<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1996
REGISTRATION NO. 333-05201
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
BANKAMERICA MORTGAGE SECURITIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 94-324470
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
345 Montgomery Street Cheryl Sorokin, Secretary
Lower Level #2, Unit #8152 Bank of America Center
San Francisco, California 94104 555 California Street
(415) 445-4855 San Francisco, California 94104
(Address and telephone number (415) 622-3530
of principal executive offices) (Name, address and telephone number
of agent for service)
--------------------
COPIES TO:
<TABLE>
<S> <C> <C>
Andrea B. Sudmann Daniel G. Weiss Ralph C. Walker
BankAmerica Corporation BankAmerica Corporation Mark R. Levie
555 South Flower Street 555 California Street Orrick, Herrington & Sutcliffe
8th Floor, Unit #4362 Unit #03017 400 Sansome Street
Los Angeles, California 90071 San Francisco, California 94104 San Francisco, CA 94111
(213) 228-5678 (415) 622-9688 (415) 773-5955
</TABLE>
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after the effective date of this Registration Statement.
------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
============================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
OFFERING AGGREGATE
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO PRICE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED PER UNIT PRICE(1) REGISTRATION FEE(2)
---------------- ------------- -------- --------- -------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates $1,000,000,000 100% $1,000,000,000 $344,828
============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a). Exclusive of accrued interest, if any, on the
Mortgage Pass-Through Certificates.
(2) $100 of the registration fee has been previously paid.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 19 )
$ (APPROXIMATE)
BANKAMERICA MORTGAGE SECURITIES, INC.
DEPOSITOR
BANK OF AMERICA [NATIONAL TRUST AND SAVINGS ASSOCIATION]
[, FEDERAL SAVINGS BANK]
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 19 -
[$ % CLASS A-1 CERTIFICATES
$ % CLASS A-2 CERTIFICATES
$ % CLASS A-3 CERTIFICATES
$ % CLASS A-4 CERTIFICATES
$ VARIABLE RATE CLASS A-5 CERTIFICATES
$ % CLASS M CERTIFICATES
$ % CLASS R CERTIFICATES
The Series 19 - Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following Classes: (i) the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, (ii) Class A-4 Certificates (the "Fixed
Strip Certificates"), (iii) Class A-5 Certificates (the "Variable Strip
Certificates"; together with the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Fixed Strip Certificates, the "Senior Certificates"),
(iv) Class R Certificates (the "Residual Certificates") and (v) [ ] Classes of
subordinate Certificates which are designated as the Class M Certificates and
the Class B Certificates (together, the "Subordinate Certificates"). [Only the
Senior Certificates, the Class M Certificates and the Residual Certificates
(collectively, the "Offered Certificates") are offered hereby.] [Only the Senior
Certificates and the Class M Certificates (collectively, the "Offered
Certificates") are offered hereby.]
SEE "RISK FACTORS" ON [PAGE S-18 HEREIN AND ON] PAGE 10 IN THE PROSPECTUS
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING
[ANY CLASS OF OFFERED] CERTIFICATES.
------------------------
PROCEEDS FROM THE ASSETS IN THE TRUST FUND WILL BE THE ONLY SOURCE OF PAYMENTS
ON THE CERTIFICATES. THESE CERTIFICATES DO NOT REPRESENT AN OBLIGATION OF OR
INTEREST IN THE DEPOSITOR, BANKAMERICA CORPORATION, BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, BANK OF AMERICA, FEDERAL SAVINGS BANK OR
ANY OF THEIR AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS OR OTHER ASSETS OF THE TRUST FUND ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
DEPOSITOR, BANKAMERICA CORPORATION, BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, BANK OF AMERICA, FEDERAL
SAVINGS BANK OR ANY OF THEIR AFFILIATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The [Offered] Certificates will be purchased from the Depositor by the
Underwriter[s] and will be offered by the Underwriter[s] from time to time to
the public in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. The proceeds to the Depositor from the sale of
the [Offered] Certificates will be equal to % of the initial aggregate
principal balance of the [Offered] Certificates, plus accrued interest thereon
from 1, 19 (the "Cut-off Date"), net of any expenses payable by
the Depositor. The [Offered] Certificates are offered by the Underwriter[s]
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter[s] and subject to certain other conditions. The Underwriter[s]
reserve[s] the right to withdraw, cancel or modify such offer and to reject any
order in whole or in part. It is expected that delivery of the Certificates will
be made on or about , 19 at the office of , [city and
state of offices where delivery is to be made] against payment therefor in
immediately available funds.
(Cover continued on next page)
[Name of Underwriters]
The date of this Prospectus Supplement is , 19 .
