificates is subject to, among other
things, the receipt of certain legal opinions and to the conditions, among
others, that no stop order suspending the effectiveness of the Depositor's
Registration Statement shall be in effect, and that no proceedings for such
purpose shall be pending before or threatened by the Securities and Exchange
Commission.
The distribution of the Offered Certificates by the Underwriter may be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined at the time of sale. Proceeds
to the Depositor from the sale of the Offered Certificates, before deducting
expenses payable by the Depositor, will be approximately % of the aggregate
Certificate Balance of the Offered Certificates plus accrued interest thereon
from the Cut-off Date. The Underwriter may effect such transactions by
selling its Certificates to or through dealers, and such dealers may receive
compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter for whom they act as agent. In connection
with the sale of the Offered Certificates, the Underwriter may be deemed to
have received compensation from the Depositor in the form of underwriting
compensation. The Underwriter and any dealers that participate with such
Underwriter in the distribution of the Offered Certificates may be deemed to
be underwriters and any profit on the resale of the Offered Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter, and that under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, as amended, or contribute to payments required to be
made in respect thereof.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue. The
primary source of ongoing information available to investors concerning the
Offered Certificates will be the monthly statements discussed in the
Prospectus under "Description of the Certificates--Reports to
Certificateholders," which will include information as to the outstanding
principal balance of the Offered Certificates and the status of the
applicable form of credit enhancement. Except as described herein under
"Description of the Certificates--Reports to Certificateholders; Certain
Available Information", there can be no assurance that any additional
information regarding the Offered Certificates will be available through any
other source. In addition, the Depositor is not aware of any source through
which price information about the Offered Certificates will be generally
available on an ongoing basis. The limited nature of such information
regarding the Offered Certificates may adversely affect the liquidity of the
Offered Certificates, even if a secondary market for the Offered Certificates
becomes available.
[If and to the extent required by applicable law or regulation, this
Prospectus Supplement and the Prospectus will be used by the Underwriter in
connection with offers and sales related to market-making transactions in the
Offered Certificates with respect to which the Underwriter acts as principal.
The Underwriter may also act as agent in such transactions. Sales may be made
at negotiated prices determined at the time of sale.]
LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon for
the Underwriter by . Certain federal income tax matters and other
matters will be passed upon for the Depositor by Cadwalader, Wickersham &
Taft.
S-48
<PAGE>
RATING
It is a condition to issuance that the Senior Certificates be rated not
lower than " ", and the Class B Certificates be rated not lower than " ",
by .
A securities rating on mortgage pass-through certificates addresses the
likelihood of the receipt by holders thereof of payments to which they are
entitled. The rating takes into consideration the credit quality of the
mortgage pool, structural and legal aspects associated with the certificates,
and the extent to which the payment stream from the mortgage pool is adequate
to make payments required under the certificates. The ratings on the Offered
Certificates do not, however, constitute a statement regarding the likelihood
or frequency of prepayments (whether voluntary or involuntary) on the
Mortgage Loans, [The following disclosure is applicable to Stripped Interest
Certificates, when offered or the possibility that as a result of prepayments
investors in the Class S Certificates may realize a lower than anticipated
yield or may fail to recover fully their initial investment.]
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating to any Class
thereof and, if so, what such rating would be. A rating assigned to any Class
of Offered Certificates by a rating agency that has not been requested by the
Depositor to do so may be lower than the rating assigned thereto by
.
The ratings on the Offered Certificates should be evaluated independently
from similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
LEGAL INVESTMENT
[As long as the Senior Certificates are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization [and are secured by liens on real property], the Senior
Certificates will constitute "mortgage related securities" within the meaning
of SMMEA.]
[The Class B Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. As a result, the appropriate
characterization of the Class B Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase the Class B Certificates, is subject to significant interpretive
uncertainties.]
[Except as to the status of the Senior Certificates as "mortgage related
securities", no] [No] representation is made as to the proper
characterization of any class of Offered Certificates for legal investment,
financial institution regulatory or other purposes, or as to the ability of
particular investors to purchase the Offered Certificates under applicable
legal investment or other restrictions. All institutions whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their own legal advisors in determining whether and to what extent the
Offered Certificates constitute legal investments for them or are subject to
investment, capital or other restrictions.
See "Legal Investment" in the Prospectus.
S-49
<PAGE>
CERTAIN ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement, including individual retirement accounts and annuities, Keogh
plans and collective investment funds and separate accounts in which such
plans, accounts or arrangements are invested, including insurance company
general accounts, that is subject to ERISA, or Section 4975 of the Code
(each, a "Plan") should review with its legal advisors whether the purchase
or holding of Offered Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or Section 4975
of the Code or whether there exists any statutory or administrative exemption
applicable thereto.
[The U.S. Department of Labor issued to [Underwriter] an individual
prohibited transaction exemption, Prohibited Transaction Exemption (the
"Exemption"), which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes imposed
on such prohibited transactions pursuant to Sections 4975(a) and (b) of the
Code and Section 501(i) of ERISA, certain transactions, among others,
relating to the servicing and operation of mortgage pools, such as the
Mortgage Pool, and the purchase, sale and holding of mortgage pass-through
certificates, such as the Class A Certificates, underwritten by an
Underwriter (as hereinafter defined), provided that certain conditions set
forth in the Exemption are satisfied. For purposes of this Section "Certain
ERISA Considerations", the term "Underwriter" shall include (a)
[Underwriter], (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
[Underwriter], and (c) any member of the underwriting syndicate or selling
group of which a person described in (a) or (b) is a manager or co-manager
with respect to the Class A Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of the Class A
Certificates to be eligible for exemptive relief thereunder. First, the
acquisition of the Class A Certificates by a Plan must be on terms that are
at least as favorable to the Plan as they would be in an arm's-length
transaction with an unrelated party. Second, the rights and interests
evidenced by the Class A Certificates must not be subordinated to the rights
and interests evidenced by the other certificates of the same trust. Third,
the Class A Certificates at the time of acquisition by the Plan must be rated
in one of the three highest generic rating categories by Standard & Poor's
Ratings Services ("Standard & Poor's"), Moody's Investors Service, Inc.
("Moody's"), Duff & Phelps Credit Rating Co. ("Duff & Phelps") or Fitch IBCA,
Inc. ("Fitch"). Fourth, the Trustee cannot be an affiliate of any other
member of the "Restricted Group", which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, the Special Servicer, any
sub-servicer, and any mortgagor with respect to Mortgage Loans constituting
more than 5% of the aggregate unamortized principal balance of the Mortgage
Loans as of the date of initial issuance of the Class A Certificates. Fifth,
the sum of all payments made to and retained by the Underwriter must
represent not more than reasonable compensation for underwriting the Class A
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Mortgage Loans to the Trust Fund must
represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer, the Special
Servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services under the Pooling and Servicing
Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the investing Plan must be an accredited
investor as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
Because the Class A Certificates are not subordinated to any other Class
of Certificates, the second general condition set forth above is satisfied
with respect to such Certificates. It is a condition of the issuance of the
Class A Certificates that they be rated not lower than " " by .
As of the Delivery Date, the fourth general condition set forth above will be
satisfied with respect to the Class A Certificates. A fiduciary of a Plan
contemplating purchasing a Class A Certificate in the secondary market must
make its own determination that, at the time of such purchase, the Class A
Certificates continue to satisfy the third and fourth general conditions set
forth above. A fiduciary of a Plan contemplating purchasing a Class A
Certificate, whether in the initial issuance of such Certificates or in the
secondary market, must make its own determination that the first, fifth and
sixth general conditions set forth above will be satisfied with respect to
such Class A Certificate.
S-50
<PAGE>
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) certificates in such
other investment pools must have been rated in one of the three highest
categories of Standard & Poor's, Moody's, Duff & Phelps or Fitch for at least
one year prior to the Plan's acquisition of Class A Certificates; and (iii)
certificates in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of Class A Certificates.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA (as well as the excise taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Sections 4975(c)(1) (A) through (D) of the Code)
in connection with (i) the direct or indirect sale, exchange or transfer of
Class A Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the Depositor, the Underwriter,
the Trustee, the Master Servicer, the Special Servicer, a Sub-Servicer or a
mortgagor is a Party in Interest with respect to the investing Plan, (ii) the
direct or indirect acquisition or disposition in the secondary market of the
Class A Certificates by a Plan and (iii) the holding of Class A Certificates
by a Plan. However, no exemption is provided from the restrictions of
Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any
person who has discretionary authority or renders investment advice with
respect to the assets of such Excluded Plan. For purposes hereof, an Excluded
Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E)
of the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Class A Certificates in the initial issuance of Certificates
between the Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan assets in such Certificates is (a) a mortgagor with
respect to 5% or less of the fair market value of the Mortgage Loans or (b)
an affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of Class A Certificates by a Plan and (3)
the holding of Class A Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Mortgage Pool.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections
4975(a) and (b) of the Code by reason of Sections 4975(c)(1) (a) through (D)
of the Code if such restrictions are deemed to otherwise apply merely because
a person is deemed to be a Party in Interest with respect to an investing
Plan by virtue of providing services to the Plan (or by virtue of having
certain specified relationships to such a person) solely as a result of the
Plan's ownership of Offered Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm that (i) the Class A Certificates constitute "certificates"
for purposes of the Exemption and (ii) the specific and general conditions
and the other requirements set forth in the Exemption would be satisfied. In
addition to making its own determination as to the availability of the
exemptive relief provided in the Exemption, the Plan fiduciary should
consider the availability of any other prohibited transaction exemptions. See
"Certain ERISA Considerations" in the Prospectus. A purchaser of a Class A
Certificate should be aware, however, that even if the conditions specified
in one or more exemptions are satisfied, the scope of relief provided by an
exemption may not cover all acts which might be construed as prohibited
transactions.
Because the characteristics of the Class B Certificates [and the Class R
Certificates] do not meet the requirements of the Exemption, the purchase or
holding of such Certificates by a Plan may result in prohibited transactions
or the imposition of excise taxes or civil penalties. As a result, no
transfer of a Class B Certificate [or Class R Certificate] or any interest
therein may be made to a Plan or to any person who is directly or indirectly
purchasing such Certificate or interest therein on behalf of, as named
fiduciary
S-51
<PAGE>
of, as trustee of, or with assets of a Plan, unless the prospective
transferee provides the Certificate Registrar with an opinion of counsel
which opinion will not be at the expense of the Depositor, the Trustee or the
Master Servicer and which establishes to the satisfaction of the Certificate
Registrar that such transfer will not result in a violation of Section 406 of
ERISA or Section 4975 of the Code or cause the Master Servicer, the Special
Servicer or the Trustee to be deemed a fiduciary of such Plan or result in
the imposition of an excise tax under Section 4975 of the Code. In lieu of
such opinion of counsel, the transferee may provide a certification
substantially to the effect that the purchase of Certificates by or on behalf
of such Plan is permissible under applicable law, will not constitute or
result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code, will not subject the Depositor, the Trustee or the Master
Servicer to any obligation in addition to those undertaken in the Agreement
and the following conditions are satisfied: (i) the transferee is an
insurance company and the source of funds used to purchase such Certificates
is an "insurance company general account" (as such term is defined in PTCE
95-60); (ii) the conditions set forth in PTCE 95-60 Part I and III have been
satisfied; and (iii) there is no Plan with respect to which the amount of
such general account's reserves and liabilities for contracts held by or on
behalf of such Plan and all other Plans maintained by the same employer (or
any "affiliate" thereof, as defined in PTCE 95-60) or by the same employee
organization exceed 10% of the total of all reserves and liabilities of such
general account (as determined under PTCE 95-60) as of the date of the
acquisition of such Certificates. See "Certain ERISA Considerations" in the
Prospectus. Any Plan fiduciary considering whether to purchase an Offered
Certificate on behalf of a Plan should consult with its counsel regarding the
applicability of the fiduciary responsibility and prohibited transaction
provisions of ERISA and the Code to such investment.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
S-52
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
30/360 ................................. S-35
Accrued Certificate Interest ........... S-35
Advance ................................ S-7, S-38
ARM Loans .............................. S-2
Available Distribution Amount .......... S-33
Balloon Payment ........................ S-3
Certificate Balance .................... ii
Certificate Registrar .................. S-32
Certificates ........................... i
Class .................................. i
Class A Certificate Owner .............. S-1
Class B Available Distribution Amount . S-5
Class S Certificates ................... ii
Collateral Support Deficit ............. S-8, S-37
Cut-off Date ........................... ii
Cut-off Date Balance ................... S-14
Debt Service Coverage Ratio ............ S-22
Definitive Class A Certificate ......... S-1, S-32
Delivery Date .......................... ii
Determination Date ..................... S-34
Distributable Certificate Interest .... S-35
Distributable Principal ................ S-36
Distribution Date ...................... ii, S-33
Distribution Date Statement ............ S-38
Due Date ............................... S-2
Due Period ............................. S-33
ERISA .................................. S-10
ERISA Considerations ................... S-31
Financial Intermediary ................. S-32
Fixed Rate Loans ....................... S-3
Form 8-K ............................... S-26
Gross Margin ........................... S-2
Index .................................. S-2
Initial Pool Balance ................... ii
Interest Rate Adjustment Date .......... S-2
LTV Ratio .............................. S-23
Master Servicing Fee ................... S-28
Monthly Payments ....................... S-2
Mortgage ............................... S-14
Mortgage Loans ......................... ii
Mortgage Note .......................... S-14
Mortgage Pool .......................... ii
Mortgage Rate .......................... S-2
Mortgaged Property ..................... S-2, S-14
Net Aggregate Prepayment Interest
Shortfall ............................. S-35
Net Mortgage Rate ...................... S-4, S-35
Net Operating Income ................... S-22
Nonrecoverable Advance ................. S-38
Nonrecoverable Advances ................ S-7
Offered Certificates ................... i, S-31
Ownership Percentage ................... S-36
Pass-Through Rate ...................... ii
Payment Adjustment Date ................ S-3
Percentage Interest .................... S-31
Pooling and Servicing Agreement ....... S-3
Prepayment Interest Excess ............. S-29
Prepayment Premiums .................... S-15
Purchase Agreement ..................... S-2
Purchase Price ......................... S-26
Reimbursement Rate ..................... S-38
Related Proceeds ....................... S-38
REMIC Regular Certificates ............. ii
REO Loan ............................... S-36
REO Property ........................... S-27
Senior Certificates .................... i, S-31
Servicing Fees ......................... S-28
Special Servicing Fee .................. S-28
Specially Serviced Mortgage Assets .... S-27
Specially Serviced Mortgage Loans ...... S-27
Stated Principal Balance ............... S-36
Trust Fund ............................. ii
Underwriter ............................ i
Voting Rights .......................... S-39
Workout Fee ............................ S-29
Workout Fee Rate ....................... S-29
</TABLE>
S-53
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
A-1
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................... S-1
Risk Factors................................ S-11
Description of the Mortgage Pool............ S-14
Servicing of the Mortgage Loans............. S-27
Description of the Certificates............. S-31
Yield and Maturity Considerations........... S-41
Certain Federal Income Tax Consequences .... S-46
Method of Distribution...................... S-48
Legal Matters............................... S-48
Rating...................................... S-49
Legal Investment............................ S-49
Certain ERISA Considerations................ S-50
Index of Principal Definitions.............. S-53
PROSPECTUS
Prospectus Supplement.......................
Available Information.......................
Incorporation of Certain Information by
Reference..................................
Summary of Prospectus.......................
Risk Factors................................
Description of the Trust Funds..............
Yield and Maturity Considerations...........
The Depositor...............................
Description of the Certificates.............
Description of the Pooling Agreements ......
Description of Credit Support...............
Certain Legal Aspects of Mortgage Loans ....
Certain Federal Income Tax Consequences ....
State Tax and Other Considerations..........
ERISA Considerations........................
Legal Investment ...........................
Use of Proceeds.............................
Method of Distribution......................
Legal Matters...............................
Financial Information.......................
Rating......................................
Index of Principal Definitions .............
</TABLE>
DEUTSCHE MORTGAGE &
ASSET RECEIVING CORPORATION
$
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 199 -
CLASS A CERTIFICATES VARIABLE RATE $
CLASS B CERTIFICATES VARIABLE RATE $
CLASS R CERTIFICATES VARIABLE RATE $100
PROSPECTUS SUPPLEMENT
[UNDERWRITER]
DATED , 199
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 23, 1998
[VERSION 4 -- HEALTH CARE AND RESTAURANT CONCENTRATION]
DEUTSCHE MORTGAGE & ASSET RECEIVING CORPORATION
MORTGAGE PASS-THROUGH CERTIFICATES
The mortgage pass-through certificates offered hereby (the "Offered
Certificates") and by the supplements hereto (each, a "Prospectus
Supplement") will be offered from time to time in series. The Offered
Certificates of any series, together with any other mortgage pass-through
certificates of such series, are collectively referred to herein as the
"Certificates".
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series,
the "Trust Fund") to be formed by Deutsche Mortgage & Asset Receiving
Corporation (the "Depositor") and including a segregated pool (a "Mortgage
Asset Pool") of various types of multifamily and commercial mortgage loans
("Mortgage Loans"), mortgage-backed securities ("MBS") that evidence
interests in, or that are secured by pledges of, one or more of various types
of multifamily or commercial mortgage loans, or a combination of Mortgage
Loans and MBS (collectively, "Mortgage Assets"). The Mortgage Loans in (and
the mortgage loans underlying the MBS in) any Trust Fund will be secured by
first or junior liens on, or security interests in, one or more of the
following types of real property: (i) residential properties consisting of
five or more rental or cooperatively-owned dwelling units and mobile home
parks; and (ii) commercial properties consisting of office buildings, retail
shopping facilities, hotels and motels, Health Care-Related Facilities (as
defined herein), recreational vehicle parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial facilities,
parking lots, individual restaurants and other establishments that are part
of the food service industry (collectively, "Restaurants"), mixed use
properties (that is, any combination of the foregoing), and unimproved land.
To the extent described in the Prospectus Supplement, Health Care-Related
Facilities and Restaurants will represent security for a material
concentration of the Mortgage Loans in (or the mortgage loans underlying the
MBS in) any Trust Fund, based on principal balance at the time such Trust
Fund is formed. If so specified in the related Prospectus Supplement, the
Trust Fund for a series of Certificates may also include letters of credit,
surety bonds, insurance policies, guarantees, reserve funds, guaranteed
investment contracts, interest rate exchange agreements or interest rate cap
or floor agreements designed to reduce the effects of interest rate
fluctuations on the Mortgage Assets. See "Description of the Trust Funds",
"Description of the Certificates" and "Description of Credit Support".
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including prepayments)
on the Mortgage Assets in the related Trust Fund and the timing of receipt of
such payments as described herein and in the related Prospectus Supplement.
See "Yield and Maturity Considerations". A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination;
Retirement of the Certificates".
(cover continued on next page)
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND WILL BE THE SOLE SOURCE OF
PAYMENTS ON THE OFFERED CERTIFICATES. THE OFFERED CERTIFICATES WILL NOT
REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR, DEUTSCHE BANK AG OR
ANY OF THEIR AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
ASSETS WILL BE GUARANTEED OR INSURED BY THE DEPOSITOR OR ANY OF ITS
AFFILIATES OR, UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS
SUPPLEMENT, BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING ON PAGE 8
HEREIN UNDER THE CAPTION "RISK FACTORS" AND SUCH INFORMATION AS MAY BE SET
FORTH UNDER THE CAPTION "RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT
BEFORE PURCHASING ANY OFFERED CERTIFICATE.
The Offered Certificates of any series may be offered through one or more
different methods, including offerings through underwriters, as described
under "Method of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any
series prior to the offering thereof. There can be no assurance that a
secondary market for any Offered Certificates will develop or, if it does
develop, that it will continue. Unless otherwise provided in the related
Prospectus Supplement, the Certificates will not be listed on any securities
exchange.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Offered Certificates of any series unless
accompanied by the Prospectus Supplement for such series.
The date of this Prospectus is , 199
<PAGE>
(cover continued)
As described in the related Prospectus Supplement, the Certificates of
each series, including the Offered Certificates of such series, may consist
of one or more classes of Certificates that: (i) provide for the accrual of
interest thereon based on a fixed, variable or adjustable interest rate; (ii)
are senior or subordinate to one or more other classes of Certificates in
entitlement to certain distributions on the Certificates; (iii) are entitled
to distributions of principal, with disproportionate, nominal or no
distributions of interest; (iv) are entitled to distributions of interest,
with disproportionate, nominal or no distributions of principal; (v) provide
for distributions of interest thereon or principal thereof that commence only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; (vi) provide for
distributions of principal thereof to be made, from time to time or for
designated periods, at a rate that is faster (and, in some cases,
substantially faster) or slower (and, in some cases, substantially slower)
than the rate at which payments or other collections of principal are
received on the Mortgage Assets in the related Trust Fund; or (vii) provide
for distributions of principal thereof to be made, subject to available
funds, based on a specified principal payment schedule or other methodology.
Distributions in respect of the Certificates of each series will be made on a
monthly, quarterly, semi-annual, annual or other periodic basis as specified
in the related Prospectus Supplement. See "Description of the Certificates".
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof
as a "real estate mortgage investment conduit" (each, a "REMIC") for federal
income tax purposes. If applicable, the Prospectus Supplement for a series of
Certificates will specify which class or classes of such series of
Certificates will be considered to be regular interests in the related REMIC
and which class of Certificates or other interests will be designated as the
residual interest in the related REMIC. See "Certain Federal Income Tax
Consequences".
An Index of Principal Definitions is included at the end of this
Prospectus specifying the location of definitions of important or frequently
used defined terms.
ii
<PAGE>
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to each series of Offered Certificates will, among other things, set forth,
as and to the extent appropriate: (i) a description of the class or classes
of such Offered Certificates, including the payment provisions with respect
to each such class, the aggregate principal amount, if any, of each such
class, the rate at which interest accrues from time to time, if at all, with
respect to each such class or the method of determining such rate, and
whether interest with respect to each such class will accrue from time to
time on its aggregate principal amount, if any, or on a specified notional
amount, if at all; (ii) information with respect to any other classes of
Certificates of the same series; (iii) the respective dates on which
distributions are to be made; (iv) information as to the assets, including
the Mortgage Assets, constituting the related Trust Fund (all such assets,
with respect to the Certificates of any series, the "Trust Assets"); (v) the
circumstances, if any, under which the related Trust Fund may be subject to
early termination; (vi) additional information with respect to the method of
distribution of such Offered Certificates; (vii) whether one or more REMIC
elections will be made and the designation of the "regular interests" and
"residual interests" in each REMIC to be created and the identity of the
person (the "REMIC Administrator") responsible for the various tax-related
duties in respect of each REMIC to be created; (viii) the initial percentage
ownership interest in the related Trust Fund to be evidenced by each class of
Certificates of such series; (ix) information concerning the Trustee (as
defined herein) of the related Trust Fund; (x) if the related Trust Fund
includes Mortgage Loans, information concerning the Master Servicer and any
Special Servicer (each as defined herein) of such Mortgage Loans and the
circumstances under which all or a portion, as specified, of the servicing of
a Mortgage Loan would transfer from the Master Servicer to the Special
Servicer; (xi) information as to the nature and extent of subordination of
any class of Certificates of such series, including a class of Offered
Certificates; and (xii) whether such Offered Certificates will be initially
issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended, with respect to the
Offered Certificates. This Prospectus and the Prospectus Supplement relating
to each series of Offered Certificates contain summaries of the material
terms of the documents referred to herein and therein, but do not contain all
of the information set forth in the Registration Statement pursuant to the
rules and regulations of the Commission. For further information, reference
is made to such Registration Statement and the exhibits thereto. Such
Registration Statement and exhibits can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at its
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at its Regional Offices located as follows: Chicago Regional Office, 500 West
Madison, 14th Floor, Chicago, Illinois 60661; New York Regional Office, Seven
World Trade Center, New York, New York 10048. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov).
No dealer, salesman, or other person has been authorized to give any
information, or to make any representations, other than those contained in
this Prospectus or any related Prospectus Supplement, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Depositor or any other person. Neither the delivery of this
Prospectus or any related Prospectus Supplement nor any sale made hereunder
or thereunder shall under any circumstances create an implication that there
has been no change in the information herein since the date hereof or therein
since the date thereof. This Prospectus and any related Prospectus Supplement
are not an offer to sell or a solicitation of an offer to buy any security in
any jurisdiction in which it is unlawful to make such offer or solicitation.
iii
<PAGE>
The Master Servicer, the Trustee or another specified person will cause to
be provided to registered holders of the Offered Certificates of each series
periodic unaudited reports concerning the related Trust Fund. If beneficial
interests in a class or series of Offered Certificates are being held and
transferred in book-entry format through the facilities of The Depository
Trust Company ("DTC") as described herein, then unless otherwise provided in
the related Prospectus Supplement, such reports will be sent on behalf of the
related Trust Fund to a nominee of DTC as the registered holder of the
Offered Certificates. Conveyance of notices and other communications by DTC
to its participating organizations, and directly or indirectly through such
participating organizations to the beneficial owners of the applicable
Offered Certificates, will be governed by arrangements among them, subject to
any statutory or regulatory requirements as may be in effect from time to
time. See "Description of the Certificates--Reports to Certificateholders"
and "--Book-Entry Registration and Definitive Certificates".
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules and regulations of the Commission thereunder. The Depositor intends to
make a written request to the staff of the Commission that the staff either
(i) issue an order pursuant to Section 12(h) of the Exchange Act exempting
the Depositor from certain reporting requirements under the Exchange Act with
respect to each Trust Fund or (ii) state that the staff will not recommend
that the Commission take enforcement action if the Depositor fulfills its
reporting obligations as described in its written request. If such request is
granted, the Depositor will file or cause to be filed with the Commission as
to each Trust Fund the periodic unaudited reports to holders of the Offered
Certificates referenced in the preceding paragraph; however, because of the
nature of the Trust Funds, it is unlikely that any significant additional
information will be filed. In addition, because of the limited number of
Certificateholders expected for each series, the Depositor anticipates that a
significant portion of such reporting requirements will be permanently
suspended following the first fiscal year for the related Trust Fund.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act of 1934, as amended,
prior to the termination of an offering of Offered Certificates evidencing
interests therein. The Depositor will provide or cause to be provided without
charge to each person to whom this Prospectus is delivered in connection with
the offering of one or more classes of Offered Certificates, upon written or
oral request of such person, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents
or reports relate to one or more of such classes of such Offered
Certificates, other than the exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). Such requests
to the Depositor should be directed in writing to the Depositor at One
International Place, Room 520, Boston, Massachusetts 02110, Attention:
Secretary, or by telephone at (617) 951-7690.
iv
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT...................................................................... iii
AVAILABLE INFORMATION...................................................................... iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................................... iv
SUMMARY OF PROSPECTUS...................................................................... 1
RISK FACTORS............................................................................... 8
Limited Liquidity of Offered Certificates................................................. 8
Limited Assets ........................................................................... 8
Credit Support Limitations................................................................ 9
Effect of Prepayments on Average Life of Certificates..................................... 9
Effect of Prepayments on Yield of Certificates ........................................... 11
Limited Nature of Ratings................................................................. 11
Certain Factors Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans ........ 11
Inclusion of Delinquent and Nonperforming Mortgage Loans in a Mortgage Asset Pool ........ 14
Termination............................................................................... 15
Risks Associated with Health Care-Related Properties...................................... 15
Risks Associated with Restaurants......................................................... 16
DESCRIPTION OF THE TRUST FUNDS............................................................. 16
General................................................................................... 16
Mortgage Loans............................................................................ 16
MBS....................................................................................... 22
Certificate Accounts...................................................................... 23
Credit Support............................................................................ 23
Cash Flow Agreements...................................................................... 24
YIELD AND MATURITY CONSIDERATIONS.......................................................... 25
General................................................................................... 25
Pass-Through Rate......................................................................... 25
Payment Delays............................................................................ 25
Certain Shortfalls in Collections of Interest............................................. 25
Yield and Prepayment Considerations....................................................... 26
Weighted Average Life and Maturity........................................................ 27
Other Factors Affecting Yield, Weighted Average Life and Maturity......................... 28
THE DEPOSITOR.............................................................................. 30
DEUTSCHE BANK AG........................................................................... 30
DESCRIPTION OF THE CERTIFICATES............................................................ 30
General................................................................................... 30
Distributions ............................................................................ 31
Distributions of Interest on the Certificates............................................. 32
Distributions of Principal of the Certificates............................................ 32
Distributions on the Certificates in Respect of Prepayment Premiums or
in Respect of Equity Participations...................................................... 33
Allocation of Losses and Shortfalls....................................................... 33
Advances in Respect of Delinquencies...................................................... 33
Reports to Certificateholders............................................................. 34
Voting Rights............................................................................. 36
Termination............................................................................... 36
Book-Entry Registration and Definitive Certificates....................................... 36
v
<PAGE>
PAGE
--------
DESCRIPTION OF THE POOLING AGREEMENTS...................................................... 39
General................................................................................... 39
Assignment of Mortgage Loans; Repurchases................................................. 39
Representations and Warranties; Repurchases............................................... 41
Collection and Other Servicing Procedures................................................. 41
Sub-Servicers............................................................................. 43
Certificate Account....................................................................... 44
Modifications, Waivers and Amendments of Mortgage Loans................................... 46
Realization Upon Defaulted Mortgage Loans................................................. 46
Hazard Insurance Policies................................................................. 48
Due-on-Sale and Due-on-Encumbrance Provisions............................................. 49
Servicing Compensation and Payment of Expenses............................................ 49
Evidence as to Compliance................................................................. 50
Certain Matters Regarding the Master Servicer, the Special Servicer,
the REMIC Administrator and the Depositor................................................ 50
Events of Default......................................................................... 51
Rights Upon Event of Default.............................................................. 52
Amendment................................................................................. 53
List of Certificateholders................................................................ 53
The Trustee............................................................................... 54
Duties of the Trustee..................................................................... 54
Certain Matters Regarding the Trustee..................................................... 54
Resignation and Removal of the Trustee.................................................... 54
DESCRIPTION OF CREDIT SUPPORT.............................................................. 55
General................................................................................... 55
Subordinate Certificates.................................................................. 55
Insurance or Guarantees with Respect to Mortgage Loans.................................... 55
Letter of Credit.......................................................................... 55
Certificate Insurance and Surety Bonds.................................................... 56
Reserve Funds............................................................................. 56
Credit Support with Respect to MBS........................................................ 56
Interest Rate Exchange, Cap and Floor Agreements ......................................... 56
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.................................................... 57
General................................................................................... 57
Types of Mortgage Instruments............................................................. 57
Leases and Rents.......................................................................... 58
Personalty................................................................................ 58
Foreclosure............................................................................... 58
Bankruptcy Laws........................................................................... 61
Environmental Considerations.............................................................. 62
Due-on-Sale and Due-on-Encumbrance Provisions............................................. 64
Junior Liens; Rights of Holders of Senior Liens........................................... 64
Subordinate Financing..................................................................... 64
Default Interest and Limitations on Prepayments........................................... 65
Applicability of Usury Laws............................................................... 65
Certain Laws and Regulations.............................................................. 65
Americans with Disabilities Act........................................................... 65
Soldiers' and Sailors' Civil Relief Act of 1940........................................... 66
Forfeitures in Drug and RICO Proceedings.................................................. 66
vi
<PAGE>
PAGE
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................................... 67
Federal Income Tax Consequences for REMIC Certificates ................................... 67
Taxation of Regular Certificates ......................................................... 70
Taxation of Residual Certificates......................................................... 77
Taxes That May Be Imposed in the REMIC Pool .............................................. 83
Liquidation of the REMIC Pool ............................................................ 84
Administrative Matters ................................................................... 84
Limitations on Deduction of Certain Expenses ............................................. 84
Taxation of Certain Foreign Investors .................................................... 85
Backup Withholding ....................................................................... 86
Reporting Requirements ................................................................... 86
Federal Income Tax Consequences For Certificates as to Which No REMIC Election Is Made .. 88
Standard Certificates .................................................................... 88
Stripped Certificates .................................................................... 90
Reporting Requirements and Backup Withholding ............................................ 93
Taxation of Certain Foreign Investors .................................................... 94
STATE AND OTHER TAX CONSEQUENCES........................................................... 94
CERTAIN ERISA CONSIDERATIONS............................................................... 94
General................................................................................... 94
Plan Asset Regulations.................................................................... 95
Prohibited Transaction Exemptions ........................................................ 96
Tax Exempt Investors...................................................................... 98
LEGAL INVESTMENT........................................................................... 98
USE OF PROCEEDS............................................................................ 101
METHOD OF DISTRIBUTION..................................................................... 101
LEGAL MATTERS.............................................................................. 102
FINANCIAL INFORMATION...................................................................... 102
RATING..................................................................................... 102
INDEX OF PRINCIPAL DEFINITIONS............................................................. 103
</TABLE>
vii
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each
series of Certificates contained in the Prospectus Supplement to be prepared
and delivered in connection with the offering of Offered Certificates of such
series. An Index of Principal Definitions is included at the end of this
Prospectus.
SECURITIES OFFERED ............ Mortgage pass-through certificates.
DEPOSITOR ..................... Deutsche Mortgage & Asset Receiving
Corporation, a Delaware corporation. See
"The Depositor".
TRUSTEE ....................... The trustee (the "Trustee") for each series
of Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--The Trustee".
MASTER SERVICER ............... If a Trust Fund includes Mortgage Loans,
then the master servicer (the "Master
Servicer") for the corresponding series of
Certificates will be named in the related
Prospectus Supplement. See "Description of
the Pooling Agreements--Certain Matters
Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the
Depositor".
SPECIAL SERVICER .............. If a Trust Fund includes Mortgage Loans,
then the special servicer (the "Special
Servicer") for the corresponding series of
Certificates will be named, or the
circumstances under which a Special Servicer
may be appointed will be described, in the
related Prospectus Supplement. See
"Description of the Pooling
Agreements--Collection and Other Servicing
Procedures".
MBS ADMINISTRATOR ............. If a Trust Fund includes MBS, then the
entity responsible for administering such
MBS (the "MBS Administrator") will be named
in the related Prospectus Supplement. If an
entity other than the Trustee and the Master
Servicer is the MBS Administrator, such
entity will be herein referred to as the
"Manager".
REMIC ADMINISTRATOR ........... The person (the "REMIC Administrator")
responsible for the various tax-related
administration duties for a series of
Certificates as to which one or more REMIC
elections have been made, will be named in
the related Prospectus Supplement. See
"Certain Federal Income Tax
Consequences--REMIC's--Reporting and Other
Administrative Matters."
THE MORTGAGE ASSETS ........... The Mortgage Assets will be the primary
assets of any Trust Fund. The Mortgage
Assets with respect to each series of
Certificates will, in general, consist of a
pool of mortgage loans ("Mortgage Loans")
secured by first or junior liens on, or
security interests in, one or more of the
following types of real property: (i)
residential properties ("Multifamily
Properties") consisting of five or more
rental or cooperatively-owned dwelling units
in high-rise, mid-rise or garden apartment
buildings or
1
<PAGE>
other residential structures, and mobile
home parks; and (ii) commercial properties
("Commercial Properties") consisting of
office buildings, retail shopping facilities
(such as shopping centers, malls and
individual stores), hotels and motels,
Health Care-Related Facilities (as defined
herein), recreational vehicle parks,
warehouse facilities, mini-warehouse
facilities, self-storage facilities,
industrial facilities, parking lots,
individual restaurants and other
establishments that are part of the food
service industry (collectively,
"Restaurants"), mixed use properties (that
is, any combination of the foregoing), and
unimproved land. The Mortgage Loans will not
be guaranteed or insured by the Depositor or
any of its affiliates or, unless otherwise
provided in the related Prospectus
Supplement, by any governmental agency or
instrumentality or by any other person. If
so specified in the related Prospectus
Supplement, some Mortgage Loans may be
delinquent or nonperforming as of the date
the related Trust Fund is formed.
As and to the extent described in the
related Prospectus Supplement, a Mortgage
Loan (i) may provide for no accrual of
interest or for accrual of interest thereon
at an interest rate (a "Mortgage Rate") that
is fixed over its term or that adjusts from
time to time, or that may be converted at
the borrower's election from an adjustable
to a fixed Mortgage Rate, or from a fixed to
an adjustable Mortgage Rate, (ii) may
provide for level payments to maturity or
for payments that adjust from time to time
to accommodate changes in the Mortgage Rate
or to reflect the occurrence of certain
events, and may permit negative
amortization, (iii) may be fully amortizing
or may be partially amortizing or
nonamortizing, with a balloon payment due on
its stated maturity date, (iv) may prohibit
over its term or for a certain period
prepayments and/or require payment of a
premium or a yield maintenance payment in
connection with certain prepayments and (v)
may provide for payments of principal,
interest or both, on due dates that occur
monthly, quarterly, semi-annually or at such
other interval as is specified in the
related Prospectus Supplement. Each Mortgage
Loan will have had an original term to
maturity of not more than 40 years. No
Mortgage Loan will have been originated by
the Depositor. See "Description of the Trust
Funds--Mortgage Loans".
If any Mortgage Loan, or group of related
Mortgage Loans, constitutes a concentration
of credit risk, financial statements or
other financial information with respect to
the related Mortgaged Property or Mortgaged
Properties will be included in the related
Prospectus Supplement. See "Description of
the Trust Funds--Mortgage Loans--Mortgage
Loan Information in Prospectus Supplements".
If and to the extent specified in the
related Prospectus Supplement, the Mortgage
Assets with respect to a series of
Certificates may also include, or consist
of, mortgage participations, mortgage
pass-through certificates and/or other
mortgage-
2
<PAGE>
backed securities (collectively, "MBS"),
that evidence an interest in, or are secured
by a pledge of, one or more mortgage loans
that conform to the descriptions of the
Mortgage Loans contained herein and which
may or may not be issued, insured or
guaranteed by the United States or an agency
or instrumentality thereof. See "Description
of the Trust Funds--MBS".
THE CERTIFICATES .............. Each series of Certificates will be issued
in one or more classes pursuant to a pooling
and servicing agreement or other agreement
specified in the related Prospectus
Supplement (in any case, a "Pooling
Agreement") and will represent in the
aggregate the entire beneficial ownership
interest in the related Trust Fund.
As described in the related Prospectus
Supplement, the Certificates of each series,
including the Offered Certificates of such
series, may consist of one or more classes
of Certificates that, among other things:
(i) are senior (collectively, "Senior
Certificates") or subordinate (collectively,
"Subordinate Certificates") to one or more
other classes of Certificates in entitlement
to certain distributions on the
Certificates; (ii) are entitled to
distributions of principal, with
disproportionate, nominal or no
distributions of interest (collectively,
"Stripped Principal Certificates"); (iii)
are entitled to distributions of interest,
with disproportionate, nominal or no
distributions of principal (collectively,
"Stripped Interest Certificates"); (iv)
provide for distributions of interest
thereon or principal thereof that commence
only after the occurrence of certain events,
such as the retirement of one or more other
classes of Certificates of such series; (v)
provide for distributions of principal
thereof to be made, from time to time or for
designated periods, at a rate that is faster
(and, in some cases, substantially faster)
or slower (and, in some cases, substantially
slower) than the rate at which payments or
other collections of principal are received
on the Mortgage Assets in the related Trust
Fund; (vi) provide for distributions of
principal thereof to be made, subject to
available funds, based on a specified
principal payment schedule or other
methodology; or (vii) provide for
distribution based on collections on the
Mortgage Assets in the related Trust Fund
attributable to prepayment premiums, yield
maintenance payments or equity
participations.
If so specified in the related Prospectus
Supplement, a series of Certificates may
include one or more "Controlled Amortization
Classes", which will entitle the holders
thereof to receive principal distributions
according to a specified principal payment
schedule. Although prepayment risk cannot be
eliminated entirely for any class of
Certificates, a Controlled Amortization
Class will generally provide a relatively
stable cash flow so long as the actual rate
of prepayment on the Mortgage Loans in the
related Trust Fund remains relatively
constant at the rate, or within the range of
rates, of prepayment used to establish the
specific principal payment schedule for such
Certificates. Pre-
3
<PAGE>
payment risk with respect to a given
Mortgage Asset Pool does not disappear,
however, and the stability afforded to a
Controlled Amortization Class comes at the
expense of one or more other classes of the
same series, any of which other classes may
also be a class of Offered Certificates. See
"Risk Factors--Effect of Prepayments on
Average Life of Certificates" and "--Effect
of Prepayments on Yield of Certificates".
Each class of Certificates, other than
certain classes of Stripped Interest
Certificates and certain classes of REMIC
Residual Certificates (as defined herein),
will have an initial stated principal amount
(a "Certificate Balance"); and each class of
Certificates, other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates, will
accrue interest on its Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, on a
notional amount (a "Notional Amount"), based
on a fixed, variable or adjustable interest
rate (a "Pass-Through Rate"). The related
Prospectus Supplement will specify the
Certificate Balance, Notional Amount and/or
Pass-Through Rate (or, in the case of a
variable or adjustable Pass-Through Rate,
the method for determining such rate), as
applicable, for each class of Offered
Certificates.
If so specified in the related Prospectus
Supplement, a class of Certificates may have
two or more component parts, each having
characteristics that are otherwise described
herein as being attributable to separate and
distinct classes.
The Certificates will not be guaranteed or
insured by the Depositor or any of its
affiliates, by any governmental agency or
instrumentality or by any other person or
entity, unless otherwise provided in the
related Prospectus Supplement. See "Risk
Factors--Limited Assets".