<PAGE> 3
(cover page continued)
The Certificates will evidence the entire beneficial ownership interest in
a trust fund (the "Trust Fund") consisting primarily of a pool of conventional
[fixed] [adjustable] rate one- to four-family first mortgage loans (the
"Mortgage Loans")[, exclusive of the Retained Yield (as defined herein under
"POOLING AGREEMENT -- Servicing And Other Compensation and Payment of Expenses;
Retained Yield"),] to be deposited by BankAmerica Mortgage Securities, Inc. (the
"Depositor") into the Trust Fund for the benefit of the Certificateholders. The
Mortgage Loans were [originated] [acquired from ] by
(the "Seller"). The Depositor will acquire the Mortgage Loans
from the Seller on the Delivery Date. The Mortgage Loans will be serviced by
Bank of America [National Trust and Savings Association] [, Federal Savings
Bank] (the "Master Servicer"). [The Senior Certificates in the aggregate and the
Class M Certificates will evidence initial undivided interests of approximately
% and %, respectively, in the Trust Fund.] Certain characteristics of the
Mortgage Loans are described herein under "DESCRIPTION OF THE MORTGAGE POOL."
[A limited amount of losses on the Mortgage Loans will initially be covered
by [description of credit enhancement] (the "[name of credit enhancement]") to
be issued by (the " "). The maximum amount
available to be drawn under the [name of credit enhancement] will initially be
equal to approximately % of the aggregate principal balance of the Mortgage
Loans as of , 19 (the "Cut-off Date") and will be subject to
reduction as claims are made thereunder. As described herein under "DESCRIPTION
OF CREDIT ENHANCEMENT," the Master Servicer is required to use its best
reasonable efforts to maintain the [name of credit enhancement] during the term
of the Pooling Agreement (as defined herein under "POOLING AGREEMENT"), unless
coverage under the [name of credit enhancement] has been exhausted through the
payment of claims.]
[The interest rates on the Mortgage Loans (each, a "Mortgage Rate") will
change [semi-]annually based on the Index (as defined herein under "DESCRIPTION
OF THE MORTGAGE POOL -- General") and the respective Note Margins described
herein under "DESCRIPTION OF THE MORTGAGE POOL," subject to certain periodic and
lifetime limitations, as described more fully herein under "DESCRIPTION OF THE
MORTGAGE POOL."]
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.
Distributions on the Certificates will be made on the day of each month
or, if such day is not a business day, then on the next succeeding business day
commencing on , 19 (each, a "Distribution Date"). [As more fully
described herein under "DESCRIPTION OF THE CERTIFICATES -- Interest
Distributions" interest distributions on the Certificates will be based on the
principal balance of the Mortgage Loans and the then applicable Weighted Average
Adjustable Pass-Through Rate, which will equal the weighted average of the
Mortgage Rates on the Mortgage Loans, net of the related servicing [and
subservicing] fees [and Retained Yield] (as to each Mortgage Loan, the "Net
Mortgage Rate"), for the month preceding such Distribution Date. The initial
Weighted Average Adjustable Pass-Through Rate for the Certificates will be %
per annum. The Weighted Average Adjustable Pass-Through Rate on the Certificates
may increase or decrease from month to month. Distributions in respect of
principal of the Certificates will be made as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal Distributions."] [As more fully
described herein under "DESCRIPTION OF THE CERTIFICATES -- Interest
Distributions" interest distributions on the Offered Certificates will be based
on the Certificate Principal Balance thereof (or the Notional Amount, as defined
herein under "DESCRIPTION OF THE CERTIFICATES -- Interest Distributions" in the
case of the Variable Strip Certificates) and the then applicable Pass-Through
S-2
<PAGE> 4
(cover page continued)
Rate thereof, which will be variable for the Variable Strip Certificates and
fixed for all other Classes of Certificates. Distributions in respect of
principal of the Offered Certificates will be allocated among the various
Classes of the Offered Certificates as described herein under "DESCRIPTION OF
THE CERTIFICATES -- Principal Distributions." The rights of the holders of the
Class B Certificates to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of the holders of the Offered Certificates,
and the right of the holders of the Class M Certificates to receive
distributions with respect to the Mortgage Loans will be subordinated to the
right of the holders of the Senior Certificates and the Residual Certificates,
to the extent described herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses; Subordination."] [Certain losses incurred
due to defaults on the Mortgage Loans that are not covered by the Subordinate
Certificates will be allocated on a pro rata basis between the Class A-1 and
Class A-4 Certificates (the "Tiered Certificates") and the Class A-2, Class A-3
and Variable Strip Certificates. Any such losses so allocated to the Tiered
Certificates will be allocated to the Class A-4 Certificates until the
Certificate Principal Balance thereof is reduced to zero, and then to the Class
A-1 Certificates.]
[Certain Mortgage Loans provide that, at the option of the related
Mortgagors, the adjustable rate on such Mortgage Loans may be converted to a
fixed rate (the "Convertible Mortgage Loans"), provided that certain conditions
have been satisfied. Upon notification from a Mortgagor of such Mortgagor's
intent to convert from an adjustable rate to a fixed rate and prior to the
conversion of any such Mortgage Loan (a "Converting Mortgage Loan"), the Master
Servicer will be obligated to [purchase the] [act as remarketing agent with
respect to such Converting Mortgage Loan and, in such capacity, to use its best
efforts to arrange for the sale of such] Converting Mortgage Loan at a net price
of par plus accrued interest thereon (the "Conversion Price"). In the event that
the Master Servicer does not [purchase] [sell] a Converting or Converted
Mortgage Loan (as defined herein under "DESCRIPTION OF THE MORTGAGE POOL --
General"), the Mortgage Pool will thereafter include both fixed rate and
adjustable rate Mortgage Loans. See "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.]
The Master Servicer's only obligations with respect to the Certificates are
its contractual obligations under the terms of the Pooling Agreement.
The yield to maturity on the [Offered] Certificates will depend on the rate
of payment of principal (including prepayments, defaults[,] [and] liquidations
[and purchases of Converting Mortgage Loans and Converted Mortgage Loans]) on
the Mortgage Loans. [The Mortgage Loans may be prepaid in full or in part at any
time without penalty.] The yield to investors on the [Offered] Certificates will
be adversely affected by any shortfalls in interest collected on the Mortgage
Loans due to prepayments, liquidations or otherwise. [The yield to investors on
the Variable Strip Certificates and, in particular, on the Fixed Strip
Certificates, will be extremely sensitive to the rate of principal payments
(including prepayments) and defaults on the Mortgage Loans and may fluctuate
significantly over time. A rapid rate of principal payments on the Mortgage
Loans could result in the failure of such investors to recover their initial
investments.] See "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" herein and
"YIELD CONSIDERATIONS" in the Prospectus.
There is currently no secondary market for the [Offered] Certificates.
(the "Underwriter[s]") intend[s] to make a secondary market in the
[Offered] Certificates but [is] [are] not obligated to do so. There can be no
assurance that a secondary market for the Certificates will develop or, if it
does develop, that it will continue. The [Offered] Certificates will not be
listed on any securities exchange.
It is a condition of the issuance of the [Offered] Certificates that they
be rated " " by and " " by .
[An] [No] election will be made to treat the Trust Fund underlying the
Certificates as a real estate mortgage investment conduit ("REMIC") for federal
income tax purposes. [Each Class of Senior Certificates and the Class M
Certificates will constitute "regular interests" in the REMIC. The Class R
Certificates will constitute the sole Class of "residual interests" in the
REMIC. See "FEDERAL INCOME TAX CONSEQUENCES" herein and in the Prospectus."]
S-3
<PAGE> 5
THE [OFFERED] CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
[PART OF] A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR
PURSUANT TO ITS PROSPECTUS DATED , 19 , OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE CERTIFICATES MAY NOT BE
CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT
AND THE PROSPECTUS.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE 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.
CAPITALIZED TERMS USED IN THIS PROSPECTUS SUPPLEMENT AND NOT OTHERWISE
DEFINED HEREIN HAVE THE MEANINGS ASSIGNED IN THE PROSPECTUS. AN INDEX INDICATING
WHERE CERTAIN TERMS USED IN THE PROSPECTUS ARE DEFINED APPEARS AT THE END OF THE
PROSPECTUS UNDER THE CAPTION "INDEX OF PRINCIPAL DEFINITIONS."
S-4
<PAGE> 6
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Title of Securities........ Mortgage Pass-Through Certificates, Series 19 - .
Depositor.................. BankAmerica Mortgage Securities, Inc. (the
"Depositor"), [an affiliate of the Master Servicer,
and] a wholly-owned subsidiary of Bank of America
National Trust and Savings Association ("Bank of
America NT&SA"). See "THE DEPOSITOR" in the
Prospectus.
Master Servicer............ (the "Master Servicer," [an
affiliate of the Depositor and] a wholly-owned
subsidiary of BankAmerica Corporation
("BankAmerica"). See "POOLING AGREEMENT -- The
Master Servicer" herein and "MORTGAGE LOAN
PROGRAM -- Residential Mortgage Loan Servicing
Activities" and "-- Delinquency, Foreclosure and
Loss Experience" in the Prospectus.
Trustee.................... , a national banking
association (the "Trustee").
Cut-off Date............... , 19 .
Delivery Date.............. On or about , 19 .