DISTRIBUTIONS OF INTEREST ON
THE CERTIFICATES ............. Interest on each class of Offered
Certificates (other than certain classes of
Stripped Principal Certificates and certain
classes of REMIC Residual Certificates) of
each series will accrue at the applicable
Pass-Through Rate on the Certificate Balance
or, in the case of certain classes of
Stripped Interest Certificates, the Notional
Amount thereof outstanding from time to time
and will be distributed to
Certificateholders as provided in the
related Prospectus Supplement (each of the
specified dates on which distributions are
to be made, a "Distribution Date").
Distributions of interest with respect to
one or more classes of Certificates
(collectively, "Accrual Certificates") may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates, and
interest accrued with respect to a class of
Accrual Certificates prior to the occurrence
of such an event will either be added to the
Certificate Balance thereof or otherwise
deferred as described in the related
Prospectus Supplement. Distributions of
4
<PAGE>
interest with respect to one or more classes
of Certificates may be reduced to the extent
of certain delinquencies, losses and other
contingencies described herein and in the
related Prospectus Supplement. See "Risk
Factors--Effect of Prepayments on Average
Life of Certificates" and "--Effect of
Prepayments on Yield of Certificates",
"Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest" and
"Description of the
Certificates--Distributions of Interest on
the Certificates".
DISTRIBUTIONS OF PRINCIPAL OF
THE CERTIFICATES ............. Each class of Certificates of each series
(other than certain classes of Stripped
Interest Certificates and certain classes of
REMIC Residual Certificates) will have a
Certificate Balance. The Certificate Balance
of a class of Certificates outstanding from
time to time will represent the maximum
amount that the holders thereof are then
entitled to receive in respect of principal
from future cash flow on the assets in the
related Trust Fund. The initial aggregate
Certificate Balance of all classes of a
series of Certificates will not be greater
than the outstanding principal balance of
the related Mortgage Assets as of a
specified date (the "Cut-off Date"), after
application of scheduled payments due on or
before such date, whether or not received.
As and to the extent described in each
Prospectus Supplement, distributions of
principal with respect to the related series
of Certificates will be made on each
Distribution Date to the holders of the
class or classes of Certificates of such
series then entitled thereto until the
Certificate Balances of such Certificates
have been reduced to zero. Distributions of
principal with respect to one or more
classes of Certificates: (i) may be made at
a rate that is faster (and, in some cases,
substantially faster) or slower (and, in
some cases, substantially slower) than the
rate at which payments or other collections
of principal are received on the Mortgage
Assets in the related Trust Fund; (ii) may
not commence until the occurrence of certain
events, such as the retirement of one or
more other classes of Certificates of the
same series; (iii) may be made, subject to
certain limitations, based on a specified
principal payment schedule; or (iv) may be
contingent on the specified principal
payment schedule for another class of the
same series and the rate at which payments
and other collections of principal on the
Mortgage Assets in the related Trust Fund
are received. Unless otherwise specified in
the related Prospectus Supplement,
distributions of principal of any class of
Offered Certificates will be made on a pro
rata basis among all of the Certificates of
such class. See "Description of the
Certificates--Distributions of Principal of
the Certificates".
CREDIT SUPPORT AND CASH FLOW
AGREEMENTS ................... If so provided in the related Prospectus
Supplement, partial or full protection
against certain defaults and losses on the
Mortgage Assets in the related Trust Fund
may be provided to one or more classes of
Certificates of the related series in the
form of
5
<PAGE>
subordination of one or more other classes
of Certificates of such series, which other
classes may include one or more classes of
Offered Certificates, or by one or more
other types of credit support, which may
include a letter of credit, a surety bond,
an insurance policy, a guarantee, a reserve
fund, or a combination thereof (any such
coverage with respect to the Certificates of
any series, "Credit Support"). If so
provided in the related Prospectus
Supplement, a Trust Fund may include: (i)
guaranteed investment contracts pursuant to
which moneys held in the funds and accounts
established for the related series will be
invested at a specified rate; or (ii)
interest rate exchange agreements, interest
rate cap or floor agreements, or other
agreements designed to reduce the effects of
interest rate fluctuations on the Mortgage
Assets or on one or more classes of
Certificates (any such agreement, in the
case of clause (i) or (ii), a "Cash Flow
Agreement"). Certain relevant information
regarding any applicable Credit Support or
Cash Flow Agreement will be set forth in the
Prospectus Supplement for a series of
Offered Certificates. See "Risk
Factors--Credit Support Limitations",
"Description of the Trust Funds--Credit
Support" and "--Cash Flow Agreements" and
"Description of Credit Support".
ADVANCES ...................... If and to the extent provided in the related
Prospectus Supplement, if a Trust Fund
includes Mortgage Loans, the Master
Servicer, the Special Servicer, the Trustee,
any provider of Credit Support and/or any
other specified person may be obligated to
make, or have the option of making, certain
advances with respect to delinquent
scheduled payments of principal and/or
interest on such Mortgage Loans. Any such
advances made with respect to a particular
Mortgage Loan will be reimbursable from
subsequent recoveries in respect of such
Mortgage Loan and otherwise to the extent
described herein and in the related
Prospectus Supplement. See "Description of
the Certificates--Advances in Respect of
Delinquencies". If and to the extent
provided in the Prospectus Supplement for a
series of Certificates, any entity making
such advances may be entitled to receive
interest thereon for a specified period
during which certain or all of such advances
are outstanding, payable from amounts in the
related Trust Fund. See "Description of the
Certificates--Advances in Respect of
Delinquencies". If a Trust Fund includes
MBS, any comparable advancing obligation of
a party to the related Pooling Agreement, or
of a party to the related MBS Agreement,
will be described in the related Prospectus
Supplement.
OPTIONAL TERMINATION .......... If so specified in the related Prospectus
Supplement, a series of Certificates may be
subject to optional early termination
through the repurchase of the Mortgage
Assets in the related Trust Fund by the
party or parties specified therein, under
the circumstances and in the manner set
forth therein. If so provided in the related
Prospectus Supplement, upon the reduction of
the
6
<PAGE>
Certificate Balance of a specified class or
classes of Certificates by a specified
percentage or amount or upon a specified
date, a party specified therein may be
authorized or required to solicit bids for
the purchase of all of the Mortgage Assets
of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets
to retire such class or classes, under the
circumstances and in the manner set forth
therein. See "Description of the
Certificates--Termination".
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES ................. The Certificates of each series will
constitute or evidence ownership of either
(i) "regular interests" ("REMIC Regular
Certificates") and "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a designated portion thereof,
treated as a REMIC under Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code"), or (ii) interests
("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust (or a
partnership) under applicable provisions of
the Code.
Investors are advised to consult their tax
advisors concerning the specific tax
consequences to them of the purchase,
ownership and disposition of the Offered
Certificates and to review "Certain Federal
Income Tax Consequences" herein and in the
related Prospectus Supplement.
ERISA CONSIDERATIONS .......... Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual
retirement accounts, annuities, Keogh plans,
and collective investment funds and separate
accounts in which such plans, accounts,
annuities or arrangements are invested, that
are subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code,
should review with their legal advisors
whether the purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. See "ERISA
Considerations" herein and in the related
Prospectus Supplement.
LEGAL INVESTMENT .............. The Offered Certificates will constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), only if
so specified in the related Prospectus
Supplement. Investors whose investment
authority is subject to legal restrictions
should consult their legal advisors to
determine whether and to what extent the
Offered Certificates constitute legal
investments for them. See "Legal Investment"
herein and in the related Prospectus
Supplement.
RATING ........................ At their respective dates of issuance, each
class of Offered Certificates will be rated
not lower than investment grade by one or
more nationally recognized statistical
rating agencies (each, a "Rating Agency").
See "Rating" herein and in the related
Prospectus Supplement.
7
<PAGE>
RISK FACTORS
In considering an investment in the Offered Certificates of any series,
investors should consider, among other things, the following risk factors and
any other factors set forth under the heading "Risk Factors" in the related
Prospectus Supplement. In general, to the extent that the factors discussed
below pertain to or are influenced by the characteristics or behavior of
Mortgage Loans included in a particular Trust Fund, they would similarly
pertain to and be influenced by the characteristics or behavior of the
mortgage loans underlying any MBS included in such Trust Fund.
LIMITED LIQUIDITY OF OFFERED CERTIFICATES
General. The Offered Certificates of any series may have limited or no
liquidity. Accordingly, an investor may be forced to bear the risk of its
investment in any Offered Certificates for an indefinite period of time.
Furthermore, except to the extent described herein and in the related
Prospectus Supplement, Certificateholders will have no redemption rights, and
the Offered Certificates of each series are subject to early retirement only
under certain specified circumstances described herein and in the related
Prospectus Supplement. See "Description of the Certificates--Termination".
Lack of a Secondary Market. There can be no assurance that a secondary
market for the Offered Certificates of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or that it
will continue for as long as such Certificates remain outstanding. The
Prospectus Supplement for any series of Offered Certificates may indicate
that an underwriter specified therein intends to establish a secondary market
in such Offered Certificates; however, no underwriter will be obligated to do
so. Any such secondary market may provide less liquidity to investors than
any comparable market for securities that evidence interests in single-family
mortgage loans. Unless otherwise provided in the related Prospectus
Supplement, the Certificates will not be listed on any securities exchange.
Limited Nature of Ongoing Information. The primary source of ongoing
information regarding the Offered Certificates of any series, including
information regarding the status of the related Mortgage Assets and any
Credit Support for such Certificates, will be the periodic reports to
Certificateholders to be delivered pursuant to the related Pooling Agreement
as described herein under the heading "Description of the
Certificates--Reports to Certificateholders". There can be no assurance that
any additional ongoing information regarding the Offered Certificates of any
series will be available through any other source. The limited nature of such
information in respect of a series of Offered Certificates may adversely
affect the liquidity thereof, even if a secondary market for such
Certificates does develop.
Sensitivity to Fluctuations in Prevailing Interest Rates. Insofar as a
secondary market does develop with respect to any series of Offered
Certificates or class thereof, the market value of such Certificates will be
affected by several factors, including the perceived liquidity thereof, the
anticipated cash flow thereon (which may vary widely depending upon the
prepayment and default assumptions applied in respect of the underlying
Mortgage Loans) and prevailing interest rates. The price payable at any given
time in respect of certain classes of Offered Certificates (in particular, a
class with a relatively long average life, a Companion Class (as defined
herein) or a class of Stripped Interest Certificates or Stripped Principal
Certificates) may be extremely sensitive to small fluctuations in prevailing
interest rates; and the relative change in price for an Offered Certificate
in response to an upward or downward movement in prevailing interest rates
may not necessarily equal the relative change in price for such Offered
Certificate in response to an equal but opposite movement in such rates.
Accordingly, the sale of Offered Certificates by a holder in any secondary
market that may develop may be at a discount from the price paid by such
holder. The Depositor is not aware of any source through which price
information about the Offered Certificates will be generally available on an
ongoing basis.
LIMITED ASSETS
Unless otherwise specified in the related Prospectus Supplement, neither
the Offered Certificates of any series nor the Mortgage Assets in the related
Trust Fund will be guaranteed or insured by the Depositor or any of its
affiliates, by any governmental agency or instrumentality or by any other
person
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or entity; and no Offered Certificate of any series will represent a claim
against or security interest in the Trust Funds for any other series.
Accordingly, if the related Trust Fund has insufficient assets to make
payments on a series of Offered Certificates, no other assets will be
available for payment of the deficiency, and the holders of one or more
classes of such Offered Certificates will be required to bear the consequent
loss. Furthermore, certain amounts on deposit from time to time in certain
funds or accounts constituting part of a Trust Fund, including the
Certificate Account and any accounts maintained as Credit Support, may be
withdrawn under certain conditions, if and to the extent described in the
related Prospectus Supplement, for purposes other than the payment of
principal of or interest on the related series of Certificates. If and to the
extent so provided in the Prospectus Supplement for a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on
the Mortgage Assets have been incurred, all or a portion of the amount of
such losses or shortfalls will be borne first by one or more classes of the
Subordinate Certificates, and, thereafter, by the remaining classes of
Certificates in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
CREDIT SUPPORT LIMITATIONS
Limitations Regarding Types of Losses Covered. The Prospectus Supplement
for a series of Certificates will describe any Credit Support provided with
respect thereto. Use of Credit Support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses; for
example, Credit Support may or may not cover loss by reason of fraud or
negligence by a mortgage loan originator or other parties. Any such losses
not covered by Credit Support may, at least in part, be allocated to one or
more classes of Offered Certificates.
Disproportionate Benefits to Certain Classes and Series. A series of
Certificates may include one or more classes of Subordinate Certificates
(which may include Offered Certificates), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the
likelihood of temporary shortfalls and ultimate losses to holders of Senior
Certificates, the amount of subordination will be limited and may decline
under certain circumstances. In addition, if principal payments on one or
more classes of Offered Certificates of a series are made in a specified
order of priority, any related Credit Support may be exhausted before the
principal of the later paid classes of Offered Certificates of such series
has been repaid in full. As a result, the impact of losses and shortfalls
experienced with respect to the Mortgage Assets may fall primarily upon those
classes of Offered Certificates having a later right of payment. Moreover, if
a form of Credit Support covers the Offered Certificates of more than one
series and losses on the related Mortgage Assets exceed the amount of such
Credit Support, it is possible that the holders of Offered Certificates of
one (or more) such series will be disproportionately benefited by such Credit
Support to the detriment of the holders of Offered Certificates of one (or
more) other such series.
Limitations Regarding the Amount of Credit Support. The amount of any
applicable Credit Support supporting one or more classes of Offered
Certificates, including the subordination of one or more other classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level
of defaults, delinquencies and losses on the underlying Mortgage Assets and
certain other factors. There can, however, be no assurance that the loss
experience on the related Mortgage Assets will not exceed such assumed
levels. See "Description of the Certificates--Allocation of Losses and
Shortfalls" and "Description of Credit Support". If the losses on the related
Mortgage Assets do exceed such assumed levels, the holders of one or more
classes of Offered Certificates will be required to bear such additional
losses.
EFFECT OF PREPAYMENTS ON AVERAGE LIFE OF CERTIFICATES
As a result of prepayments on the Mortgage Loans in any Trust Fund, the
amount and timing of distributions of principal and/or interest on the
Offered Certificates of the related series may be highly unpredictable.
Prepayments on the Mortgage Loans in any Trust Fund will result in a faster
rate of principal payments on one or more classes of the related series of
Certificates than if payments on such
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Mortgage Loans were made as scheduled. Thus, the prepayment experience on the
Mortgage Loans in a Trust Fund may affect the average life of one or more
classes of Certificates of the related series, including a class of Offered
Certificates. The rate of principal payments on pools of mortgage loans
varies among pools and from time to time is influenced by a variety of
economic, demographic, geographic, social, tax and legal factors. For
example, if prevailing interest rates fall significantly below the Mortgage
Rates borne by the Mortgage Loans included in a Trust Fund, then, subject to
the particular terms of the Mortgage Loans (e.g., provisions that prohibit
voluntary prepayments during specified periods or impose penalties in
connection therewith) and the ability of borrowers to obtain new financing,
principal prepayments on such Mortgage Loans are likely to be higher than if
prevailing interest rates remain at or above the rates borne by those
Mortgage Loans. Conversely, if prevailing interest rates rise significantly
above the Mortgage Rates borne by the Mortgage Loans included in a Trust
Fund, then principal prepayments on such Mortgage Loans are likely to be
lower than if prevailing interest rates remain at or below the mortgage rates
borne by those Mortgage Loans. There can be no assurance as to the actual
rate of prepayment on the Mortgage Loans in any Trust Fund or that such rate
of prepayment will conform to any model described herein or in any Prospectus
Supplement. As a result, depending on the anticipated rate of prepayment for
the Mortgage Loans in any Trust Fund, the retirement of any class of
Certificates of the related series could occur significantly earlier or
later, and the average life thereof could be significantly shorter or longer,
than expected.
The extent to which prepayments on the Mortgage Loans in any Trust Fund
ultimately affect the average life of any class of Certificates of the
related series will depend on the terms and provisions of such Certificates.
A class of Certificates, including a class of Offered Certificates, may
provide that on any Distribution Date the holders of such Certificates are
entitled to a pro rata share of the prepayments on the Mortgage Loans in the
related Trust Fund that are distributable on such date, to a
disproportionately large share (which, in some cases, may be all) of such
prepayments, or to a disproportionately small share (which, in some cases,
may be none) of such prepayments. A class of Certificates that entitles the
holders thereof to a disproportionately large share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of early
retirement of such class ("Call Risk") if the rate of prepayment is
relatively fast; while a class of Certificates that entitles the holders
thereof to a disproportionately small share of the prepayments on the
Mortgage Loans in the related Trust Fund increases the likelihood of an
extended average life of such class ("Extension Risk") if the rate of
prepayment is relatively slow. As and to the extent described in the related
Prospectus Supplement, the respective entitlements of the various classes of
Certificateholders of any series to receive payments (and, in particular,
prepayments) of principal of the Mortgage Loans in the related Trust Fund may
vary based on the occurrence of certain events (e.g., the retirement of one
or more classes of Certificates of such series) or subject to certain
contingencies (e.g., prepayment and default rates with respect to such
Mortgage Loans).
A series of Certificates may include one or more Controlled Amortization
Classes, which will entitle the holders thereof to receive principal
distributions according to a specified principal payment schedule. Although
prepayment risk cannot be eliminated entirely for any class of Certificates,
a Controlled Amortization Class will generally provide a relatively stable
cash flow so long as the actual rate of prepayment on the Mortgage Loans in
the related Trust Fund remains relatively constant at the rate, or within the
range of rates, of prepayment used to establish the specific principal
payment schedule for such Certificates. Prepayment risk with respect to a
given Mortgage Asset Pool does not disappear, however, and the stability
afforded to a Controlled Amortization Class comes at the expense of one or
more Companion Classes of the same series, any of which Companion Classes may
also be a class of Offered Certificates. In general, and as more specifically
described in the related Prospectus Supplement, a Companion Class may entitle
the holders thereof to a disproportionately large share of prepayments on the
Mortgage Loans in the related Trust Fund when the rate of prepayment is
relatively fast, and/or may entitle the holders thereof to a
disproportionately small share of prepayments on the Mortgage Loans in the
related Trust Fund when the rate of prepayment is relatively slow. As and to
the extent described in the related Prospectus Supplement, a Companion Class
absorbs some (but not all) of the Call Risk and/or Extension Risk that would
otherwise belong to the related Controlled Amortization Class if all payments
of principal of the Mortgage Loans in the related Trust Fund were allocated
on a pro rata basis.
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EFFECT OF PREPAYMENTS ON YIELD OF CERTIFICATES
A series of Certificates may include one or more classes of Offered
Certificates offered at a premium or discount. Yields on such classes of
Certificates will be sensitive, and in some cases extremely sensitive, to
prepayments on the Mortgage Loans in the related Trust Fund and, where the
amount of interest payable with respect to a class is disproportionately
large, as compared to the amount of principal, as with certain classes of
Stripped Interest Certificates, a holder might fail to recover its original
investment under some prepayment scenarios. The extent to which the yield to
maturity of any class of Offered Certificates may vary from the anticipated
yield will depend upon the degree to which such Certificates are purchased at
a discount or premium and the amount and timing of distributions thereon. An
investor should consider, in the case of any Offered Certificate purchased at
a discount, the risk that a slower than anticipated rate of principal
payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Offered Certificate purchased at a premium, the risk that a faster than
anticipated rate of principal payments could result in an actual yield to
such investor that is lower than the anticipated yield. See "Yield and
Maturity Considerations".
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Offered Certificates
will reflect only its assessment of the likelihood that holders of such
Offered Certificates will receive payments to which such Certificateholders
are entitled under the related Pooling Agreement. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Loans will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the related Trust Fund. Furthermore, such
rating will not address the possibility that prepayment of the related
Mortgage Loans at a higher or lower rate than anticipated by an investor may
cause such investor to experience a lower than anticipated yield or that an
investor that purchases an Offered Certificate at a significant premium might
fail to recover its initial investment under certain prepayment scenarios.
Hence, a rating assigned by a Rating Agency does not guarantee or ensure the
realization of any anticipated yield on a class of Offered Certificates.
The amount, type and nature of Credit Support, if any, provided with
respect to a series of Certificates will be determined on the basis of
criteria established by each Rating Agency rating classes of the Certificates
of such series. Those criteria are sometimes based upon an actuarial analysis
of the behavior of mortgage loans in a larger group. However, there can be no
assurance that the historical data supporting any such actuarial analysis
will accurately reflect future experience, or that the data derived from a
large pool of mortgage loans will accurately predict the delinquency,
foreclosure or loss experience of any particular pool of Mortgage Loans. In
other cases, such criteria may be based upon determinations of the values of
the Mortgaged Properties that provide security for the Mortgage Loans.
However, no assurance can be given that those values will not decline in the
future. As a result, the Credit Support required in respect of the Offered
Certificates of any series may be insufficient to fully protect the holders
thereof from losses on the related Mortgage Asset Pool. See "Description of
Credit Support" and "Rating".
CERTAIN FACTORS AFFECTING DELINQUENCY, FORECLOSURE AND LOSS OF THE MORTGAGE
LOANS
General. The payment performance of the Offered Certificates of any series
will be directly related to the payment performance of the underlying
Mortgage Loans. Set forth below is a discussion of certain factors that will
affect the full and timely payment of the Mortgage Loans in any Trust Fund.
In addition, a description of certain material considerations associated with
investments in mortgage loans is included herein under "Certain Legal Aspects
of Mortgage Loans".
The Offered Certificates will be directly or indirectly backed by mortgage
loans secured by multifamily and/or commercial properties. Mortgage loans
made on the security of multifamily or commercial property may have a greater
likelihood of delinquency and foreclosure, and a greater likelihood of loss
in the event thereof, than loans made on the security of an owner-occupied
single-family property. See "Description of the Trust Funds--Mortgage
Loans--Default and Loss Considerations with
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Respect to the Mortgage Loans". The ability of a borrower to repay a loan
secured by an income-producing property typically is dependent primarily upon
the successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. If the net operating income of the property is
reduced (for example, if rental or occupancy rates decline or real estate tax
rates or other operating expenses increase), the borrower's ability to repay
the loan may be impaired. A number of the Mortgage Loans may be secured by
liens on owner-occupied Mortgaged Properties or on Mortgaged Properties
leased to a single tenant or a small number of significant tenants.
Accordingly, a decline in the financial condition of the borrower or a
significant tenant, as applicable, may have a disproportionately greater
effect on the net operating income from such Mortgaged Properties than would
be the case with respect to Mortgaged Properties with multiple tenants.
Furthermore, the value of any Mortgaged Property may be adversely affected by
factors generally incident to interests in real property, including changes
in general or local economic conditions and/or specific industry segments;
declines in real estate values; declines in rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating
expenses; changes in governmental rules, regulations and fiscal policies,
including environmental legislation; natural disasters and civil disturbances
such as earthquakes, hurricanes, floods, eruptions or riots; and other
circumstances, conditions or events beyond the control of a Master Servicer
or a Special Servicer. Additional considerations may be presented by the type
and use of a particular Mortgaged Property. For instance, Mortgaged
Properties that operate as hospitals and nursing homes are subject to
significant governmental regulation of the ownership, operation, maintenance
and financing of health care institutions. Hotel and motel properties are
often operated pursuant to franchise, management or operating agreements that
may be terminable by the franchisor or operator, and the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law
requirements.
In addition, the concentration of default, foreclosure and loss risks in
individual Mortgage Loans in a particular Trust Fund will generally be
greater than for pools of single-family loans because Mortgage Loans in a
Trust Fund will generally consist of a smaller number of higher balance loans
than would a pool of single-family loans of comparable aggregate unpaid
principal balance.
Limited Recourse Nature of the Mortgage Loans. It is anticipated that some
or all of the Mortgage Loans included in any Trust Fund will be nonrecourse
loans or loans for which recourse may be restricted or unenforceable. As to
any such Mortgage Loan, recourse in the event of borrower default will be
limited to the specific real property and other assets, if any, that were
pledged to secure the Mortgage Loan. However, even with respect to those
Mortgage Loans that provide for recourse against the borrower and its assets
generally, there can be no assurance that enforcement of such recourse
provisions will be practicable, or that the assets of the borrower will be
sufficient to permit a recovery in respect of a defaulted Mortgage Loan in
excess of the liquidation value of the related Mortgaged Property. See
"Certain Legal Aspects of Mortgage Loans--Foreclosure--Anti-Deficiency
Legislation".
Limitations on Enforceability of Cross-Collateralization. A Mortgage Pool
may include groups of Mortgage Loans which are cross-collateralized and
cross-defaulted. These arrangements are designed primarily to ensure that all
of the collateral pledged to secure the respective Mortgage Loans in a
cross-collateralized group, and the cash flows generated thereby, are
available to support debt service on, and ultimate repayment of, the
aggregate indebtedness evidenced by those Mortgage Loans. These arrangements
thus seek to reduce the risk that the inability of one or more of the
Mortgaged Properties securing any such group of Mortgage Loans to generate
net operating income sufficient to pay debt service will result in defaults
and ultimate losses.
There may not be complete identity of ownership of the Mortgaged
Properties securing a group of cross-collateralized Mortgage Loans. In such
an instance, creditors of one or more of the related borrowers could
challenge the cross-collateralization arrangement as a fraudulent conveyance.
Generally, under federal and state fraudulent conveyance statutes, the
incurring of an obligation or the transfer of property by a person will be
subject to avoidance under certain circumstances if the person did not
receive fair consideration or reasonably equivalent value in exchange for
such obligation or transfer and was then insolvent or was rendered insolvent
by such obligation or transfer. Accordingly, a creditor seeking
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ownership of a Mortgaged Property subject to such cross-collateralization to
repay such creditor's claim against the related borrower could assert (i)
that such borrower was insolvent at the time the cross-collateralized
Mortgage Loans were made and (ii) that such borrower did not, when it allowed
its property to be encumbered by a lien securing the indebtedness represented
by the other Mortgage Loans in the group of cross-collateralized Mortgage
Loans, receive fair consideration or reasonably equivalent value for, in
effect, "guaranteeing" the performance of the other borrowers. Although the
borrower making such "guarantee" will be receiving "guarantees" from each of
the other borrowers in return, there can be no assurance that such exchanged
"guarantees" would be found to constitute fair consideration or be of
reasonably equivalent value, and no unqualified legal opinion to that effect
will be obtained.
The cross-collateralized Mortgage Loans constituting any group thereof may
be secured by mortgage liens on Mortgaged Properties located in different
states. Because of various state laws governing foreclosure or the exercise
of a power of sale and because, in general, foreclosure actions are brought
in state court, and the courts of one state cannot exercise jurisdiction over
property in another state, it may be necessary upon a default under any such
Mortgage Loan to foreclose on the related Mortgaged Properties in a
particular order rather than simultaneously in order to ensure that the lien
of the related Mortgages is not impaired or released.
Increased Risk of Default Associated With Balloon Payments. Certain of the
Mortgage Loans included in a Trust Fund may be nonamortizing or only
partially amortizing over their terms to maturity and, thus, will require
substantial payments of principal and interest (that is, balloon payments) at
their stated maturity. Mortgage Loans of this type involve a greater
likelihood of default than self-amortizing loans because the ability of a
borrower to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property. The
ability of a borrower to accomplish either of these goals will be affected by
a number of factors, including the value of the related Mortgaged Property,
the level of available mortgage rates at the time of sale or refinancing, the
borrower's equity in the related Mortgaged Property, the financial condition
and operating history of the borrower and the related Mortgaged Property, tax
laws, rent control laws (with respect to certain residential properties),
Medicaid and Medicare reimbursement rates (with respect to hospitals and
nursing homes), prevailing general economic conditions and the availability
of credit for loans secured by multifamily or commercial, as the case may be,
real properties generally. Neither the Depositor nor any of its affiliates
will be required to refinance any Mortgage Loan.
If and to the extent described herein and in the related Prospectus
Supplement, in order to maximize recoveries on defaulted Mortgage Loans, the
Master Servicer or the Special Servicer will be permitted (within prescribed
limits) to extend and modify Mortgage Loans that are in default or as to
which a payment default is imminent. See "Description of the Pooling
Agreements--Realization Upon Defaulted Mortgage Loans". While the Master
Servicer or the Special Servicer generally will be required to determine that
any such extension or modification is reasonably likely to produce a greater
recovery than liquidation, taking into account the time value of money, there
can be no assurance that any such extension or modification will in fact
increase the present value of receipts from or proceeds of the affected
Mortgage Loans.
Lender Difficulty in Collecting Rents Upon the Default and/or Bankruptcy
of Borrower. Each Mortgage Loan included in any Trust Fund secured by
Mortgaged Property that is subject to leases typically will be secured by an
assignment of leases and rents pursuant to which the borrower assigns to the
lender its right, title and interest as landlord under the leases of the
related Mortgaged Property, and the income derived therefrom, as further
security for the related Mortgage Loan, while retaining a license to collect
rents for so long as there is no default. If the borrower defaults, the
license terminates and the lender is entitled to collect rents. Some state
laws may require that the lender take possession of the Mortgaged Property
and obtain a judicial appointment of a receiver before becoming entitled to
collect the rents. In addition, if bankruptcy or similar proceedings are
commenced by or in respect of the borrower, the lender's ability to collect
the rents may be adversely affected. See "Certain Legal Aspects of Mortgage
Loans--Leases and Rents".
Limitations on Enforceability of Due-on-Sale and Debt-Acceleration
Clauses. Mortgages may contain a due-on-sale clause, which permits the lender
to accelerate the maturity of the Mortgage Loan
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if the borrower sells, transfers or conveys the related Mortgaged Property or
its interest in the Mortgaged Property. Mortgages also may include a
debt-acceleration clause, which permits the lender to accelerate the debt
upon a monetary or nonmonetary default of the mortgagor. Such clauses are
generally enforceable subject to certain exceptions. The courts of all states
will enforce clauses providing for acceleration in the event of a material
payment default. The equity courts of any state, however, may refuse the
foreclosure of a mortgage or deed of trust when an acceleration of the
indebtedness would be inequitable or unjust or the circumstances would render
the acceleration unconscionable.
Risk of Liability Arising From Environmental Conditions. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances at a property, if agents or
employees of the lender have become sufficiently involved in the operations
of the borrower, regardless of whether the environmental damage or threat was
caused by the borrower or a prior owner. A lender also risks such liability
on foreclosure of the mortgage. See "Certain Legal Aspects of Mortgage
Loans--Environmental Considerations".
Lack of Insurance Coverage for Certain Special Hazard Losses. Unless
otherwise specified in a Prospectus Supplement, the Master Servicer and
Special Servicer for the related Trust Fund will be required to cause the
borrower on each Mortgage Loan in such Trust Fund to maintain such insurance
coverage in respect of the related Mortgaged Property as is required under
the related Mortgage, including hazard insurance; provided that, as and to
the extent described herein and in the related Prospectus Supplement, each of
the Master Servicer and the Special Servicer may satisfy its obligation to
cause hazard insurance to be maintained with respect to any Mortgaged
Property through acquisition of a blanket policy. In general, the standard
form of fire and extended coverage policy covers physical damage to or
destruction of the improvements of the property by fire, lightning,
explosion, smoke, windstorm and hail, and riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although
the policies covering the Mortgaged Properties will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and certain other kinds
of risks. Unless the related Mortgage specifically requires the mortgagor to
insure against physical damage arising from such causes, then, to the extent
any consequent losses are not covered by Credit Support, such losses may be
borne, at least in part, by the holders of one or more classes of Offered
Certificates of the related series. See "Description of the Pooling
Agreements--Hazard Insurance Policies".
Risks of Geographic Concentration. Certain geographic regions of the
United States from time to time will experience weaker regional economic
conditions and housing markets, and, consequently, will experience higher
rates of loss and delinquency than will be experienced on mortgage loans
generally. For example, a region's economic condition and housing market may
be directly, or indirectly, adversely affected by natural disasters or civil
disturbances such as earthquakes, hurricanes, floods, eruptions or riots. The
economic impact of any of these types of events may also be felt in areas
beyond the region immediately affected by the disaster or disturbance. The
Mortgage Loans securing certain series of Certificates may be concentrated in
these regions, and such concentration may present risk considerations in
addition to those generally present for similar mortgage-backed securities
without such concentration.
INCLUSION OF DELINQUENT AND NONPERFORMING MORTGAGE LOANS IN A MORTGAGE ASSET
POOL
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular series of Certificates may include Mortgage Loans that are past
due or are nonperforming. However, Mortgage Loans which are seriously
delinquent loans (that is, loans more than 60 days delinquent or as to which
foreclosure has been commenced) will not constitute a material concentration
of the Mortgage Loans in
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any Trust Fund, based on principal balance at the time such Trust Fund is
formed. If so specified in the related Prospectus Supplement, the servicing
of such Mortgage Loans will be performed by the Special Servicer; however,
the same entity may act as both Master Servicer and Special Servicer. Credit
Support provided with respect to a particular series of Certificates may not
cover all losses related to such delinquent or nonperforming Mortgage Loans,
and investors should consider the risk that the inclusion of such Mortgage
Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments in respect of the subject Mortgage Asset Pool and the yield on
the Offered Certificates of such series. See "Description of the Trust
Funds--Mortgage Loans--General".
TERMINATION
If so provided in the related Prospectus Supplement, upon the reduction of
the Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount or upon a specified date, a party designated
therein may be authorized or required to solicit bids for the purchase of all
the Mortgage Assets of the related Trust Fund, or of a sufficient portion of
such Mortgage Assets to retire such class or classes, under the circumstances
and in the manner set forth therein. The solicitation of bids will be
conducted in a commercially reasonable manner and, generally, assets will be
sold at their fair market value. In addition, if so specified in the related
Prospectus Supplement, upon the reduction of the aggregate principal balance
of some or all of the Mortgage Assets by a specified percentage, a party or
parties designated therein may be authorized to purchase such Mortgage
Assets, generally at a price equal to, in the case of any Mortgage Asset, the
unpaid principal balance thereof plus accrued interest (or, in some cases, at
fair market value). However, circumstances may arise in which such fair
market value may be less than the unpaid balance of the related Mortgage
Assets, together with interest thereon, sold and therefore, as a result of
such a sale or purchase, the Certificateholders of one or more Classes of
Certificates may receive an amount less than the Certificate Balance of, and
accrued unpaid interest on, their Certificates. See "Description of the
Certificates--Termination."
RISKS ASSOCIATED WITH HEALTH CARE-RELATED PROPERTIES
Government Reimbursement Programs. Certain types of Health Care-Related
Facilities typically receive a substantial portion of their revenues from
government reimbursement programs, primarily Medicaid and Medicare. Medicaid
and Medicare are subject to statutory and regulatory changes, retroactive
rate adjustments, administrative rulings, policy interpretations, delays by
fiscal intermediaries and government funding restrictions. Accordingly, there
can be no assurance that payments under government reimbursement programs
will, in the future, be sufficient to fully reimburse the cost of caring for
program beneficiaries. If such payments are insufficient, net operating
income of those Health Care-Related Facilities that receive revenues from
those sources, and consequently the ability of the related borrowers to meet
their obligations under any Mortgage Loans secured thereby, could be
adversely affected.
Government Regulation. Health Care-Related Facilities are generally
subject to federal and state laws and licensing requirements that relate to
the adequacy of medical care, distribution of pharmaceuticals, rate setting,
equipment, personnel, operating policies and additions to facilities and
services. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations at
a Health Care-Related Facility or, if applicable, bar it from participation
in government reimbursement programs. Furthermore, under applicable federal
and state laws and regulations, Medicare and Medicaid reimbursements are
generally not permitted to be made to any person other than the provider who
actually furnished the related medical goods and services. Accordingly, in
the event of foreclosure, none of the Trustee, the Master Servicer, the
Special Servicer or a subsequent lessee or operator of a Health Care-Related
Facility securing a defaulted Mortgage Loan would generally be entitled to
obtain from federal or state governments any outstanding reimbursement
payments relating to services furnished at such property prior to such
foreclosure. In those cases where Health Care-Related Facilities constitute
Mortgaged Properties, any of the aforementioned events may adversely affect
the ability of the related borrowers to meet their obligations under the
Mortgage Loans secured thereby.
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RISKS ASSOCIATED WITH RESTAURANTS
Various factors may affect the economic viability of Restaurants,
including but not limited to competition from facilities having businesses
similar to the particular Restaurant; perceptions by prospective customers of
the safety, convenience, services and attractiveness of the Restaurant; the
quality of available food products; changes in demographics, consumer habits
and traffic patterns; the ability to provide or contract for capable
management and adequate maintenance; and retroactive changes to building
codes, similar ordinances and other legal requirements. Additional factors
that can affect the success of a regionally or nationally-known chain
Restaurant include actions and omissions of any franchisor (including
management practices that adversely affect the nature of the business or that
require renovation, refurbishment, expansion or other expenditures); the
degree of support provided or arranged by any such franchisor, its franchisee
organizations and third party providers of products or services; the
bankruptcy or business discontinuation of any such franchisor, franchisee
organization or third party; and increases in operating expenses.
DESCRIPTION OF THE TRUST FUNDS
GENERAL
The primary assets of each Trust Fund will consist of (i) various types of
multifamily or commercial mortgage loans ("Mortgage Loans"), (ii) mortgage
participations, pass-through certificates or other mortgage-backed securities
("MBS") that evidence interests in, or that are secured by pledges of, one or
more of various types of multifamily or commercial mortgage loans or (iii) a
combination of Mortgage Loans and MBS (collectively, "Mortgage Assets"). Each
Trust Fund will be established by the Depositor. Each Mortgage Asset will be
selected by the Depositor for inclusion in a Trust Fund from among those
purchased, either directly or indirectly, from a prior holder thereof (a
"Mortgage Asset Seller"), which prior holder may or may not be the originator
of such Mortgage Loan or the issuer of such MBS. The Mortgage Assets will not
be guaranteed or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the related Prospectus Supplement, by any governmental
agency or instrumentality or by any other person. The discussion below under
the heading "--Mortgage Loans", unless otherwise noted, applies equally to
mortgage loans underlying any MBS included in a particular Trust Fund.
MORTGAGE LOANS
General. The Mortgage Loans will be evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or similar security
instruments (the "Mortgages") that create first or junior liens on fee or
leasehold estates in properties (the "Mortgaged Properties") consisting of
one or more of the following types of real property: (i) residential
properties ("Multifamily Properties") consisting of five or more rental or
cooperatively-owned dwelling units in high-rise, mid-rise or garden apartment
buildings or other residential structures, and mobile home parks; and (ii)
commercial properties ("Commercial Properties") consisting of office
buildings, retail shopping facilities (such as shopping centers, malls and
individual stores), hotels and motels, Health Care-Related Facilities (as
defined herein), recreational vehicle parks, warehouse facilities,
mini-warehouse facilities, self-storage facilities, industrial facilities,
parking lots, individual restaurants and other establishments that are part
of the food service industry (collectively, "Restaurants"), mixed use
properties (that is, any combination of the foregoing), and unimproved land.
The Multifamily Properties may include mixed commercial and residential
structures and apartment buildings owned by private cooperative housing
corporations ("Cooperatives"). Unless otherwise specified in the related
Prospectus Supplement, each Mortgage will create a first priority mortgage
lien on a fee estate in a Mortgaged Property. If a Mortgage creates a lien on
a borrower's leasehold estate in a property, then, unless otherwise specified
in the related Prospectus Supplement, the term of any such leasehold will
exceed the term of the Mortgage Note by at least ten years. Unless otherwise
specified in the related Prospectus Supplement, each Mortgage Loan will have
been originated by a person (the "Originator") other than the Depositor.
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related senior liens ("Senior
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Liens") may not be included in the Mortgage Pool. The primary risk to holders
of Mortgage Loans secured by junior liens is the possibility that adequate
funds will not be received in connection with a foreclosure of the related
Senior Liens to satisfy fully both the Senior Liens and the Mortgage Loan. In
the event that a holder of a Senior Lien forecloses on a Mortgaged Property,
the proceeds of the foreclosure or similar sale will be applied first to the
payment of court costs and fees in connection with the foreclosure, second to
real estate taxes, third in satisfaction of all principal, interest,
prepayment or acceleration penalties, if any, and any other sums due and
owing to the holder of the Senior Liens. The claims of the holders of the
Senior Liens will be satisfied in full out of proceeds of the liquidation of
the related Mortgage Property, if such proceeds are sufficient, before the
Trust Fund as holder of the junior lien receives any payments in respect of
the Mortgage Loan. If the Master Servicer were to foreclose on any Mortgage
Loan, it would do so subject to any related Senior Liens. In order for the
debt related to such Mortgage Loan to be paid in full at such sale, a bidder
at the foreclosure sale of such Mortgage Loan would have to bid an amount
sufficient to pay off all sums due under the Mortgage Loan and any Senior
Liens or purchase the Mortgaged Property subject to such Senior Liens. In the
event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property are insufficient to satisfy all Senior Liens and the
Mortgage Loan in the aggregate, the Trust Fund, as the holder of the junior
lien, and, accordingly, holders of one or more classes of the Certificates of
the related series bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of
loss if the deficiency judgment is not obtained and satisfied. Moreover,
deficiency judgments may not be available in certain jurisdictions, or the
particular Mortgage Loan may be a nonrecourse loan, which means that, absent
special facts, recourse in the case of default will be limited to the
Mortgaged Property and such other assets, if any, that were pledged to secure
repayment of the Mortgage Loan.
If so specified in the related Prospectus Supplement, the Mortgage Assets
for a particular series of Certificates may include Mortgage Loans that are
delinquent or nonperforming as of the date such Certificates are issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance, any forbearance arrangement then in effect, the condition of
the related Mortgaged Property and the ability of the Mortgaged Property to
generate income to service the mortgage debt. However, Mortgage Loans which
are seriously delinquent loans (that is, loans more than 60 days delinquent
or as to which foreclosure has been commenced) will not constitute a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed.
Default and Loss Considerations with Respect to the Mortgage
Loans. Mortgage loans secured by liens on income-producing properties are
substantially different from loans made on the security of owner-occupied
single-family homes. The repayment of a loan secured by a lien on an
income-producing property is typically dependent upon the successful
operation of such property (that is, its ability to generate income).
Moreover, as noted above, some or all of the Mortgage Loans included in a
particular Trust Fund may be nonrecourse loans.
Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important factor in evaluating the
likelihood of default on such a loan. Unless otherwise defined in the related
Prospectus Supplement, the "Debt Service Coverage Ratio" of a Mortgage Loan
at any given time is the ratio of (i) the Net Operating Income derived from
the related Mortgaged Property for a twelve-month period to (ii) the
annualized scheduled payments of principal and/or interest on the Mortgage
Loan and any other loans senior thereto that are secured by the related
Mortgaged Property. Unless otherwise defined in the related Prospectus
Supplement, "Net Operating Income" means, for any given period, the total
operating revenues derived from a Mortgaged Property during such period,
minus the total operating expenses incurred in respect of such Mortgaged
Property during such period other than (i) noncash items such as depreciation
and amortization, (ii) capital expenditures and (iii) debt service on the
related Mortgage Loan or on any other loans that are secured by such
Mortgaged Property. The Net Operating Income of a Mortgaged Property will
generally fluctuate over time and may or may not be sufficient to cover debt
service on the related Mortgage Loan at any given time. As the primary source
of the operating revenues of a nonowner occupied, income-producing property,
rental income (and, with respect to a Mortgage Loan secured by a Cooperative
apartment building, maintenance
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payments from tenant-stockholders of a Cooperative) may be affected by the
condition of the applicable real estate market and/or area economy. In
addition, properties typically leased, occupied or used on a short-term
basis, such as certain health care-related facilities, hotels and motels, and
mini-warehouse and self-storage facilities, tend to be affected more rapidly
by changes in market or business conditions than do properties typically
leased for longer periods, such as warehouses, retail stores, office
buildings and industrial facilities. Commercial Properties may be
owner-occupied or leased to a small number of tenants. Thus, the Net
Operating Income of such a Mortgaged Property may depend substantially on the
financial condition of the borrower or a tenant, and Mortgage Loans secured
by liens on such properties may pose a greater likelihood of default and loss
than loans secured by liens on Multifamily Properties or on multi-tenant
Commercial Properties.
Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the likelihood of default on a Mortgage
Loan. As may be further described in the related Prospectus Supplement, in
some cases leases of Mortgaged Properties may provide that the lessee, rather
than the borrower/landlord, is responsible for payment of operating expenses
("Net Leases"). However, the existence of such "net of expense" provisions
will result in stable Net Operating Income to the borrower/landlord only to
the extent that the lessee is able to absorb operating expense increases
while continuing to make rent payments.
Lenders also look to the Loan-to-Value Ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property must be liquidated
following a default. Unless otherwise defined in the related Prospectus
Supplement, the "Loan-to-Value Ratio" of a Mortgage Loan at any given time is
the ratio (expressed as a percentage) of (i) the then outstanding principal
balance of the Mortgage Loan and any other loans senior thereto that are
secured by the related Mortgaged Property to (ii) the Value of the related
Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, the "Value" of a Mortgaged Property will be its fair market value
as determined by an appraisal of such property conducted by or on behalf of
the Originator in connection with the origination of such loan. The lower the
Loan-to-Value Ratio, the greater the percentage of the borrower's equity in a
Mortgaged Property, and thus (a) the greater the incentive of the borrower to
perform under the terms of the related Mortgage Loan (in order to protect
such equity) and (b) the greater the cushion provided to the lender against
loss on liquidation following a default.
Loan-to-Value Ratios will not necessarily constitute an accurate measure
of the likelihood of liquidation loss in a pool of Mortgage Loans. For
example, the value of a Mortgaged Property as of the date of initial issuance
of the related series of Certificates may be less than the Value determined
at loan origination, and will likely continue to fluctuate from time to time
based upon certain factors including changes in economic conditions and the
real estate market. Moreover, even when current, an appraisal is not
necessarily a reliable estimate of value. Appraised values of
income-producing properties are generally based on the market comparison
method (recent resale value of comparable properties at the date of the
appraisal), the cost replacement method (the cost of replacing the property
at such date), the income capitalization method (a projection of value based
upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these
appraisal methods can present analytical difficulties. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections
of income and expense and the selection of an appropriate capitalization rate
and discount rate. Where more than one of these appraisal methods are used
and provide significantly different results, an accurate determination of
value and, correspondingly, a reliable analysis of the likelihood of default
and loss, is even more difficult.
Although there may be multiple methods for determining the value of a
Mortgaged Property, value will in all cases be affected by property
performance. As a result, if a Mortgage Loan defaults because the income
generated by the related Mortgaged Property is insufficient to cover
operating costs and expenses and pay debt service, then the value of the
Mortgaged Property will reflect such and a liquidation loss may occur.
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While the Depositor believes that the foregoing considerations are
important factors that generally distinguish loans secured by liens on
income-producing real estate from single-family mortgage loans, there can be
no assurance that all of such factors will in fact have been prudently
considered by the Originators of the Mortgage Loans, or that, for a
particular Mortgage Loan, they are complete or relevant. See "Risk
Factors--Certain Factors Affecting Delinquency, Foreclosure and Loss of the
Mortgage Loans--General" and "--Certain Factors Affecting Delinquency,
Foreclosure and Loss of the Mortgage Loans--Increased Risk of Default
Associated With Balloon Payments".
Payment Provisions of the Mortgage Loans. All of the Mortgage Loans will
(i) have had original terms to maturity of not more than 40 years and (ii)
provide for scheduled payments of principal, interest or both, to be made on
specified dates ("Due Dates") that occur monthly, quarterly, semi-annually or
annually. A Mortgage Loan (i) may provide for no accrual of interest or for
accrual of interest thereon at a Mortgage Rate that is fixed over its term or
that adjusts from time to time, or that may be converted at the borrower's
election from an adjustable to a fixed Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, (ii) may provide for level payments to maturity or
for payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may permit
negative amortization, (iii) may be fully amortizing or may be partially
amortizing or nonamortizing, with a balloon payment due on its stated
maturity date, and (iv) may prohibit over its term or for a certain period
prepayments (the period of such prohibition, a "Lock-out Period" and its date
of expiration, a "Lock-out Date") and/or require payment of a premium or a
yield maintenance payment (a "Prepayment Premium") in connection with certain
prepayments, in each case as described in the related Prospectus Supplement.
A Mortgage Loan may also contain a provision that entitles the lender to a
share of appreciation of the related Mortgaged Property, or profits realized
from the operation or disposition of such Mortgaged Property or the benefit,
if any, resulting from the refinancing of the Mortgage Loan (any such
provision, an "Equity Participation"), as described in the related Prospectus
Supplement.
Mortgage Loan Information in Prospectus Supplements. Each Prospectus
Supplement will contain certain information pertaining to the Mortgage Loans
in the related Trust Fund, which, to the extent then applicable, will
generally include the following: (i) the aggregate outstanding principal
balance and the largest, smallest and average outstanding principal balance
of the Mortgage Loans, (ii) the type or types of property that provide
security for repayment of the Mortgage Loans, (iii) the earliest and latest
origination date and maturity date of the Mortgage Loans, (iv) the original
and remaining terms to maturity of the Mortgage Loans, or the respective
ranges thereof, and the weighted average original and remaining terms to
maturity of the Mortgage Loans, (v) the Loan-to-Value Ratios of the Mortgage
Loans (either at origination or as of a more recent date), or the range
thereof, and the weighted average of such Loan-to-Value Ratios, (vi) the
Mortgage Rates borne by the Mortgage Loans, or the range thereof, and the
weighted average Mortgage Rate borne by the Mortgage Loans, (vii) with
respect to Mortgage Loans with adjustable Mortgage Rates ("ARM Loans"), the
index or indices upon which such adjustments are based, the adjustment dates,
the range of gross margins and the weighted average gross margin, and any
limits on Mortgage Rate adjustments at the time of any adjustment and over
the life of the ARM Loan, (viii) information regarding the payment
characteristics of the Mortgage Loans, including, without limitation, balloon
payment and other amortization provisions, Lock-out Periods and Prepayment
Premiums, (ix) the Debt Service Coverage Ratios of the Mortgage Loans (either
at origination or as of a more recent date), or the range thereof, and the
weighted average of such Debt Service Coverage Ratios, and (x) the geographic
distribution of the Mortgaged Properties on a state-by-state basis. In
appropriate cases, the related Prospectus Supplement will also contain
certain information available to the Depositor that pertains to the
provisions of leases and the nature of tenants of the Mortgaged Properties.
If the Depositor is unable to provide the specific information described
above at the time Offered Certificates of a series are initially offered,
more general information of the nature described above will be provided in
the related Prospectus Supplement, and specific information will be set forth
in a report which will be available to purchasers of those Certificates at or
before the initial issuance thereof and will be filed as part of a Current
Report on Form 8-K with the Commission within fifteen days following such
issuance.
If any Mortgage Loan, or group of related Mortgage Loans, constitutes a
concentration of credit risk, financial statements or other financial
information with respect to the related Mortgaged Property or Mortgaged
Properties will be included in the related Prospectus Supplement.
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If and to the extent available and relevant to an investment decision in
the Offered Certificates of the related series, information regarding the
prepayment experience of a Master Servicer's multifamily and/or commercial
mortgage loan servicing portfolio will be included in the related Prospectus
Supplement. However, many servicers do not maintain records regarding such
matters or, at least, not in a format that can be readily aggregated. In
addition, the relevant characteristics of a Master Servicer's servicing
portfolio may be so materially different from those of the related Mortgage
Asset Pool that such prepayment experience would not be meaningful to an
investor. For example, differences in geographic dispersion, property type
and/or loan terms (e.g., mortgage rates, terms to maturity and/or prepayment
restrictions) between the two pools of loans could render the Master
Servicer's prepayment experience irrelevant. Because of the nature of the
assets to be serviced and administered by a Special Servicer, no comparable
prepayment information will be presented with respect to the Special
Servicer's multifamily and/or commercial mortgage loan servicing portfolio.
Mortgage Loans Secured by Health Care-Related Properties. The Mortgaged
Properties may include Senior Housing, Assisted Living Facilities, Skilled
Nursing Facilities and Acute Care Facilities (any of the foregoing, "Health
Care-Related Facilities"). "Senior Housing" generally consist of facilities
with respect to which the residents are ambulatory, handle their own affairs
and typically are couples whose children have left the home and at which the
accommodations are usually apartment style. "Assisted Living Facilities" are
typically single or double room occupancy, dormitory-style housing facilities
which provide food service, cleaning and some personal care and with respect
to which the tenants are able to medicate themselves but may require
assistance with certain daily routines. "Skilled Nursing Facilities" provide
services to post trauma and frail residents with limited mobility who require
extensive medical treatment. "Acute Care Facilities" generally consist of
hospital and other facilities providing short-term, acute medical care
services.
Certain types of Health Care-Related Properties, particularly Acute Care
Facilities, Skilled Nursing Facilities and some Assisted Living Facilities,
typically receive a substantial portion of their revenues from government
reimbursement programs, primarily Medicaid and Medicare. Medicaid and
Medicare are subject to statutory and regulatory changes, retroactive rate
adjustments, administrative rulings, policy interpretations, delays by fiscal
intermediaries and government funding restrictions. Moreover, governmental
payors have employed cost-containment measures that limit payments to health
care providers, and there exist various proposals for national health care
reform that could further limit those payments. Accordingly, there can be no
assurance that payments under government reimbursement programs will, in the
future, be sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those Health Care-Related Facilities that receive revenues from those
sources, and consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, Health Care-Related Facilities are generally subject to federal
and state laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services. In addition, facilities where such care
or other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation
in the Medicaid and Medicare reimbursement programs. Providers of assisted
living services are also subject to state licensing requirements in certain
states. The failure of an operator to maintain or renew any required license
or regulatory approval could prevent it from continuing operations at a
Health Care-Related Facility or, if applicable, bar it from participation in
government reimbursement programs. Furthermore, under applicable federal and
state laws and regulations, Medicare and Medicaid reimbursements are
generally not permitted to be made to any person other than the provider who
actually furnished the related medical goods and services. Accordingly, in
the event of foreclosure, none of the Trustee, the Master Servicer, the
Special Servicer or a subsequent lessee or operator of any Health
Care-Related Facility securing a defaulted Mortgage Loan (a "Health
Care-Related Mortgaged Property") would generally be entitled to obtain from
federal or state governments any outstanding reimbursement payments relating
to services furnished at such property prior to such foreclosure. Any of the
aforementioned events may adversely affect the ability of the related
borrowers to meet their Mortgage Loan obligations.
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Government regulation applying specifically to Acute Care Facilities,
Skilled Nursing Facilities and certain types of Assisted Living Facilities
includes health planning legislation, enacted by most states, intended, at
least in part, to regulate the supply of nursing beds. The most common method
of control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility, add
beds to an existing facility or, in some states, take certain other actions
(for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer ownership
of a facility). States also regulate nursing bed supply in other ways. For
example, some states have imposed moratoria on the licensing of new beds, or
on the certification of new Medicaid beds, or have discouraged the
construction of new nursing facilities by limiting Medicaid reimbursements
allocable to the cost of new construction and equipment. In general, a CON is
site specific and operator specific; it cannot be transferred from one site
to another, or to another operator, without the approval of the appropriate
state agency. Accordingly, if a Mortgage Loan secured by a lien on such a
Health Care-Related Mortgaged Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate
exemption. In addition, compliance by a purchaser with applicable regulations
may in any case require the engagement of a new operator and the issuance of
a new operating license. Upon a foreclosure, a state regulatory agency may be
willing to expedite any necessary review and approval process to avoid
interruption of care to a facility's residents, but there can be no assurance
that any will do so or that any necessary licenses or approvals will be
issued.
Further government regulation applicable to Health Care-Related Facilities
is found in the form of federal and state "fraud and abuse" laws that
generally prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of patients
to, or the recommendation of, a particular provider for medical products or
services. Violation of these restrictions can result in license revocation,
civil and criminal penalties, and exclusion from participation in Medicare or
Medicaid programs. The state law restrictions in this area vary considerably
from state to state. Moreover, the federal anti-kickback law includes broad
language that potentially could be applied to a wide range of referral
arrangements, and regulations designed to create "safe harbors" under the law
provide only limited guidance. Accordingly, there can be no assurance that
such laws will be interpreted in a manner consistent with the practices of
the owners or operators of the Health Care-Related Mortgaged Properties that
are subject to such laws.
The operators of Health Care-Related Facilities are likely to compete on a
local and regional basis with others that operate similar facilities, some of
which competitors may be better capitalized, may offer services not offered
by such operators, or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other sources not available to such operators. The successful operation of a
Health Care-Related Facility will generally depend upon the number of
competing facilities in the local market, as well as upon other factors such
as its age, appearance, reputation and management, the types of services it
provides and, where applicable, the quality of care and the cost of that
care. The inability of a Health Care-Related Mortgaged Property to flourish
in a competitive market may increase the likelihood of foreclosure on the
related Mortgage Loan, possibly affecting the yield on one or more classes of
the related series of Offered Certificates.
Mortgage Loans Secured by Restaurants. The Mortgaged Properties that
constitute Restaurants may include those that are individually owned and
operated and those which are part of a regionally-or nationally-known chain
of Restaurants. In each case, the related Mortgage Loan is secured by a first
or junior mortgage lien on the respective Restaurant and is further secured
by a first or junior priority security interest in certain equipment and
other property of the related borrower, which is used in the operation of the
respective Restaurant.
As with loans secured by other income-producing properties, a Mortgage
Loan secured by a Restaurant is dependent on the successful operation of the
Restaurant, which, in turn, is dependent on various factors, many of which
are beyond the control of the Restaurant operator, including but not limited
to competition from facilities having businesses similar to the Restaurant;
perceptions by prospective customers of the safety, convenience, services and
attractiveness of the Restaurant; the quality of available food products;
changes in demographics, consumer habits and traffic patterns; the ability to
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provide or contract for capable management and adequate maintenance and
retroactive changes to building codes, similar ordinances and other legal
requirements. Adverse economic conditions, either local, regional or
national, may limit the amount that may be charged for food and may result in
a reduction in customers. The construction of competing food establishments
can have similar effects. Because of the nature of the business, Restaurants
tend to respond to adverse economic conditions and competition more quickly
than do other commercial properties.
The restaurant industry is highly competitive. The principal means of
competition are segment, product, price, value, quality, service,
convenience, location and the nature and condition of the Restaurant
facility. A Restaurant operator competes with all operators of comparable
restaurant facilities in the area in which its Restaurant is located. Other
Restaurants could have lower operating costs, more favorable locations, more
effective marketing, more efficient operations or better facilities.
The location and condition of a particular Restaurant will affect the
number of customers and, to a certain extent, the prices that may be charged.
The characteristics of an area or neighborhood in which a Restaurant is
located may change over time or in relation to competing facilities, and the
cleanliness and maintenance at a Restaurant will affect the appeal of the
Restaurant to customers. In addition, the effects of poor construction
quality will increase over time in the form of increased maintenance and
capital improvements. Even good construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion. In the case of regionally-or nationally-known chain restaurants,
there may be expenditures for renovation, refurbishment or expansion at a
Restaurant regardless of its condition. While a Restaurant may be renovated,
refurbished or expanded to either maintain its condition or remain
competitive, such renovation, refurbishment or expansion may itself entail
significant risks. In addition, the business conducted at a Restaurant may
face competition from other industries and industry segments.
The success of a Restaurant which is part of either a regionally-or
nationally-known chain of restaurants can be affected by various factors such
as the management practices of the respective franchisor, a lack of support
by such franchisor, its franchisee organizations or third party providers of
products or services or the bankruptcy or business discontinuation of any
such franchisor, franchisee organization or third party may adversely affect
the operating results of the related Restaurants. Furthermore, the
transferability of franchise license agreements may be restricted and, in the
event of foreclosure, there can be no assurance that the related Restaurant
would have the right to continue to use the license. In addition, the ability
of a Restaurant to attract customers, and some of such Restaurant's revenues,
may depend in large part on its having a liquor license. Such a license may
not be transferable (for example, in connection with a foreclosure).
MBS
MBS may include (i) private-label (that is, not issued, insured or
guaranteed by the United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates issued and/or insured or
guaranteed by the Federal Home Loan Mortgage Corporation ("FHLMC"), the
Federal National Mortgage Association ("FNMA"), the Governmental National
Mortgage Association ("GNMA") or the Federal Agricultural Mortgage
Corporation ("FAMC"), provided that, unless otherwise specified in the
related Prospectus Supplement, each MBS will evidence an interest in, or will
be secured by a pledge of, mortgage loans that conform to the descriptions of
the Mortgage Loans contained herein.
Except in the case of a pro rata mortgage participation in a single
mortgage loan or a pool of mortgage loans, each MBS included in a Mortgage
Asset Pool: (a) either will (i) have been previously registered under the
Securities Act of 1933, as amended, (ii) be exempt from such registration
requirements or (iii) have been held for at least the holding period
specified in Rule 144(k) under the Securities Act of 1933, as amended; and
(b) either (i) will have been acquired (other than from the Depositor or an
affiliate thereof) in bona fide secondary market transactions or (ii) if so
specified in the related Prospectus Supplement, may be derived from the
Depositor's (or an affiliate's) unsold allotments from the Depositor (or an
affiliate's) previous offerings.
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Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar
agreement (an "MBS Agreement"). The issuer of the MBS (the "MBS Issuer")
and/or the servicer of the underlying mortgage loans (the "MBS Servicer")
will be parties to the MBS Agreement, generally together with a trustee (the
"MBS Trustee") or, in the alternative, with the original purchaser or
purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Certificates described herein. Distributions in
respect of the MBS will be made by the MBS Issuer, the MBS Servicer or the
MBS Trustee on the dates specified in the related Prospectus Supplement. The
MBS Issuer or the MBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the MBS after a certain date or under other
circumstances specified in the related Prospectus Supplement.
Reserve funds, subordination or other credit support similar to that
described for the Certificates under "Description of Credit Support" may have
been provided with respect to the MBS. The type, characteristics and amount
of such credit support, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may
have assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a series of Certificates that evidence
interests in MBS will specify: (i) the aggregate approximate initial and
outstanding principal amount(s) and type of the MBS to be included in the
Trust Fund, (ii) the original and remaining term(s) to stated maturity of the
MBS, if applicable, (iii) the pass-through or bond rate(s) of the MBS or the
formula for determining such rate(s), (iv) the payment characteristics of the
MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, of each
of the MBS, (vi) a description of the related credit support, if any, (vii)
the circumstances under which the related underlying mortgage loans, or the
MBS themselves, may be purchased prior to their maturity, (viii) the terms on
which mortgage loans may be substituted for those originally underlying the
MBS, (ix) the type of mortgage loans underlying the MBS and, to the extent
appropriate under the circumstances, such other information in respect of the
underlying mortgage loans described under "--Mortgage Loans--Mortgage Loan
Information in Prospectus Supplements", and (x) the characteristics of any
cash flow agreements that relate to the MBS.
The Depositor will provide the same information regarding the MBS in any
Trust Fund in its reports filed under the Exchange Act with respect to such
Trust Fund as was provided by the related MBS Issuer in its own such reports
if such MBS was publicly offered or the reports the related MBS Issuer
provides the related MBS Trustee if such MBS was privately issued.
CERTIFICATE ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
"Certificate Account") established and maintained on behalf of the
Certificateholders into which all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust
Fund will be deposited to the extent described herein and in the related
Prospectus Supplement. See "Description of the Pooling
Agreements--Certificate Account".
CREDIT SUPPORT
If so provided in the Prospectus Supplement for a series of Certificates,
partial or full protection against certain defaults and losses on the
Mortgage Assets in the related Trust Fund may be provided to one or more
classes of Certificates of such series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other
types of Credit Support, which may include a letter of credit, a surety bond,
an insurance policy, a guarantee, a reserve fund, or any combination thereof.
The amount and types of such Credit Support, the identity of the entity
providing it (if applicable) and related information with respect to each
type of Credit Support, if any, will be set forth in the Prospectus
Supplement for a series of Certificates. See "Risk Factors--Credit Support
Limitations" and "Description of Credit Support".
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CASH FLOW AGREEMENTS
If so provided in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include guaranteed investment contracts pursuant
to which moneys held in the funds and accounts established for such series
will be invested at a specified rate. The Trust Fund may also include
interest rate exchange agreements, interest rate cap or floor agreements, or
other agreements designed to reduce the effects of interest rate fluctuations
on the Mortgage Assets on one or more classes of Certificates. The principal
terms of any such Cash Flow Agreement, including, without limitation,
provisions relating to the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof, will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
identify the obligor under the Cash Flow Agreement.
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YIELD AND MATURITY CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate and the amount
and timing of distributions on the Certificate. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates". The following discussion
contemplates a Trust Fund that consists solely of Mortgage Loans. While the
characteristics and behavior of mortgage loans underlying an MBS can
generally be expected to have the same effect on the yield to maturity and/or
weighted average life of a class of Certificates as will the characteristics
and behavior of comparable Mortgage Loans, the effect may differ due to the
payment characteristics of the MBS. If a Trust Fund includes MBS, the related
Prospectus Supplement will discuss the effect, if any, that the payment
characteristics of the MBS may have on the yield to maturity and weighted
average lives of the Offered Certificates of the related series.
PASS-THROUGH RATE
The Certificates of any class within a series may have a fixed, variable
or adjustable Pass-Through Rate, which may or may not be based upon the
interest rates borne by the Mortgage Loans in the related Trust Fund. The
Prospectus Supplement with respect to any series of Certificates will specify
the Pass-Through Rate for each class of Offered Certificates of such series
or, in the case of a class of Offered Certificates with a variable or
adjustable Pass-Through Rate, the method of determining the Pass-Through
Rate; the effect, if any, of the prepayment of any Mortgage Loan on the
Pass-Through Rate of one or more classes of Offered Certificates; and whether
the distributions of interest on the Offered Certificates of any class will
be dependent, in whole or in part, on the performance of any obligor under a
Cash Flow Agreement.
PAYMENT DELAYS
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the Mortgage Loans in the related
Trust Fund are due and the Distribution Date on which such payments are
passed through to Certificateholders. That delay will effectively reduce the
yield that would otherwise be produced if payments on such Mortgage Loans
were distributed to Certificateholders on the date they were due.
CERTAIN SHORTFALLS IN COLLECTIONS OF INTEREST
When a principal prepayment in full or in part is made on a Mortgage Loan,
the borrower is generally charged interest on the amount of such prepayment
only through the date of such prepayment, instead of through the Due Date for
the next succeeding scheduled payment. However, interest accrued on any
series of Certificates and distributable thereon on any Distribution Date
will generally correspond to interest accrued on the Mortgage Loans to their
respective Due Dates during the related Due Period. A "Due Period" will be a
specified time period (generally corresponding in length to the period
between Distribution Dates) and all scheduled payments on the Mortgage Loans
in the related Trust Fund that are due during a given Due Period will, to the
extent received by a specified date (the "Determination Date") or otherwise
advanced by the related Master Servicer, Special Servicer or other specified
person, be distributed to the holders of the Certificates of such series on
the next succeeding Distribution Date. Consequently, if a prepayment on any
Mortgage Loan is distributable to Certificateholders on a particular
Distribution Date, but such prepayment is not accompanied by interest thereon
to the Due Date for such Mortgage Loan in the related Due Period, then the
interest charged to the borrower (net of servicing and administrative fees)
may be less (such shortfall, a "Prepayment Interest Shortfall") than the
corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such
shortfall is allocated to a class of Offered Certificates, the yield thereon
will be adversely affected. The Prospectus Supplement for each series of
Certificates will describe the manner in which any such shortfalls will be
allocated among the classes of such Certificates. The related Prospectus
Supplement will also describe any amounts available to offset such
shortfalls.
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YIELD AND PREPAYMENT CONSIDERATIONS
A Certificate's yield to maturity will be affected by the rate of
principal payments on the Mortgage Loans in the related Trust Fund and the
allocation thereof to reduce the principal balance (or notional amount, if
applicable) of such Certificate. The rate of principal payments on the
Mortgage Loans in any Trust Fund will in turn be affected by the amortization
schedules thereof (which, in the case of ARM Loans, may change periodically
to accommodate adjustments to the Mortgage Rates thereon), the dates on which
any balloon payments are due, and the rate of principal prepayments thereon
(including for this purpose, voluntary prepayments by borrowers and also
prepayments resulting from liquidations of Mortgage Loans due to defaults,
casualties or condemnations affecting the related Mortgaged Properties, or
purchases of Mortgage Loans out of the related Trust Fund). Because the rate
of principal prepayments on the Mortgage Loans in any Trust Fund will depend
on future events and a variety of factors (as described below), no assurance
can be given as to such rate.
The extent to which the yield to maturity of a class of Offered
Certificates of any series may vary from the anticipated yield will depend
upon the degree to which they are purchased at a discount or premium and
when, and to what degree, payments of principal on the Mortgage Loans in the
related Trust Fund are in turn distributed on such Certificates (or, in the
case of a class of Stripped Interest Certificates, result in the reduction of
the Notional Amount thereof). An investor should consider, in the case of any
Offered Certificate purchased at a discount, the risk that a slower than
anticipated rate of principal payments on the Mortgage Loans in the related
Trust Fund could result in an actual yield to such investor that is lower
than the anticipated yield and, in the case of any Offered Certificate
purchased at a premium, the risk that a faster than anticipated rate of
principal payments on such Mortgage Loans could result in an actual yield to
such investor that is lower than the anticipated yield. In addition, if an
investor purchases an Offered Certificate at a discount (or premium), and
principal payments are made in reduction of the principal balance or notional
amount of such investor's Offered Certificates at a rate slower (or faster)
than the rate anticipated by the investor during any particular period, any
consequent adverse effects on such investor's yield would not be fully offset
by a subsequent like increase (or decrease) in the rate of principal
payments.
In general, the Notional Amount of a class of Stripped Interest
Certificates will either (i) be based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal the
Certificate Balances of one or more of the other classes of Certificates of
the same series. Accordingly, the yield on such Stripped Interest
Certificates will be inversely related to the rate at which payments and
other collections of principal are received on such Mortgage Assets or
distributions are made in reduction of the Certificate Balances of such
classes of Certificates, as the case may be.
Consistent with the foregoing, if a class of Certificates of any series
consists of Stripped Interest Certificates or Stripped Principal
Certificates, a lower than anticipated rate of principal prepayments on the
Mortgage Loans in the related Trust Fund will negatively affect the yield to
investors in Stripped Principal Certificates, and a higher than anticipated
rate of principal prepayments on such Mortgage Loans will negatively affect
the yield to investors in Stripped Interest Certificates. If the Offered
Certificates of a series include any such Certificates, the related
Prospectus Supplement will include a table showing the effect of various
constant assumed levels of prepayment on yields on such Certificates. Such
tables will be intended to illustrate the sensitivity of yields to various
constant assumed prepayment rates and will not be intended to predict, or to
provide information that will enable investors to predict, yields or
prepayment rates.
The extent of prepayments of principal of the Mortgage Loans in any Trust
Fund may be affected by a number of factors, including, without limitation,
the availability of mortgage credit, the relative economic vitality of the
area in which the Mortgaged Properties are located, the quality of management
of the Mortgaged Properties, the servicing of the Mortgage Loans, possible
changes in tax laws and other opportunities for investment. In general, those
factors which increase the attractiveness of selling a Mortgaged Property or
refinancing a Mortgage Loan or which enhance a borrower's ability to do so,
as well as those factors which increase the likelihood of default under a
Mortgage Loan, would be expected to cause the rate of prepayment in respect
of any Mortgage Asset Pool to accelerate. In contrast, those factors having
an opposite effect would be expected to cause the rate of prepayment of any
Mortgage Asset Pool to slow.
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The rate of principal payments on the Mortgage Loans in any Trust Fund may
also be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by Prepayment Premiums, and by the
extent to which such provisions may be practicably enforced. To the extent
enforceable, such provisions could constitute either an absolute prohibition
(in the case of a Lock-out Period) or a disincentive (in the case of a
Prepayment Premium) to a borrower's voluntarily prepaying its Mortgage Loan,
thereby slowing the rate of prepayments.
The rate of prepayment on a pool of mortgage loans is likely to be
affected by prevailing market interest rates for mortgage loans of a
comparable type, term and risk level. When the prevailing market interest
rate is below a mortgage coupon, a borrower may have an increased incentive
to refinance its mortgage loan. Even in the case of ARM Loans, as prevailing
market interest rates decline, and without regard to whether the Mortgage
Rates on such ARM Loans decline in a manner consistent therewith, the related
borrowers may have an increased incentive to refinance for purposes of either
(i) converting to a fixed rate loan and thereby "locking in" such rate or
(ii) taking advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan. Therefore, as prevailing market
interest rates decline, prepayment speeds would be expected to accelerate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash
flow needs or to make other investments. In addition, some borrowers may be
motivated by federal and state tax laws (which are subject to change) to sell
Mortgaged Properties prior to the exhaustion of tax depreciation benefits.
The Depositor makes no representation as to the particular factors that will
affect the prepayment of the Mortgage Loans in any Trust Fund, as to the
relative importance of such factors, as to the percentage of the principal
balance of such Mortgage Loans that will be paid as of any date or as to the
overall rate of prepayment on such Mortgage Loans.
WEIGHTED AVERAGE LIFE AND MATURITY
The rate at which principal payments are received on the Mortgage Loans in
any Trust Fund will affect the ultimate maturity and the weighted average
life of one or more classes of the Certificates of such series. Unless
otherwise specified in the related Prospectus Supplement, weighted average
life refers to the average amount of time that will elapse from the date of
issuance of an instrument until each dollar allocable as principal of such
instrument is repaid to the investor.
The weighted average life and maturity of a class of Certificates of any
series will be influenced by the rate at which principal on the related
Mortgage Loans, whether in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes voluntary prepayments by
borrowers and also prepayments resulting from liquidations of Mortgage Loans
due to default, casualties or condemnations affecting the related Mortgaged
Properties and purchases of Mortgage Loans out of the related Trust Fund), is
paid to such class. Prepayment rates on loans are commonly measured relative
to a prepayment standard or model, such as the Constant Prepayment Rate
("CPR") prepayment model or the Standard Prepayment Assumption ("SPA")
prepayment model. CPR represents an assumed constant rate of prepayment each
month (expressed as an annual percentage) relative to the then outstanding
principal balance of a pool of mortgage loans for the life of such loans. SPA
represents an assumed variable rate of prepayment each month (expressed as an
annual percentage) relative to the then outstanding principal balance of a
pool of mortgage loans, with different prepayment assumptions often expressed
as percentages of SPA. For example, a prepayment assumption of 100% of SPA
assumes prepayment rates of 0.2% per annum of the then outstanding principal
balance of such loans in the first month of the life of the loans and an
additional 0.2% per annum in each month thereafter until the thirtieth month.
Beginning in the thirtieth month, and in each month thereafter during the
life of the loans, 100% of SPA assumes a constant prepayment rate of 6% per
annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of
the anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical
prepayment experience for single-family mortgage loans. Thus, it is unlikely
that the prepayment experience of the Mortgage Loans included in any Trust
Fund will conform to any particular level of CPR or SPA.
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The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average
life of each class of Offered Certificates of such series with a Certificate
Balance, and the percentage of the initial Certificate Balance of each such
class that would be outstanding on specified Distribution Dates, based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the related Mortgage Loans are made at rates corresponding to
various percentages of CPR or SPA, or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions will illustrate the
sensitivity of the weighted average lives of the Certificates to various
assumed prepayment rates and will not be intended to predict, or to provide
information that will enable investors to predict, the actual weighted
average lives of the Certificates.
OTHER FACTORS AFFECTING YIELD, WEIGHTED AVERAGE LIFE AND MATURITY
Balloon Payments; Extensions of Maturity. Some or all of the Mortgage
Loans included in a particular Trust Fund may require that balloon payments
be made at maturity. Because the ability of a borrower to make a balloon
payment typically will depend upon its ability either to refinance the loan
or to sell the related Mortgaged Property, there is a possibility that
Mortgage Loans that require balloon payments may default at maturity, or that
the maturity of such a Mortgage Loan may be extended in connection with a
workout. In the case of defaults, recovery of proceeds may be delayed by,
among other things, bankruptcy of the borrower or adverse conditions in the
market where the property is located. In order to minimize losses on
defaulted Mortgage Loans, the Master Servicer or the Special Servicer, to the
extent and under the circumstances set forth herein and in the related
Prospectus Supplement, may be authorized to modify Mortgage Loans that are in
default or as to which a payment default is imminent. Any defaulted balloon
payment or modification that extends the maturity of a Mortgage Loan may
delay distributions of principal on a class of Offered Certificates and
thereby extend the weighted average life of such Certificates and, if such
Certificates were purchased at a discount, reduce the yield thereon.
Negative Amortization. The weighted average life of a class of
Certificates can be affected by Mortgage Loans that permit negative
amortization to occur (that is, Mortgage Loans that provide for the current
payment of interest calculated at a rate lower than the rate at which
interest accrues thereon, with the unpaid portion of such interest being
added to the related principal balance). Negative amortization on one or more
Mortgage Loans in any Trust Fund may result in negative amortization on the
Offered Certificates of the related series. The related Prospectus Supplement
will describe, if applicable, the manner in which negative amortization in
respect of the Mortgage Loans in any Trust Fund is allocated among the
respective classes of Certificates of the related series. The portion of any
Mortgage Loan negative amortization allocated to a class of Certificates may
result in a deferral of some or all of the interest payable thereon, which
deferred interest may be added to the Certificate Balance thereof. In
addition, an ARM Loan that permits negative amortization would be expected
during a period of increasing interest rates to amortize at a slower rate
(and perhaps not at all) than if interest rates were declining or were
remaining constant. Such slower rate of Mortgage Loan amortization would
correspondingly be reflected in a slower rate of amortization for one or more
classes of Certificates of the related series. Accordingly, the weighted
average lives of Mortgage Loans that permit negative amortization (and that
of the classes of Certificates to which any such negative amortization would
be allocated or that would bear the effects of a slower rate of amortization
on such Mortgage Loans) may increase as a result of such feature.
Negative amortization may occur in respect of an ARM Loan that (i) limits
the amount by which its scheduled payment may adjust in response to a change
in its Mortgage Rate, (ii) provides that its scheduled payment will adjust
less frequently than its Mortgage Rate or (iii) provides for constant
scheduled payments notwithstanding adjustments to its Mortgage Rate.
Accordingly, during a period of declining interest rates, the scheduled
payment on such a Mortgage Loan may exceed the amount necessary to amortize
the loan fully over its remaining amortization schedule and pay interest at
the then applicable Mortgage Rate, thereby resulting in the accelerated
amortization of such Mortgage Loan. Any such acceleration in amortization of
its principal balance will shorten the weighted average life of such Mortgage
Loan and, correspondingly, the weighted average lives of those classes of
Certificates entitled to a portion of the principal payments on such Mortgage
Loan.
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The extent to which the yield on any Offered Certificate will be affected
by the inclusion in the related Trust Fund of Mortgage Loans that permit
negative amortization, will depend upon (i) whether such Offered Certificate
was purchased at a premium or a discount and (ii) the extent to which the
payment characteristics of such Mortgage Loans delay or accelerate the
distributions of principal on such Certificate (or, in the case of a Stripped
Interest Certificate, delay or accelerate the reduction of the notional
amount thereof). See "--Yield and Prepayment Considerations" above.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Mortgage Loans that are foreclosed in relation to the
number and principal amount of Mortgage Loans that are repaid in accordance
with their terms will affect the weighted average lives of those Mortgage
Loans and, accordingly, the weighted average lives of and yields on the
Certificates of the related series. Servicing decisions made with respect to
the Mortgage Loans, including the use of payment plans prior to a demand for
acceleration and the restructuring of Mortgage Loans in bankruptcy
proceedings or otherwise, may also have an effect upon the payment patterns
of particular Mortgage Loans and thus the weighted average lives of and
yields on the Certificates of the related series.
Losses and Shortfalls on the Mortgage Assets. The yield to holders of the
Offered Certificates of any series will directly depend on the extent to
which such holders are required to bear the effects of any losses or
shortfalls in collections arising out of defaults on the Mortgage Loans in
the related Trust Fund and the timing of such losses and shortfalls. In
general, the earlier that any such loss or shortfall occurs, the greater will
be the negative effect on yield for any class of Certificates that is
required to bear the effects thereof.
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates.
The yield to maturity on a class of Subordinate Certificates may be
extremely sensitive to losses and shortfalls in collections on the Mortgage
Loans in the related Trust Fund.
Additional Certificate Amortization. In addition to entitling the holders
thereof to a specified portion (which may during specified periods range from
none to all) of the principal payments received on the Mortgage Assets in the
related Trust Fund, one or more classes of Certificates of any series,
including one or more classes of Offered Certificates of such series, may
provide for distributions of principal thereof from (i) amounts attributable
to interest accrued but not currently distributable on one or more classes of
Accrual Certificates, (ii) Excess Funds or (iii) any other amounts described
in the related Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, "Excess Funds" will, in general, represent
that portion of the amounts distributable in respect of the Certificates of
any series on any Distribution Date that represent (i) interest received or
advanced on the Mortgage Assets in the related Trust Fund that is in excess
of the interest currently accrued on the Certificates of such series, or (ii)
Prepayment Premiums, payments from Equity Participations or any other amounts
received on the Mortgage Assets in the related Trust Fund that do not
constitute interest thereon or principal thereof.
The amortization of any class of Certificates out of the sources described
in the preceding paragraph would shorten the weighted average life of such
Certificates and, if such Certificates were purchased at a premium, reduce
the yield thereon. The related Prospectus Supplement will discuss the
relevant factors to be considered in determining whether distributions of
principal of any class of Certificates out of such sources is likely to have
any material effect on the rate at which such Certificates are amortized and
the consequent yield with respect thereto.
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THE DEPOSITOR
The Depositor is a special purpose corporation incorporated in the State
of Delaware on March 22, 1996, for the purpose of engaging in the business,
among other things, of acquiring and depositing mortgage assets in trust in
exchange for certificates evidencing interest in such trusts and selling or
otherwise distributing such certificates. The Depositor is not an affiliate
of Deutsche Bank AG. The principal executive offices of the Depositor are
located at One International Place, Room 520, Boston, Massachusetts 02110.
Its telephone number is (617) 951-7690. The Depositor's capitalization is
nominal. All of the shares of capital stock of the Depositor are held by The
Deutsche Mortgage & Asset Receiving Trust, a Massachusetts charitable lead
trust (the "DMARC Trust") formed by J H Management Corporation and J H
Holdings Corporation, both of which are Massachusetts corporations. J H
Holdings Corporation is the trustee of the DMARC Trust, which holds no assets
other than the stock of the Depositor. All of the stock of J H Holdings
Corporation and of J H Management Corporation is held by the 1960 Trust, an
independent charitable organization qualified under Section 501(c)(3) of the
Code, and operated for the benefit of a Massachusetts charitable institution.
None of the Depositor, J H Management Corporation, Deutsche Bank A.G. or
any of their respective affiliates will insure or guarantee distributions on
the Certificates of any series.