The Mortgage Pool.......... The Mortgage Pool will consist of [fixed]
[adjustable] rate, [fully-amortizing] [, level
monthly payment] mortgage loans (the "Mortgage
Loans")[, exclusive of the Retained Yield (as
defined herein under "POOLING
AGREEMENT -- Servicing and Other Compensation and
Payment of Expenses; Retained Yield")]. The
Mortgage Loans were [originated] [acquired from
] by (the
"Seller"). The Depositor will acquire the Mortgage
Loans from the Seller on the Delivery Date. The
aggregate principal balance of the Mortgage Loans
as of the Cut-off Date will be approximately
$ .
The Mortgage Loans are secured by first liens on
one- to four-family residential real properties
(each, a "Mortgaged Property"). The Mortgage Loans
have terms to maturity of years from the date of
origination and a weighted average remaining term
to stated maturity of approximately months as of
the Cut-off Date.
[The Mortgage Loans will bear interest at Mortgage
Rates of at least % per annum but not more
than % per annum, with a weighted average
Mortgage Rate of approximately % per annum as
of the Cut-off Date.] [The Mortgage Rate on each
Mortgage Loan will adjust [monthly]
[semi-][annually] on its Adjustment Date (as
defined herein under "DESCRIPTION OF THE MORTGAGE
POOL -- General"), with corresponding adjustments
in the amount of monthly payments, to equal the sum
(rounded as described herein under "DESCRIPTION OF
THE MORTGAGE POOL -- General") of the Index
described below and a fixed percentage set forth in
the related Mortgage Note (the "Note Margin").
However, (i) on any Adjustment Date such Mortgage
Rate may not increase or decrease by more than 1%
(the "Periodic Rate Cap"), and (ii) over the life
of such Mortgage Loan, such Mortgage Rate may not
exceed the related maximum Mortgage Rate (such
maximum Mortgage Rate is equal to the Mortgage Rate
at origination plus a lifetime rate cap (the
"Lifetime Rate Cap")); which maximum
S-5
<PAGE> 7
Mortgage Rates will range from % to % and
(iii) with respect to approximately % of the
Mortgage Loans, by aggregate principal balance as
of the Cut-off Date, over the life of such Mortgage
Loan, such Mortgage Rate may not be lower than the
minimum Mortgage Rate. The difference between the
Mortgage Rate on each Mortgage Loan at origination
and the minimum Mortgage Rate on such Mortgage Loan
will equal the lifetime rate floor (the "Lifetime
Rate Floor"). The minimum Mortgage Rates will range
from % to %. Accordingly, changes in the
Weighted Average Adjustable Pass-Through Rate will
not necessarily correspond to changes in the Index
or other prevailing interest rates. Additionally,
the initial Mortgage Rates in effect on the
Mortgage Loans will likely be lower than the sum of
the Index and related Note Margin that would have
been applicable at origination. Because the maximum
Mortgage Rate on any Mortgage Loan is determined by
adding the Lifetime Rate Cap to the Mortgage Rate
at origination, the maximum rate on a Mortgage Loan
will likely be less than the sum of the Index and
the Note Margin that would have been applicable at
origination plus the Lifetime Rate Cap. No Mortgage
Loan provides for payment caps on any Adjustment
Date which would result in deferred interest or
negative amortization. The Mortgage Loans will bear
interest at Mortgage Rates of at least % per
annum but not more than % per annum, as of the
Cut-off Date.]
For a further description of the Mortgage Loans,
see "DESCRIPTION OF THE MORTGAGE POOL" herein.
[The Index................. As of any Adjustment Date with respect to any
Mortgage Loan, the Index applicable to the
determination of the related Mortgage Rate will be
a rate equal to [the twelve-month average of
monthly yields on actively traded U.S. Treasury
Securities adjusted to a constant maturity of one
year] [the weekly average of the secondary market
interest rates on six-month negotiable certificates
of deposit] [the average of interbank offered rates
for six-month U.S. dollar-denominated deposits in
the London Market] [the cost of funds of member
institutions of the Federal Home Loan Bank of San
Francisco] as most recently available days prior
to the Adjustment Date (the "Index").]
[Conversion of Mortgage
Loans.................... Approximately % of the Mortgage Loans, by
aggregate principal balance as of the Cut-off Date,
are Convertible Mortgage Loans. Upon notification
from a Mortgagor of such Mortgagor's intent to
convert from an adjustable rate to a fixed rate and
prior to the conversion thereof, the Master
Servicer will be obligated to [purchase the] [act
as remarketing agent with respect to such
Converting Mortgage Loan and, in such capacity, to
use its best efforts to arrange for the sale of
such] Converting Mortgage Loan at a net price of
par plus accrued interest thereon (the "Conversion
Price"). In the event that the Master Servicer does
not [purchase][sell] a Converting or Converted
Mortgage Loan, the Mortgage Pool will thereafter
include both fixed-rate and adjustable-rate
Mortgage Loans. See "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.]