DEUTSCHE BANK AG
It is anticipated that the assets conveyed to the Trust Fund by the
Depositor will have been acquired by the Depositor from Deutsche Bank AG or
an affiliate thereof. Deutsche Bank AG is the largest banking institution in
the Federal Republic of Germany and one of the largest in the world. It is
the parent company of a group (the "Deutsche Bank Group") consisting of
commercial banks, investment banking and fund management companies, mortgage
banks and property finance companies, installment financing and leasing
companies, insurance companies, research and consultancy companies and other
domestic and foreign companies. The Deutsche Bank Group employs over 74,000
staff members at more than 2,400 branches and offices around the world.
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each series of Certificates will represent the entire beneficial ownership
interest in the Trust Fund created pursuant to the related Pooling Agreement.
As described in the related Prospectus Supplement, the Certificates of each
series, including the Offered Certificates of such series, may consist of one
or more classes of Certificates that, among other things: (i) provide for the
accrual of interest on the Certificate Balance or Notional Amount thereof at
a fixed, variable or adjustable rate; (ii) constitute Senior Certificates or
Subordinate Certificates; (iii) constitute Stripped Interest Certificates or
Stripped Principal Certificates; (iv) provide for distributions of interest
thereon or principal thereof that commence only after the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of such series; (v) provide for distributions of principal
thereof to be made, from time to time or for designated periods, at a rate
that is faster (and, in some cases, substantially faster) or slower (and, in
some cases, substantially slower) than the rate at which payments or other
collections of principal are received on the Mortgage Assets in the related
Trust Fund; (vi) provide for distributions of principal thereof to be made,
subject to available funds, based on a specified principal payment schedule
or other methodology; or (vii) provide for distributions based on collections
on the Mortgage Assets in the related Trust Fund attributable to Prepayment
Premiums and Equity Participations.
If so specified in the related Prospectus Supplement, a class of
Certificates may have two or more component parts, each having
characteristics that are otherwise described herein as being attributable to
separate and distinct classes. For example, a class of Certificates may have
a Certificate Balance on which it accrues interest at a fixed, variable or
adjustable rate. Such class of Certificates may also have certain
characteristics attributable to Stripped Interest Certificates insofar as it
may also entitle the holders thereof to distributions of interest accrued on
a Notional Amount at a different fixed, variable or
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adjustable rate. In addition, a class of Certificates may accrue interest on
one portion of its Certificate Balance at one fixed, variable or adjustable
rate and on another portion of its Certificate Balance at a different fixed,
variable or adjustable rate.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to the principal balances or, in case of certain
classes of Stripped Interest Certificates or REMIC Residual Certificates,
notional amounts or percentage interests, specified in the related Prospectus
Supplement. As provided in the related Prospectus Supplement, one or more
classes of Offered Certificates of any series may be issued in fully
registered, definitive form (such Certificates, "Definitive Certificates") or
may be offered in book-entry format (such Certificates, "Book-Entry
Certificates") through the facilities of DTC. The Offered Certificates of
each series (if issued as Definitive Certificates) may be transferred or
exchanged, subject to any restrictions on transfer described in the related
Prospectus Supplement, at the location specified in the related Prospectus
Supplement, without the payment of any service charges, other than any tax or
other governmental charge payable in connection therewith. Interests in a
class of Book-Entry Certificates will be transferred on the book-entry
records of DTC and its participating organizations. If so specified in the
related Prospectus Supplement, arrangements may be made for clearance and
settlement through CEDEL, S.A. or the Euroclear System, if they are
participants in DTC.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made on each
Distribution Date from the Available Distribution Amount for such series and
such Distribution Date. Unless otherwise provided in the related Prospectus
Supplement, the "Available Distribution Amount" for any series of
Certificates and any Distribution Date will refer to the total of all
payments or other collections (or advances in lieu thereof) on, under or in
respect of the Mortgage Assets and any other assets included in the related
Trust Fund that are available for distribution to the holders of Certificates
of such series on such date. The particular components of the Available
Distribution Amount for any series and Distribution Date will be more
specifically described in the related Prospectus Supplement. In general, the
Distribution Date for a series of Certificates will be the 25th day of each
month (or, if any such 25th day is not a business day, the next succeeding
business day), commencing in the month immediately following the month in
which such series of Certificates is issued.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount
of each distribution will be determined as of the close of business on the
date (the "Determination Date") specified in the related Prospectus
Supplement. All distributions with respect to each class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates in such class in proportion to the respective Percentage
Interests evidenced thereby unless otherwise specified in the related
Prospectus Supplement. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank
or other entity having appropriate facilities therefor, if such
Certificateholder has provided the person required to make such payments with
wiring instructions no later than the related Record Date or such other date
specified in the related Prospectus Supplement (and, if so provided in the
related Prospectus Supplement, such Certificateholder holds Certificates in
the requisite amount or denomination specified therein), or by check mailed
to the address of such Certificateholder as it appears on the Certificate
Register; provided, however, that the final distribution in retirement of any
class of Certificates (whether Definitive Certificates or Book-Entry
Certificates) will be made only upon presentation and surrender of such
Certificates at the location specified in the notice to Certificateholders of
such final distribution. The undivided percentage interest (the "Percentage
Interest") represented by an Offered Certificate of a particular class will
be equal to the percentage obtained by dividing the initial principal balance
or notional amount of such Certificate by the initial Certificate Balance or
Notional Amount of such class.
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DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Principal Certificates and certain classes of REMIC Residual
Certificates that have no Pass-Through Rate) may have a different
Pass-Through Rate, which in each case may be fixed, variable or adjustable.
The related Prospectus Supplement will specify the Pass-Through Rate or, in
the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate, for each class of Offered Certificates.
Unless otherwise specified in the related Prospectus Supplement, interest on
the Certificates of each series will be calculated on the basis of a 360-day
year consisting of twelve 30-day months.
Distributions of interest in respect of any class of Certificates (other
than a class of Accrual Certificates, which will be entitled to distributions
of accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement, and other than
any class of Stripped Principal Certificates or REMIC Residual Certificates
that is not entitled to any distributions of interest) will be made on each
Distribution Date based on the Accrued Certificate Interest for such class
and such Distribution Date, subject to the sufficiency of that portion, if
any, of the Available Distribution Amount allocable to such class on such
Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, the amount of Accrued Certificate Interest otherwise
distributable on such class will be added to the Certificate Balance thereof
on each Distribution Date or otherwise deferred as described in the related
Prospectus Supplement. With respect to each class of Certificates (other than
certain classes of Stripped Interest Certificates and certain classes of
REMIC Residual Certificates), the "Accrued Certificate Interest" for each
Distribution Date will be equal to interest at the applicable Pass-Through
Rate accrued for a specified period (generally the most recently ended
calendar month) on the outstanding Certificate Balance of such class of
Certificates immediately prior to such Distribution Date. Unless otherwise
provided in the related Prospectus Supplement, the Accrued Certificate
Interest for each Distribution Date on a class of Stripped Interest
Certificates will be similarly calculated except that it will accrue on a
Notional Amount that is either (i) based on the principal balances of some or
all of the Mortgage Assets in the related Trust Fund or (ii) equal to the
Certificate Balances of one or more other classes of Certificates of the same
series. Reference to a Notional Amount with respect to a class of Stripped
Interest Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distributions of
principal. If so specified in the related Prospectus Supplement, the amount
of Accrued Certificate Interest that is otherwise distributable on (or, in
the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) one or more classes of the Certificates of a series
may be reduced to the extent that any Prepayment Interest Shortfalls, as
described under "Yield and Maturity Considerations--Certain Shortfalls in
Collections of Interest", exceed the amount of any sums that are applied to
offset the amount of such shortfalls. The particular manner in which such
shortfalls will be allocated among some or all of the classes of Certificates
of that series will be specified in the related Prospectus Supplement. The
related Prospectus Supplement will also describe the extent to which the
amount of Accrued Certificate Interest that is otherwise distributable on
(or, in the case of Accrual Certificates, that may otherwise be added to the
Certificate Balance of) a class of Offered Certificates may be reduced as a
result of any other contingencies, including delinquencies, losses and
deferred interest on or in respect of the Mortgage Assets in the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement,
any reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Certificates by reason of the allocation to such
class of a portion of any deferred interest on or in respect of the Mortgage
Assets in the related Trust Fund will result in a corresponding increase in
the Certificate Balance of such class. See "Risk Factors--Effect of
Prepayments on Average Life of Certificates" and "--Effect of Prepayments on
Yield of Certificates" and "Yield and Maturity Considerations--Certain
Shortfalls in Collections of Interest".
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Stripped Interest Certificates and certain classes of REMIC Residual
Certificates) will have a Certificate Balance, which, at any time, will equal
the then maximum amount that the holders of Certificates of such class will
be entitled to receive as principal out of the future cash flow on the
Mortgage Assets and other assets included in the related Trust Fund. The
outstanding Certificate Balance of a class of Certificates will be reduced by
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distributions of principal made thereon from time to time and, if and to the
extent so provided in the related Prospectus Supplement, further by any
losses incurred in respect of the related Mortgage Assets allocated thereto
from time to time. In turn, the outstanding Certificate Balance of a class of
Certificates may be increased as a result of any deferred interest on or in
respect of the related Mortgage Assets being allocated thereto from time to
time, and will be increased, in the case of a class of Accrual Certificates
prior to the Distribution Date on which distributions of interest thereon are
required to commence, by the amount of any Accrued Certificate Interest in
respect thereof (reduced as described above). The initial aggregate
Certificate Balance of all classes of a series of Certificates will not be
greater than the aggregate outstanding principal balance of the related
Mortgage Assets as of a specified date (the "Cut-off Date"), after
application of scheduled payments due on or before such date, whether or not
received. The initial Certificate Balance of each class of a series of
Certificates will be specified in the related Prospectus Supplement. As and
to the extent described in the related Prospectus Supplement, distributions
of principal with respect to a series of Certificates will be made on each
Distribution Date to the holders of the class or classes of Certificates of
such series entitled thereto until the Certificate Balances of such
Certificates have been reduced to zero. Distributions of principal with
respect to one or more classes of Certificates may be made at a rate that is
faster (and, in some cases, substantially faster) than the rate at which
payments or other collections of principal are received on the Mortgage
Assets in the related Trust Fund. Distributions of principal with respect to
one or more classes of Certificates may not commence until the occurrence of
certain events, such as the retirement of one or more other classes of
Certificates of the same series, or may be made at a rate that is slower
(and, in some cases, substantially slower) than the rate at which payments or
other collections of principal are received on the Mortgage Assets in the
related Trust Fund. Distributions of principal with respect to one or more
classes of Certificates (each such class, a "Controlled Amortization Class")
may be made, subject to available funds, based on a specified principal
payment schedule. Distributions of principal with respect to one or more
other classes of Certificates (each such class, a "Companion Class") may be
contingent on the specified principal payment schedule for a Controlled
Amortization Class of the same series and the rate at which payments and
other collections of principal on the Mortgage Assets in the related Trust
Fund are received. Unless otherwise specified in the related Prospectus
Supplement, distributions of principal of any class of Offered Certificates
will be made on a pro rata basis among all of the Certificates of such class.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR
IN RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums
or payments in respect of Equity Participations received on or in connection
with the Mortgage Assets in any Trust Fund will be distributed on each
Distribution Date to the holders of the class of Certificates of the related
series entitled thereto in accordance with the provisions described in such
Prospectus Supplement. Alternatively, such items may be retained by the
Depositor or any of its affiliates or by any other specified person and/or
may be excluded as Trust Assets.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage
Assets in any Trust Fund (to the extent not covered or offset by draws on any
reserve fund or under any instrument of Credit Support) will be allocated
among the respective classes of Certificates of the related series in the
priority and manner, and subject to the limitations, specified in the related
Prospectus Supplement. As described in the related Prospectus Supplement,
such allocations may be effected by (i) a reduction in the entitlements to
interest and/or the Certificate Balances of one or more such classes of
Certificates and/or (ii) establishing a priority of payments among such
classes of Certificates. See "Description of Credit Support".
ADVANCES IN RESPECT OF DELINQUENCIES
If and to the extent provided in the related Prospectus Supplement, if a
Trust Fund includes Mortgage Loans, the Master Servicer, the Special
Servicer, the Trustee, any provider of Credit Support and/or any other
specified person may be obligated to advance, or have the option of
advancing, on or
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before each Distribution Date, from its or their own funds or from excess
funds held in the related Certificate Account that are not part of the
Available Distribution Amount for the related series of Certificates for such
Distribution Date, an amount up to the aggregate of any payments of principal
(other than the principal portion of any balloon payments) and interest that
were due on or in respect of such Mortgage Loans during the related Due
Period and were delinquent on the related Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates
entitled thereto, rather than to guarantee or insure against losses.
Accordingly, all advances made out of a specific entity's own funds will be
reimbursable out of related recoveries on the Mortgage Loans (including
amounts drawn under any fund or instrument constituting Credit Support)
respecting which such advances were made (as to any Mortgage Loan, "Related
Proceeds") and such other specific sources as may be identified in the
related Prospectus Supplement, including, in the case of a series that
includes one or more classes of Subordinate Certificates, if so identified,
collections on other Mortgage Assets in the related Trust Fund that would
otherwise be distributable to the holders of one or more classes of such
Subordinate Certificates. No advance will be required to be made by a Master
Servicer, Special Servicer or Trustee if, in the judgment of the Master
Servicer, Special Servicer or Trustee, as the case may be, such advance would
not be recoverable from Related Proceeds or another specifically identified
source (any such advance, a "Nonrecoverable Advance"); and, if previously
made by a Master Servicer, Special Servicer or Trustee, a Nonrecoverable
Advance will be reimbursable thereto from any amounts in the related
Certificate Account prior to any distributions being made to the related
series of Certificateholders.
If advances have been made by a Master Servicer, Special Servicer, Trustee
or other entity from excess funds in a Certificate Account, such Master
Servicer, Special Servicer, Trustee or other entity, as the case may be, will
be required to replace such funds in such Certificate Account on or prior to
any future Distribution Date to the extent that funds in such Certificate
Account on such Distribution Date are less than payments required to be made
to the related series of Certificateholders on such date. If so specified in
the related Prospectus Supplement, the obligation of a Master Servicer,
Special Servicer, Trustee or other entity to make advances may be secured by
a cash advance reserve fund or a surety bond. If applicable, information
regarding the characteristics of, and the identity of any obligor on, any
such surety bond, will be set forth in the related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest on certain or all
of such advances for a specified period during which such advances are
outstanding at the rate specified in such Prospectus Supplement, and such
entity will be entitled to payment of such interest periodically from general
collections on the Mortgage Loans in the related Trust Fund prior to any
payment to the related series of Certificateholders or as otherwise provided
in the related Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust Fund that includes MBS will describe any comparable
advancing obligation of a party to the related Pooling Agreement or of a
party to the related MBS Agreement.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, together with the distribution to the holders
of each class of the Offered Certificates of a series, a Master Servicer,
Manager or Trustee, as provided in the related Prospectus Supplement, will
forward to each such holder, a statement (a "Distribution Date Statement")
that, unless otherwise provided in the related Prospectus Supplement, will
set forth, among other things, in each case to the extent applicable:
(i) the amount of such distribution to holders of such class of Offered
Certificates that was applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of such class of Offered
Certificates that was applied to pay Accrued Certificate Interest;
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(iii) the amount, if any, of such distribution to holders of such class of
Offered Certificates that was allocable to (A) Prepayment Premiums and (B)
payments on account of Equity Participations;
(iv) the amount, if any, by which such distribution is less than the
amounts to which holders of such class of Offered Certificates are entitled;
(v) if the related Trust Fund includes Mortgage Loans, the aggregate
amount of advances included in such distribution;
(vi) if the related Trust Fund includes Mortgage Loans, the amount of
servicing compensation received by the related Master Servicer (and, if
payable directly out of the related Trust Fund, by any Special Servicer and
any Sub-Servicer) and, if the related Trust Fund includes MBS, the amount of
administrative compensation received by the MBS Administrator;
(vii) information regarding the aggregate principal balance of the related
Mortgage Assets on or about such Distribution Date;
(viii) if the related Trust Fund includes Mortgage Loans, information
regarding the number and aggregate principal balance of such Mortgage Loans
that are delinquent;
(ix) if the related Trust Fund includes Mortgage Loans, information
regarding the aggregate amount of losses incurred and principal prepayments
made with respect to such Mortgage Loans during the related Prepayment Period
(that is, the specified period, generally corresponding in length to the
period between Distribution Dates, during which prepayments and other
unscheduled collections on the Mortgage Loans in the related Trust Fund must
be received in order to be distributed on a particular Distribution Date);
(x) the Certificate Balance or Notional Amount, as the case may be, of
such class of Certificates at the close of business on such Distribution
Date, separately identifying any reduction in such Certificate Balance or
Notional Amount due to the allocation of any losses in respect of the related
Mortgage Assets, any increase in such Certificate Balance or Notional Amount
due to the allocation of any negative amortization in respect of the related
Mortgage Assets and any increase in the Certificate Balance of a class of
Accrual Certificates, if any, in the event that Accrued Certificate Interest
has been added to such balance;
(xi) if such class of Offered Certificates has a variable Pass-Through
Rate or an adjustable Pass-Through Rate, the Pass-Through Rate applicable
thereto for such Distribution Date and, if determinable, for the next
succeeding Distribution Date;
(xii) the amount deposited in or withdrawn from any reserve fund on such
Distribution Date, and the amount remaining on deposit in such reserve fund
as of the close of business on such Distribution Date;
(xiii) if the related Trust Fund includes one or more instruments of
Credit Support, such as a letter of credit, an insurance policy and/or a
surety bond, the amount of coverage under each such instrument as of the
close of business on such Distribution Date; and
(xiv)the amount of Credit Support being afforded by any classes of
Subordinate Certificates.
In the case of information furnished pursuant to subclauses (i)-(iii)
above, the amounts will be expressed as a dollar amount per specified
denomination of the relevant class of Offered Certificates or as a
percentage. The Prospectus Supplement for each series of Certificates may
describe additional information to be included in reports to the holders of
the Offered Certificates of such series.
Within a reasonable period of time after the end of each calendar year,
the Master Servicer, Manager or Trustee for a series of Certificates, as the
case may be, will be required to furnish to each person who at any time
during the calendar year was a holder of an Offered Certificate of such
series a statement containing the information set forth in subclauses
(i)-(iii) above, aggregated for such calendar year or the applicable portion
thereof during which such person was a Certificateholder. Such obligation
will be deemed to have been satisfied to the extent that substantially
comparable information is provided pursuant to any requirements of the Code
as are from time to time in force. See, however, "--Book-Entry Registration
and Definitive Certificates" below.
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If the Trust Fund for a series of Certificates includes MBS, the ability
of the related Master Servicer, Manager or Trustee, as the case may be, to
include in any Distribution Date Statement information regarding the mortgage
loans underlying such MBS will depend on the reports received with respect to
such MBS. In such cases, the related Prospectus Supplement will describe the
loan-specific information to be included in the Distribution Date Statements
that will be forwarded to the holders of the Offered Certificates of that
series in connection with distributions made to them. The Depositor will
provide the same information with respect to any MBSs in its own reports that
were publicly offered and the reports the related MBS Issuer provides to the
Trustee if privately issued.
VOTING RIGHTS
The voting rights evidenced by each series of Certificates (as to such
series, the "Voting Rights") will be allocated among the respective classes
of such series in the manner described in the related Prospectus Supplement.
Certificateholders will generally not have a right to vote, except with
respect to required consents to certain amendments to the related Pooling
Agreement and as otherwise specified in the related Prospectus Supplement.
See "Description of the Pooling Agreements--Amendment". The holders of
specified amounts of Certificates of a particular series will have the right
to act as a group to remove the related Trustee and also upon the occurrence
of certain events which if continuing would constitute an Event of Default on
the part of the related Master Servicer, Special Servicer or REMIC
Administrator. See "Description of the Pooling Agreements--Events of
Default", "--Rights Upon Event of Default" and "--Resignation and Removal of
the Trustee".
TERMINATION
The obligations created by the Pooling Agreement for each series of
Certificates will terminate following (i) the final payment or other
liquidation of the last Mortgage Asset subject thereto or the disposition of
all property acquired upon foreclosure of any Mortgage Loan subject thereto
and (ii) the payment (or provision for payment) to the Certificateholders of
that series of all amounts required to be paid to them pursuant to such
Pooling Agreement. Written notice of termination of a Pooling Agreement will
be given to each Certificateholder of the related series, and the final
distribution will be made only upon presentation and surrender of the
Certificates of such series at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the
repurchase of the Mortgage Assets in the related Trust Fund by the party or
parties specified therein, under the circumstances and in the manner set
forth therein.
In addition, if so provided in the related Prospectus Supplement upon the
reduction of the Certificate Balance of a specified class or classes of
Certificates by a specified percentage or amount or upon a specified date, a
party designated therein may be authorized or required to solicit bids for
the purchase of all the Mortgage Assets of the related Trust Fund, or of a
sufficient portion of such Mortgage Assets to retire such class or classes,
under the circumstances and in the manner set forth therein. The solicitation
of bids will be conducted in a commercially reasonable manner and, generally,
assets will be sold at their fair market value. Circumstances may arise in
which such fair market value may be less than the unpaid balance of the
Mortgage Loans sold and therefore, as a result of such a sale, the
Certificateholders of one or more Classes of Certificates may receive an
amount less than the Certificate Balance of, and accrued unpaid interest on,
their Certificates.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
one or more classes of the Offered Certificates of such series will be
offered in book-entry format through the facilities of DTC, and each such
class will be represented by one or more global Certificates registered in
the name of The Depository Trust Company ("DTC") or its nominee. If so
provided in the Prospectus Supplement, arrangements may be made for clearance
and settlement through the Euroclear System or CEDEL, S.A., if they are
participants in DTC.
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DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking corporation" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. DTC was created to hold securities for its participating organizations
("DTC Participants") and facilitate the clearance and settlement of
securities transactions between DTC Participants through electronic
computerized book-entry changes in their accounts, thereby eliminating the
need for physical movement of securities certificates. DTC Participants that
maintain accounts with DTC include securities brokers and dealers, banks,
trust companies and clearing corporations and may include other
organizations. DTC is owned by a number of DTC Participants and by the New
York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
directly or indirectly clear through or maintain a custodial relationship
with a DTC Participant that maintains as account with DTC. The rules
applicable to DTC and DTC Participants are on file with the Commission.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for such
purpose. In turn, the Financial Intermediary's ownership of such Certificates
will be recorded on the records of DTC (or of a participating firm that acts
as agent for the Financial Intermediary, whose interest will in turn be
recorded on the records of DTC, if the beneficial owner's Financial
Intermediary is not a DTC Participant). Therefore, the beneficial owner must
rely on the foregoing procedures to evidence its beneficial ownership of such
Certificates. The beneficial ownership interest of the owner of a Book-Entry
Certificate (a "Certificate Owner") may only be transferred by compliance
with the rules, regulations and procedures of such Financial Intermediaries
and DTC Participants.
DTC has no knowledge of the actual Certificate Owners; DTC's records
reflect only the identity of the DTC Participants to whose accounts such
Certificates are credited, which may or may not be the Certificate Owners.
The DTC Participants will remain responsible for keeping account of their
holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC Participants
and by DTC Participants to Financial Intermediaries and Certificate Owners
will be governed by arrangements among them, subject to any statutory or
regulatory requirements as may be in effect from time to time.
Distributions on the Book-Entry Certificates will be made to DTC. DTC's
practice is to credit DTC Participants' accounts on the related Distribution
Date in accordance with their respective holdings shown on DTC's records
unless DTC has reason to believe that it will not receive payment on such
date. Disbursement of such distributions by DTC Participants to Financial
Intermediaries and Certificate Owners will be governed by standing
instructions and customary practices, as is the case with securities held for
the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of each such DTC Participant (and not of DTC, the
Depositor or any Trustee, Master Servicer, Special Servicer or Manager),
subject to any statutory or regulatory requirements as may be in effect from
time to time. Accordingly, under a book-entry system, Certificate Owners may
receive payments after the related Distribution Date.
Unless otherwise provided in the related Prospectus Supplement, the only
"Certificateholder" (as such term is used in the related Pooling Agreement)
of Book-Entry Certificates will be the nominee of DTC, and the Certificate
Owners will not be recognized as Certificateholders under the Pooling
Agreement. Certificate Owners will be permitted to exercise the rights of
Certificateholders under the related Pooling Agreement only indirectly
through the DTC Participants who in turn will exercise their rights through
DTC. The Depositor has been informed that DTC will take action permitted to
be taken by a Certificateholder under a Pooling Agreement only at the
direction of one or more DTC Participants to whose account with DTC interests
in the Book-Entry Certificates are credited. DTC may take conflicting actions
with respect to the Book-Entry Certificates to the extent that such actions
are taken on behalf of Financial Intermediaries whose holdings include such
Certificates.
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Because DTC can act only on behalf of DTC Participants, who in turn act on
behalf of Financial Intermediaries and certain Certificate Owners, the
ability of a Certificate Owner to pledge its interest in Book-Entry
Certificates to persons or entities that do not participate in the DTC
system, or otherwise take actions in respect of its interest in Book-Entry
Certificates, may be limited due to the lack of a physical certificate
evidencing such interest.
Unless otherwise specified in the related Prospectus Supplement,
Certificates initially issued in book-entry form will be issued as Definitive
Certificates to Certificate Owners or their nominees, rather than to DTC or
its nominee, only if (i) the Depositor advises the Trustee in writing that
DTC is no longer willing or able to discharge properly its responsibilities
as depository with respect to such Certificates and the Depositor is unable
to locate a qualified successor or (ii) the Depositor, at its option, elects
to terminate the book-entry system through DTC with respect to such
Certificates. Upon the occurrence of either of the events described in the
preceding sentence, DTC will be required to notify all DTC Participants of
the availability through DTC of Definitive Certificates. Upon surrender by
DTC of the certificate or certificates representing a class of Book-Entry
Certificates, together with instructions for registration, the Trustee for
the related series or other designated party will be required to issue to the
Certificate Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the holders of such
Definitive Certificates will be recognized as "Certificateholders" under and
within the meaning of the related Pooling Agreement.
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DESCRIPTION OF THE POOLING AGREEMENTS
GENERAL
The Certificates of each series will be issued pursuant to a Pooling
Agreement. In general, the parties to a Pooling Agreement will include the
Depositor, the Trustee, the Master Servicer, the Special Servicer and, if one
or more REMIC elections have been made with respect to the Trust Fund, the
REMIC Administrator. However, a Pooling Agreement that relates to a Trust
Fund that includes MBS may include a Manager as a party, but may not include
a Master Servicer, Special Servicer or other servicer as a party. All parties
to each Pooling Agreement under which Certificates of a series are issued
will be identified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Mortgage Asset Seller or an affiliate
thereof may perform the functions of Master Servicer, Special Servicer,
Manager or REMIC Administrator. If so specified in the related Prospectus
Supplement, the Master Servicer may also perform the duties of Special
Servicer, and the Master Servicer, the Special Servicer or the Trustee may
also perform the duties of REMIC Administrator. Any party to a Pooling
Agreement or any affiliate thereof may own Certificates issued thereunder;
however, except in limited circumstances (including with respect to required
consents to certain amendments to a Pooling Agreement), Certificates issued
thereunder that are held by the Master Servicer or Special Servicer for the
related Series will not be allocated Voting Rights.
A form of a pooling and servicing agreement has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part. However,
the provisions of each Pooling Agreement will vary depending upon the nature
of the Certificates to be issued thereunder and the nature of the related
Trust Fund. The following summaries describe certain provisions that may
appear in a Pooling Agreement under which Certificates that evidence
interests in Mortgage Loans will be issued. The Prospectus Supplement for a
series of Certificates will describe any provision of the related Pooling
Agreement that materially differs from the description thereof contained in
this Prospectus and, if the related Trust Fund includes MBS, will summarize
all of the material provisions of the related Pooling Agreement. The
summaries herein do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each series of Certificates and the description of such
provisions in the related Prospectus Supplement. The Depositor will provide a
copy of the Pooling Agreement (without exhibits) that relates to any series
of Certificates without charge upon written request of a holder of a
Certificate of such series addressed to it at its principal executive offices
specified herein under "The Depositor".
ASSIGNMENT OF MORTGAGE LOANS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Mortgage Loans
to be included in the related Trust Fund, together with, unless otherwise
specified in the related Prospectus Supplement, all principal and interest to
be received on or with respect to such Mortgage Loans after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to
or at the direction of the Depositor in exchange for the Mortgage Loans and
the other assets to be included in the Trust Fund for such series. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
related Pooling Agreement. Such schedule generally will include detailed
information that pertains to each Mortgage Loan included in the related Trust
Fund, which information will typically include the address of the related
Mortgaged Property and type of such property; the Mortgage Rate and, if
applicable, the applicable index, gross margin, adjustment date and any rate
cap information; the original and remaining term to maturity; the
amortization term; and the original and outstanding principal balance.
In addition, unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Mortgage Loan to be included in a
Trust Fund, deliver, or cause to be delivered, to the related Trustee (or to
a custodian appointed by the Trustee as described below) the Mortgage Note
endorsed, without recourse, either in blank or to the order of such Trustee
(or its nominee), the Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording
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office), an assignment of the Mortgage in blank or to the Trustee (or its
nominee) in recordable form, together with any intervening assignments of the
Mortgage with evidence of recording thereon (except for any such assignment
not returned from the public recording office), and, if applicable, any
riders or modifications to such Mortgage Note and Mortgage, together with
certain other documents at such times as set forth in the related Pooling
Agreement. Such assignments may be blanket assignments covering Mortgages on
Mortgaged Properties located in the same county, if permitted by law.
Notwithstanding the foregoing, a Trust Fund may include Mortgage Loans where
the original Mortgage Note is not delivered to the Trustee if the Depositor
delivers, or causes to be delivered, to the related Trustee (or such
custodian) a copy or a duplicate original of the Mortgage Note, together with
an affidavit certifying that the original thereof has been lost or destroyed.
In addition, if the Depositor cannot deliver, with respect to any Mortgage
Loan, the Mortgage or any intervening assignment with evidence of recording
thereon concurrently with the execution and delivery of the related Pooling
Agreement because of a delay caused by the public recording office, the
Depositor will deliver, or cause to be delivered, to the related Trustee (or
such custodian) a true and correct photocopy of such Mortgage or assignment
as submitted for recording. The Depositor will deliver, or cause to be
delivered, to the related Trustee (or such custodian) such Mortgage or
assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office. If the Depositor cannot deliver, with
respect to any Mortgage Loan, the Mortgage or any intervening assignment with
evidence of recording thereon concurrently with the execution and delivery of
the related Pooling Agreement because such Mortgage or assignment has been
lost, the Depositor will deliver, or cause to be delivered, to the related
Trustee (or such custodian) a true and correct photocopy of such Mortgage or
assignment with evidence of recording thereon. Unless otherwise specified in
the related Prospectus Supplement, assignments of Mortgage to the Trustee (or
its nominee) will be recorded in the appropriate public recording office,
except in states where, in the opinion of counsel acceptable to the Trustee,
such recording is not required to protect the Trustee's interests in the
Mortgage Loan against the claim of any subsequent transferee or any successor
to or creditor of the Depositor or the originator of such Mortgage Loan.
The Trustee (or a custodian appointed by the Trustee) for a series of
Certificates will be required to review the Mortgage Loan documents delivered
to it within a specified period of days after receipt thereof, and the
Trustee (or such custodian) will hold such documents in trust for the benefit
of the Certificateholders of such series. Unless otherwise specified in the
related Prospectus Supplement, if any such document is found to be missing or
defective, and such omission or defect, as the case may be, materially and
adversely affects the interests of the Certificateholders of the related
series, the Trustee (or such custodian) will be required to notify the Master
Servicer, the Special Servicer and the Depositor, and one of such persons
will be required to notify the relevant Mortgage Asset Seller. In that case,
and if the Mortgage Asset Seller cannot deliver the document or cure the
defect within a specified number of days after receipt of such notice, then,
except as otherwise specified below or in the related Prospectus Supplement,
the Mortgage Asset Seller will be obligated to repurchase the related
Mortgage Loan from the Trustee at a price generally equal to the unpaid
principal balance thereof, together with accrued but unpaid interest through
a date on or about the date of purchase, or at such other price as will be
specified in the related Prospectus Supplement (in any event, the "Purchase
Price"). If so provided in the Prospectus Supplement for a series of
Certificates, a Mortgage Asset Seller, in lieu of repurchasing a Mortgage
Loan as to which there is missing or defective loan documentation, will have
the option, exercisable upon certain conditions and/or within a specified
period after initial issuance of such series of Certificates, to replace such
Mortgage Loan with one or more other mortgage loans, in accordance with
standards that will be described in the Prospectus Supplement. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation will constitute the sole remedy to holders of the
Certificates of any series or to the related Trustee on their behalf for
missing or defective Mortgage Loan documentation, and neither the Depositor
nor, unless it is the Mortgage Asset Seller, the Master Servicer or the
Special Servicer will be obligated to purchase or replace a Mortgage Loan if
a Mortgage Asset Seller defaults on its obligation to do so.
The Trustee will be authorized at any time to appoint one or more
custodians pursuant to a custodial agreement to hold title to the Mortgage
Loans in any Trust Fund and to maintain possession of and, if
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applicable, to review the documents relating to such Mortgage Loans, in any
case as the agent of the Trustee. The identity of any such custodian to be
appointed on the date of initial issuance of the Certificates will be set
forth in the related Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, the Depositor will, with respect to each Mortgage Loan in the
related Trust Fund, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making such representations and
warranties, the "Warranting Party") covering, by way of example: (i) the
accuracy of the information set forth for such Mortgage Loan on the schedule
of Mortgage Loans appearing as an exhibit to the related Pooling Agreement;
(ii) the enforceability of the related Mortgage Note and Mortgage and the
existence of title insurance insuring the lien priority of the related
Mortgage; (iii) the Warranting Party's title to the Mortgage Loan and the
authority of the Warranting Party to sell the Mortgage Loan; and (iv) the
payment status of the Mortgage Loan. It is expected that in most cases the
Warranting Party will be the Mortgage Asset Seller; however, the Warranting
Party may also be an affiliate of the Mortgage Asset Seller, the Depositor or
an affiliate of the Depositor, the Master Servicer, the Special Servicer or
another person acceptable to the Depositor. The Warranting Party, if other
than the Mortgage Asset Seller, will be identified in the related Prospectus
Supplement.
Unless otherwise provided in the related Prospectus Supplement, each
Pooling Agreement will provide that the Master Servicer and/or Trustee will
be required to notify promptly any Warranting Party of any breach of any
representation or warranty made by it in respect of a Mortgage Loan that
materially and adversely affects the interests of the Certificateholders of
the related series. If such Warranting Party cannot cure such breach within a
specified period following the date on which it was notified of such breach,
then, unless otherwise provided in the related Prospectus Supplement, it will
be obligated to repurchase such Mortgage Loan from the Trustee at the
applicable Purchase Price. If so provided in the Prospectus Supplement for a
series of Certificates, a Warranting Party, in lieu of repurchasing a
Mortgage Loan as to which a breach has occurred, will have the option,
exercisable upon certain conditions and/or within a specified period after
initial issuance of such series of Certificates, to replace such Mortgage
Loan with one or more other mortgage loans, in accordance with standards that
will be described in the Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, this repurchase or substitution obligation
will constitute the sole remedy available to holders of the Certificates of
any series or to the related Trustee on their behalf for a breach of
representation and warranty by a Warranting Party, and neither the Depositor
nor the Master Servicer, in either case unless it is the Warranting Party,
will be obligated to purchase or replace a Mortgage Loan if a Warranting
Party defaults on its obligation to do so.
In some cases, representations and warranties will have been made in
respect of a Mortgage Loan as of a date prior to the date upon which the
related series of Certificates is issued, and thus may not address events
that may occur following the date as of which they were made. However, the
Depositor will not include any Mortgage Loan in the Trust Fund for any series
of Certificates if anything has come to the Depositor's attention that would
cause it to believe that the representations and warranties made in respect
of such Mortgage Loan will not be accurate in all material respects as of the
date of issuance. The date as of which the representations and warranties
regarding the Mortgage Loans in any Trust Fund were made will be specified in
the related Prospectus Supplement.
COLLECTION AND OTHER SERVICING PROCEDURES
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and the Special Servicer for any Mortgage Pool, directly or
through Sub-Servicers, will each be obligated under the related Pooling
Agreement to service and administer the Mortgage Loans in such Mortgage Pool
for the benefit of the related Certificateholders, in accordance with
applicable law and further in accordance with the terms of such Pooling
Agreement, such Mortgage Loans and any instrument of Credit Support included
in the related Trust Fund. Subject to the foregoing, the Master Servicer and
the Special Servicer will each have full power and authority to do any and
all things in connection with such servicing and administration that it may
deem necessary and desirable.
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As part of its servicing duties, each of the Master Servicer and the
Special Servicer will be required to make reasonable efforts to collect all
payments called for under the terms and provisions of the Mortgage Loans that
it services and will be obligated to follow such collection procedures as it
would follow with respect to mortgage loans that are comparable to such
Mortgage Loans and held for its own account, provided (i) such procedures are
consistent with the terms of the related Pooling Agreement and (ii) do not
impair recovery under any instrument of Credit Support included in the
related Trust Fund. Consistent with the foregoing, the Master Servicer and
the Special Servicer will each be permitted, in its discretion, unless
otherwise specified in the related Prospectus Supplement, to waive any
Prepayment Premium, late payment charge or other charge in connection with
any Mortgage Loan.
The Master Servicer and the Special Servicer for any Trust Fund, either
separately or jointly, directly or through Sub-Servicers, will also be
required to perform as to the Mortgage Loans in such Trust Fund various other
customary functions of a servicer of comparable loans, including maintaining
escrow or impound accounts, if required under the related Pooling Agreement,
for payment of taxes, insurance premiums, ground rents and similar items, or
otherwise monitoring the timely payment of those items; attempting to collect
delinquent payments; supervising foreclosures; negotiating modifications;
conducting property inspections on a periodic or other basis; managing (or
overseeing the management of) Mortgaged Properties acquired on behalf of such
Trust Fund through foreclosure, deed-in-lieu of foreclosure or otherwise
(each, an "REO Property"); and maintaining servicing records relating to such
Mortgage Loans. The related Prospectus Supplement will specify when and the
extent to which servicing of a Mortgage Loan is to be transferred from the
Master Servicer to the Special Servicer. In general, and subject to the
discussion in the related Prospectus Supplement, a Special Servicer will be
responsible for the servicing and administration of: (i) Mortgage Loans that
are delinquent in respect of a specified number of scheduled payments; (ii)
Mortgage Loans as to which the related borrower has entered into or consented
to bankruptcy, appointment of a receiver or conservator or similar insolvency
proceeding, or the related borrower has become the subject of a decree or
order for such a proceeding which shall have remained in force undischarged
or unstayed for a specified number of days; and (iii) REO Properties. If so
specified in the related Prospectus Supplement, a Pooling Agreement also may
provide that if a default on a Mortgage Loan has occurred or, in the judgment
of the related Master Servicer, a payment default is reasonably foreseeable,
the related Master Servicer may elect to transfer the servicing thereof, in
whole or in part, to the related Special Servicer. Unless otherwise provided
in the related Prospectus Supplement, when the circumstances no longer
warrant a Special Servicer's continuing to service a particular Mortgage Loan
(e.g., the related borrower is paying in accordance with the forbearance
arrangement entered into between the Special Servicer and such borrower), the
Master Servicer will resume the servicing duties with respect thereto. If and
to the extent provided in the related Pooling Agreement and described in the
related Prospectus Supplement, a Special Servicer may perform certain limited
duties in respect of Mortgage Loans for which the Master Servicer is
primarily responsible (including, if so specified, performing property
inspections and evaluating financial statements); and a Master Servicer may
perform certain limited duties in respect of any Mortgage Loan for which the
Special Servicer is primarily responsible (including, if so specified,
continuing to receive payments on such Mortgage Loan (including amounts
collected by the Special Servicer), making certain calculations with respect
to such Mortgage Loan and making remittances and preparing certain reports to
the Trustee and/or Certificateholders with respect to such Mortgage Loan.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will be responsible for filing and settling claims in respect of
particular Mortgage Loans under any applicable instrument of Credit Support.
See "Description of Credit Support".
A mortgagor's failure to make required Mortgage Loan payments may mean
that operating income is insufficient to service the mortgage debt, or may
reflect the diversion of that income from the servicing of the mortgage debt.
In addition, a mortgagor that is unable to make Mortgage Loan payments may
also be unable to make timely payment of taxes and otherwise to maintain and
insure the related Mortgaged Property. In general, the related Special
Servicer will be required to monitor any Mortgage Loan that is in default,
evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related Mortgaged
Property, initiate corrective action in cooperation with the Mortgagor if
cure is likely, inspect the related Mortgaged Property and take such
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other actions as it deems necessary and appropriate. A significant period of
time may elapse before the Special Servicer is able to assess the success of
any such corrective action or the need for additional initiatives. The time
within which the Special Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure)
on behalf of the Certificateholders of the related series may vary
considerably depending on the particular Mortgage Loan, the Mortgaged
Property, the mortgagor, the presence of an acceptable party to assume the
Mortgage Loan and the laws of the jurisdiction in which the Mortgaged
Property is located. If a mortgagor files a bankruptcy petition, the Special
Servicer may not be permitted to accelerate the maturity of the Mortgage Loan
or to foreclose on the related Mortgaged Property for a considerable period
of time. See "Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
Mortgagors may, from time to time, request partial releases of the
Mortgaged Properties, easements, consents to alteration or demolition and
other similar matters. In general, the Master Servicer may approve such a
request if it has determined, exercising its business judgment in accordance
with the applicable servicing standard, that such approval will not adversely
affect the security for, or the timely and full collectability of, the
related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Mortgage Loans secured by junior liens on the related
Mortgaged Properties, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be required to file (or cause to be
filed) of record a request for notice of any action by a superior lienholder
under the Senior Lien for the protection of the related Trustee's interest,
where permitted by local law and whenever applicable state law does not
require that a junior lienholder be named as a party defendant in foreclosure
proceedings in order to foreclose such junior lienholder's equity of
redemption. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer also will be required to notify any superior lienholder
in writing of the existence of the Mortgage Loan and request notification of
any action (as described below) to be taken against the mortgagor or the
Mortgaged Property by the superior lienholder. If the Master Servicer is
notified that any superior lienholder has accelerated or intends to
accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer and the
Special Servicer will each be required to take, on behalf of the related
Trust Fund, whatever actions are necessary to protect the interests of the
related Certificateholders and/or to preserve the security of the related
Mortgage Loan, subject to the application of the REMIC Provisions. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
or Special Servicer, as applicable, will be required to advance the necessary
funds to cure the default or reinstate the Senior Lien, if such advance is in
the best interests of the related Certificateholders and the Master Servicer
or Special Servicer, as applicable, determines such advances are recoverable
out of payments on or proceeds of the related Mortgage Loan.
SUB-SERVICERS
A Master Servicer or Special Servicer may delegate its servicing
obligations in respect of the Mortgage Loans serviced thereby to one or more
third-party servicers (each, a "Sub-Servicer"); provided that, unless
otherwise specified in the related Prospectus Supplement, such Master
Servicer or Special Servicer will remain obligated under the related Pooling
Agreement. Unless otherwise provided in the related Prospectus Supplement,
each sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
"Sub-Servicing Agreement") must provide for servicing of the applicable
Mortgage Loans consistent with the related Pooling Agreement. The Master
Servicer and Special Servicer in respect of any Mortgage Asset Pool will each
be required to monitor the performance of Sub-Servicers retained by it and
will have the right to remove a Sub-Servicer retained by it at any time it
considers such removal to be in the best interests of Certificateholders.
Unless otherwise provided in the related Prospectus Supplement, a Master
Servicer or Special Servicer will be solely liable for all fees owed by it to
any Sub-Servicer, irrespective of whether the Master
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Servicer's or Special Servicer's compensation pursuant to the related Pooling
Agreement is sufficient to pay such fees. Each Sub-Servicer will be
reimbursed by the Master Servicer or Special Servicer, as the case may be,
that retained it for certain expenditures which it makes, generally to the
same extent such Master Servicer or Special Servicer would be reimbursed
under a Pooling Agreement. See "--Certificate Account" and "--Servicing
Compensation and Payment of Expenses".
CERTIFICATE ACCOUNT
General. The Master Servicer, the Trustee and/or the Special Servicer
will, as to each Trust Fund that includes Mortgage Loans, establish and
maintain or cause to be established and maintained the corresponding
Certificate Account, which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
as an interest-bearing or a noninterest-bearing account and the funds held
therein may be invested pending each succeeding Distribution Date in United
States government securities and other investment grade obligations that are
acceptable to each Rating Agency that has rated any one or more classes of
Certificates of the related series ("Permitted Investments"). Such Permitted
Investments include federal funds, uncertificated certificates of deposit,
time deposits, bankers' acceptances and repurchase agreements, certain United
States dollar-denominated commercial paper, units of money market funds that
maintain a constant net asset value and any other obligations or security
acceptable to each Rating Agency. Unless otherwise provided in the related
Prospectus Supplement, any interest or other income earned on funds in a
Certificate Account will be paid to the related Master Servicer, Trustee or
Special Servicer as additional compensation. A Certificate Account may be
maintained with the related Master Servicer, Special Servicer, Trustee or
Mortgage Asset Seller or with a depository institution that is an affiliate
of any of the foregoing or of the Depositor, provided that it complies with
applicable Rating Agency standards. If permitted by the applicable Rating
Agency or Agencies, a Certificate Account may contain funds relating to more
than one series of mortgage pass-through certificates and may contain other
funds representing payments on mortgage loans owned by the related Master
Servicer or Special Servicer or serviced by either on behalf of others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the following payments and
collections received or made by the Master Servicer, the Trustee or the
Special Servicer subsequent to the Cut-off Date (other than payments due on
or before the Cut-off Date) are to be deposited in the Certificate Account
for each Trust Fund that includes Mortgage Loans, within a certain period
following receipt (in the case of collections on or in respect of the
Mortgage Loans) or otherwise as provided in the related Pooling Agreement:
(i) all payments on account of principal, including principal prepayments,
on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof
retained by the Master Servicer or the Special Servicer as its servicing
compensation or as compensation to the Trustee;
(iii) all proceeds received under any hazard, title or other insurance
policy that provides coverage with respect to a Mortgaged Property or the
related Mortgage Loan or in connection with the full or partial condemnation
of a Mortgaged Property (other than proceeds applied to the restoration of
the property or released to the related borrower) ("Insurance Proceeds" and
"Condemnation Proceeds", respectively) and all other amounts received and
retained in connection with the liquidation of defaulted Mortgage Loans or
property acquired in respect thereof, by foreclosure or otherwise (such
amounts, together with those amounts listed in clause (vii) below,
"Liquidation Proceeds"), together with the net operating income (less
reasonable reserves for future expenses) derived from the operation of any
Mortgaged Properties acquired by the Trust Fund through foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates;
(v) any advances made with respect to delinquent scheduled payments of
principal and interest on the Mortgage Loans;
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(vi) any amounts paid under any Cash Flow Agreement;
(vii) all proceeds of the purchase of any Mortgage Loan, or property
acquired in respect thereof, by the Depositor, any Mortgage Asset Seller or
any other specified person as described under "--Assignment of Mortgage
Loans; Repurchases" and "--Representations and Warranties; Repurchases", all
proceeds of the purchase of any defaulted Mortgage Loan as described under
"--Realization Upon Defaulted Mortgage Loans", and all proceeds of any
Mortgage Asset purchased as described under "Description of the
Certificates--Termination; Retirement of Certificates";
(viii) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or the Special Servicer and is
not otherwise retained by the Depositor or another specified person, any
payments on account of modification or assumption fees, late payment charges,
Prepayment Premiums or Equity Participations with respect to the Mortgage
Loans;
(ix) all payments required to be deposited in the Certificate Account with
respect to any deductible clause in any blanket insurance policy as described
under "--Hazard Insurance Policies";
(x) any amount required to be deposited by the Master Servicer, the
Special Servicer or the Trustee in connection with losses realized on
investments for the benefit of the Master Servicer, the Special Servicer or
the Trustee, as the case may be, of funds held in the Certificate Account;
and
(xi) any other amounts received on or in respect of the Mortgage Loans
required to be deposited in the Certificate Account as provided in the
related Pooling Agreement and described in the related Prospectus Supplement.
Withdrawals. Unless otherwise provided in the related Pooling Agreement
and described in the related Prospectus Supplement, a Master Servicer,
Trustee or Special Servicer may make withdrawals from the Certificate Account
for each Trust Fund that includes Mortgage Loans for any of the following
purposes:
(i) to make distributions to the Certificateholders on each Distribution
Date;
(ii) to pay the Master Servicer or the Special Servicer any servicing fees
not previously retained thereby, such payment to be made out of payments and
other collections of interest on the particular Mortgage Loans as to which
such fees were earned;
(iii) to reimburse the Master Servicer, the Special Servicer or any other
specified person for unreimbursed advances of delinquent scheduled payments
of principal and interest made by it, and certain unreimbursed servicing
expenses incurred by it, with respect to Mortgage Loans in the Trust Fund and
properties acquired in respect thereof, such reimbursement to be made out of
amounts that represent late payments collected on the particular Mortgage
Loans, Liquidation Proceeds, Insurance Proceeds and Condemnation Proceeds
collected on the particular Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such advances
were made or such expenses were incurred or out of amounts drawn under any
form of Credit Support with respect to such Mortgage Loans and properties, or
if in the judgment of the Master Servicer, the Special Servicer or such other
person, as applicable, such advances and/or expenses will not be recoverable
from such amounts, such reimbursement to be made from amounts collected on
other Mortgage Loans in the same Trust Fund or, if and to the extent so
provided by the related Pooling Agreement and described in the related
Prospectus Supplement, only from that portion of amounts collected on such
other Mortgage Loans that is otherwise distributable on one or more classes
of Subordinate Certificates of the related series;
(iv) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, the Special Servicer or any other specified
person interest accrued on the advances and servicing expenses described in
clause (iii) above incurred by it while such remain outstanding and
unreimbursed;
(v) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Mortgaged Properties
that constitute security for defaulted Mortgage Loans, and for any
containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "--Realization Upon
Defaulted Mortgage Loans";
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(vi) to reimburse the Master Servicer, the Special Servicer, the REMIC
Administrator, the Depositor, the Trustee, or any of their respective
directors, officers, employees and agents, as the case may be, for certain
expenses, costs and liabilities incurred thereby, as and to the extent
described under "--Certain Matters Regarding the Master Servicer, the Special
Servicer, the REMIC Administrator and the Depositor" and "--Certain Matters
Regarding the Trustee";
(vii) if and to the extent described in the related Prospectus Supplement,
to pay the fees of the Trustee, the REMIC Administrator and any provider of
Credit Support;
(viii) if and to the extent described in the related Prospectus
Supplement, to reimburse prior draws on any form of Credit Support;
(ix) to pay the Master Servicer, the Special Servicer or the Trustee, as
appropriate, interest and investment income earned in respect of amounts held
in the Certificate Account as additional compensation;
(x) to pay any servicing expenses not otherwise required to be advanced by
the Master Servicer, the Special Servicer or any other specified person;
(xi) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to the
extent described under "Certain Federal Income Tax
Consequences--REMICs--Prohibited Transactions Tax and Other Taxes";
(xii) to pay for the cost of various opinions of counsel obtained pursuant
to the related Pooling Agreement for the benefit of Certificateholders;
(xiii) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xiv) to clear and terminate the Certificate Account upon the termination
of the Trust Fund.
MODIFICATIONS, WAIVERS AND AMENDMENTS OF MORTGAGE LOANS
The Master Servicer and the Special Servicer may each agree to modify,
waive or amend any term of any Mortgage Loan serviced by it in a manner
consistent with the applicable Servicing Standard; provided that, unless
otherwise set forth in the related Prospectus Supplement, the modification,
waiver or amendment (i) will not affect the amount or timing of any scheduled
payments of principal or interest on the Mortgage Loan, (ii) will not, in the
judgment of the Master Servicer or the Special Servicer, as the case may be,
materially impair the security for the Mortgage Loan or reduce the likelihood
of timely payment of amounts due thereon and (iii) will not adversely affect
the coverage under any applicable instrument of Credit Support. Unless
otherwise provided in the related Prospectus Supplement, the Special Servicer
also may agree to any other modification, waiver or amendment if, in its
judgment, (i) a material default on the Mortgage Loan has occurred or a
payment default is imminent, (ii) such modification, waiver or amendment is
reasonably likely to produce a greater recovery with respect to the Mortgage
Loan, taking into account the time value of money, than would liquidation and
(iii) such modification, waiver or amendment will not adversely affect the
coverage under any applicable instrument of Credit Support.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
If a default on a Mortgage Loan has occurred or, in the Special Servicer's
judgment, a payment default is imminent, the Special Servicer, on behalf of
the Trustee, may at any time institute foreclosure proceedings, exercise any
power of sale contained in the related Mortgage, obtain a deed in lieu of
foreclosure, or otherwise acquire title to the related Mortgaged Property, by
operation of law or otherwise. Unless otherwise specified in the related
Prospectus Supplement, the Special Servicer may not, however, acquire title
to any Mortgaged Property, have a receiver of rents appointed with respect to
any Mortgaged Property or take any other action with respect to any Mortgaged
Property that would cause the Trustee, for the benefit of the related series
of Certificateholders, or any other specified person to be
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considered to hold title to, to be a "mortgagee-in-possession" of, or to be
an "owner" or an "operator" of such Mortgaged Property within the meaning of
certain federal environmental laws, unless the Special Servicer has
previously received a report prepared by a person who regularly conducts
environmental audits (which report will be an expense of the Trust Fund) and
either:
(i) such report indicates that (a) the Mortgaged Property is in
compliance with applicable environmental laws and regulations and (b)
there are no circumstances or conditions present at the Mortgaged Property
that have resulted in any contamination for which investigation, testing,
monitoring, containment, clean-up or remediation could be required under
any applicable environmental laws and regulations; or
(ii) the Special Servicer, based solely (as to environmental matters and
related costs) on the information set forth in such report, determines
that taking such actions as are necessary to bring the Mortgaged Property
into compliance with applicable environmental laws and regulations and/or
taking the actions contemplated by clause (i)(b) above, is reasonably
likely to produce a greater recovery, taking into account the time value
of money, than not taking such actions. See "Certain Legal Aspects of
Mortgage Loans--Environmental Considerations".
A Pooling Agreement may grant to the Master Servicer, the Special
Servicer, a provider of Credit Support and/or the holder or holders of
certain classes of the related series of Certificates a right of first
refusal to purchase from the Trust Fund, at a predetermined price (which, if
less than the Purchase Price, will be specified in the related Prospectus
Supplement), any Mortgage Loan as to which a specified number of scheduled
payments are delinquent. In addition, unless otherwise specified in the
related Prospectus Supplement, the Special Servicer may offer to sell any
defaulted Mortgage Loan if and when the Special Servicer determines,
consistent with its normal servicing procedures, that such a sale would
produce a greater recovery, taking into account the time value of money, than
would liquidation of the related Mortgaged Property. In the absence of any
such sale, the Special Servicer will generally be required to proceed against
the related Mortgaged Property, subject to the discussion above.
Unless otherwise provided in the related Prospectus Supplement, if title
to any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Special Servicer, on behalf of the Trust Fund,
will be required to sell the Mortgaged Property within two years of
acquisition, unless (i) the Internal Revenue Service (the "IRS") grants an
extension of time to sell such property or (ii) the Trustee receives an
opinion of independent counsel to the effect that the holding of the property
by the Trust Fund for more than two years after its acquisition will not
result in the imposition of a tax on the Trust Fund or cause the Trust Fund
(or any designated portion thereof) to fail to qualify as a REMIC under the
Code at any time that any Certificate is outstanding. Subject to the
foregoing and any other tax-related limitations, the Special Servicer will
generally be required to attempt to sell any Mortgaged Property so acquired
on the same terms and conditions it would if it were the owner. Unless
otherwise provided in the related Prospectus Supplement, if title to any
Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Special Servicer will also be required to ensure that the
Mortgaged Property is administered so that it constitutes "foreclosure
property" within the meaning of Code Section 860G(a)(8) at all times, that
the sale of such property does not result in the receipt by the Trust Fund of
any income from nonpermitted assets as described in Code Section
860F(a)(2)(B), and that the Trust Fund does not derive any "net income from
foreclosure property" within the meaning of Code Section 860G(c)(2), with
respect to such property. If the Trust Fund acquires title to any Mortgaged
Property, the Special Servicer, on behalf of the Trust Fund, may retain an
independent contractor to manage and operate such property. The retention of
an independent contractor, however, will not relieve the Special Servicer of
its obligation to manage such Mortgaged Property as required under the
related Pooling Agreement.
If Liquidation Proceeds collected with respect to a defaulted Mortgage
Loan are less than the outstanding principal balance of the defaulted
Mortgage Loan plus interest accrued thereon plus the aggregate amount of
reimbursable expenses incurred by the Special Servicer and/or the Master
Servicer in connection with such Mortgage Loan, then, to the extent that such
shortfall is not covered by any instrument or fund constituting Credit
Support, the Trust Fund will realize a loss in the amount of such
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shortfall. The Special Servicer and/or the Master Servicer will be entitled
to reimbursement out of the Liquidation Proceeds recovered on any defaulted
Mortgage Loan, prior to the distribution of such Liquidation Proceeds to
Certificateholders, any and all amounts that represent unpaid servicing
compensation in respect of the Mortgage Loan, unreimbursed servicing expenses
incurred with respect to the Mortgage Loan and any unreimbursed advances of
delinquent payments made with respect to the Mortgage Loan. In addition, if
and to the extent set forth in the related Prospectus Supplement, amounts
otherwise distributable on the Certificates may be further reduced by
interest payable to the Master Servicer and/or Special Servicer on such
servicing expenses and advances.
If any Mortgaged Property suffers damage such that the proceeds, if any,
of the related hazard insurance policy are insufficient to restore fully the
damaged property, neither the Special Servicer nor the Master Servicer will
be required to expend its own funds to effect such restoration unless (and to
the extent not otherwise provided in the related Prospectus Supplement) it
determines (i) that such restoration will increase the proceeds to
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Special Servicer or the Master Servicer, as the case may be, for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds, Condemnation Proceeds, Liquidation Proceeds and/or
amounts drawn on any instrument or fund constituting Credit Support.
HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will require the Master Servicer (or the Special Servicer
with respect to Mortgage Loans serviced thereby) to use reasonable efforts to
cause each Mortgage Loan borrower to maintain a hazard insurance policy that
provides for such coverage as is required under the related Mortgage or, if
the Mortgage permits the holder thereof to dictate to the borrower the
insurance coverage to be maintained on the related Mortgaged Property, such
coverage as is consistent with the Master Servicer's (or Special Servicer's)
normal servicing procedures. Unless otherwise specified in the related
Prospectus Supplement, such coverage generally will be in an amount equal to
the lesser of the principal balance owing on such Mortgage Loan and the
replacement cost of the related Mortgaged Property. The ability of a Master
Servicer (or Special Servicer) to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance
policy referred to below, or upon the extent to which information concerning
covered losses is furnished by borrowers. All amounts collected by a Master
Servicer (or Special Servicer) under any such policy (except for amounts to
be applied to the restoration or repair of the Mortgaged Property or released
to the borrower in accordance with the Master Servicer's (or Special
Servicer's) normal servicing procedures and/or to the terms and conditions of
the related Mortgage and Mortgage Note) will be deposited in the related
Certificate Account. The Pooling Agreement may provide that the Master
Servicer (or Special Servicer) may satisfy its obligation to cause each
borrower to maintain such a hazard insurance policy by maintaining a blanket
policy insuring against hazard losses on the Mortgage Loans in a Trust Fund.
If such blanket policy contains a deductible clause, the Master Servicer (or
Special Servicer) will be required, in the event of a casualty covered by
such blanket policy, to deposit in the related Certificate Account all
additional sums that would have been deposited therein under an individual
policy but were not because of such deductible clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, and riot, strike and
civil commotion, subject to the conditions and exclusions specified in each
policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance
with different applicable state forms, and therefore will not contain
identical terms and conditions, most such policies typically do not cover any
physical damage resulting from war, revolution, governmental actions, floods
and other water-related causes, earth movement (including earthquakes,
landslides and mudflows), wet or dry rot, vermin and domestic animals.
Accordingly, a Mortgaged Property may not be insured for losses arising from
any such cause unless the related Mortgage specifically requires, or permits
the holder thereof to require, such coverage.
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The hazard insurance policies covering the Mortgaged Properties will
typically contain co-insurance clauses that in effect require an insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clauses generally provide that the
insurer's liability in the event of partial loss does not exceed the lesser
of (i) the replacement cost of the improvements less physical depreciation
and (ii) such proportion of the loss as the amount of insurance carried bears
to the specified percentage of the full replacement cost of such
improvements.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain a due-on-sale clause that
entitles the lender to accelerate payment of the Mortgage Loan upon any sale
or other transfer of the related Mortgaged Property made without the lender's
consent. Certain of the Mortgage Loans may also contain a due-on-encumbrance
clause that entitles the lender to accelerate the maturity of the Mortgage
Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer (or Special Servicer) will determine whether to exercise any
right the Trustee may have under any such provision in a manner consistent
with the Master Servicer's (or Special Servicer's) normal servicing
procedures. Unless otherwise specified in the related Prospectus Supplement,
the Master Servicer or Special Servicer, as applicable, will be entitled to
retain as additional servicing compensation any fee collected in connection
with the permitted transfer of a Mortgaged Property. See "Certain Legal
Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance".
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Unless otherwise specified in the related Prospectus Supplement, a Master
Servicer's primary servicing compensation with respect to a series of
Certificates will come from the periodic payment to it of a specified portion
of the interest payments on each Mortgage Loan in the related Trust Fund,
including Mortgage Loans serviced by the related Special Servicer. If and to
the extent described in the related Prospectus Supplement, a Special
Servicer's primary compensation with respect to a series of Certificates may
consist of any or all of the following components: (i) a specified portion of
the interest payments on each Mortgage Loan in the related Trust Fund,
whether or not serviced by it; (ii) an additional specified portion of the
interest payments on each Mortgage Loan then currently serviced by it; and
(iii) subject to any specified limitations, a fixed percentage of some or all
of the collections and proceeds received with respect to each Mortgage Loan
which was at any time serviced by it, including Mortgage Loans for which
servicing was returned to the Master Servicer. Insofar as any portion of the
Master Servicer's or Special Servicer's compensation consists of a specified
portion of the interest payments on a Mortgage Loan, such compensation will
generally be based on a percentage of the principal balance of such Mortgage
Loan outstanding from time to time and, accordingly, will decrease with the
amortization of the Mortgage Loan. As additional compensation, a Master
Servicer or Special Servicer may be entitled to retain all or a portion of
late payment charges, Prepayment Premiums, modification fees and other fees
collected from borrowers and any interest or other income that may be earned
on funds held in the related Certificate Account. A more detailed description
of each Master Servicer's and Special Servicer's compensation will be
provided in the related Prospectus Supplement. Any Sub-Servicer will receive
as its sub-servicing compensation a portion of the servicing compensation to
be paid to the Master Servicer or Special Servicer that retained such
Sub-Servicer.
In addition to amounts payable to any Sub-Servicer, a Master Servicer or
Special Servicer may be required, to the extent provided in the related
Prospectus Supplement, to pay from amounts that represent its servicing
compensation certain expenses incurred in connection with the administration
of the related Trust Fund, including, without limitation, payment of the fees
and disbursements of independent accountants, payment of fees and
disbursements of the Trustee and any custodians appointed thereby and payment
of expenses incurred in connection with distributions and reports to
Certificateholders. Certain other expenses, including certain expenses
related to Mortgage Loan defaults and liquidations and, to the extent so
provided in the related Prospectus Supplement, interest on such expenses at
the rate specified therein, may be required to be borne by the Trust Fund.
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EVIDENCE AS TO COMPLIANCE
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will provide that on or before a specified date in each
year, beginning the first such date that is at least a specified number of
months after the Cut-off Date, there will be furnished to the related Trustee
a report of a firm of independent certified public accountants stating that
(i) it has obtained a letter of representation regarding certain matters from
the management of the Master Servicer which includes an assertion that the
Master Servicer has complied with certain minimum mortgage loan servicing
standards (to the extent applicable to commercial and multifamily mortgage
loans), identified in the Uniform Single Attestation Program for Mortgage
Bankers established by the Mortgage Bankers Association of America, with
respect to the Master Servicer's servicing of commercial and multifamily
mortgage loans during the most recently completed calendar year and (ii) on
the basis of an examination conducted by such firm in accordance with
standards established by the American Institute of Certified Public
Accountants, such representation is fairly stated in all material respects,
subject to such exceptions and other qualifications that, in the opinion of
such firm, such standards require it to report. In rendering its report such
firm may rely, as to the matters relating to the direct servicing of
commercial and multifamily mortgage loans by Sub-Servicers, upon comparable
reports of firms of independent public accountants rendered on the basis of
examinations conducted in accordance the same standards (rendered within one
year of such report) with respect to those Sub-Servicers. The Prospectus
Supplement may provide that additional reports of independent certified
public accountants relating to the servicing of mortgage loans may be
required to be delivered to the Trustee.
Each Pooling Agreement will also provide that, on or before a specified
date in each year, beginning the first such date that is at least a specified
number of months after the Cut-off Date, the Master Servicer and Special
Servicer shall each deliver to the related Trustee an annual statement signed
by one or more officers of the Master Servicer or the Special Servicer, as
the case may be, to the effect that, to the best knowledge of each such
officer, the Master Servicer or the Special Servicer, as the case may be, has
fulfilled in all material respects its obligations under the Pooling
Agreement throughout the preceding year or, if there has been a material
default in the fulfillment of any such obligation, such statement shall
specify each such known default and the nature and status thereof. Such
statement may be provided as a single form making the required statements as
to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer or Special Servicer may be obtained by Certificateholders
upon written request to the Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE SPECIAL SERVICER, THE
REMIC
ADMINISTRATOR AND THE DEPOSITOR
Unless otherwise specified in the Prospectus Supplement for a series of
Certificates, the related Pooling Agreement will permit the Master Servicer,
the Special Servicer and any REMIC Administrator to resign from its
obligations thereunder only upon (a) the appointment of, and the acceptance
of such appointment by, a successor thereto and receipt by the Trustee of
written confirmation from each applicable Rating Agency that such resignation
and appointment will not have an adverse effect on the rating assigned by
such Rating Agency to any class of Certificates of such series or (b) a
determination that such obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by it. No such resignation will become
effective until the Trustee or other successor has assumed the obligations
and duties of the resigning Master Servicer, Special Servicer or REMIC
Administrator, as the case may be, under the Pooling Agreement. The Master
Servicer and Special Servicer for each Trust Fund will be required to
maintain a fidelity bond and errors and omissions policy or their equivalent
that provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions,
subject to certain limitations as to amount of coverage, deductible amounts,
conditions, exclusions and exceptions permitted by the related Pooling
Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Pooling Agreement will further provide that none of the Master Servicer, the
Special Servicer, the REMIC Administrator, the
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Depositor or any director, officer, employee or agent of any of them will be
under any liability to the related Trust Fund or Certificateholders for any
action taken, or not taken, in good faith pursuant to the Pooling Agreement
or for errors in judgment; provided, however, that none of the Master
Servicer, the Special Servicer, the REMIC Administrator, the Depositor or any
such person will be protected against any liability that would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in
the performance of obligations or duties thereunder or by reason of reckless
disregard of such obligations and duties. Unless otherwise specified in the
related Prospectus Supplement, each Pooling Agreement will further provide
that the Master Servicer, the Special Servicer, the REMIC Administrator, the
Depositor and any director, officer, employee or agent of any of them will be
entitled to indemnification by the related Trust Fund against any loss,
liability or expense incurred in connection with any legal action that
relates to such Pooling Agreement or the related series of Certificates;
provided, however, that such indemnification will not extend to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties under such
Pooling Agreement, or by reason of reckless disregard of such obligations or
duties. In addition, each Pooling Agreement will provide that none of the
Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor will be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective responsibilities under
the Pooling Agreement and that in its opinion may involve it in any expense
or liability. However, each of the Master Servicer, the Special Servicer, the
REMIC Administrator and the Depositor will be permitted, in the exercise of
its discretion, to undertake any such action that it may deem necessary or
desirable with respect to the enforcement and/or protection of the rights and
duties of the parties to the Pooling Agreement and the interests of the
related series of Certificateholders thereunder. In such event, the legal
expenses and costs of such action, and any liability resulting therefrom,
will be expenses, costs and liabilities of the related series of
Certificateholders, and the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor, as the case may be, will be entitled to
charge the related Certificate Account therefor.
Any person into which the Master Servicer, the Special Servicer, the REMIC
Administrator or the Depositor may be merged or consolidated, or any person
resulting from any merger or consolidation to which the Master Servicer, the
Special Servicer, the REMIC Administrator or the Depositor is a party, or any
person succeeding to the business of the Master Servicer, the Special
Servicer, the REMIC Administrator or the Depositor, will be the successor of
the Master Servicer, the Special Servicer, the REMIC Administrator or the
Depositor, as the case may be, under the related Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, a REMIC
Administrator will be entitled to perform any of its duties under the related
Pooling Agreement either directly or by or through agents or attorneys, and
the REMIC Administrator will not be responsible for any willful misconduct or
gross negligence on the part of any such agent or attorney appointed by it
with due care.
EVENTS OF DEFAULT
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, "Events of Default" under the related Pooling Agreement will
include, without limitation, (i) any failure by the Master Servicer to
distribute or cause to be distributed to the Certificateholders of such
series, or to remit to the Trustee for distribution to such
Certificateholders, any amount required to be so distributed or remitted,
which failure continues unremedied for five days after written notice thereof
has been given to the Master Servicer by any other party to the related
Pooling Agreement, or to the Master Servicer, with a copy to each other party
to the related Pooling Agreement, by Certificateholders entitled to not less
than 25% (or such other percentage specified in the related Prospectus
Supplement) of the Voting Rights for such series; (ii) any failure by the
Special Servicer to remit to the Master Servicer or the Trustee, as
applicable, any amount required to be so remitted, which failure continues
unremedied for five days after written notice thereof has been given to the
Special Servicer by any other party to the related Pooling Agreement, or to
the Special Servicer, with a copy to each other party to the related Pooling
Agreement, by the Certificateholders entitled to not less than 25% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights of such series; (iii) any failure by the Master Servicer or the
Special Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the related Pooling Agreement, which
failure continues unremedied for sixty days after
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written notice thereof has been given to the Master Servicer or the Special
Servicer, as the case may be, by any other party to the related Pooling
Agreement, or to the Master Servicer or the Special Servicer, as the case may
be, with a copy to each other party to the related Pooling Agreement, by
Certificateholders entitled to not less than 25% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights for such
series; (iv) any failure by a REMIC Administrator (if other than the Trustee)
duly to observe or perform in any material respect any of its covenants or
obligations under the related Pooling Agreement, which failure continues
unremedied for sixty days after written notice thereof has been given to the
REMIC Administrator by any other party to the related Pooling Agreement, or
to the REMIC Administrator, with a copy to each other party to the related
Pooling Agreement, by Certificateholders entitled to not less than 25% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series; and (v) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities, or similar
proceedings in respect of or relating to the Master Servicer, the Special
Servicer or the REMIC Administrator (if other than the Trustee), and certain
actions by or on behalf of the Master Servicer, the Special Servicer or the
REMIC Administrator (if other than the Trustee) indicating its insolvency or
inability to pay its obligations. Material variations to the foregoing Events
of Default (other than to add thereto or shorten cure periods or eliminate
notice requirements) will be specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, when a
single entity acts as Master Servicer, Special Servicer and REMIC
Administrator, or in any two of the foregoing capacities, for any Trust Fund,
an Event of Default in one capacity will constitute an Event of Default in
each capacity.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default occurs with respect to the Master Servicer, the
Special Servicer or a REMIC Administrator under a Pooling Agreement, then, in
each and every such case, so long as the Event of Default remains unremedied,
the Depositor or the Trustee will be authorized, and at the direction of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, the Trustee will be required, to terminate all
of the rights and obligations of the defaulting party as Master Servicer,
Special Servicer or REMIC Administrator, as applicable, under the Pooling
Agreement, whereupon the Trustee will succeed to all of the responsibilities,
duties and liabilities of the defaulting party as Master Servicer, Special
Servicer or REMIC Administrator, as applicable, under the Pooling Agreement
(except that if the defaulting party is required to make advances thereunder
regarding delinquent Mortgage Loans, but the Trustee is prohibited by law
from obligating itself to make such advances, or if the related Prospectus
Supplement so specifies, the Trustee will not be obligated to make such
advances) and will be entitled to similar compensation arrangements. Unless
otherwise specified in the related Prospectus Supplement, if the Trustee is
unwilling or unable so to act, it may (or, at the written request of
Certificateholders of the related series entitled to not less than 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series, it will be required to) appoint, or petition a
court of competent jurisdiction to appoint, a loan servicing institution or
other entity that (unless otherwise provided in the related Prospectus
Supplement) is acceptable to each applicable Rating Agency to act as
successor to the Master Servicer, Special Servicer or REMIC Administrator, as
the case may be, under the Pooling Agreement. Pending such appointment, the
Trustee will be obligated to act in such capacity.
If the same entity is acting as both Trustee and REMIC Administrator, it
may be removed in both such capacities as described under "--Resignation and
Removal of the Trustee" below.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates of any class
evidencing not less than 25% of the aggregate Percentage Interests
constituting such class have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for sixty days
after receipt of such request and indemnity has neglected or refused to
institute any such proceeding. However, the Trustee will be under no
obligation to exercise any of the trusts or powers vested in it by the
Pooling Agreement or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any
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of the holders of Certificates covered by such Pooling Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
Except as otherwise specified in the related Prospectus Supplement, each
Pooling Agreement may be amended by the parties thereto, without the consent
of any of the holders of Certificates covered by such Pooling Agreement, (i)
to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be inconsistent with any other provision therein or to correct any
error, (iii) to change the timing and/or nature of deposits in the
Certificate Account, provided that (A) such change would not adversely affect
in any material respect the interests of any Certificateholder, as evidenced
by an opinion of counsel, and (B) such change would not adversely affect the
then-current rating of any rated classes of Certificates, as evidenced by a
letter from each applicable Rating Agency, (iv) if a REMIC election has been
made with respect to the related Trust Fund, to modify, eliminate or add to
any of its provisions (A) to such extent as shall be necessary to maintain
the qualification of the Trust Fund (or any designated portion thereof) as a
REMIC or to avoid or minimize the risk of imposition of any tax on the
related Trust Fund, provided that the Trustee has received an opinion of
counsel to the effect that (1) such action is necessary or desirable to
maintain such qualification or to avoid or minimize such risk, and (2) such
action will not adversely affect in any material respect the interests of any
holder of Certificates covered by the Pooling Agreement, or (B) to restrict
the transfer of the REMIC Residual Certificates, provided that the Depositor
has determined that the then-current ratings of the classes of the
Certificates that have been rated will not be adversely affected, as
evidenced by a letter from each applicable Rating Agency, and that any such
amendment will not give rise to any tax with respect to the transfer of the
REMIC Residual Certificates to a non-permitted transferee (See "Certain
Federal Income Tax Consequences--REMICs--Tax and Restrictions on Transfers of
REMIC Residual Certificates to Certain Organizations" herein), (v) to make
any other provisions with respect to matters or questions arising under such
Pooling Agreement or any other change, provided that such action will not
adversely affect in any material respect the interests of any
Certificateholder, or (vi) to amend specified provisions that are not
material to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66-2/3% (or such other percentage
specified in the related Prospectus Supplement) of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such
Pooling Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a
Certificate of any class without the consent of the holder of such
Certificate or (ii) reduce the aforesaid percentage of Certificates of any
class the holders of which are required to consent to any such amendment
without the consent of the holders of all Certificates of such class covered
by such Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be required to
consent to any amendment to a Pooling Agreement without having first received
an opinion of counsel to the effect that such amendment or the exercise of
any power granted to the Master Servicer, the Special Servicer, the
Depositor, the Trustee or any other specified person in accordance with such
amendment will not result in the imposition of a tax on the related Trust
Fund or cause such Trust Fund (or any designated portion thereof) to fail to
qualify as a REMIC.
LIST OF CERTIFICATEHOLDERS
Unless otherwise specified in the related Prospectus Supplement, upon
written request of three or more Certificateholders of record made for
purposes of communicating with other holders of Certificates of the same
series with respect to their rights under the related Pooling Agreement, the
Trustee or other specified person will afford such Certificateholders access
during normal business hours to the most recent
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list of Certificateholders of that series held by such person. If such list
is as of a date more than 90 days prior to the date of receipt of such
Certificateholders' request, then such person, if not the registrar for such
series of Certificates, will be required to request from such registrar a
current list and to afford such requesting Certificateholders access thereto
promptly upon receipt.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Depositor and its affiliates and with any
Master Servicer, Special Servicer or REMIC Administrator and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, such
Certificates or any underlying Mortgage Asset or related document and will
not be accountable for the use or application by or on behalf of any Master
Servicer or Special Servicer of any funds paid to the Master Servicer or
Special Servicer in respect of the Certificates or the underlying Mortgage
Assets. If no Event of Default has occurred and is continuing, the Trustee
for each series of Certificates will be required to perform only those duties
specifically required under the related Pooling Agreement. However, upon
receipt of any of the various certificates, reports or other instruments
required to be furnished to it pursuant to the related Pooling Agreement, a
Trustee will be required to examine such documents and to determine whether
they conform to the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the
related Master Servicer or other specified person or may be required to be
borne by the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to indemnification,
from amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to
any loss liability or expense incurred by reason of willful misfeasance, bad
faith or gross negligence on the part of the Trustee in the performance of
its obligations and duties thereunder, or by reason of its reckless disregard
of such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the
Trustee for each series of Certificates will be entitled to execute any of
its trusts or powers under the related Pooling Agreement or perform any of
this duties thereunder either directly or by or through agents or attorneys,
and the Trustee will not be responsible for any willful misconduct or gross
negligence on the part of any such agent or attorney appointed by it with due
care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Depositor will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates of the applicable series evidencing not less than 51% (or such
other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance
of the appointment by the successor Trustee. Notwithstanding anything herein
to the contrary, if any entity is acting as both Trustee and REMIC
Administrator, then any resignation or removal of such entity as the Trustee
will also constitute the resignation or removal of such entity as REMIC
Administrator, and the successor trustee will serve as successor to the REMIC
Administrator as well.
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DESCRIPTION OF CREDIT SUPPORT
GENERAL
Credit Support may be provided with respect to one or more classes of the
Certificates of any series or with respect to the related Mortgage Assets.
Credit Support may be in the form of a letter of credit, the subordination of
one or more classes of Certificates, the use of a surety bond, an insurance
policy or a guarantee, the establishment of one or more reserve funds, or any
combination of the foregoing. If and to the extent so provided in the related
Prospectus Supplement, any of the foregoing forms of Credit Support may
provide credit enhancement for more than one series of Certificates.
The Credit Support may not provide protection against all risks of loss
and will not guarantee payment to Certificateholders of all amounts to which
they are entitled under the related Pooling Agreement. If losses or
shortfalls occur that exceed the amount covered by the related Credit Support
or that are of a type not covered by such Credit Support, Certificateholders
will bear their allocable share of deficiencies. Moreover, if a form of
Credit Support covers the Offered Certificates of more than one series and
losses on the related Mortgage Assets exceed the amount of such Credit
Support, it is possible that the holders of Offered Certificates of one (or
more) such series will be disproportionately benefited by such Credit Support
to the detriment of the holders of Offered Certificates of one (or more)
other such series.
If Credit Support is provided with respect to one or more classes of
Certificates of a series, or with respect to the related Mortgage Assets, the
related Prospectus Supplement will include a description of (i) the nature
and amount of coverage under such Credit Support, (ii) any conditions to
payment thereunder not otherwise described herein, (iii) the conditions (if
any) under which the amount of coverage under such Credit Support may be
reduced and under which such Credit Support may be terminated or replaced and
(iv) the material provisions relating to such Credit Support. Additionally,
the related Prospectus Supplement will set forth certain information with
respect to the obligor, if any, under any instrument of Credit Support. See
"Risk Factors--Credit Support Limitations".
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate
Account on any Distribution Date will be subordinated to the corresponding
rights of the holders of Senior Certificates. If so provided in the related
Prospectus Supplement, the subordination of a class may apply only in the
event of certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the method and amount of
subordination provided by a class or classes of Subordinate Certificates in a
series and the circumstances under which such subordination will be
available.
If the Mortgage Assets in any Trust Fund are divided into separate groups,
each supporting a separate class or classes of Certificates of the related
series, Credit Support may be provided by cross-support provisions requiring
that distributions be made on Senior Certificates evidencing interests in one
group of Mortgage Assets prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Assets within the Trust
Fund. The Prospectus Supplement for a series that includes a cross-support
provision will describe the manner and conditions for applying such
provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO MORTGAGE LOANS
If so provided in the Prospectus Supplement for a series of Certificates,
Mortgage Loans included in the related Trust Fund will be covered for certain
default risks by insurance policies or guarantees. The related Prospectus
Supplement will describe the nature of such default risks and the extent of
such coverage.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by one or more letters of
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credit, issued by a bank or other financial institution specified in such
Prospectus Supplement (the "Letter of Credit Bank"). Under a letter of
credit, the Letter of Credit Bank will be obligated to honor draws thereunder
in an aggregate fixed dollar amount, net of unreimbursed payments thereunder,
generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of some or all of the related
Mortgage Assets on the related Cut-off Date or of the initial aggregate
Certificate Balance of one or more classes of Certificates. If so specified
in the related Prospectus Supplement, the letter of credit may permit draws
only in the event of certain types of losses and shortfalls. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder and may otherwise be reduced
as described in the related Prospectus Supplement. The obligations of the
Letter of Credit Bank under the letter of credit for each series of
Certificates will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
CERTIFICATE INSURANCE AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered by insurance policies or surety bonds
provided by one or more insurance companies or sureties. Such instruments may
cover, with respect to one or more classes of Certificates of the related
series, timely distributions of interest or distributions of principal on the
basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. The related
Prospectus Supplement will describe any limitations on the draws that may be
made under any such instrument.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
deficiencies in amounts otherwise payable on such Certificates or certain
classes thereof will be covered (to the extent of available funds) by one or
more reserve funds in which cash, a letter of credit, Permitted Investments,
a demand note or a combination thereof will be deposited, in the amounts
specified in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the reserve fund for a series may also be funded over
time by a specified amount of certain collections received on the related
Mortgage Assets.