The [Offered]
Certificates............... The Certificates will evidence the entire
beneficial ownership interest in a trust fund (the
"Trust Fund") consisting primarily of the Mortgage
Pool[, exclusive of the Retained Yield]. The
Certificates will be issued
S-6
<PAGE> 8
pursuant to a Pooling Agreement, to be dated as of
the Cut-off Date, among the Depositor, the Master
Servicer, and the Trustee (the "Pooling
Agreement").
[The Senior Certificates will evidence an initial
interest of approximately % in the Trust Fund.
The Class M Certificates will evidence an initial
interest of approximately % in the Trust Fund.
The Offered Certificates will have the following
Pass-Through Rates and Certificate Principal
Balances as of the Cut-off Date:
<TABLE>
<S> <C> <C>
Class A-1 Certificates............... % $
Class A-2 Certificates............... % $
Class A-3 Certificates............... % $
Class A-4 Certificates............... % $
Class A-5 Certificates............... Variable Rate $
Class M Certificates................. % $
Class R Certificates................. % $ ]
</TABLE>
Pass-Through Rate on the
[Offered] Certificates... [The Pass-Through Rate on all Classes of the
Offered Certificates, other than the Variable Strip
Certificates, is fixed. The Pass-Through Rate on
the Variable Strip Certificates on each
Distribution Date will equal the weighted average,
as determined on the Due Date in the month
preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on each of the
Mortgage Loans.] [The Pass-Through Rate applicable
to the Certificates in respect of each Distribution
Date will equal the weighted average of the Net
Mortgage Rates on the outstanding Mortgage Loans
for the month preceding such Distribution Date. The
initial weighted Average Adjustable Pass-Through
Rate will be % per annum. The Net Mortgage
Rate on each Mortgage Loan is equal to the Mortgage
Rate thereon minus the per annum rate at which the
related master and primary servicing fees accrue
(the "Servicing Fee Rate") [and the per annum rate
at which the Retained Yield referred to below under
"POOLING AGREEMENT -- Servicing and Other
Compensation and Payment of Expenses; Retained
Yield" accrues].] [The Pool Strip Rates on the
Mortgage Loans range between % and %. The
initial Pass-Through Rate on the Variable Strip
Certificates is approximately %.]
Denominations.............. The [Offered] Certificates will be offered in
registered form, in minimum denominations of
$ and integral multiples of $ in
excess thereof [with one Certificate evidencing the
authorized minimum denomination plus the remainder
of the aggregate initial principal balance of all
of the Certificates].
[The Certificates ("DTC Registered
Certificates") are issuable in book-entry form in
minimum denominations of approximately $[ ]
and integral multiples of $ in excess
thereof, and will be represented by certificates
registered in the name of Cede & Co. ("Cede"), as
the nominee of the depository, The Depository Trust
Company ("DTC" and, together with any successor
depository, the "Depository"), which will be the
"Certificateholder" of the DTC Registered
Certificates, as such term is used herein. A person
acquiring an interest in DTC Registered
Certificates (a "Beneficial Owner") will not be
entitled to receive a certificate representing such
Beneficial Owner's
S-7
<PAGE> 9
interest in the DTC Registered Certificates except
in the event that Definitive Certificates (as
defined herein under "DESCRIPTION OF THE
CERTIFICATES -- General") are issued for all
Certificates under the limited circumstances
described in the Prospectus. Until such time, the
rights of Beneficial Owners may be exercised only
through DTC and its participating organizations,
except as otherwise specified herein. See
"DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Registration of Certain Certificates" herein and
"DESCRIPTION OF THE CERTIFICATES -- Form of
Certificates" in the Prospectus.]
Interest Distributions..... [Holders of each Class of Offered Certificates will
be entitled to receive distributions in an amount
equal to the Accrued Certificate Interest (as
defined below) on such Class on each Distribution
Date, to the extent of the Available Distribution
Amount (as defined herein under "DESCRIPTION OF THE
CERTIFICATES -- Available Distribution Amount") for
such Distribution Date.
With respect to any Distribution Date, Accrued
Certificate Interest will be equal to (a) in the
case of each Class of Offered Certificates, other
than the Variable Strip Certificates, one month's
interest accrued on the Certificate Principal
Balance of the Certificates of such Class, at the
Pass-Through Rate on such Class, and (b) in the
case of the Variable Strip Certificates, one
month's interest accrued on the Notional Amount (as
defined below) of the Variable Strip Certificates
at the then applicable Pass-Through Rate on such
Class for such Distribution Date; in each case less
any interest shortfalls not covered by the
Subordination (as defined herein under "DESCRIPTION
OF THE CERTIFICATES -- Allocation of Losses;
Subordination"), including any Net Prepayment
Interest Shortfall (as defined and allocated as
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions") for such
Distribution Date.