Amounts on deposit in any reserve fund for a series will be applied for
the purposes, in the manner, and to the extent specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement,
reserve funds may be established to provide protection only against certain
types of losses and shortfalls. Following each Distribution Date, amounts in
a reserve fund in excess of any amount required to be maintained therein may
be released from the reserve fund under the conditions and to the extent
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, amounts deposited in
any reserve fund will be invested in Permitted Investments. Unless otherwise
specified in the related Prospectus Supplement, any reinvestment income or
other gain from such investments will be credited to the related reserve fund
for such series, and any loss resulting from such investments will be charged
to such reserve fund. However, such income may be payable to any related
Master Servicer or another service provider as additional compensation for
its services. The reserve fund, if any, for a series will not be a part of
the Trust Fund unless otherwise specified in the related Prospectus
Supplement.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Certificates,
any MBS included in the related Trust Fund and/or the related underlying
mortgage loans may be covered by one or more of the types of Credit Support
described herein. The related Prospectus Supplement will specify, as to each
such form of Credit Support, the information indicated above with respect
thereto, to the extent such information is material and available.
INTEREST RATE EXCHANGE, CAP AND FLOOR AGREEMENTS
If so specified in the Prospectus Supplement for a series of Certificates,
the related Trust Fund may include interest rate exchange agreements or
interest rate cap or floor agreements. These types of
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agreements may be used to limit the exposure of the Trust Fund or investors
in the Certificates to fluctuations in interest rates and to situations where
interest rates become higher or lower than specified thresholds. Generally,
an interest rate exchange agreement is a contract between two parties to pay
and receive, with a set frequency, interest payments determined by applying
the differential between two interest rates to an agreed-upon notional
principal. Generally, an interest rate cap agreement is a contract pursuant
to which one party agrees to reimburse another party for a floating rate
interest payment obligation, to the extent that the rate payable at any time
exceeds a specified cap. Generally, an interest rate floor agreement is a
contract pursuant to which one party agrees to reimburse another party in the
event that amounts owing to the latter party under a floating rate interest
payment obligation are payable at a rate which is less than a specified
floor. The specific provisions of these types of agreements will be described
in the related Prospectus Supplement.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by commercial and multifamily residential
properties. Because such legal aspects are governed by applicable local law
(which laws may differ substantially), the summaries do not purport to be
complete, to reflect the laws of any particular jurisdiction, or to encompass
the laws of all jurisdictions in which the security for the Mortgage Loans
(or mortgage loans underlying any MBS) is situated. Accordingly, the
summaries are qualified in their entirety by reference to the applicable laws
of those jurisdictions. See "Description of the Trust Funds--Mortgage Loans".
If a significant percentage of Mortgage Loans (or mortgage loans underlying
MBS), by balance, are secured by properties in a particular jurisdiction,
relevant local laws, to the extent they vary materially from this discussion,
will be discussed in the Prospectus Supplement. For purposes of the following
discussion, "Mortgage Loan" includes a mortgage loan underlying an MBS.
GENERAL
Each Mortgage Loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property, which may be a
mortgage, deed of trust or a deed to secure debt, depending upon the
prevailing practice and law in the state in which the related Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as "mortgages". A mortgage creates a lien
upon, or grants a title interest in, the real property covered thereby, and
represents the security for the repayment of the indebtedness customarily
evidenced by a promissory note. The priority of the lien created or interest
granted will depend on the terms of the mortgage and, in some cases, on the
terms of separate subordination agreements or intercreditor agreements with
others that hold interests in the real property, the knowledge of the parties
to the mortgage and, generally, the order of recordation of the mortgage in
the appropriate public recording office. However, the lien of a recorded
mortgage will generally be subordinate to later-arising liens for real estate
taxes and assessments and other charges imposed under governmental police
powers.
TYPES OF MORTGAGE INSTRUMENTS
There are two parties to a mortgage: a mortgagor (the borrower and usually
the owner of the subject property) and a mortgagee (the lender). In contrast,
a deed of trust is a three-party instrument, among a trustor (the equivalent
of a borrower), a trustee to whom the real property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. Under a
deed of trust, the trustor grants the property, irrevocably until the debt is
paid, in trust and generally with a power of sale, to the trustee to secure
repayment of the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties, pursuant to which the borrower, or grantor,
conveys title to the real property to the grantee, or lender, generally with
a power of sale, until such time as the debt is repaid. In a case where the
borrower is a land trust, there would be an additional party because legal
title to the property is held by a land trustee under a land trust agreement
for the benefit of the borrower. At origination of a mortgage loan involving
a land trust, the borrower may execute a separate undertaking to make
payments on the mortgage note. In no event is the land trustee personally
liable for the mortgage note obligation. The
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mortgagee's authority under a mortgage, the trustee's authority under a deed
of trust and the grantee's authority under a deed to secure debt are governed
by the express provisions of the related instrument, the law of the state in
which the real property is located, certain federal laws and, in some deed of
trust transactions, the directions of the beneficiary.
LEASES AND RENTS
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases, pursuant to which the borrower assigns to the
lender the borrower's right, title and interest as landlord under each lease
and the income derived therefrom, while (unless rents are to be paid directly
to the lender) retaining a revocable license to collect the rents for so long
as there is no default. If the borrower defaults, the license terminates and
the lender is entitled to collect the rents. Local law may require that the
lender take possession of the property and/or obtain a court-appointed
receiver before becoming entitled to collect the rents.
In most states, hotel and motel room rates are considered accounts
receivable under the Uniform Commercial Code ("UCC"); in cases where hotels
or motels constitute loan security, the rates are generally pledged by the
borrower as additional security for the loan. In general, the lender must
file financing statements in order to perfect its security interest in the
room rates and must file continuation statements, generally every five years,
to maintain perfection of such security interest. In certain cases, Mortgage
Loans secured by hotels or motels may be included in a Trust Fund even if the
security interest in the room rates was not perfected or the requisite UCC
filings were allowed to lapse. Even if the lender's security interest in room
rates is perfected under applicable nonbankruptcy law, it will generally be
required to commence a foreclosure action or otherwise take possession of the
property in order to enforce its rights to collect the room rates following a
default. In the bankruptcy setting, however, the lender will be stayed from
enforcing its rights to collect room rates, but those room rates (in light of
certain revisions to the Bankruptcy Code which are effective for all
bankruptcy cases commenced on or after October 22, 1994) constitute "cash
collateral" and therefore cannot be used by the bankruptcy debtor without a
hearing or lender's consent and unless the lender's interest in the room
rates is given adequate protection (e.g., cash payment for otherwise
encumbered funds or a replacement lien on unencumbered property, in either
case equal in value to the amount of room rates that the debtor proposes to
use, or other similar relief). See "--Bankruptcy Laws".
PERSONALTY
In the case of certain types of mortgaged properties, such as hotels,
motels and nursing homes, personal property (to the extent owned by the
borrower and not previously pledged) may constitute a significant portion of
the property's value as security. The creation and enforcement of liens on
personal property are governed by the UCC. Accordingly, if a borrower pledges
personal property as security for a mortgage loan, the lender generally must
file UCC financing statements in order to perfect its security interest
therein, and must file continuation statements, generally every five years,
to maintain that perfection. In certain cases, Mortgage Loans secured in part
by personal property may be included in a Trust Fund even if the security
interest in such personal property was not perfected or the requisite UCC
filings were allowed to lapse.
FORECLOSURE
General. Foreclosure is a legal procedure that allows the lender to
recover its mortgage debt by enforcing its rights and available legal
remedies under the mortgage. If the borrower defaults in payment or
performance of its obligations under the note or mortgage, the lender has the
right to institute foreclosure proceedings to sell the real property at
public auction to satisfy the indebtedness.
Foreclosure procedures vary from state to state. Two primary methods of
foreclosing a mortgage are judicial foreclosure, involving court proceedings,
and nonjudicial foreclosure pursuant to a power of sale granted in the
mortgage instrument. Other foreclosure procedures are available in some
states, but they are either infrequently used or available only in limited
circumstances.
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A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are interposed, and
sometimes requires several years to complete.
Judicial Foreclosure. A judicial foreclosure proceeding is conducted in a
court having jurisdiction over the mortgaged property. Generally, the action
is initiated by the service of legal pleadings upon all parties having a
subordinate interest of record in the real property and all parties in
possession of the property, under leases or otherwise, whose interests are
subordinate to the mortgage. Delays in completion of the foreclosure may
occasionally result from difficulties in locating defendants. When the
lender's right to foreclose is contested, the legal proceedings can be
time-consuming. Upon successful completion of a judicial foreclosure
proceeding, the court generally issues a judgment of foreclosure and appoints
a referee or other officer to conduct a public sale of the mortgaged
property, the proceeds of which are used to satisfy the judgment. Such sales
are made in accordance with procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain
Provisions. United States courts have traditionally imposed general equitable
principles to limit the remedies available to lenders in foreclosure actions.
These principles are generally designed to relieve borrowers from the effects
of mortgage defaults perceived as harsh or unfair. Relying on such
principles, a court may alter the specific terms of a loan to the extent it
considers necessary to prevent or remedy an injustice, undue oppression or
overreaching, or may require the lender to undertake affirmative actions to
determine the cause of the borrower's default and the likelihood that the
borrower will be able to reinstate the loan. In some cases, courts have
substituted their judgment for the lender's and have required that lenders
reinstate loans or recast payment schedules in order to accommodate borrowers
who are suffering from a temporary financial disability. In other cases,
courts have limited the right of the lender to foreclose in the case of a
nonmonetary default, such as a failure to adequately maintain the mortgaged
property or an impermissible further encumbrance of the mortgaged property.
Finally, some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness
of the notice provisions or have found that a public sale under a mortgage
providing for a power of sale does not involve sufficient state action to
trigger constitutional protections.
In addition, some states may have statutory protection such as the right
of the borrower to reinstate mortgage loans after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale. In states permitting nonjudicial
foreclosure proceedings, foreclosure of a deed of trust is generally
accomplished by a nonjudicial trustee's sale pursuant to a power of sale
typically granted in the deed of trust. A power of sale may also be contained
in any other type of mortgage instrument if applicable law so permits. A
power of sale under a deed of trust allows a nonjudicial public sale to be
conducted generally following a request from the beneficiary/lender to the
trustee to sell the property upon default by the borrower and after notice of
sale is given in accordance with the terms of the mortgage and applicable
state law. In some states, prior to such sale, the trustee under the deed of
trust must record a notice of default and notice of sale and send a copy to
the borrower and to any other party who has recorded a request for a copy of
a notice of default and notice of sale. In addition, in some states the
trustee must provide notice to any other party having an interest of record
in the real property, including junior lienholders. A notice of sale must be
posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. The borrower or junior lienholder
may then have the right, during a reinstatement period required in some
states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
expenses incurred in enforcing the obligation. In other states, the borrower
or the junior lienholder is not provided a period to reinstate the loan, but
has only the right to pay off the entire debt to prevent the foreclosure
sale. Generally, state law governs the procedure for public sale, the parties
entitled to notice, the method of giving notice and the applicable time
periods.
Public Sale. A third party may be unwilling to purchase a mortgaged
property at a public sale because of the difficulty in determining the exact
status of title to the property (due to, among other
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things, redemption rights that may exist) and because of the possibility that
physical deterioration of the property may have occurred during the
foreclosure proceedings. Therefore, it is common for the lender to purchase
the mortgaged property for an amount equal to the secured indebtedness and
accrued and unpaid interest plus the expenses of foreclosure, in which event
the borrower's debt will be extinguished, or for a lesser amount in order to
preserve its right to seek a deficiency judgment if such is available under
state law and under the terms of the Mortgage Loan documents. (The Mortgage
Loans, however, may be nonrecourse. See "Risk Factors--Certain Factors
Affecting Delinquency, Foreclosure and Loss of the Mortgage Loans--Limited
Recourse Nature of the Mortgage Loans".) Thereafter, subject to the
borrower's right in some states to remain in possession during a redemption
period, the lender will become the owner of the property and have both the
benefits and burdens of ownership, including the obligation to pay debt
service on any senior mortgages, to pay taxes, to obtain casualty insurance
and to make such repairs as are necessary to render the property suitable for
sale. The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services
of a real estate broker and pay the broker's commission in connection with
the sale or lease of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Moreover, because of the expenses associated with
acquiring, owning and selling a mortgaged property, a lender could realize an
overall loss on a mortgage loan even if the mortgaged property is sold at
foreclosure, or resold after it is acquired through foreclosure, for an
amount equal to the full outstanding principal amount of the loan plus
accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure
of its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full
amount of the senior mortgage indebtedness or face foreclosure.
Rights of Redemption. The purposes of a foreclosure action are to enable
the lender to realize upon its security and to bar the borrower, and all
persons who have interests in the property that are subordinate to that of
the foreclosing lender, from exercise of their "equity of redemption". The
doctrine of equity of redemption provides that, until the property encumbered
by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having interests that are subordinate
to that of the foreclosing lender have an equity of redemption and may redeem
the property by paying the entire debt with interest. Those having an equity
of redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be terminated.
The equity of redemption is a common-law (nonstatutory) right which should
be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienors are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchaser through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Anti-Deficiency Legislation. Some or all of the Mortgage Loans may be
nonrecourse loans, as to which recourse in the case of default will be
limited to the Mortgaged Property and such other assets, if any, that were
pledged to secure the Mortgage Loan. However, even if a mortgage loan by its
terms provides for recourse to the borrower's other assets, a lender's
ability to realize upon those assets may be limited by state law. For
example, in some states a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A
deficiency judgment is a personal judgment against the former borrower equal
to the difference between the net amount realized upon the public sale of the
real property and the amount due to the lender. Other statutes may require
the lender
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to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the
option of bringing a personal action against the borrower on the debt without
first exhausting such security; however, in some of those states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and thus may be precluded from foreclosing upon the security.
Consequently, lenders in those states where such an election of remedy
provision exists will usually proceed first against the security. Finally,
other statutory provisions, designed to protect borrowers from exposure to
large deficiency judgments that might result from bidding at below-market
values at the foreclosure sale, limit any deficiency judgment to the excess
of the outstanding debt over the fair market value of the property at the
time of the sale.
Leasehold Considerations. Mortgage Loans may be secured by a mortgage on
the borrower's leasehold interest in a ground lease. Leasehold mortgage loans
are subject to certain risks not associated with mortgage loans secured by a
lien on the fee estate of the borrower. The most significant of these risks
is that if the borrower's leasehold were to be terminated upon a lease
default, the leasehold mortgagee would lose its security. This risk may be
lessened if the ground lease requires the lessor to give the leasehold
mortgagee notices of lessee defaults and an opportunity to cure them, permits
the leasehold estate to be assigned to and by the leasehold mortgagee or the
purchaser at a foreclosure sale, and contains certain other protective
provisions typically included in a "mortgageable" ground lease. Certain
Mortgage Loans, however, may be secured by ground leases which do not contain
these provisions.
Cooperative Shares. Mortgage Loans may be secured by a security interest
on the borrower's ownership interest in shares, and the proprietary leases
appurtenant thereto, allocable to cooperative dwelling units that may be
vacant or occupied by nonowner tenants. Such loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate
of a borrower in real property. Such a loan typically is subordinate to the
mortgage, if any, on the Cooperative's building which, if foreclosed, could
extinguish the equity in the building and the proprietary leases of the
dwelling units derived from ownership of the shares of the Cooperative.
Further, transfer of shares in a Cooperative are subject to various
regulations as well as to restrictions under the governing documents of the
Cooperative, and the shares may be cancelled in the event that associated
maintenance charges due under the related proprietary leases are not paid.
Typically, a recognition agreement between the lender and the Cooperative
provides, among other things, the lender with an opportunity to cure a
default under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on Cooperative
shares is accomplished by a sale in accordance with the provisions of Article
9 of the UCC and the security agreement relating to the shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner, which may be dependent upon, among other things, the notice given the
debtor and the method, manner, time, place and terms of the sale. Article 9
of the UCC provides that the proceeds of the sale will be applied first to
pay the costs and expenses of the sale and then to satisfy the indebtedness
secured by the lender's security interest. A recognition agreement, however,
generally provides that the lender's right to reimbursement is subject to the
right of the Cooperative to receive sums due under the proprietary leases.
BANKRUPTCY LAWS
Operation of the Bankruptcy Code and related state laws may interfere with
or affect the ability of a lender to realize upon collateral and/or to
enforce a deficiency judgment. For example, under the Bankruptcy Code,
virtually all actions (including foreclosure actions and deficiency judgment
proceedings) to collect a debt are automatically stayed upon the filing of
the bankruptcy petition and, often, no interest or principal payments are
made during the course of the bankruptcy case. The delay and the consequences
thereof caused by such automatic stay can be significant. Also, under the
Bankruptcy Code, the filing of a petition in bankruptcy by or on behalf of a
junior lienor may stay the senior lender from taking action to foreclose out
such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards protective of the lender are met, the amount and terms of a
mortgage loan secured by a lien on property of the debtor may be modified
under certain circumstances. For example, the outstanding amount of the loan
may be reduced to the then-current value of the property (with a
corresponding partial reduction of the amount
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of lender's security interest) pursuant to a confirmed plan or lien avoidance
proceeding, thus leaving the lender a general unsecured creditor for the
difference between such value and the outstanding balance of the loan. Other
modifications may include the reduction in the amount of each scheduled
payment, by means of a reduction in the rate of interest and/or an alteration
of the repayment schedule (with or without affecting the unpaid principal
balance of the loan), and/or by an extension (or shortening) of the term to
maturity. Some bankruptcy courts have approved plans, based on the particular
facts of the reorganization case, that effected the cure of a mortgage loan
default by paying arrearages over a number of years. Also, a bankruptcy court
may permit a debtor, through its rehabilitative plan, to reinstate a loan
mortgage payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
affecting the ability of a secured lender to enforce the borrower's
assignment of rents and leases related to the mortgaged property. Under the
Bankruptcy Code, a lender may be stayed from enforcing the assignment, and
the legal proceedings necessary to resolve the issue could be time-consuming,
with resulting delays in the lender's receipt of the rents. Recent amendments
to the Bankruptcy code, however, may minimize the impairment of the lender's
ability to enforce the borrower's assignment of rents and leases. In addition
to the inclusion of hotel revenues within the definition of "cash collateral"
as noted previously in the section entitled "--Leases and Rents", the
amendments provide that a pre-petition security interest in rents or hotel
revenues is designed to overcome those cases holding that a security interest
in rents is unperfected under the laws of certain states until the lender has
taken some further action, such as commencing foreclosure or obtaining a
receiver prior to activation of the assignment of rents.
If a borrower's ability to make payment on a mortgage loan is dependent on
its receipt of rent payments under a lease of the related property, that
ability may be impaired by the commencement of a bankruptcy case relating to
a lessee under such lease. Under the Bankruptcy Code, the filing of a
petition in bankruptcy by or on behalf of a lessee results in a stay in
bankruptcy against the commencement or continuation of any state court
proceeding for past due rent, for accelerated rent, for damages or for a
summary eviction order with respect to a default under the lease that
occurred prior to the filing of the lessee's petition. In addition, the
Bankruptcy Code generally provides that a trustee or debtor-in-possession
may, subject to approval of the court, (i) assume the lease and retain it or
assign it to a third party or (ii) reject the lease. If the lease is assumed,
the trustee or debtor-in-possession (or assignee, if applicable) must cure
any defaults under the lease, compensate the lessor for its losses and
provide the lessor with "adequate assurance" of future performance. Such
remedies may be insufficient, and any assurances provided to the lessor may,
in fact, be inadequate. If the lease is rejected, the lessor will be treated
as an unsecured creditor with respect to its claim for damages for
termination of the lease. The Bankruptcy Code also limits a lessor's damages
for lease rejection to the rent reserved by the lease (without regard to
acceleration) for the greater of one year, or 15%, not to exceed three years,
of the remaining term of the lease.
ENVIRONMENTAL CONSIDERATIONS
General. A lender may be subject to environmental risks when taking a
security interest in real property. Of particular concern may be properties
that are or have been used for industrial, manufacturing, military or
disposal activity. Such environmental risks include the possible diminution
of the value of a contaminated property or, as discussed below, potential
liability for clean-up costs or other remedial actions that could exceed the
value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged
property as collateral for its loan rather than foreclose and risk liability
for clean-up costs.
Superlien Laws. Under the laws of many states, contamination on a property
may give rise to a lien on the property for clean-up costs. In several
states, such a lien has priority over all existing liens, including those of
existing mortgages. In these states, the lien of a mortgage may lose its
priority to such a "superlien".
CERCLA. The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), imposes strict liability on
present and past "owners" and "operators"
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of contaminated real property for the costs of clean-up. A secured lender may
be liable as an "owner" or "operator" of a contaminated mortgaged property if
agents or employees of the lender have participated in the management of such
mortgaged property or the operations of the borrower. Such liability may
exist even if the lender did not cause or contribute to the contamination and
regardless of whether the lender has actually taken possession of a mortgaged
property through foreclosure, deed in lieu of foreclosure or otherwise.
Moreover, such liability is not limited to the original or unamortized
principal balance of a loan or to the value of the property securing a loan.
Excluded from CERCLA's definition of "owner" or "operator", however, is a
person "who without participating in the management of the facility, holds
indicia of ownership primarily to protect his security interest". This is the
so called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Act") amended, among other things, the provisions of CERCLA with
respect to lender liability and the secured creditor exemption. The Act
offers substantial protection to lenders by defining the activities in which
a lender can engage and still have the benefit of the secured creditor
exemption. In order for a lender to be deemed to have participated in the
management of a mortgaged property, the lender must actually participate in
the operational affairs of the property of the borrower. The Act provides
that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption only if it
exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or
assumes day-to-day management of all operational functions of the mortgaged
property. The Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a
mortgaged property, purchases it at a foreclosure sale or accepts a
deed-in-lieu of foreclosure provided that the lender seeks to sell the
mortgaged property at the earliest practicable commercially reasonable time
on commercially reasonable terms.
Certain Other Federal and State Laws. Many states have statutes similar to
CERCLA, and not all those statutes provide for a secured creditor exemption.
In addition, under federal law, there is potential liability relating to
hazardous wastes and underground storage tanks under the federal Resource
Conservation and Recovery Act.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender
that becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise, may be required to clean up the contamination
before selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to
hazardous environmental conditions on a property. While it may be more
difficult to hold a lender liable in such cases, unanticipated or uninsured
liabilities of the borrower may jeopardize the borrower's ability to meet its
loan obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. Such costs may jeopardize
the borrower's ability to meet its loan obligations.
Additional Considerations. The cost of remediating hazardous substance
contamination at a property can be substantial. If a lender becomes liable,
it can bring an action for contribution against the owner or operator who
created the environmental hazard, but that individual or entity may be
without substantial assets. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders.
To reduce the likelihood of such a loss, unless otherwise specified in the
related Prospectus Supplement, the Pooling Agreement will provide that
neither the Master Servicer nor the Special Servicer, acting on behalf of the
Trustee, may acquire title to a Mortgaged Property or take over its operation
unless the Special Servicer, based solely (as to environmental matters) on a
report prepared by a person who regularly conducts environmental audits, has
made the determination that it is appropriate to do so, as described under
"Description of the Pooling Agreements--Realization Upon Defaulted Mortgage
Loans".
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If a lender forecloses on a mortgage secured by a property, the operations
on which are subject to environmental laws and regulations, the lender will
be required to operate the property in accordance with those laws and
regulations. Such compliance may entail substantial expense, especially in
the case of industrial or manufacturing properties.
In addition, a lender may be obligated to disclose environmental
conditions on a property to government entities and/or to prospective buyers
(including prospective buyers at a foreclosure sale or following
foreclosure). Such disclosure may decrease the amount that prospective buyers
are willing to pay for the affected property, sometimes substantially, and
thereby decrease the ability of the lender to recoup its investment in a loan
upon foreclosure.
Environmental Site Assessments. In most cases, an environmental site
assessment of each Mortgaged Property will have been performed in connection
with the origination of the related Mortgage Loan or at some time prior to
the issuance of the related Certificates. Environmental site assessments,
however, vary considerably in their content, quality and cost. Even when
adhering to good professional practices, environmental consultants will
sometimes not detect significant environmental problems because to do an
exhaustive environmental assessment would be far too costly and
time-consuming to be practical.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Mortgage Loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate
the maturity of the loan if the borrower transfers or encumbers the related
Mortgaged Property. In recent years, court decisions and legislative actions
placed substantial restrictions on the right of lenders to enforce such
clauses in many states. However, the Garn-St Germain Depository Institutions
Act of 1982 (the "Garn Act") generally preempts state laws that prohibit the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limitations as set
forth in the Garn Act and the regulations promulgated thereunder.
Accordingly, a Master Servicer may nevertheless have the right to accelerate
the maturity of a Mortgage Loan that contains a "due-on-sale" provision upon
transfer of an interest in the property, without regard to the Master
Servicer's ability to demonstrate that a sale threatens its legitimate
security interest.
JUNIOR LIENS; RIGHTS OF HOLDERS OF SENIOR LIENS
If so provided in the related Prospectus Supplement, Mortgage Assets for a
series of Certificates may include Mortgage Loans secured by junior liens,
and the loans secured by the related Senior Liens may not be included in the
Mortgage Pool. The primary risk to holders of Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully
both the Senior Liens and the Mortgage Loan. In the event that a holder of a
Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the Senior Liens. The claims of the holders of the Senior Liens
will be satisfied in full out of proceeds of the liquidation of the related
Mortgage Property, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage
Loan. In the event that such proceeds from a foreclosure or similar sale of
the related Mortgaged Property are insufficient to satisfy all Senior Liens
and the Mortgage Loan in the aggregate, the Trust Fund, as the holder of the
junior lien, and, accordingly, holders of one or more classes of the
Certificates of the related series bear (i) the risk of delay in
distributions while a deficiency judgment against the borrower is obtained
and (ii) the risk of loss if the deficiency judgment is not realized upon.
Moreover, deficiency judgments may not be available in certain jurisdictions
or the Mortgage Loan may be nonrecourse.
SUBORDINATE FINANCING
The terms of certain of the Mortgage Loans may not restrict the ability of
the borrower to use the Mortgaged Property as security for one or more
additional loans, or such restrictions may be
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unenforceable. Where a borrower encumbers a mortgaged property with one or
more junior liens, the senior lender is subjected to additional risk. First,
the borrower may have difficulty servicing and repaying multiple loans.
Moreover, if the subordinate financing permits recourse to the borrower (as
is frequently the case) and the senior loan does not, a borrower may have
more incentive to repay sums due on the subordinate loan. Second, acts of the
senior lender that prejudice the junior lender or impair the junior lender's
security may create a superior equity in favor of the junior lender. For
example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the
senior lender may lose its priority to the extent any existing junior lender
is harmed or the borrower is additionally burdened. Third, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior lender and can interfere with or delay the taking of
action by the senior lender. Moreover, the bankruptcy of a junior lender may
operate to stay foreclosure or similar proceedings by the senior lender.
DEFAULT INTEREST AND LIMITATIONS ON PREPAYMENTS
Notes and mortgages may contain provisions that obligate the borrower to
pay a late charge or additional interest if payments are not timely made, and
in some circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid.
In addition, the enforceability of provisions that provide for prepayment
fees or penalties upon an involuntary prepayment is unclear under the laws of
many states.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V") provides that state usury limitations shall not apply
to certain types of residential (including multifamily) first mortgage loans
originated by certain lenders after March 31, 1980. Title V authorized any
state to reimpose interest rate limits by adopting, before April 1, 1983, a
law or constitutional provision that expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits and/or to limit discount points or
other charges.
No Mortgage Loan originated in any state in which application of Title V
has been expressly rejected or a provision limiting discount points or other
charges has been adopted, will (if originated after that rejection or
adoption) be eligible for inclusion in a Trust Fund unless (i) such Mortgage
Loan provides for such interest rate, discount points and charges as are
permitted in such state or (ii) such Mortgage Loan provides that the terms
thereof are to be construed in accordance with the laws of another state
under which such interest rate, discount points and charges would not be
usurious and the borrower's counsel has rendered an opinion that such choice
of law provision would be given effect.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply
(together with an inability to remedy any such failure) could result in
material diminution in the value of a Mortgaged Property which could,
together with the possibility of limited alternative uses for a particular
Mortgaged Property (i.e., a nursing or convalescent home or hospital), result
in a failure to realize the full principal amount of the related Mortgage
Loan.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the "ADA"), in order to protect
individuals with disabilities, public accommodations (such
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as hotels, restaurants, shopping centers, hospitals, schools and social
service center establishments) must remove architectural and communication
barriers which are structural in nature from existing places of public
accommodation to the extent "readily achievable." In addition, under the ADA,
alterations to a place of public accommodation or a commercial facility are
to be made so that, to the maximum extent feasible, such altered portions are
readily accessible to and usable by disabled individuals. The "readily
achievable" standard takes into account, among other factors, the financial
resources of the affected site, owner, landlord or other applicable person.
In addition to imposing a possible financial burden on the borrower in its
capacity as owner or landlord, the ADA may also impose such requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with
the requirements of the ADA may be subject to more stringent requirements
than those to which the borrower is subject.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a borrower who enters military service after the
origination of such borrower's mortgage loan (including a borrower who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. The Relief
Act applies to individuals who are members of the Army, Navy, Air Force,
Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Relief
Act applies to individuals who enter military service (including reservists
who are called to active duty) after origination of the related mortgage
loan, no information can be provided as to the number of loans with
individuals as borrowers that may be affected by the Relief Act. Application
of the Relief Act would adversely affect, for an indeterminate period of
time, the ability of a Master Servicer or Special Servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in
interest collections resulting from the application of the Relief Act would
result in a reduction of the amounts distributable to the holders of the
related series of Certificates, and would not be covered by advances or,
unless otherwise specified in the related Prospectus Supplement, any form of
Credit Support provided in connection with such Certificates. In addition,
the Relief Act imposes limitations that would impair the ability of the
Master Servicer or Special Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status, and, under certain
circumstances, during an additional three month period thereafter.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ("RICO") statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the comprehensive Crime Control Act of 1984 (the
"Crime Control Act"), the government may seize the property even before
conviction. The government must publish notice of the forfeiture proceeding
and may give notice to all parties "known to have an alleged interest in the
property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before
commission of the crime upon which the forfeiture is based, or (ii) the
lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as
regulations (the "REMIC Regulations") promulgated by the U.S. Department of
Treasury (the "Treasury"). Investors should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of
the purchase, ownership and disposition of Certificates.
For purposes of this discussion, (i) references to the Mortgage Loans
include references to the mortgage loans underlying MBS included in the
Mortgage Assets and (ii) where the applicable Prospectus Supplement provides
for a fixed retained yield with respect to the Mortgage Loans underlying a
series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Fund which does
not include the Retained Interest. References to a "holder" or
"Certificateholder" in this discussion generally mean the beneficial owner of
a Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
General
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A
Trust Fund or a portion thereof as to which a REMIC election will be made
will be referred to as a "REMIC Pool". For purposes of this discussion,
Certificates of a series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes
of "Regular Certificates" and one Class of "Residual Certificates" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Certificates,
Cadwalader, Wickersham & Taft, counsel to the Depositor, has advised the
Depositor that in the firm's opinion, assuming (i) the making of such an
election, (ii) compliance with the Pooling Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or
applicable Treasury regulations thereunder, each REMIC Pool will qualify as a
REMIC. In such case, the Regular Certificates will be considered to be
"regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be "residual
interests" in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect
to the related Trust Fund will be made, in which event references to "REMIC"
or "REMIC Pool" herein shall be deemed to refer to each such REMIC Pool. If
so specified in the applicable Prospectus Supplement, the portion of a Trust
Fund as to which a REMIC election is not made may be treated as a grantor
trust for federal income tax purposes. See "--Federal Income Tax Consequences
for Certificates as to Which No REMIC Election Is Made".
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi), but only in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property which is . . . residential real property" (such as
single family or multifamily properties, but not commercial properties)
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C), and otherwise will not qualify for
such treatment. REMIC Certificates held by a real estate investment trust
will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the Regular Certificates and income with
respect to Residual Certificates will be considered "interest on obligations
secured by mortgages on real property or on interests in real property"
within the meaning of Code Section 856(c)(3)(B) in the same proportion that,
for both purposes, the assets of the REMIC Pool would be so treated. If at
all times 95% or more
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of the assets of the REMIC Pool qualify for each of the foregoing respective
treatments, the REMIC Certificates will qualify for the corresponding status
in their entirety. For purposes of Code Section 856(c)(5)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of REMIC Certificates qualify for such treatment.
Where two REMIC Pools are a part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Mortgage Loans, it is possible that the percentage of such
assets constituting "loans . . . secured by an interest in real property
which is . . . residential real property" for purposes of Code Section
7701(a)(19)(C)(v) may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company
will not constitute "Government Securities" within the meaning of Code
Section 851(b)(4)(A)(i). REMIC Certificates held by certain financial
institutions will constitute an "evidence of indebtedness" within the meaning
of Code Section 582(c)(1). The Small Business Job Protection Act of 1996 (the
"SBJPA of 1996") repealed the reserve method for bad debts of domestic
building and loan associations and mutual savings banks, and thus has
eliminated the asset category of "qualifying real property loans" in former
Code Section 593(d) for taxable years beginning after December 31, 1995. The
requirement in the SBJPA of 1996 that such institutions must "recapture" a
portion of their existing bad debt reserves is suspended if a certain portion
of their assets are maintained in "residential loans" under Code Section
7701(a)(19)(C)(v), but only if such loans were made to acquire, construct or
improve the related real property and not for the purpose of refinancing.
However, no effort will be made to identify the portion of the Mortgage Loans
of any Series meeting this requirement, and no representation is made in this
regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which
for purposes of this discussion is the date of issuance of the REMIC
Certificates) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments". The REMIC Regulations
provide a safe harbor pursuant to which the de minimis requirement is met if
at all times the aggregate adjusted basis of the nonqualified assets is less
than 1% of the aggregate adjusted basis of all the REMIC Pool's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that
it holds no more than a de minimis amount of nonqualified assets. A REMIC
also must provide "reasonable arrangements" to prevent its residual interest
from being held by "disqualified organizations" and must furnish applicable
tax information to transferors or agents that violate this requirement. The
Pooling Agreement for each Series will contain a provision designed to meet
this requirement. See "Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified
Organizations".
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, including certain of the MBS, regular interests in another REMIC, such
as MBS in a trust as to which a REMIC election has been made, loans secured
by timeshare interests and loans secured by shares held by a tenant
stockholder in a cooperative housing corporation, provided, in general, (i)
the fair market value of the real property security (including buildings and
structural components thereof) is at least 80% of the principal balance of
the related Mortgage Loan or mortgage loan underlying the Mortgage
Certificate either at origination or as of the Startup Day (an original
loan-to-value ratio of not more than 125% with respect to the real property
security) or (ii) substantially all the proceeds of the Mortgage Loan or the
underlying mortgage loan were used to acquire, improve or protect an interest
in real property that, at the origination date, was the only security for the
Mortgage Loan or underlying mortgage loan. If the Mortgage Loan has been
substantially modified other than in connection with a default or reasonably
foreseeable default, it must meet the loan-to-value test in (i) of the
preceding sentence as of the date of the last such modification or at
closing. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have
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been treated as a qualified mortgage if it were transferred to the REMIC Pool
on the Startup Day and that is received either (i) in exchange for any
qualified mortgage within a three-month period thereafter or (ii) in exchange
for a "defective obligation" within a two-year period thereafter. A
"defective obligation" includes (i) a mortgage in default or as to which
default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the
mortgagor, and (iv) a mortgage that was not in fact principally secured by
real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged,
within 90 days of discovery, ceases to be a qualified mortgage after such
90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for payments of expenses of the REMIC Pool or amounts
due on the regular or residual interests in the event of defaults (including
delinquencies) on the qualified mortgages, lower than expected reinvestment
returns, prepayment interest shortfalls and certain other contingencies. The
reserve fund will be disqualified if more than 30% of the gross income from
the assets in such fund for the year is derived from the sale or other
disposition of property held for less than three months, unless required to
prevent a default on the regular interests caused by a default on one or more
qualified mortgages. A reserve fund must be reduced "promptly and
appropriately" as payments on the Mortgage Loans are received. Foreclosure
property is real property acquired by the REMIC Pool in connection with the
default or imminent default of a qualified mortgage and generally not held
beyond the close of the third calendar year following the acquisition of the
property by the REMIC Pool, with an extension that may be granted by the
Internal Revenue Service (the "Service").
In addition to the foregoing requirements, the various interests in a
REMIC Pool also must meet certain requirements. All of the interests in a
REMIC Pool must be either of the following: (i) one or more classes of
regular interests or (ii) a single class of residual interests on which
distributions, if any, are made pro rata. A regular interest is an interest
in a REMIC Pool that is issued on the Startup Day with fixed terms, is
designated as a regular interest, and unconditionally entitles the holder to
receive a specified principal amount (or other similar amount), and provides
that interest payments (or other similar amounts), if any, at or before
maturity either are payable based on a fixed rate or a qualified variable
rate, or consist of a specified, nonvarying portion of the interest payments
on qualified mortgages. Such a specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a fixed
or qualified variable or inverse variable rate on some or all of the
qualified mortgages minus a different fixed or qualified variable rate. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments
on qualified mortgages may be zero. A residual interest is an interest in a
REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool
may be treated as a regular interest even if payments of principal with
respect to such interest are subordinated to payments on other regular
interests or the residual interest in the REMIC Pool, and are dependent on
the absence of defaults or delinquencies on qualified mortgages or permitted
investments, lower than reasonably expected returns on permitted investments,
unanticipated expenses incurred by the REMIC Pool or prepayment interest
shortfalls. Accordingly, the Regular Certificates of a series will constitute
one or more classes of regular interests, and the Residual Certificates with
respect to that series will constitute a single class of residual interests
on which distributions are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for
such year and thereafter. In this event, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. The Code, however,
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authorizes the Treasury Department to issue regulations that address
situations where failure to meet one or more of the requirements for REMIC
status occurs inadvertently and in good faith, and disqualification of the
REMIC Pool would occur absent regulatory relief. Investors should be aware,
however, that the Conference Committee Report to the Tax Reform Act of 1986
(the "1986 Act") indicates that the relief may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC
Pool's income for the period of time in which the requirements for REMIC
status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
General
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder") as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the
accrual method of accounting with regard to Regular Certificates, regardless
of the method of accounting otherwise used by such Regular
Certificateholders.
Original Issue Discount
Accrual Certificates and principal-only Certificates will be, and other
Classes of Regular Certificates may be, issued with "original issue discount"
within the meaning of Code Section 1273(a). Holders of any Class of Regular
Certificates having original issue discount generally must include original
issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with the constant yield method that takes into account
the compounding of interest, in advance of receipt of the cash attributable
to such income. The following discussion is based in part on temporary and
final Treasury regulations issued on February 2, 1994, as amended on June 14,
1996 (the "OID Regulations") under Code Sections 1271 through 1273 and 1275
and in part on the provisions of the 1986 Act. Regular Certificateholders
should be aware, however, that the OID Regulations do not adequately address
certain issues relevant to prepayable securities, such as the Regular
Certificates. To the extent such issues are not addressed in such
regulations, the Depositor intends to apply the methodology described in the
Conference Committee Report to the 1986 Act. No assurance can be provided
that the Service will not take a different position as to those matters not
currently addressed by the OID Regulations. Moreover, the OID Regulations
include an anti-abuse rule allowing the Service to apply or depart from the
OID Regulations where necessary or appropriate to ensure a reasonable tax
result in light of the applicable statutory provisions. A tax result will not
be considered unreasonable under the anti-abuse rule in the absence of a
substantial effect on the present value of a taxpayer's tax liability.
Investors are advised to consult their own tax advisors as to the discussion
herein and the appropriate method for reporting interest and original issue
discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with
respect to a Regular Certificate on which principal is distributed by random
lot ("Random Lot Certificates")) will be treated as a single installment
obligation for purposes of determining the original issue discount includible
in a Regular Certificateholder's income. The total amount of original issue
discount on a Regular Certificate is the excess of the "stated redemption
price at maturity" of the Regular Certificate over its "issue price". The
issue price of a Class of Regular Certificates offered pursuant to this
Prospectus generally is the first price at which a substantial amount of
Regular Certificates of that Class is sold to the public (excluding bond
houses, brokers and underwriters). Although unclear under the OID
Regulations, the Depositor intends to treat the issue price of a Class as to
which there is no substantial sale as of the issue date or that is retained
by the Depositor as the fair market value of that Class as of the issue date.
The issue price of a Regular Certificate also includes the amount paid by an
initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate, unless the Regular
Certificateholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular
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Certificate always includes the original principal amount of the Regular
Certificate, but generally will not include distributions of stated interest
if such interest distributions constitute "qualified stated interest". Under
the OID Regulations, qualified stated interest generally means interest
payable at a single fixed rate or a qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Regular
Certificate. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Certificate, it is possible
that no interest on any Class of Regular Certificates will be treated as
qualified stated interest. However, except as provided in the following three
sentences or in the applicable Prospectus Supplement, because the underlying
Mortgage Loans provide for remedies in the event of default, the Depositor
intends to treat interest with respect to the Regular Certificates as
qualified stated interest. Distributions of interest on an Accrual
Certificate, or on other Regular Certificates with respect to which deferred
interest will accrue, will not constitute qualified stated interest, in which
case the stated redemption price at maturity of such Regular Certificates
includes all distributions of interest as well as principal thereon.
Likewise, the Depositor intends to treat an "interest only" class, or a class
on which interest is substantially disproportionate to its principal amount
(a so-called "super-premium" class) as having no qualified stated interest.
Where the interval between the issue date and the first Distribution Date on
a Regular Certificate is shorter than the interval between subsequent
Distribution Dates, the interest attributable to the additional days will be
included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution is scheduled to be made by a fraction, the numerator of which is
the amount of each distribution included in the stated redemption price at
maturity of the Regular Certificate and the denominator of which is the
stated redemption price at maturity of the Regular Certificate. The
Conference Committee Report to the 1986 Act provides that the schedule of
such distributions should be determined in accordance with the assumed rate
of prepayment of the Mortgage Loans (the "Prepayment Assumption") and the
anticipated reinvestment rate, if any, relating to the Regular Certificates.