The Notional Amount of the Variable Strip
Certificates as of any date of determination is
equal to the aggregate Certificate Principal
Balance of the Certificates of all Classes,
including the Subordinate Certificates, as of such
date.
If the Available Distribution Amount for any
Distribution Date is less than the aggregate amount
of Accrued Certificate Interest required to be
distributed on the Senior Certificates on such date
(the "Senior Interest Distribution Amount"), the
shortfall will be allocated among each affected
Class as described herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination" [(the portion of such shortfall so
allocated to the Tiered Certificates will be
allocated first to the Class A-4 Certificates to
the extent described herein under "DESCRIPTION OF
THE CERTIFICATES -- Allocation of Losses;
Subordination"), and will be distributable to
holders of the Certificates of such Classes on
subsequent Distribution Dates, to the extent of
available funds. Any such amount so carried forward
will not bear interest].
[Holders of the Certificates will be entitled to
receive distributions allocable to interest in
proportion to their respective Percentage Interests
(as defined herein under "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions") on each
Distribution Date, to the
S-8
<PAGE> 10
extent of available funds, in an aggregate amount
equal to one month's interest, at the then
applicable Weighted Average Adjustable Pass-Through
Rate, on the principal balance of the Certificates
outstanding as of the close of business on the
immediately preceding Distribution Date, subject to
reduction in the event of any full and partial
prepayments or any interest shortfalls not covered
by the [name of credit enhancement] (as defined
herein under "DESCRIPTION OF CREDIT ENHANCEMENT")
as well as certain losses and delinquencies on the
Mortgage Loans as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Allocation of
Losses; Subordination". See "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions" herein and
in the Prospectus.]
Compensating Interest...... With respect to prepayments in full or in part, the
Master Servicer is obligated to reduce its Master
Servicing Fee to the extent necessary to fund any
Prepayment Interest Shortfall (adjusted to the
related Net Mortgage Rate) on each Distribution
Date but only to the extent of its Master Servicing
Fee therefor. The amount so passed through will
hereinafter be referred to as "Compensating
Interest." Compensating Interest on any
Distribution Date will be allocated [to] [among]
the holders of [all Classes of] [the] Certificates
[(including the Subordinate and Residual
Certificates), in proportion to the respective
amounts of Accrued Certificate Interest for such
Distribution Date on each such Class] [pro rata
based on distributions of interest to be made on
such Distribution Date]. See "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions" and
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
herein.
Principal Distributions.... [Holders of the Senior Certificates will be
entitled to receive on each Distribution Date, in
the manner and priority set forth herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions", to the extent of the portion of the
Available Distribution Amount remaining after the
Senior Interest Distribution Amount is distributed
to the holders of the Senior Certificates, a
distribution allocable to principal which will, as
more fully described herein under "DESCRIPTION OF
THE CERTIFICATES -- Principal Distributions",
include (i) the Senior Percentage (as defined
below) of scheduled principal payments due on the
Mortgage Loans and of the principal portion of any
unscheduled collections of principal (other than
mortgagor prepayments and amounts received in
connection with a Final Disposition (as defined
herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions") of a
Mortgage Loan described in clause (ii) below),
including repurchases of the Mortgage Loans, (ii)
in connection with the Final Disposition of a
Mortgage Loan that did not incur any Excess Special
Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses and Extraordinary Losses (as
defined herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination"), an amount equal to the lesser of
(a) the Senior Percentage of the Stated Principal
Balance (as defined herein under "DESCRIPTION OF
THE CERTIFICATES -- Principal Distributions") of
such Mortgage Loan and (b) the Senior Accelerated
Distribution Percentage (as defined herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions") of the related collections,
including any Insurance Proceeds and Liquidation
Proceeds, to the extent applied as recoveries of
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<PAGE> 11
principal; (iii) the Senior Accelerated
Distribution Percentage (as defined below) of
mortgagor prepayments and (iv) the Excess
Subordinate Principal Amount (as defined herein
under "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions"), if any, for such Distribution
Date. Distributions in respect of principal of the
Senior Certificates on any Distribution Date will
be allocated to the Classes then entitled to such
distributions, as described herein. See
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions" herein.
Holders of the Class M Certificates will be
entitled to receive a distribution of principal on
each Distribution Date, to the extent of the
portion of the Available Distribution Amount
remaining after (i) distributions in respect of
interest and principal to the holders of the Senior
Certificates [and distributions of the Retained
Yield], (ii) reimbursement for certain Advances to
the Master Servicer and (iii) distributions in
respect of interest to the holders of the Class M
Certificates. Such principal distributions will be
made as to the Class M Certificates in the amounts
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions".
The Senior Percentage initially will be
approximately % and will be recalculated after
each Distribution Date as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions" to reflect the entitlement of the
holders of the Senior Certificates to subsequent
distributions allocable to principal. The Senior
Accelerated Distribution Percentage for each
Distribution Date occurring during the first five
years after the Delivery Date will equal %.
Commencing in , 19 , the Senior
Accelerated Distribution Percentage will decline
annually, subject to certain limitations, in
accordance with the schedule described herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions" until, commencing in ,
it will equal the then applicable Senior
Percentage; however, the Senior Accelerated
Distribution Percentage will be 100% for any
Distribution Date on which the then applicable
Senior Percentage is greater than the initial
Senior Percentage. See "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination" herein.]
[Principal payments (including prepayments)
received on the Mortgage Loans will be passed
through on each Distribution Date to holders of the
Certificates in proportion to their respective
Percentage Interests. See "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions" herein and
in the Prospectus.]
Advances................... The Master Servicer is required to make advances
("Advances") to holders of the Certificates in
respect of delinquent payments of principal and
interest on the Mortgage Loans, but only if the
Master Servicer believes that the amount advanced
will be recoverable from subsequent payments or
collections (including Insurance Proceeds and
Liquidation Proceeds) in respect of the related
Mortgage Loan and subject to the limitations
described herein. See "DESCRIPTION OF THE
CERTIFICATES -- Advances" herein and in the
Prospectus.
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<PAGE> 12
[Credit Enhancement]
[Allocation of Losses;
Subordination]........... Neither the [Offered] Certificates nor the
underlying Mortgage Loans or other assets of the
Trust Fund are insured or guaranteed by any
governmental agency or instrumentality or by the
Depositor, the Master Servicer, Bank America or any
of their affiliates. [A limited amount of losses on
the Mortgage Loans will be covered initially by
[description of credit enhancement] (the "[name of
credit enhancement]") to be issued by
(the " ") in favor of the Trustee for
the benefit of the holders of the Certificates. The
maximum amount available under the [name of credit
enhancement] to cover losses with respect to the
Mortgage Loans will initially equal $ (the
initial "Available Amount") which is equal to
approximately % of the aggregate principal
balance of the Mortgage Loans as of the Cut-off
Date. The Available Amount is subject to periodic
reduction as described herein.
The [name of credit enhancement] will cover losses
on the Mortgage Loans from [Defaulted Mortgage
Losses], [Special Hazard Losses], [Fraud Losses]
and [Bankruptcy Losses] (each as defined in the
Prospectus). [Coverage] [Amounts that may be drawn]
under the [name of credit enhancement] to cover
[Special Hazard Losses] [Fraud Losses] [Bankruptcy
Losses] are initially limited to $ ,
$ and $ , respectively. All of
the foregoing amounts are subject to periodic
reduction as described herein under "DESCRIPTION OF
CREDIT ENHANCEMENT." Any [draws] [claims] under the
[name of credit enhancement], including [draws]
[claims] for [Special Hazard Losses] [Fraud Losses]
[Bankruptcy Losses] will reduce the Available
Amount. The [name of credit enhancement] will
expire on , 19 , unless earlier
terminated or extended in accordance with its terms
or replaced in a manner as herein described under
"DESCRIPTION OF CREDIT ENHANCEMENT."
In the event losses on Mortgage Loans occur which
are not covered by the [name of credit enhancement]
or any replacement credit enhancement, such losses
will be borne by the Certificateholders [in the
order of priority described herein]. See
"DESCRIPTION OF CREDIT ENHANCEMENT" herein.]