The Prepayment Assumption with respect to a Series of Regular Certificates
will be set forth in the related Prospectus Supplement. Holders generally
must report de minimis original issue discount pro rata as principal payments
are received, and such income will be capital gain if the Regular Certificate
is held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount
as well as market discount and market premium under the constant yield
method. See "Election to Treat All Interest Under the Constant Yield Method".
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Depositor will
treat the monthly period ending on the day before each Distribution Date as
the accrual period. With respect to each Regular Certificate, a calculation
will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Distribution Date on the
Regular Certificate. The Conference Committee Report to the 1986 Act states
that the rate of accrual of original issue discount is intended to be based
on the Prepayment Assumption. Other than as discussed below with respect to a
Random Lot Certificate, the original issue discount accruing in a full
accrual period would be the excess, if any, of (i) the sum of (a) the present
value of all of the remaining distributions to be made on the Regular
Certificate as of the end of that accrual period that are included in the
Regular Certificate's stated redemption price at maturity and (b) the
distributions made on the Regular Certificate during the accrual period that
are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on
(i) the yield to maturity of the Regular Certificate at the issue date, (ii)
events (including actual prepayments) that have occurred prior to the end of
the accrual period
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and (iii) the Prepayment Assumption. For these purposes, the adjusted issue
price of a Regular Certificate at the beginning of any accrual period equals
the issue price of the Regular Certificate, increased by the aggregate amount
of original issue discount with respect to the Regular Certificate that
accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods.
The original issue discount accruing during any accrual period (as determined
in this paragraph) will then be divided by the number of days in the period
to determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for
any period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either
an increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to
determine the yield to maturity of such Certificate based upon the
anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Random Lot Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case
of a distribution in retirement of the entire unpaid principal balance of any
Random Lot Certificate (or portion of such unpaid principal balance), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Random Lot Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is
consistent with the "pro rata prepayment" rules of the OID Regulations, but
with the rate of accrual of original issue discount determined based on the
Prepayment Assumption for the Class as a whole. Investors are advised to
consult their tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining
stated redemption price at maturity over the adjusted issue price.
Alternatively, such a subsequent purchaser may elect to treat all such
acquisition premium under the constant yield method, as described below under
the heading "Election to Treat All Interest Under the Constant Yield Method".
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates", (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate", or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate". A floating rate
is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
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funds, where such rate is subject to a fixed multiple that is greater than
0.65, but not more than 1.35. Such rate may also be increased or decreased by
a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly. An objective rate (other than a qualified floating
rate) is a rate that is determined using a single fixed formula and that is
based on objective financial or economic information, provided that such
information is not (i) within the control of the issuer or a related party or
(ii) unique to the circumstances of the issuer or a related party. A
qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified floating rate may nevertheless be an objective rate. A Class of
Regular Certificates may be issued under this Prospectus that does not have a
variable rate under the OID Regulations, for example, a Class that bears
different rates at different times during the period it is outstanding such
that it is considered significantly "front-loaded" or "back-loaded" within
the meaning of the OID Regulations. It is possible that such a Class may be
considered to bear "contingent interest" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to Regular
Certificates. However, if final regulations dealing with contingent interest
with respect to Regular Certificates apply the same principles as the OID
Regulations, such regulations may lead to different timing of income
inclusion than would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on
the sale of contingent interest Regular Certificates as ordinary income.
Investors should consult their tax advisors regarding the appropriate
treatment of any Regular Certificate that does not pay interest at a fixed
rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to
current values of a variable rate (or the highest, lowest or average of two
or more variable rates), including a rate based on the average cost of funds
of one or more financial institutions, or a positive or negative multiple of
such a rate (plus or minus a specified number of basis points), or that
represents a weighted average of rates on some or all of the Mortgage Loans,
including such a rate that is subject to one or more caps or floors, or (ii)
bearing one or more such variable rates for one or more periods or one or
more fixed rates for one or more periods, and a different variable rate or
fixed rate for other periods qualifies as a regular interest in a REMIC.
Accordingly, unless otherwise indicated in the applicable Prospectus
Supplement, the Depositor intends to treat Regular Certificates that qualify
as regular interests under this rule in the same manner as obligations
bearing a variable rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular
Certificate bearing a variable rate of interest will accrue in the manner
described above under "Original Issue Discount" with the yield to maturity
and future payments on such Regular Certificate generally to be determined by
assuming that interest will be payable for the life of the Regular
Certificate based on the initial rate (or, if different, the value of the
applicable variable rate as of the pricing date) for the relevant Class.
Unless otherwise specified in the applicable Prospectus Supplement, the
Depositor intends to treat such variable interest as qualified stated
interest, other than variable interest on an interest-only or super-premium
Class, which will be treated as non-qualified stated interest includible in
the stated redemption price at maturity. Ordinary income reportable for any
period will be adjusted based on subsequent changes in the applicable
interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, the Depositor intends to treat Regular
Certificates bearing an interest rate that is a weighted average of the net
interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest, except to the extent
that initial "teaser" rates cause sufficiently "back-loaded" interest to
create more than de minimis original issue discount. The yield on such
Regular Certificates for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial "teaser rates" followed by fully indexed rates,
in the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly
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the issue date) will be deemed to be in effect beginning with the period in
which the first weighted average adjustment date occurring after the issue
date occurs. Adjustments will be made in each accrual period either
increasing or decreasing the amount of ordinary income reportable to reflect
the actual Pass-Through Rate on the Regular Certificates.
Deferred Interest
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues
with respect to a Class of Regular Certificates may constitute income to the
holders of such Regular Certificates prior to the time distributions of cash
with respect to such Deferred Interest are made.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections
and the principles applied by the OID Regulations in the context of original
issue discount, "market discount" is the amount by which the purchaser's
original basis in the Regular Certificate (i) is exceeded by the then-current
principal amount of the Regular Certificate or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received,
in an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take
into account the Prepayment Assumption. The Conference Committee Report to
the 1986 Act provides that until such regulations are issued, such market
discount would accrue either (i) on the basis of a constant interest rate or
(ii) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for such period plus the remaining interest as of the end
of such period, or in the case of a Regular Certificate issued with original
issue discount, in the ratio of original issue discount accrued for the
relevant period to the sum of the original issue discount accrued for such
period plus the remaining original issue discount as of the end of such
period. Such purchaser also generally will be required to treat a portion of
any gain on a sale or exchange of the Regular Certificate as ordinary income
to the extent of the market discount accrued to the date of disposition under
one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the
stated redemption price at maturity were received. Such purchaser will be
required to defer deduction of a portion of the excess of the interest paid
or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Certificate for such year. Any such
deferred interest expense is, in general, allowed as a deduction not later
than the year in which the related market discount income is recognized or
the Regular Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. See "Election to Treat All Interest
Under the Constant Yield Method" below regarding an alternative manner in
which such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered
to be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under "Original Issue Discount") remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
"Original Issue Discount" above. Treasury regulations implementing the
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market discount rules have not yet been issued, and therefore investors
should consult their own tax advisors regarding the application of these
rules. Investors should also consult Revenue Procedure 92-67 concerning the
elections to include market discount in income currently and to accrue market
discount on the basis of the constant yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased
at a premium. If the Regular Certificateholder holds such Regular Certificate
as a "capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986
Act indicates a Congressional intent that the same rules that will apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations
such as the Regular Certificates, although it is unclear whether the
alternatives to the constant yield method described above under "Market
Discount" are available. Amortizable bond premium will be treated as an
offset to interest income on a Regular Certificate rather than as a separate
deduction item. See "Election to Treat All Interest Under the Constant Yield
Method" below regarding an alternative manner in which the Code Section 171
election may be deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest,
original issue discount, de minimis original issue discount, market discount
and de minimis market discount, as adjusted by any amortizable bond premium
or acquisition premium and (ii) the debt instrument is treated as if the
instrument were issued on the holder's acquisition date in the amount of the
holder's adjusted basis immediately after acquisition. It is unclear whether,
for this purpose, the initial Prepayment Assumption would continue to apply
or if a new prepayment assumption as of the date of the holder's acquisition
would apply. A holder generally may make such an election on an instrument by
instrument basis or for a class or group of debt instruments. However, if the
holder makes such an election with respect to a debt instrument with
amortizable bond premium or with market discount, the holder is deemed to
have made elections to amortize bond premium or to report market discount
income currently as it accrues under the constant yield method, respectively,
for all debt instruments acquired by the holder in the same taxable year or
thereafter. The election is made on the holder's federal income tax return
for the year in which the debt instrument is acquired and is irrevocable
except with the approval of the Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Certificate and reduced by
amounts included in the stated redemption price at maturity of the Regular
Certificate that were previously received by the seller, by any amortized
premium and by previously recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Such
gain will be treated as ordinary income (i) if a Regular Certificate is held
as part of a "conversion transaction" as defined in Code Section 1258(c), up
to the amount of
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interest that would have accrued on the Regular Certificateholder's net
investment in the conversion transaction at 120% of the appropriate
applicable Federal rate under Code Section 1274(d) in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior distribution of property that was
held as a part of such transaction, (ii) in the case of a non-corporate
taxpayer, to the extent such taxpayer has made an election under Code Section
163(d)(4) to have net capital gains taxed as investment income at ordinary
rates, or (iii) to the extent that such gain does not exceed the excess, if
any, of (a) the amount that would have been includible in the gross income of
the holder if its yield on such Regular Certificate were 110% of the
applicable Federal rate as of the date of purchase, over (b) the amount of
income actually includible in the gross income of such holder with respect to
the Regular Certificate. In addition, gain or loss recognized from the sale
of a Regular Certificate by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to Code Section 582(c). Capital
gains of certain non-corporate taxpayers generally are subject to a lower
maximum tax rate (28%) than ordinary income of such taxpayers (39.6%) for
property held for more than one year but not more than 18 months, and a still
lower maximum rate (20%) for property held for more than 18 months. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
Treatment of Losses
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the Mortgage Loans allocable to a particular
class of Regular Certificates, except to the extent it can be established
that such losses are uncollectible. Accordingly, the holder of a Regular
Certificate may have income, or may incur a diminution in cash flow as a
result of a default or delinquency, but may not be able to take a deduction
(subject to the discussion below) for the corresponding loss until a
subsequent taxable year. In this regard, investors are cautioned that while
they may generally cease to accrue interest income if it reasonably appears
that the interest will be uncollectible, the Internal Revenue Service may
take the position that original issue discount must continue to be accrued in
spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts
are applicable, it appears that holders of Regular Certificates that are
corporations or that otherwise hold the Regular Certificates in connection
with a trade or business should in general be allowed to deduct as an
ordinary loss any such loss sustained during the taxable year on account of
any such Regular Certificates becoming wholly or partially worthless, and
that, in general, holders of Regular Certificates that are not corporations
and do not hold the Regular Certificates in connection with a trade or
business will be allowed to deduct as a short-term capital loss any loss with
respect to principal sustained during the taxable year on account of a
portion of any class or subclass of such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate holders
of Regular Certificates should be allowed a bad debt deduction at such time
as the principal balance of any class or subclass of such Regular
Certificates is reduced to reflect losses resulting from any liquidated
Mortgage Loans. The Service, however, could take the position that
non-corporate holders will be allowed a bad debt deduction to reflect such
losses only after all Mortgage Loans remaining in the Trust Fund have been
liquidated or such class of Regular Certificates has been otherwise retired.
The Service could also assert that losses on the Regular Certificates are
deductible based on some other method that may defer such deductions for all
holders, such as reducing future cash flow for purposes of computing original
issue discount. This may have the effect of creating "negative" original
issue discount which would be deductible only against future positive
original issue discount or otherwise upon termination of the Class. Holders
of Regular Certificates are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with
respect to such Regular Certificates. While losses attributable to interest
previously reported as income should be deductible as ordinary losses by both
corporate and non-corporate holders, the Internal Revenue Service may take
the position that losses attributable to accrued original issue discount may
only be deducted as short-term capital losses by non-corporate holders not
engaged in a trade or business. Special loss rules are applicable to banks
and thrift institutions, including rules regarding reserves for bad debts.
Such taxpayers are advised to consult their tax advisors regarding the
treatment of losses on Regular Certificates.
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TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will
be includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"),
and will not be taxed separately to the REMIC Pool. The daily portions of
REMIC taxable income or net loss of a Residual Certificateholder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Certificateholders in proportion to their
respective holdings of Residual Certificates in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the
taxable income of an individual using the accrual method of accounting,
except that (i) the limitations on deductibility of investment interest
expense and expenses for the production of income do not apply, (ii) all bad
loans will be deductible as business bad debts and (iii) the limitation on
the deductibility of interest and expenses related to tax-exempt income will
apply. The REMIC Pool's gross income includes interest, original issue
discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans, plus income
from amortization of issue premium, if any, on the Regular Certificates, plus
income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
Regular Certificates. The REMIC Pool's deductions include interest and
original issue discount expense on the Regular Certificates, servicing fees
on the Mortgage Loans, other administrative expenses of the REMIC Pool and
realized losses on the Mortgage Loans. The requirement that Residual
Certificateholders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no Certificates of any class
of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship
between the timing of recognition of interest and original issue discount or
market discount income or amortization of premium with respect to the
Mortgage Loans, on the one hand, and the timing of deductions for interest
(including original issue discount) on the Regular Certificates or income
from amortization of issue premium on the Regular Certificates, on the other
hand. In the event that an interest in the Mortgage Loans is acquired by the
REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the Residual Certificateholder may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of
principal on the Regular Certificates and (ii) the discount on the Mortgage
Loans which is includible in income may exceed the deduction allowed upon
such distributions on those Regular Certificates on account of any unaccrued
original issue discount relating to those Regular Certificates. When there is
more than one class of Regular Certificates that distribute principal
sequentially, this mismatching of income and deductions is particularly
likely to occur in the early years following issuance of the Regular
Certificates when distributions in reduction of principal are being made in
respect of earlier classes of Regular Certificates to the extent that such
classes are not issued with substantial discount. If taxable income
attributable to such a mismatching is realized, in general, losses would be
allowed in later years as distributions on the later classes of Regular
Certificates are made. Taxable income may also be greater in earlier years
than in later years as a result of the fact that interest expense deductions,
expressed as a percentage of the outstanding principal amount of such a
series of Regular Certificates, may increase over time as distributions in
reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount
of that loan. Consequently, Residual Certificateholders must have sufficient
other sources of cash to pay any federal, state or local income taxes due as
a result of such mismatching or unrelated deductions against which to offset
such income, subject to the discussion of "excess inclusions" below under
"Limitations on Offset or Exemption of REMIC Income". The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a series of Certificates, may have a significant adverse
effect upon the Residual Certificateholder's after-tax rate of return. In
addition, a Residual Certificateholder's taxable
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income during certain periods may exceed the income reflected by such
Residual Certificateholder for such periods in accordance with generally
accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in
Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into
account by the Residual Certificateholder is limited to the adjusted basis of
the Residual Certificate as of the close of the quarter (or time of
disposition of the Residual Certificate if earlier), determined without
taking into account the net loss for the quarter. The initial adjusted basis
of a purchaser of a Residual Certificate is the amount paid for such Residual
Certificate. Such adjusted basis will be increased by the amount of taxable
income of the REMIC Pool reportable by the Residual Certificateholder and
will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool
reportable by the Residual Certificateholder. Any loss that is disallowed on
account of this limitation may be carried over indefinitely with respect to
the Residual Certificateholder as to whom such loss was disallowed and may be
used by such Residual Certificateholder only to offset any income generated
by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, that taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration
of the income of Residual Certificateholders described above under "Taxation
of REMIC Income", the period of time over which such issue price is
effectively amortized may be longer than the economic life of the Residual
Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a
residual interest as zero rather than such negative amount for purposes of
determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Service may provide future guidance on the proper
tax treatment of payments made by a transferor of such a residual interest to
induce the transferee to acquire the interest, and Residual
Certificateholders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans, the Residual Certificateholder will not recover a portion of
such basis until termination of the REMIC Pool unless future Treasury
regulations provide for periodic adjustments to the REMIC income otherwise
reportable by such holder. The REMIC Regulations currently in effect do not
so provide. See "Treatment of Certain Items of REMIC Income and
Expense--Market Discount" below regarding the basis of Mortgage Loans to the
REMIC Pool and "Sale or Exchange of a Residual Certificate" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Treatment of Certain Items of REMIC Income and Expense
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are
subject to differing interpretations. The Depositor makes no representation
as to the specific method that it will use for reporting income with respect
to the Mortgage Loans and expenses with respect to the Regular Certificates,
and different methods could result in different timing of reporting of
taxable income or net loss to Residual Certificateholders or differences in
capital gain versus ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's
deductions for original issue discount and income from amortization of issue
premium will be determined in the same manner as
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original issue discount income on Regular Certificates as described above
under "Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates", without regard to the de minimis rule
described therein, and "--Premium".
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income
to the REMIC Pool and will be treated in a manner similar to the Deferred
Interest that accrues with respect to Regular Certificates as described above
under "Taxation of Regular Certificates--Deferred Interest".
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool
allocable to such Mortgage Loans is exceeded by their unpaid principal
balances. The REMIC Pool's basis in such Mortgage Loans is generally the fair
market value of the Mortgage Loans immediately after the transfer thereof to
the REMIC Pool. The REMIC Regulations provide that such basis is equal in the
aggregate to the issue prices of all regular and residual interests in the
REMIC Pool (or the fair market value thereof at the Closing Date, in the case
of a retained Class). In respect of Mortgage Loans that have market discount
to which Code Section 1276 applies, the accrued portion of such market
discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under "Taxation of Regular
Certificates--Market Discount".
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices (or the fair market value of retained Classes) of the
regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under "Taxation of Regular Certificates--Premium", a REMIC Pool that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect
under Code Section 171 to amortize premium on whole mortgage loans or
mortgage loans underlying MBS that were originated after September 27, 1985
or MBS that are REMIC regular interests under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. To the extent
that the mortgagors with respect to the Mortgage Loans are individuals, Code
Section 171 will not be available for premium on Mortgage Loans (including
underlying mortgage loans) originated on or prior to September 27, 1985.
Premium with respect to such Mortgage Loans may be deductible in accordance
with a reasonable method regularly employed by the holder thereof. The
allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Service may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject
to special treatment. That portion, referred to as the "excess inclusion", is
equal to the excess of REMIC taxable income for the calendar quarter
allocable to a Residual Certificate over the daily accruals for such
quarterly period of (i) 120% of the long-term applicable Federal rate that
would have applied to the Residual Certificate (if it were a debt instrument)
on the Startup Day under Code Section 1274(d), multiplied by (ii) the
adjusted issue price of such Residual Certificate at the beginning of such
quarterly period. For this purpose, the adjusted issue price of a Residual
Certificate at the beginning of a quarter is the issue price of the Residual
Certificate, plus the amount of such daily accruals of REMIC income described
in this paragraph for all prior quarters, decreased by any distributions made
with respect to such Residual Certificate prior to the beginning of such
quarterly period. Accordingly, the portion of the REMIC Pool's taxable income
that will be treated as excess inclusions will be a larger portion of such
income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on
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such Residual Certificateholder's return. However, net operating loss
carryovers are determined without regard to excess inclusion income. Further,
if the Residual Certificateholder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual
Certificateholder's excess inclusions will be treated as unrelated business
taxable income of such Residual Certificateholder for purposes of Code
Section 511. In addition, REMIC taxable income is subject to 30% withholding
tax with respect to certain persons who are not U.S. Persons (as defined
below under "Tax-Related Restrictions on Transfer of Residual
Certificates--Foreign Investors"), and the portion thereof attributable to
excess inclusions is not eligible for any reduction in the rate of
withholding tax (by treaty or otherwise). See "Taxation of Certain Foreign
Investors--Residual Certificates" below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a
portion (allocated under Treasury regulations yet to be issued) of dividends
paid by the real estate investment trust or a regulated investment company
could not be offset by net operating losses of its shareholders, would
constitute unrelated business taxable income for tax-exempt shareholders, and
would be ineligible for reduction of withholding to certain persons who are
not U.S. Persons. The SBJPA of 1996 has eliminated the special rule
permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess
inclusion income from Residual Certificates that have "significant value"
within the meaning of the REMIC Regulations, effective for taxable years
beginning after December 31, 1995, except with respect to Residual
Certificates continuously held by thrift institutions since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Certificateholder. First, alternative minimum taxable income for a
Residual Certificateholder is determined without regard to the special rule,
discussed above, that taxable income cannot be less than excess inclusions.
Second, a Residual Certificateholder's alternative minimum taxable income for
a taxable year cannot be less than the excess inclusions for the year. Third,
the amount of any alternative minimum tax net operating loss deduction must
be computed without regard to any excess inclusions. These rules are
effective for taxable years beginning after December 31, 1996, unless a
Residual Certificateholder elects to have such rules apply only to taxable
years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as
defined below), a tax would be imposed in an amount equal to the product of
(i) the present value of the total anticipated excess inclusions with respect
to such Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
REMIC Regulations provide that the anticipated excess inclusions are based on
actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals
the applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. Such a tax generally would be imposed on
the transferor of the Residual Certificate, except that where such transfer
is through an agent (including a broker, nominee or other middleman) for a
Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Certificate would in no event be liable
for such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified
Organization and, as of the time of the transfer, the transferor does not
have actual knowledge that such affidavit is false. The tax also may be
waived by the Treasury Department if the Disqualified Organization promptly
disposes of the residual interest and the transferor pays income tax at the
highest corporate rate on the excess inclusions for the period the Residual
Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are
allocable to the interest in the Pass-Through Entity during the period such
interest is held by such Disqualified Organization, and (ii) the highest
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marginal federal corporate income tax rate. Such tax would be deductible from
the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received
an affidavit from such record holder that it is not a Disqualified
Organization or stating such holder's taxpayer identification number and,
during the period such person is the record holder of the Residual
Certificate, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the
electing large partnership are treated as held by Disqualified Organizations
for purposes of the tax imposed upon a Pass-Through Entity by section 860E(c)
of the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if
all of its activities are subject to tax and a majority of its board of
directors is not selected by any such governmental entity), any cooperative
organization furnishing electric energy or providing telephone service to
persons in rural areas as described in Code Section 1381(a)(2)(C), and any
organization (other than a farmers' cooperative described in Code Section
521) that is exempt from taxation under the Code unless such organization is
subject to the tax on unrelated business income imposed by Code Section 511,
(ii) "Pass-Through Entity" means any regulated investment company, real
estate investment trust, common trust fund, partnership, trust or estate and
certain corporations operating on a cooperative basis. Except as may be
provided in Treasury regulations, any person holding an interest in a
Pass-Through Entity as a nominee for another will, with respect to such
interest, be treated as a Pass-Through Entity, and (iii) an "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code.
The Pooling Agreement with respect to a series of Certificates will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred unless (i) the proposed transferee provides to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual
Certificate, is not a Disqualified Organization and is not purchasing such
Residual Certificates on behalf of a Disqualified Organization (i.e., as a
broker, nominee or middleman thereof), and (ii) the transferor provides a
statement in writing to the Depositor and the Trustee that it has no actual
knowledge that such affidavit is false. Moreover, the Pooling Agreement will
provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Certificate with respect to a series will
bear a legend referring to such restrictions on transfer, and each Residual
Certificateholder will be deemed to have agreed, as a condition of ownership
thereof, to any amendments to the related Pooling Agreement required under
the Code or applicable Treasury regulations to effectuate the foregoing
restrictions. Information necessary to compute an applicable excise tax must
be furnished to the Service and to the requesting party within 60 days of the
request, and the Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor
would continue to be treated as the owner of the Residual Certificates and
thus would continue to be subject to tax on its allocable portion of the net
income of the REMIC Pool. Under the REMIC Regulations, a transfer of a
"noneconomic residual interest" (as defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a U.S.
Person, as defined below under "Foreign Investors") is disregarded for all
federal income tax purposes if a significant purpose of the transferor is to
impede the assessment or collection of tax. A residual interest in a REMIC
(including a residual interest with a positive value at issuance) is a
"noneconomic residual interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest
at least equals the product of the present value of the
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anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the
REMIC at or after the time at which taxes accrue on the anticipated excess
inclusions in an amount sufficient to satisfy the accrued taxes. The
anticipated excess inclusions and the present value rate are determined in
the same manner as set forth above under "Disqualified Organizations". The
REMIC Regulations explain that a significant purpose to impede the assessment
or collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came due in the
future, and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of cash flows generated by the
interest and that the transferee intends to pay taxes associated with holding
the residual interest as they become due. The Pooling Agreement with respect
to each series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of
the affidavit described above under the heading "Disqualified Organizations".
The transferor must have no actual knowledge or reason to know that such
statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a "U.S. Person" (as defined below),
unless such transferee's income is effectively connected with the conduct of
a trade or business within the United States. A Residual Certificate is
deemed to have tax avoidance potential unless, at the time of the transfer,
(i) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and (ii) the transferor
reasonably expects that the transferee will receive sufficient distributions
from the REMIC Pool at or after the time at which the excess inclusions
accrue and prior to the end of the next succeeding taxable year for the
accumulated withholding tax liability to be paid. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will
be disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (except to the extent provided in applicable Treasury
regulations) or other entity created or organized in or under the laws of the
United States or any political subdivision thereof, an estate that is subject
to United States federal income tax regardless of the source of its income or
a trust if a court within the United States is able to exercise primary
supervision over the administration of such trust, and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust (or, to the extent provided in applicable Treasury regulations,
certain trusts in existence on August 20, 1996 which are eligible to elect to
be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates--Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to it from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in such Residual
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Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii)
in the case of a non-corporate taxpayer, to the extent such taxpayer has made
an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of
Code Section 1091 will apply to dispositions of Residual Certificates where
the seller of the Residual Certificate, during the period beginning six
months before the sale or disposition of the Residual Certificate and ending
six months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Service has issued regulations (the "Mark to Market Regulations")
under Code Section 475 relating to the requirement that a securities dealer
mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities of a dealer, except to the extent that
the dealer has specifically identified a security as held for investment. The
Mark to Market Regulations provide that, for purposes of this mark-to-market
requirement, a Residual Certificate is not treated as a security and thus may
not be marked to market. The Mark to Market Regulations apply to all Residual
Certificates acquired on or after January 4, 1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss
includible in the federal income tax returns of Residual Certificateholders,
but rather will be taxed directly to the REMIC Pool at a 100% rate.
Prohibited transactions generally include (i) the disposition of a qualified
mortgage other than for (a) substitution within two years of the Startup Day
for a defective (including a defaulted) obligation (or repurchase in lieu of
substitution of a defective (including a defaulted) obligation at any time)
or for any qualified mortgage within three months of the Startup Day, (b)
foreclosure, default or imminent default of a qualified mortgage, (c)
bankruptcy or insolvency of the REMIC Pool or (d) a qualified (complete)
liquidation, (ii) the receipt of income from assets that are not the type of
mortgages or investments that the REMIC Pool is permitted to hold, (iii) the
receipt of compensation for services or (iv) the receipt of gain from
disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction
to sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional termination to save administrative costs when no more
than a small percentage of the Certificates is outstanding). The REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or due-on-encumbrance clause or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible
adjustable rate Mortgage Loan.
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Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Certificateholder, (iii) in the nature of a guarantee,
(iv) made to facilitate a qualified liquidation or clean-up call and (v) as
otherwise permitted in Treasury regulations yet to be issued.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property", determined by
reference to the rules applicable to real estate investment trusts.
Generally, property acquired by deed in lieu of foreclosure would be treated
as "foreclosure property" for a period ending with the third calendar year
following the year of acquisition of such property, with a possible
extension. Net income from foreclosure property generally means gain from the
sale of a foreclosure property that is inventory property and gross income
from foreclosure property other than qualifying rents and other qualifying
income for a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material
state income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on the date of the adoption of the plan of liquidation, the REMIC
Pool will not be subject to the prohibited transaction rules on the sale of
its assets, provided that the REMIC Pool credits or distributes in
liquidation all of the sale proceeds plus its cash (other than amounts
retained to meet claims) to holders of Regular Certificates and Residual
Certificateholders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
The Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool will be subject
to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction or
credit in a unified administrative proceeding. The Residual Certificateholder
owning the largest percentage interest in the Residual Certificates will be
obligated to act as "tax matters person", as defined in applicable Treasury
regulations, with respect to the REMIC Pool. Each Residual Certificateholder
will be deemed, by acceptance of such Residual Certificates, to have agreed
(i) to the appointment of the tax matters person as provided in the preceding
sentence and (ii) to the irrevocable designation of the Master Servicer as
agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a
taxable year of an individual taxpayer will be reduced by the lesser of (i)
3% of the excess, if any, of adjusted gross income over $100,000 ($50,000 in
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the case of a married individual filing a separate return) (subject to
adjustments for inflation) or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such
deductions may include deductions under Code Section 212 for the servicing
fee and all administrative and other expenses relating to the REMIC Pool, or
any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of
computing the alternative minimum tax, and may cause such investors to be
subject to significant additional tax liability. Temporary Treasury
regulations provide that the additional gross income and corresponding amount
of expenses generally are to be allocated entirely to the holders of Residual
Certificates in the case of a REMIC Pool that would not qualify as a fixed
investment trust in the absence of a REMIC election. However, such additional
gross income and limitation on deductions will apply to the allocable portion
of such expenses to holders of Regular Certificates, as well as holders of
Residual Certificates, where such Regular Certificates are issued in a manner
that is similar to pass-through certificates in a fixed investment trust. In
general, such allocable portion will be determined based on the ratio that a
REMIC Certificateholder's income, determined on a daily basis, bears to the
income of all holders of Regular Certificates and Residual Certificates with
respect to a REMIC Pool. As a result, individuals, estates or trusts holding
REMIC Certificates (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Certificates that are issued in a single Class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the
related period on Residual Certificates. Unless otherwise indicated in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or
other Non-U.S. Persons (as defined below), will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that such Non-U.S. Person (i) is not a "10-percent
shareholder" within the meaning of Code Section 871(h)(3)(B) or a controlled
foreign corporation described in Code Section 881(c)(3)(C) and (ii) provides
the Trustee, or the person who would otherwise be required to withhold tax
from such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial
owner and stating, among other things, that the beneficial owner of the
Regular Certificate is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless
reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Regular Certificate is effectively connected with the conduct
of a trade or business within the United States by such Non-U.S. Person. In
the latter case, such Non-U.S. Person will be subject to United States
federal income tax at regular rates. Prepayment Premiums distributable to
Regular Certificateholders who are Non-U.S. Persons may be subject to 30%
United States withholding tax. Investors who are Non-U.S. Persons should
consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Certificate. The term "Non-U.S. Person" means any
person who is not a U.S. Person.
The IRS recently issued final regulations (the "New Regulations") which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 1999, although valid withholding certificates that are held on
December 31, 1998, remain valid until the earlier of December 31, 1999 or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular
Certificates held by a foreign partnership, that (x) the certification
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply
in the case of
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tiered partnerships. Non-U.S. Persons should consult their own tax advisors
concerning the application of the certification requirements in the New
Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts
paid to Residual Certificateholders who are Non-U.S. Persons are treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Certificateholders may qualify as "portfolio interest", subject to
the conditions described in "Regular Certificates" above, but only to the
extent that (i) the Mortgage Loans (including mortgage loans underlying MBS)
were issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of
assets therein (as to which a separate REMIC election will be made), to which
the Residual Certificate relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
whole mortgage loans will not be, but MBS and regular interests in another
REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent
of that portion of REMIC taxable income that constitutes an "excess
inclusion". See "Taxation of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income". If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with
the conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States
federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account
for purposes of withholding only when paid or otherwise distributed (or when
the Residual Certificate is disposed of) under rules similar to withholding
upon disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential". Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to
a "backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Service or
allowed as a credit against the Regular Certificateholder's federal income
tax liability. The New Regulations change certain of the rules relating to
certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and
information reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals,
estates, non-exempt and non-charitable trusts, and partnerships who are
either holders of record of Regular Certificates or beneficial owners who own
Regular Certificates through a broker or middleman as nominee. All brokers,
nominees and all other non-exempt holders of record of Regular Certificates
(including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies,
common trust funds, thrift institutions and charitable trusts) may request
such information for any calendar quarter by telephone or in writing by
contacting the person designated in Service Publication 938 with respect to a
particular series of Regular Certificates. Holders through nominees must
request such information from the nominee.
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The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice
to Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool
to each Residual Certificateholder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates".
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FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES AS
TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates
that are not designated as "Stripped Certificates", as described below, as a
REMIC (Certificates of such a series hereinafter referred to as "Standard
Certificates"), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association
taxable as a corporation or a "taxable mortgage pool" within the meaning of
Code Section 7701(i). Where there is no fixed retained yield with respect to
the Mortgage Loans underlying the Standard Certificates, the holder of each
such Standard Certificate (a "Standard Certificateholder") in such series
will be treated as the owner of a pro rata undivided interest in the ordinary
income and corpus portions of the Trust Fund represented by its Standard
Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "Recharacterization of Servicing Fees". Accordingly, the holder
of a Standard Certificate of a particular series will be required to report
on its federal income tax return its pro rata share of the entire income from
the Mortgage Loans represented by its Standard Certificate, including
interest at the coupon rate on such Mortgage Loans, original issue discount
(if any), prepayment fees, assumption fees, and late payment charges received
by the Master Servicer, in accordance with such Standard Certificateholder's
method of accounting. A Standard Certificateholder generally will be able to
deduct its share of the servicing fee and all administrative and other
expenses of the Trust Fund in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Fund. However, investors who are individuals, estates or trusts
who own Standard Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the servicing fee and all such administrative and other
expenses of the Trust Fund, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income.
In addition, Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over
$100,000 ($50,000 in the case of a married individual filing a separate
return) (subject to adjustments for inflation), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. As a result, such
investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect
to interest at the pass-through rate on such Standard Certificates. In
addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where the servicing fee is in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees",
respectively.
Tax Status
Standard Certificates will have the following status for federal income
tax purposes:
1. A Standard Certificate owned by a "domestic building and loan
association" within the meaning of Code Section 7701(a)(19) will be
considered to represent "loans . . . secured by an interest in real property
which is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Certificate is of the type described in
such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust Fund
consist of qualified assets, and interest income on such assets will be
considered "interest on obligations secured by mortgages on real property" to
such extent within the meaning of Code Section 856(c)(3)(B).
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3. A Standard Certificate owned by a REMIC will be considered to represent
an "obligation . . . which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent that
the assets of the related Trust Fund consist of "qualified mortgages" within
the meaning of Code Section 860G(a)(3).
Premium and Discount
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under "Certain
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Treatment of Certain Items of REMIC Income and
Expense--Premium".
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans
as to which the conditions for the application of those sections are met.
Rules regarding periodic inclusion of original issue discount income are
applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated
after July 1, 1982, and mortgages of individuals originated after March 2,
1984. Under the OID Regulations, such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount
greater than a statutory de minimis exception, including a payment of points
currently deductible by the borrower under applicable Code provisions or,
under certain circumstances, by the presence of "teaser rates" on the
Mortgage Loans.
Original issue discount must generally be reported as ordinary gross
income as it accrues under a constant interest method that takes into account
the compounding of interest, in advance of the cash attributable to such
income. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than
the sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Loans acquired by a Standard Certificateholder are purchased at a price equal
to the then unpaid principal amount of such Mortgage Loans, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of
those sections are met. Market discount on the Mortgage Loans will be
determined and will be reported as ordinary income generally in the manner
described above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Market Discount", except that
the ratable accrual methods described therein will not apply and it is
unclear whether a Prepayment Assumption would apply. Rather, the holder will
accrue market discount pro rata over the life of the Mortgage Loans, unless
the constant yield method is elected. Unless indicated otherwise in the
applicable Prospectus Supplement, no prepayment assumption will be assumed
for purposes of such accrual.
Recharacterization of Servicing Fees
If the servicing fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there
are no authoritative guidelines for federal income tax purposes as to either
the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Standard Certificate, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan
basis. If a loan-by-loan basis is appropriate, the likelihood that such
amount would exceed reasonable servicing compensation as to
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some of the Mortgage Loans would be increased. Service guidance indicates
that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Service's approach is upheld, a servicer who receives
a servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage
Loans. Under the rules of Code Section 1286, the separation of ownership of
the right to receive some or all of the interest payments on an obligation
from the right to receive some or all of the principal payments on the
obligation would result in treatment of such Mortgage Loans as "stripped
coupons" and "stripped bonds". Subject to the de minimis rule discussed below
under "--Stripped Certificates", each stripped bond or stripped coupon could
be considered for this purpose as a non-interest bearing obligation issued on
the date of issue of the Standard Certificates, and the original issue
discount rules of the Code would apply to the holder thereof. While Standard
Certificateholders would still be treated as owners of beneficial interests
in a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Loans the ownership
of which is attributed to the Master Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations
treat such an arrangement as a fixed investment trust, since the multiple
classes of trust interests should be treated as merely facilitating direct
investments in the trust assets and the existence of multiple classes of
ownership interests is incidental to that purpose. In general, such a
recharacterization should not have any significant effect upon the timing or
amount of income reported by a Standard Certificateholder, except that the
income reported by a cash method holder may be slightly accelerated. See
"Stripped Certificates" below for a further description of the federal income
tax treatment of stripped bonds and stripped coupons.
Sale or Exchange of Standard Certificates
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the
Mortgage Loans and the other assets represented by the Standard Certificate.
In general, the aggregate adjusted basis will equal the Standard
Certificateholder's cost for the Standard Certificate, increased by the
amount of any income previously reported with respect to the Standard
Certificate and decreased by the amount of any losses previously reported
with respect to the Standard Certificate and the amount of any distributions
received thereon. Except as provided above with respect to market discount on
any Mortgage Loans, and except for certain financial institutions subject to
the provisions of Code Section 582(c), any such gain or loss would be capital
gain or loss if the Standard Certificate was held as a capital asset.
However, gain on the sale of a Standard Certificate will be treated as
ordinary income (i) if a Standard Certificate is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount
of interest that would have accrued on the Standard Certificateholder's net
investment in the conversion transaction at 120% of the appropriate
applicable Federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with
respect to any prior disposition of property that was held as a part of such
transaction or (ii) in the case of a non-corporate taxpayer, to the extent
such taxpayer has made an election under Code Section 163(d)(4) to have net
capital gains taxed as investment income at ordinary income rates. Capital
gains of certain non-corporate taxpayers generally are subject to a lower
maximum tax rate (28%) than ordinary income of such taxpayers (39.6%) for
property held for more than one year but not more than 18 months, and a still
lower maximum rate (20%) for property held for more than 18 months. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest
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payments results in the creation of "stripped bonds" with respect to
principal payments and "stripped coupons" with respect to interest payments.
For purposes of this discussion, Certificates that are subject to those rules
will be referred to as "Stripped Certificates". Stripped Certificates include
"Stripped Interest Certificates" and "Stripped Principal Certificates" (as
defined in this Prospectus) as to which no REMIC election is made.
The Certificates will be subject to those rules if (i) the Depositor or
any of its affiliates retains (for its own account or for purposes of
resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Loans, (ii) the Master
Servicer is treated as having an ownership interest in the Mortgage Loans to
the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
"Standard Certificates--Recharacterization of Servicing Fees" above) and
(iii) Certificates are issued in two or more classes or subclasses
representing the right to non-pro-rata percentages of the interest and
principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of
the principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under "Standard Certificates--Recharacterization of Servicing Fees". Although
not free from doubt, for purposes of reporting to Stripped
Certificateholders, the servicing fees will be allocated to the Stripped
Certificates in proportion to the respective entitlements to distributions of
each class (or subclass) of Stripped Certificates for the related period or
periods. The holder of a Stripped Certificate generally will be entitled to a
deduction each year in respect of the servicing fees, as described above
under "Standard Certificates--General", subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the
Depositor has been advised by counsel that (i) the Trust Fund will be treated
as a grantor trust under subpart E, Part 1 of subchapter J of the Code and
not as an association taxable as a corporation or a "taxable mortgage pool"
within the meaning of Code Section 7701(i), and (ii) each Stripped
Certificate should be treated as a single installment obligation for purposes
of calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code
Sections 1272 through 1275, and the OID Regulations. While under Code Section
1286 computations with respect to Stripped Certificates arguably should be
made in one of the ways described below under "Taxation of Stripped
Certificates--Possible Alternative Characterizations," the OID Regulations
state, in general, that two or more debt instruments issued by a single
issuer to a single investor in a single transaction should be treated as a
single debt instrument for original issue discount purposes. The Pooling
Agreement requires that the Trustee make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents
a right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment suggests that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations.
Further, these final regulations provide that the purchaser of such a
Stripped Certificate will be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under
the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be
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reportable as described under "Certain Federal Income Tax Consequences for
REMIC Certificates--Taxation of Regular Certificates--Market Discount,"
without regard to the de minimis rule therein, assuming that a prepayment
assumption is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt,
counsel has advised the Depositor that Stripped Certificates owned by
applicable holders should be considered to represent "real estate assets"
within the meaning of Code Section 856(c)(5)(A), "obligation[s] principally
secured by an interest in real property" within the meaning of Code Section
860G(a)(3)(A), and "loans . . . secured by an interest in real property which
is . . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "General", each
Stripped Certificate will be considered to have been issued at an original
issue discount for federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Based in part on the OID Regulations and
the amendments to the original issue discount sections of the Code made by
the 1986 Act, the amount of original issue discount required to be included
in the income of a holder of a Stripped Certificate (referred to in this
discussion as a "Stripped Certificateholder") in any taxable year likely will
be computed generally as described above under "Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount" and "--Variable Rate Regular
Certificates". However, with the apparent exception of a Stripped Certificate
qualifying as a market discount obligation, as described above under
"General", the issue price of a Stripped Certificate will be the purchase
price paid by each holder thereof, and the stated redemption price at
maturity will include the aggregate amount of the payments, other than
qualified stated interest to be made on the Stripped Certificate to such
Stripped Certificateholder, presumably under the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition
of original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each
Mortgage Loan represented by such Stripped Certificateholder's Stripped
Certificate. While the matter is not free from doubt, the holder of a
Stripped Certificate should be entitled in the year that it becomes certain
(assuming no further prepayments) that the holder will not recover a portion
of its adjusted basis in such Stripped Certificate to recognize an ordinary
loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not
be made if the Mortgage Loans are prepaid could lead to the interpretation
that such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead
to different timing of income inclusion that would be the case under the OID
Regulations. Furthermore, application of such principles could lead to the
characterization of gain on the sale of contingent interest Stripped
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate tax treatment of Stripped Certificates.
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Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Certain Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Sale or Exchange of Regular
Certificates". To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Certificates, such
subsequent purchaser will be required for federal income tax purposes to
accrue and report such excess as if it were original issue discount in the
manner described above. It is not clear for this purpose whether the assumed
prepayment rate that is to be used in the case of a Stripped
Certificateholder other than an original Stripped Certificateholder should be
the Prepayment Assumption or a new rate based on the circumstances at the
date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an
investor purchases more than one class of Stripped Certificates, it is
currently unclear whether for federal income tax purposes such classes of
Stripped Certificates should be treated separately or aggregated for purposes
of the rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more classes
of Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations
less likely to be applicable. The preamble to those regulations states that
they are premised on the assumption that an aggregation approach is
appropriate for determining whether original issue discount on a stripped
bond or stripped coupon is de minimis, and solicits comments on appropriate
rules for aggregating stripped bonds and stripped coupons under Code Section
1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income
tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable
to enable such Certificateholders to prepare their federal income tax
returns. Such information will include the amount of original issue discount
accrued on Certificates held by persons other than Certificateholders
exempted from the reporting requirements. The amounts required to be reported
by the Trustee may not be equal to the proper amount of original issue
discount required to be reported as taxable income by a Certificateholder,
other than an original Certificateholder that purchased at the issue price.
In particular, in the case of Stripped Certificates, unless provided
otherwise in the applicable Prospectus Supplement, such reporting will be
based upon a representative initial offering price of each class of Stripped
Certificates. The Trustee will also file such original issue discount
information with the Service. If a Certificateholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Certificateholder has not reported all interest and
dividend income required
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to be shown on his federal income tax return, 31% backup withholding may be
required in respect of any reportable payments, as described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Backup
Withholding".
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue
discount paid by the person required to withhold tax under Code Section 1441
or 1442 to nonresident aliens, foreign corporations, or other Non-U.S.
Persons generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Standard Certificateholder
or Stripped Certificateholder on original issue discount recognized by the
Standard Certificateholder or Stripped Certificateholders on the sale or
exchange of such a Certificate also will be subject to federal income tax at
the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under
"Certain Federal Income Tax Consequences for REMIC Certificates--Taxation of
Certain Foreign Investors--Regular Certificates".
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the
state and local tax consequences of the acquisition, ownership, and
disposition of the Offered Certificates. State tax law may differ
substantially from the corresponding federal law, and the discussion above
does not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their tax
advisors with respect to the various tax consequences of investments in the
Offered Certificates.
CERTAIN ERISA CONSIDERATIONS
GENERAL
Sections 404 and 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), impose certain fiduciary requirements and
prohibited transaction restrictions on employee pension and welfare benefit
plans subject to ERISA ("ERISA Plans") and on certain other retirement plans
and arrangements, including individual retirement accounts and annuities,
Keogh plans and bank collective investment funds and insurance company
general and separate accounts in which such ERISA Plans are invested. Section
4975 of the Code imposes essentially the same prohibited transaction
restrictions on tax-qualified retirement plans described in Section 401(a) of
the Code and on Individual Retirement Accounts described in Section 408 of
the Code (collectively, "Tax Favored Plans").
Certain employee benefit plans, such as governmental plans (as defined in
ERISA Section 3(32)), and, if no election has been made under Section 410(d)
of the Code, church plans (as defined in Section 3(33) of ERISA) are not
subject to ERISA requirements. Accordingly, assets of such plans may be
invested in Offered Certificates without regard to the ERISA considerations
described below, subject to the provisions of other applicable federal and
state law. Any such plan which is qualified and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons ("parties in interest" within the meaning of ERISA and
"disqualified persons" within the meaning of the Code; collectively, "Parties
in Interest") who have certain specified relationships to the Plan, unless a
statutory
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or administrative exemption is available with respect to any such
transaction. Pursuant to Section 4975 of the Code, certain Parties in
Interest to a prohibited transaction may be subject to a nondeductible 15%
per annum excise tax on the amount involved in such transaction, which excise
tax increases to 100% if the Party in Interest involved in the transaction
does not correct such transaction during the taxable period. In addition,
such Party in Interest may be subject to a penalty imposed pursuant to
Section 502(i) of ERISA. The United States Department of Labor ("DOL") and
participants, beneficiaries and fiduciaries of ERISA Plans may generally
enforce violations of ERISA, including the prohibited transaction provisions.
If the prohibited transaction amounts to a breach of fiduciary responsibility
under ERISA, a 20% civil penalty may be imposed on the fiduciary or other
person participating in the breach.
PLAN ASSET REGULATIONS
Certain transactions involving the Trust Fund, including a Plan's
investment in Offered Certificates, might be deemed to constitute prohibited
transactions under ERISA and the Code if the underlying Mortgage Assets and
other assets included in a related Trust Fund are deemed to be assets of such
Plan. Section 2510.3-101 of the DOL regulations (the "Plan Asset
Regulations") defines the term "Plan Assets" for purposes of applying the
general fiduciary responsibility provisions of ERISA and the prohibited
transaction provisions of ERISA and the Code. Under the Plan Asset
Regulations, generally, when a Plan acquires an equity interest in an entity,
the Plan's assets include both such equity interest and an undivided interest
in each of the underlying assets of the entity, unless certain exceptions not
applicable here apply, or unless the equity participation in the entity by
"benefit plan investors" (i.e., Plans and certain employee benefit plans not
subject to ERISA) is not "significant", both as defined therein. For this
purpose, in general, equity participation by benefit plan investors will be
"significant" on any date if 25% or more of the value of any class of equity
interests in the entity is held by benefit plan investors. Equity
participation in a Trust Fund will be significant on any date if immediately
after the most recent acquisition of any Certificate, 25% or more of any
class of Certificates is held by benefit plan investors.
The prohibited transaction provisions of Section 406 of ERISA and Section
4975 of the Code may apply to a Trust Fund and cause the Depositor, the
Master Servicer, any Special Servicer, any Sub-Servicer, any Manager, the
Trustee, the obligor under any credit enhancement mechanism or certain
affiliates thereof to be considered or become Parties in Interest with
respect to an investing Plan (or of a Plan holding an interest in an
investing entity). If so, the acquisition or holding of Certificates by or on
behalf of the investing Plan could also give rise to a prohibited transaction
under ERISA and the Code, unless some statutory or administrative exemption
is available. Certificates acquired by a Plan may be assets of that Plan.
Under the Plan Asset Regulations, the Trust Fund, including the Mortgage
Asset Loans and the other assets held in the Trust Fund, may also be deemed
to be Plan Assets of each Plan that acquires Certificates. Special caution
should be exercised before Plan Assets are used to acquire a Certificate in
such circumstances, especially if, with respect to such assets, the
Depositor, the Master Servicer, any Special Servicer, any Sub-Servicer, any
Manager, the Trustee, the obligor under any credit enhancement mechanism or
an affiliate thereof either (i) has investment discretion with respect to the
investment of Plan Assets; or (ii) has authority or responsibility to give
(or regularly gives) investment advice with respect to Plan Assets for a fee
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such Plan Assets.
Any person who has discretionary authority or control respecting the
management or disposition of Plan Assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of
the investing Plan. If the Mortgage Assets and other assets included in a
Trust Fund constitute Plan Assets, then any party exercising management or
discretionary control regarding those assets, such as the Master Servicer,
any Special Servicer, any Sub-Servicer, the Trustee, the obligor under any
credit enhancement mechanism, or certain affiliates thereof may be deemed to
be a Plan "fiduciary" and thus subject to the fiduciary responsibility
provisions and prohibited transaction provisions of ERISA and the Code with
respect to the investing Plan. In addition, if the Mortgage Assets and other
assets included in a Trust Fund constitute Plan Assets, the purchase of
Certificates by a Plan, as well as the operation of the Trust Fund, may
constitute or involve a prohibited transaction under ERISA or the Code.
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The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets
include such certificate but do not solely by reason of the Plan's holdings
of such certificate include any of the mortgages underlying such certificate.
The Plan Asset Regulations include in the definition of a "guaranteed
governmental mortgage pool certificate" FHLMC Certificates, GNMA Certificates
and FNMA Certificates, but do not include FAMC Certificates. Accordingly,
even if such MBS (other than FAMC Certificates) included in a Trust Fund were
deemed to be assets of Plan investors, the mortgages underlying such MBS
(other than FAMC Certificates) would not be treated as assets of such Plans.
Private label mortgage participations, mortgage pass-through certificates,
FAMC Certificates or other mortgage-backed securities are not "guaranteed
governmental mortgage pool certificates" within the meaning of the Plan Asset
Regulations. Potential Plan investors should consult their counsel and review
the ERISA discussion in the related Prospectus Supplement before purchasing
any such Certificates.
PROHIBITED TRANSACTION EXEMPTIONS
The DOL granted an individual exemption, DOL exemption application number
E-0003 (the "Exemption"), to Deutsche Bank AG, New York Branch ("DBNY") and
Deutsche Morgan Grenfell Inc. ("DMG") which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to
Section 4975(a) and (b) of the Code, certain transactions, among others,
relating to the servicing and operation of mortgage pools and the initial
purchase, holding and subsequent resale of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that
certain conditions set forth in the Exemption are satisfied. For purposes of
this Section "ERISA Considerations," the term "Underwriter" shall include (a)
DBNY and DMG, (b) any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with DBNY
and DMG and (c) any member of the underwriting syndicate or selling group of
which a person described in (a) or (b) is a manager or co-manager with
respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for the Exemption to apply. First, the acquisition of Certificates by a Plan
or with Plan Assets must be on terms that are at least as favorable to the
Plan as they would be in an arm's-length transaction with an unrelated party.
Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by
other Certificates of the same trust. Third, the Certificates at the time of
acquisition by a Plan or with Plan Assets must be rated in one of the three
highest generic rating categories by Standard & Poor's Ratings Services, a
division of McGraw-Hill Companies, Inc., Moody's Investors Service, Inc.,
Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc. (collectively, the
"Exemption Rating Agencies"). Fourth, the Trustee cannot be an affiliate of
any member of the "Restricted Group" which consists of any Underwriter, the
Depositor, the Trustee, the Master Servicer, any Sub-Servicer and any obligor
with respect to assets included in the Trust Fund constituting more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund as of the date of initial issuance of the Certificates. Fifth, the sum
of all payments made to and retained by the Underwriter(s) must represent not
more than reasonable compensation for underwriting the Certificates; the sum
of all payments made to and retained by the Depositor pursuant to the
assignment of the assets to the related Trust Fund must represent not more
than the fair market value of such obligations; and the sum of all payments
made to and retained by the Master Servicer and any Sub-Servicer must
represent not more than reasonable compensation for such person's services
under the related Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the Exemption states that the
investing Plan or Plan Asset investor must be an accredited investor as
defined in Rule 501(a)(1) of Regulation D of the Commission under the
Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that have been included in other investment pools; (ii) Certificates
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of
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Certificates by or on behalf of a Plan or with Plan Assets; and (iii)
Certificates evidencing interests in such other investment pools must have
been purchased by investors other than Plans for at least one year prior to
any acquisition of Certificates by or on behalf of a Plan or with Plan
Assets.
A fiduciary of a Plan or any person investing Plan Assets to purchase a
Certificate must make its own determination that the conditions set forth
above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code, in
connection with the direct or indirect sale, exchange, transfer, holding or
the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan or with Plan Assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA
for the acquisition or holding of a Certificate on behalf of an "Excluded
Plan" by any person who has discretionary authority or renders investment
advice with respect to the assets of such Excluded Plan. For purposes of the
Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by Sections
4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the Code,
in connection with (1) the direct or indirect sale, exchange or transfer of
Certificates in the initial issuance of Certificates between the Depositor or
an Underwriter and a Plan when the person who has discretionary authority or
renders investment advice with respect to the investment of Plan Assets in
the Certificates is (a) a mortgagor with respect to 5% or less of the fair
market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market
of Certificates by a Plan and (3) the holding of Certificates by a Plan or
with Plan Assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Sections 406(a), 406(b) and 407 of ERISA, and the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code
for transactions in connection with the servicing, management and operation
of the Trust Fund. The Depositor expects that the specific conditions of the
Exemption required for this purpose will be satisfied with respect to the
Certificates so that the Exemption would provide an exemption from the
restrictions imposed by Sections 406(a) and (b) of ERISA (as well as the
excise taxes imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c) of the Code) for transactions in connection with the
servicing, management and operation of the Trust Fund, provided that the
general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed
by Sections 406(a) and 407(a) of ERISA, and the excise taxes imposed by
Section 4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to
an investing Plan by virtue of providing services to the Plan (or by virtue
of having certain specified relationships to such a person) solely as a
result of the Plan's ownership of Certificates.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Certificates, such as Subordinate Certificates, Residual
Certificates or any Certificates which are not rated in one of the three
highest generic rating categories by the Exemption Rating Agencies, transfers
of such Certificates to a Plan, to a trustee or other person acting on behalf
of any Plan, or to any other person investing Plan Assets to effect such
acquisition will not be registered by the Trustee unless the transferee
provides the Depositor, the Trustee and the Master Servicer with an opinion
of counsel satisfactory to the Depositor, the Trustee and the Master
Servicer, which opinion will not be at the expense of the Depositor, the
Trustee or the Master Servicer, that the purchase of such Certificates by or
on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustee or
the Master Servicer to any obligation in addition to those undertaken in the
Agreement.
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In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Certificates
by or on behalf of such Plan is permissible under applicable law, will not
constitute or result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code, will not subject the Depositor, the Trustee or the
Master Servicer to any obligation in addition to those undertaken in the
Agreement and the following conditions are satisfied: (i) the transferee is
an insurance company and the source of funds used to purchase such
Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60); (ii) the conditions set forth in PTCE 95-60 Part I
and III have been satisfied; and (iii) there is no Plan with respect to which
the amount of such general account's reserves and liabilities for contracts
held by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60) or by the
same employee organization exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of the acquisition of such Certificates.
The purchaser or any transferee of any interest in a Class B Certificate
[or Class R Certificate] that is not a definitive certificate, by the act of
purchasing such Certificate, shall be deemed to represent that it is not a
Plan or directly or indirectly purchasing such Certificate or interest
therein on behalf of, as named fiduciary of, as trustee of, or with assets of
a Plan. The Class B Certificates [and Class R Certificates] will contain a
legend describing such restrictions on transfer and the Pooling and Servicing
Agreement will provide that any attempted or purported transfer in violation
of these transfer restrictions will be null and void.
There can be no assurance that any DOL exemption will apply with respect
to any particular Plan that acquires the Certificates or, even if all the
conditions specified therein were satisfied, that any such exemption would
apply to all transactions involving the Trust Fund. Prospective Plan
investors should consult with their legal counsel concerning the impact of
ERISA and the Code and the potential consequences to their specific
circumstances prior to making an investment in the Certificates. Neither the
Depositor, the Trustee, the Master Servicer nor any of their respective
affiliates will make any representation to the effect that the Certificates
satisfy all legal requirements with respect to the investment therein by
Plans generally or any particular Plan or to the effect that the Certificates
are an appropriate investment for Plans generally or any particular Plan.
BEFORE PURCHASING A CERTIFICATE (OTHER THAN A SUBORDINATE CERTIFICATE,
RESIDUAL CERTIFICATE OR ANY CERTIFICATE WHICH IS NOT RATED IN ONE OF THE
THREE HIGHEST GENERIC RATING CATEGORIES BY THE EXEMPTION RATING AGENCIES), A
FIDUCIARY OF A PLAN SHOULD ITSELF CONFIRM THAT (A) ALL THE SPECIFIC AND
GENERAL CONDITIONS SET FORTH IN THE EXEMPTION OR ONE OF THE CLASS EXEMPTIONS
WOULD BE SATISFIED AND (B) IN THE CASE OF A CERTIFICATE PURCHASED UNDER THE
EXEMPTION, THE CERTIFICATE CONSTITUTES A "CERTIFICATE" FOR PURPOSES OF THE
EXEMPTION. IN ADDITION, A PLAN FIDUCIARY SHOULD CONSIDER ITS GENERAL
FIDUCIARY OBLIGATIONS UNDER ERISA IN DETERMINING WHETHER TO PURCHASE A
CERTIFICATE ON BEHALF OF A PLAN.
TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Certain Federal Income Tax Consequences--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income".
LEGAL INVESTMENT
If so specified in the related Prospectus Supplement, the Offered
Certificates will constitute "mortgage related securities" for purposes of
SMMEA. Generally, only classes of Offered Certificates that (i) are rated in
one of the two highest rating categories by one or more Rating Agencies and
(ii) are part of a series evidencing interests in a Trust Fund consisting of
loans secured by first liens on real property and originated by certain types
of Originators specified in SMMEA, will be "mortgage related securities" for
purposes of SMMEA. As "mortgage related securities," such classes will
constitute legal
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investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions,
insurance companies and pension funds) created pursuant to or existing under
the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation, to the same extent that, under applicable law, obligations issued
by or guaranteed as to principal and interest by the United States or any
agency or instrumentality thereof constitute legal investments for such
entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cutoff for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies)
to invest in "mortgage related securities" secured by liens on residential,
or mixed residential and commercial properties, in most cases by requiring
the affected investors to rely solely upon existing state law, and not SMMEA.
Pursuant to Section 347 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which amended the definition of "mortgage related
security" to include, in relevant part, Offered Certificates satisfying the
rating and qualified Originator requirements for "mortgage related
securities," but evidencing interests in a Trust Fund consisting, in whole or
in part, of first liens on one or more parcels of real estate upon which are
located one or more commercial structures, states were authorized to enact
legislation, on or before September 23, 2001, specifically referring to
Section 347 and prohibiting or restricting the purchase, holding or
investment by state-regulated entities in such types of Offered Certificates.
Accordingly, the investors affected by any such state legislation, when and
if enacted, will be authorized to invest in Offered Certificates qualifying
as "mortgage related securities" only to the extent provided in such
legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. Section 24 (Seventh), subject in each case to such
regulations as the applicable federal regulatory authority may prescribe. In
this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell
for their own account, without limitation as to a percentage of the bank's
capital and surplus (but subject to compliance with certain general standards
concerning "safety and soundness" and retention of credit information in 12
C.F.R. Section 1.5), certain "Type IV securities," defined in 12 C.F.R.
Section 1.2(1) to include certain "commercial mortgage-related securities"
and "residential mortgage-related securities." As so defined, "commercial
mortgage-related security" and "residential mortgage-related security" mean,
in relevant part, "mortgage related security" within the meaning of SMMEA,
provided that, in the case of a "commercial mortgage-related security," it
"represents ownership of a promissory note or certificate of interest or
participation that is directly secured by a first lien on one or more parcels
of real estate upon which one or more commercial structures are located and
that is fully secured by interests in a pool of loans to numerous obligors."
In the absence of any rule or administrative interpretation by the OCC
defining the term "numerous obligors," no representation is made as to
whether any class of Offered Certificates will qualify as "commercial
mortgage-related securities," and thus as "Type IV securities," for
investment by national banks. Federal credit unions should review National
Credit Union Administration ("NCUA") Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to
assist federal credit unions in making investment decisions for mortgage
related securities. The NCUA has adopted rules, codified at 12 C.F.R. Part
703, which permit federal credit unions to invest in "mortgage related
securities" under certain limited circumstances, other than stripped mortgage
related securities, residual interests in mortgage related securities, and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot
program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council (the
"FFIEC"). The Policy Statement, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the OCC and the Office of Thrift Supervision, and by the NCUA
(with certain modifications), prohibits depository institutions from investing
in certain "high-risk
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mortgage securities" (including securities such as certain series or classes
of the Offered Certificates), except under limited circumstances, and sets
forth certain investment practices deemed to be unsuitable for regulated
institutions. On September 29, 1997, the FFIEC released for public comment a
proposed "Supervisory Policy Statement on Investment Securities and End-User
Derivatives Activities" (the "1997 Statement"), which would replace the
Policy Statement. As proposed, the 1997 Statement would delete the specific
"high-risk mortgage securities" tests, and substitute general guidelines
which depository institutions should follow in managing risks (including
market, credit, liquidity, operational (transactional), and legal risks)
applicable to all securities (including mortgage pass-through securities and
mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain classes of Offered Certificates as
"mortgage related securities," no representation is made as to the proper
characterization of the Offered Certificates for legal investment purposes,
financial institution regulatory purposes, or other purposes, or as to the
ability of particular investors to purchase Offered Certificates under
applicable legal investment restrictions. The uncertainties described above
(and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Offered Certificates)
may adversely affect the liquidity of the Offered Certificates.
Accordingly, all investors whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Offered Certificates of any class
constitute legal investments or are subject to investment, capital or other
restrictions and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS (as defined herein). The
Policy Statement generally indicates that a mortgage derivative product will
be deemed to be high risk if it exhibits greater price volatility than a
standard fixed rate thirty-year mortgage security. According to the Policy
Statement, prior to purchase, a depository institution will be required to
determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce
the institution's overall interest rate risk. Reliance on analysis and
documentation obtained from a securities dealer or other outside party
without internal analysis by the institution would be unacceptable. There can
be no assurance as to which classes of Certificates, including Offered
Certificates, will be treated as high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision (the "OTS") issued a
bulletin, entitled "Mortgage Derivative Products and Mortgage Swaps", which
is applicable to thrift institutions regulated by the OTS. The bulletin
established guidelines for the investment by savings institutions in certain
"high-risk" mortgage derivative securities and limitations on the use of such
securities by insolvent, undercapitalized or otherwise "troubled"
institutions. According to the bulletin, such "high-risk" mortgage derivative
securities include securities having certain specified characteristics, which
may include certain classes of Offered Certificates. In addition, the
National Credit Union Administration has issued regulations governing federal
credit union investments which prohibit investment in certain specified types
of securities, which may include certain classes of Offered Certificates.
Similar policy statements have been issued by regulators having jurisdiction
over other types of depository institutions.
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There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class
of Offered Certificates representing more than a specified percentage of the
investor's assets. The Depositor will make no representations as to the
proper characterization of any class of Offered Certificates for legal
investment or other purposes, or as to the ability of particular investors to
purchase any class of Offered Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
class of Offered Certificates. Accordingly, all investors whose investment
activities are subject to legal investment laws and regulations, regulatory
capital requirements or review by regulatory authorities should consult with
their legal advisors in determining whether and to what extent the Offered
Certificates of any class constitute legal investments or are subject to
investment, capital or other restrictions.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates of any
series will be applied by the Depositor to the purchase of Trust Assets or
will be used by the Depositor to cover expenses related thereto. The
Depositor expects to sell the Certificates from time to time, but the timing
and amount of offerings of Certificates will depend on a number of factors,
including the volume of Mortgage Assets acquired by the Depositor, prevailing
interest rates, availability of funds and general market conditions.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method
of offering being utilized for that series and will state the net proceeds to
the Depositor from such sale.
The Depositor intends that Offered Certificates will be offered through
the following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of
the Offered Certificates of a particular series may be made through a
combination of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related Prospectus
Supplement;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
In addition, if specified in the related Prospectus Supplement, the
Offered Certificates of a series may be offered in whole or in part to the
seller of the related Mortgage Assets that would comprise the Trust Fund for
such Certificates.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such
Certificates will be acquired by the underwriters for their own account and
may be resold from time to time in one or more transactions, including
negotiated transactions, at fixed public offering prices or at varying prices
to be determined at the time of sale or at the time of commitment therefor.
The managing underwriter or underwriters with respect to the offer and sale
of Offered Certificates of a particular series will be set forth on the cover
of the Prospectus Supplement relating to such series and the members of the
underwriting syndicate, if any, will be named in such Prospectus Supplement.
In connection with the sale of Offered Certificates, underwriters may
receive compensation from the Depositor or from purchasers of the Offered
Certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the Offered
Certificates may be deemed to be underwriters in connection with such
Certificates, and any discounts or commissions received by them from the
Depositor and any profit on the resale of Offered Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the sale
of the Offered Certificates of any series will provide that the obligations
of the underwriters will be subject to certain conditions
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<PAGE>
precedent, that the underwriters will be obligated to purchase all such
Certificates if any are purchased (other than in connection with an
underwriting on a best efforts basis) and that, in limited circumstances, the
Depositor will indemnify the several underwriters and the underwriters will
indemnify the Depositor against certain civil liabilities, including
liabilities under the Securities Act of 1933, as amended, or will contribute
to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Offered Certificates of such series.
The Depositor anticipates that the Offered Certificates will be sold
primarily to institutional investors. Purchasers of Offered Certificates,
including dealers, may, depending on the facts and circumstances of such
purchases, be deemed to be "underwriters" within the meaning of the
Securities Act of 1933, as amended, in connection with reoffers and sales by
them of Offered Certificates. Holders of Offered Certificates should consult
with their legal advisors in this regard prior to any such reoffer or sale.
As to any series of Certificates, only those classes rated in an
investment grade rating category by any Rating Agency will be offered hereby.
Any unrated class may be initially retained by the Depositor, and may be sold
by the Depositor at any time to one or institutional investors.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by the Underwriter in connection with offers and
sales related to market-making transactions in the Offered Certificates with
respect to which the Underwriter acts as principal. The Underwriter may also
act as agent in such transactions. Sales may be made at negotiated prices
determined at the time of sale.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series, including
certain federal income tax consequences, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates, and no Trust Fund will engage in any business activities or
have any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement. The Depositor has determined that its financial statements will
not be material to the offering of any Offered Certificates.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
Stripped Interest Certificates might, in extreme cases fail to recoup their
initial investments. Furthermore, ratings on mortgage pass-through
certificates do not address the price of such certificates or the suitability
of such certificates to the investor.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
rating organization. Each security rating should be evaluated independently
of any other security rating.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
1986 Act ............................ 70
Accrual Certificates ................ 4
Act ................................. 63
ADA ................................. 65
ARM Loans ........................... 19
Book-Entry Certificates ............. 31
capital asset ....................... 75
Cash Flow Agreement ................. 6
CERCLA .............................. 62
Certificate Account ................. 23
Certificate Balance ................. 4
Certificate Owner ................... 37
Code ................................ 7, 67
Commercial Properties ............... 2, 16
Commission .......................... 3
Companion Class ..................... 33
CON ................................. 21
Condemnation Proceeds ............... 44
Controlled Amortization Class ...... 33
Controlled Amortization Classes .... 3
Cooperatives ........................ 16
CPR ................................. 27
Credit Support ...................... 6
Crime Control Act ................... 66
Cut-off Date ........................ 5, 33
DBNY ................................ 96
Definitive Certificates ............. 31
Depositor ........................... 1
Determination Date .................. 25, 31
Deutsche Bank Group ................. 30
Disqualified Organization ........... 81
Disqualified Organizations .......... 82
Distribution Date ................... 4
Distribution Date Statement ......... 34
DMARC Trust ......................... 30
DMG ................................. 96
DOL ................................. 95
DTC ................................. 4, 36
DTC Participants .................... 37
Due Dates ........................... 19
Equity Participation ................ 19
ERISA ............................... 7, 94
ERISA Plans ......................... 94
Exchange Act ........................ 4
Exemption ........................... 96
Exemption Rating Agencies ........... 96
FAMC ................................ 22
FHLMC ............................... 22
Financial Intermediary .............. 37
FNMA ................................ 22
Foreign Investors ................... 81
Garn Act ............................ 64
GNMA ................................ 22
Grantor Trust Certificates .......... 7
Health Care-Related Facilities ..... 20
Health Care-Related Mortgaged
Property ........................... 20
Insurance Proceeds .................. 44
IRS ................................. 47
Letter of Credit Bank ............... 56
Lock-out Date ....................... 19
Lock-out Period ..................... 19
Mark to Market Regulations .......... 83
Market Discount ..................... 74, 75
Master Servicer ..................... 1
MBS ................................. 1, 3, 16
MBS Administrator ................... 1
MBS Agreement ....................... 23
MBS Issuer .......................... 23
MBS Servicer ........................ 23
MBS Trustee ......................... 23
Mortgage Asset Pool ................. 1
Mortgage Asset Seller ............... 16
Mortgage Assets ..................... 1, 16
Mortgage Loans ...................... 1, 16
Mortgage Notes ...................... 16
Mortgage Rate ....................... 2
Mortgaged Properties ................ 16
Mortgages ........................... 16
Multifamily Properties .............. 1, 16
Net Leases .......................... 18
Nonrecoverable Advance .............. 34
Non-U.S. Person ..................... 85
Notional Amount ..................... 4
Offered Certificates ................ 1
OID Regulations ..................... 70
original issue discount ............. 70
Original Issue Discount ............. 73, 74
Originator .......................... 16
OTS ................................. 100
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<PAGE>
Parties in Interest ................. 94
Pass-Through Entity ................. 80, 81
Pass-Through Rate ................... 4
Percentage Interest ................. 31
Permitted Investments ............... 44
Plan Asset Regulations .............. 95
Policy Statement .................... 100
Prepayment Assumption ............... 71
Prepayment Interest Shortfall ...... 25
Prepayment Premium .................. 19
Prospectus Supplement ............... 1
Purchase Price ...................... 40
Random Lot Certificates ............. 70
Rating Agency ....................... 7
Record Date ......................... 31
Regular Certificateholder ........... 70
Regular Certificates ................ 67, 86
Related Proceeds .................... 34
Relief Act .......................... 66
REMIC ............................... 2, 67
REMIC Administrator ................. 3, 1
REMIC Certificates .................. 67
REMIC Pool .......................... 67
REMIC Regular Certificates .......... 7
REMIC Regulations ................... 67
REMIC Residual Certificates ......... 7
REO Property ........................ 42
Residual Certificateholders ......... 77
Residual Certificates ............... 67
Restaurants ......................... 1, 2, 16
RICO ................................ 66
Senior Certificates ................. 3
Senior Liens ........................ 16
Service ............................. 69
SMMEA ............................... 7
SPA ................................. 27
Special Servicer .................... 1
Standard Certificateholder .......... 88
Startup Day ......................... 68
stripped bond ....................... 90
stripped bonds ...................... 90
Stripped Certificateholder .......... 92
Stripped Certificates ............... 88, 90, 91
stripped coupons .................... 90
Stripped Interest Certificates ..... 3, 91
Stripped Principal Certificates .... 3, 91
Subordinate Certificates ............ 3
Sub-Servicer ........................ 43
Sub-Servicing Agreement ............. 43
Tax Exempt Investor ................. 98
Tax Favored Plans ................... 94
The Depositor ....................... 1
Title V ............................. 65
Treasury ............................ 67
Trust Assets ........................ 3
Trust Fund .......................... 1
Trustee ............................. 1
UBTI ................................ 98
UCC ................................. 58
U.S. Person ......................... 82
Voting Rights ....................... 36
Warranting Party .................... 41
</TABLE>
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (ITEM 14 OF FORM S-3).
The expenses expected to be incurred in connection with the issuance and
distribution of the Certificates being registered, other than underwriting
compensation, are as set forth below.
<TABLE>
<CAPTION>
<S> <C>
Filing Fee for Registration Statement.................... $303.03
Legal Fees and Expenses ................................. *
Accounting Fees and Expenses............................. *
Trustee's Fees and Expenses (including counsel fees) .... *
Blue Sky Fees and Expenses............................... *
Printing and Engraving Fees ............................. *
Rating Agency Fees ...................................... *
Miscellaneous............................................ *
-----------
Total.................................................... $ *
===========
</TABLE>
- ------------
* To be provided by amendment.
INDEMNIFICATION OF DIRECTORS AND OFFICERS (ITEM 15 OF FORM S-3).
The Pooling Agreements will provide that no director, officer, employee or
agent of the Registrant is liable to the Trust Fund or the
Certificateholders, except for such person's own willful misfeasance, bad
faith, gross negligence in the performance of duties or reckless disregard of
obligations and duties. The Pooling Agreements will further provide that,
with the exceptions stated above, a director, officer, employee or agent of
the Registrant is entitled to be indemnified against any loss, liability or
expense incurred in connection with legal action relating to such Pooling
Agreements and related Certificates other than such expenses related to
particular Mortgage Assets.
Any underwriters who execute an Underwriting Agreement in the form filed
as Exhibit 1.1 to this Registration Statement will agree to indemnify the
Registrant's directors and its officers who signed this Registration
Statement against certain liabilities which might arise under the Securities
Act of 1933 (the "Act") from certain information furnished to the Registrant
by or on behalf of such indemnifying party.
It is contemplated that the Registrant will enter into an Indemnification
Agreement with Deutsche Bank North America Holding Corp., a Delaware
corporation, pursuant to which Deutsche Bank North America Holding Corp. will
be obligated to indemnify the Registrant and each officer, director or
employee of the Registrant and certain others against certain liabilities
under the Securities Act of 1933 or the Securities Exchange Act of 1934 or
other laws to the extent such liabilities arise in connection with the
issuance of securities under this Registration Statement.
Subsection (a) of Section 145 of the General Corporation Law of Delaware
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him
in connection with such action, suit or proceeding if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the
II-1
<PAGE>
right of the corporation to procure a judgment in its favor by reason of the
fact that such person acted in any of the capacities set forth above, against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification may be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred
by him in connection therewith; that indemnification or advancement of
expenses provided for by Section 145 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled; and empowers the
corporation to purchase and maintain insurance on behalf of a director,
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his
status as such whether or not the corporation would have the power to
indemnify him against such liabilities under Section 145.
The By-Laws of the Registrant provide, in effect, that to the extent and
under the circumstances permitted by subsections (a) and (b) of Section 145
of the General Corporation Law of the State of Delaware, the Registrant (i)
shall indemnify and hold harmless each person who was or is a party or is
threatened to be made a party to any action, suit or proceeding described in
subsections (a) and (b) by reason of the fact that he is or was a director or
officer, or his testator or intestate is or was a director or officer of the
Registrant, against expenses, judgments, fines and amounts paid in
settlement, and (ii) shall indemnify and hold harmless each person who was or
is a party or is threatened to be made a party to any such action, suit or
proceeding if such person is or was serving at the request of the Registrant
as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
EXHIBITS (ITEM 16 OF FORM S-3).
Exhibits--
<TABLE>
<CAPTION>
<S> <C>
1.1* --Form of Underwriting Agreement.
3.1* --Certificate of Incorporation.
3.2* --By-Laws.
4.1* --Form of Pooling and Servicing Agreement.
5.1 --Opinion of Cadwalader, Wickersham & Taft with respect to legality
of the Certificates.
8.1 --Opinion of Cadwalader, Wickersham & Taft with respect to certain
tax matters (included in Exhibit 5.1).
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
24.1 --Power of Attorney.
</TABLE>
- ------------
* Previously filed with Registration Statement No. 333-4272 and incorporated
by reference herein.
II-2
<PAGE>
UNDERTAKINGS (ITEM 17 OF FORM S-3).
A. Undertakings Pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(a) (1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933, (ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement, and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in this
Registration Statement or any material change to such information in this
Registration Statement; provided however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(b) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(c) To provide to the underwriter at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
B. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, reasonably believes that the security
rating requirement contained in Transaction Requirement B.5. of Form S-3 will
be met by the time of the sale of the securities registered hereunder and has
duly caused this 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 23rd day of January 1998.
DEUTSCHE MORTGAGE & ASSET
RECEIVING CORPORATION
By:
-----------------------------------
Nancy D. Smith
Director (President)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Nancy D. Smith his/her true and lawful
attorney-in-fact and agent for him/her and in his/her name, place and stead,
in any and all capacities, to sign any and 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
attorney-in-fact and agent 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 they might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ---------------------------------- -------------------
<S> <C> <C>
Director (President and Chief January 23, 1998
- -------------------------- Executive Officer)
Nancy D. Smith
(Treasurer and Chief Financial January 23, 1998
- -------------------------- Officer)
R. Douglas Donaldson
- -------------------------- Director January 23, 1998
Louise E. Colby
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C>
1.1* --Form of Underwriting Agreement.
3.1* --Certificate of Incorporation.
3.2* --By-Laws.
4.1* --Form of Pooling and Servicing Agreement.
5.1 --Opinion of Cadwalader, Wickersham & Taft with respect to legality
of the Certificates.
8.1 --Opinion of Cadwalader, Wickersham & Taft with respect to certain
tax matters (included in Exhibit 5.1).
23.1 --Consent of Cadwalader, Wickersham & Taft (included in Exhibit 5.1).
24.1 --Power of Attorney.
</TABLE>
- -----------
* Previously filed with Registration Statement No. 333-4272 and incorporated
by reference herein.
<PAGE>
[CADWALADER, WICKERSHAM & TAFT LETTERHEAD]
January 23, 1998
Deutsche Mortgage & Asset
Receiving Corporation
One International Place
Room 520
Boston, MA 02110
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as special counsel to Deutsche Mortgage & Asset Receiving
Corporation ("DMARC") in connection with the Registration Statement on Form
S-3 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") on even date herewith and to which this opinion
is an exhibit, pursuant to the Securities Act of 1933, as amended (the
"Act"). The Registration Statement covers mortgage pass-through certificates
("Certificates") to be sold by DMARC in one or more series (each, a
"Series"). Each Series of Certificates will be issued under a separate
pooling and servicing agreement (each, a "Pooling and Servicing Agreement")
among DMARC, a master servicer (a "Servicer") and a trustee (a "Trustee") to
be identified in the Prospectus Supplement for such Series. A form of Pooling
and Servicing Agreement was previously filed as an exhibit to a registration
statement No. 333-4272 and incorporated by reference as an exhibit to the
Registration Statement. Capitalized terms used and not otherwise defined
herein have the respective meanings ascribed to such terms in the
Registration Statement.
In rendering the opinions set forth below, we have examined and relied upon
the following: (1) the Registration Statement, the Prospectus and the form of
Prospectus Supplement constituting a part thereof, each substantially in the
form filed or being filed with the Commission; (2) the form of the Pooling
and Servicing Agreement previously filed as an exhibit to registration
statement No. 333-4272, and incorporated by reference as an exhibit to the
Registration Statement; and (3) such other documents, materials and
authorities as we have deemed necessary in order to enable us to render our
opinion set forth below.
We express no opinion with respect to any Series of Certificates for which we
do not act as counsel to DMARC.
<PAGE>
Deutsche Mortgage & Asset January 23, 1998
Receiving Corporation
Based on the foregoing, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by
DMARC, a Servicer and a Trustee, such Pooling and Servicing
Agreement will constitute a valid and legally binding agreement to
DMARC, enforceable against DMARC in accordance with its terms,
subject to applicable bankruptcy, reorganization, insolvency,
moratorium and other laws affecting the enforcement of rights of
creditors generally and to general principles of equity and the
discretion of the court (regardless of whether enforceability is
considered in a proceeding in equity or at law).
2. When a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by
DMARC, a Servicer and a Trustee, and the Certificates of such
Series have been duly executed, authenticated, delivered and sold
as contemplated in the Registration Statement, such Certificates
will be legally and validly issued, fully paid and nonassessable,
and the holders of such Certificates will be entitled to the
benefits of such Pooling and Servicing Agreement.
As your special counsel, we have considered certain federal income tax
aspects of the proposed issuance of Certificates of each Series. In
particular, we have considered the material federal income tax consequences
for holders of Certificates and have reviewed the description of the material
federal income tax consequences for holders of Certificates that appears
under the heading "Federal Income Tax Consequences" in the Prospectus and
under the heading "Certain Federal Income Tax Consequences" in the form of
Prospectus Supplement. Such descriptions do not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Certificates, but, with respect to those federal income tax consequences that
are discussed, in our opinion, the description is accurate in all material
respects.
The opinion expressed in the preceding paragraph is based on the facts and
circumstances set forth in the Prospectus and the form of Prospectus
Supplement and in the other documents reviewed by us. Such opinion could
change with respect to a particular Series of Certificates as a result of
changes in facts and circumstances, changes in the terms of the documents
reviewed by us, or changes in the law subsequent to the date hereof. As the
Registration Statement contemplates Series of Certificates with numerous
different characteristics, the particular characteristics of each Series of
Certificates must be considered in determining the applicability of such
opinion to a particular Series of Certificates. Furthermore, we express no
<PAGE>
Deutsche Mortgage & Asset January 23, 1998
Receiving Corporation
opinion with respect to any Series of Certificates for which we do not act as
counsel to DMARC.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the reference to this firm under the headings
"Legal Matters" and "Federal Income Tax Consequences" in the Prospectus
forming a part of the Registration Statement and under the headings "Legal
Matters" and "Certain Federal Income Tax Consequences" in the form of
Prospectus Supplement forming a part of the Registration Statement. This
consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
/s/ Cadwalader, Wickersham & Taft