[Subject to the limitations set forth below,
Realized Losses on the Mortgage Loans will be
allocated to the Subordinate Certificates prior to
allocation to the Senior Certificates and to the
Class B Certificates prior to allocation to the
Class M Certificates. The subordination provided to
the Senior Certificates by the Subordinate
Certificates and provided to the Class M
Certificates by the Class B Certificates will cover
Realized Losses on the Mortgage Loans from
Defaulted Mortgage Losses, Special Hazard Losses,
Fraud Losses and Bankruptcy Losses (each as defined
in the Prospectus). The aggregate amounts of
Realized Losses which may be allocated to the
Subordinate Certificates to cover Special Hazard
Losses, Fraud Losses and Bankruptcy Losses are
initially limited to $ , $ and
$ , respectively. All of the foregoing
amounts are subject to periodic reduction as
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination". In the event the Certificate
Principal Balance of the
S-11
<PAGE> 13
Subordinate Certificates is reduced to zero, all
additional losses will be borne by the Class M
Certificateholders until the Certificate Principal
Balance of the Class M Certificates is reduced to
zero and then to the Senior Certificateholders. In
addition, any Special Hazard Losses, Fraud Losses
and Bankruptcy Losses in excess of the respective
amounts of coverage therefor will be borne by the
holders of Senior Certificates and Subordinate
Certificates on a pro rata basis. [Any Default
Losses (as defined herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination") incurred on the Mortgage Loans and
not covered by the Subordinate Certificates will be
allocated on a pro rata basis between the Class A-1
and Class A-4 Certificates (the "Tiered
Certificates") and the Class A-2, Class A-3 and
Variable Strip Certificates. Any such losses so
allocated to the Tiered Certificates will be
allocated first to the Class A-4 Certificates until
the Certificate Principal Balance thereof is
reduced to zero and then to the Class A-1
Certificates. However, the credit enhancement
provided to the Class A-1 Certificates by the Class
A-4 Certificates will in no event cover Special
Hazard Losses, Bankruptcy Losses or Fraud Losses.]
Because principal distributions are paid to certain
Classes of Senior Certificates before other
Classes, holders of Classes of Senior Certificates
having a later priority of payment bear a greater
risk of such losses than holders of Classes of
Senior Certificates having earlier priorities for
distribution of principal. See "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination" herein.]
[Subordinate
Certificates............... The Class M Certificates and Class B Certificates
(together, the "Subordinate Certificates") have
aggregate initial Certificate Principal Balances of
approximately $ and $ ,
respectively, evidencing an initial Class M
Percentage and Class B Percentage of approximately
% and %, respectively, and Pass-Through
Rates of % and % respectively. The Class
B Certificates are not being offered hereby. The
Depositor expects that the Class B Certificates
will be privately placed directly or indirectly
with one or more institution investors.]
[Residual Certificates..... [The Class R Certificates (the "Residual
Certificates") have no Certificate Principal
Balance and no Pass-Through Rate.] [The Class R
Certificates (the "Residual Certificates") have an
aggregate initial Certificate Principal Balance of
approximately and a Pass-Through Rate
of %.] In addition, the Residual Certificates
represent the right to receive certain
distributions, if any, of amounts which are in
excess of the amounts required to be distributed to
all other Classes of Certificates, including the
Subordinate Certificates, following the retirement
of [the] [all of the Senior Certificates and the
Subordinate] Certificates. [The Residual
Certificates are not being offered hereby.]
Optional Termination....... At its option, on any Distribution Date when the
principal balance of the Mortgage Loans is less
than [5][10]% of the aggregate principal balance of
the Mortgage Loans as of the Cut-off Date, the
Master Servicer or the Depositor may purchase from
the Trust Fund all remaining Mortgage Loans and
other assets thereof at a price equal to
and thereby effect early retirement of
the Certificates. See "POOLING
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<PAGE> 14
AGREEMENT -- Termination" herein and "THE POOLING
AGREEMENT -- Termination" in the Prospectus.
Special Prepayment
Considerations........... The rate of principal payments on the [Offered]
Certificates collectively will depend on the rate
and timing of principal payments (including
prepayments, defaults and liquidations) on the
Mortgage Loans. As is the case with mortgage-backed
securities generally, the [Offered] Certificates
are subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans may be
prepaid at any time. Generally, when prevailing
interest rates are increasing, prepayment rates on
mortgage loans tend to decrease, resulting in a
reduced return of principal to investors at a time
when reinvestment at such higher prevailing rates
would be desirable. Conversely, when prevailing
interest rates are declining, prepayment rates on
mortgage loans tend to increase, resulting in a
greater return of principal to investors at a time
when reinvestment at comparable yields may not be
possible.
[The multiple Class structure of the Senior
Certificates results in the allocation of
prepayments among certain Classes as follows [to be
included as appropriate]:
[Sequentially paying Classes: [All] Classes of the
Senior Certificates are subject to various
priorities for payment of principal as described
herein under "DESCRIPTION OF THE CERTIFICATES --
Principal Distributions". Distributions on Classes
having an earlier priority of payment will be
immediately affected by the prepayment speed of the
Mortgage Loans early in the life of the Mortgage
Pool. Distribution on Classes with a later priority
of payment will not be directly affected by the
prepayment speed until such time as principal is
distributable on such Classes; however, the timing
of commencement of principal distributions and the
weighted average lives of such Classes will be
affected by the prepayment speed experienced both
before and after the commencement of principal
distributions on such Classes.]
[PAC Certificates: Principal distributions on the
PAC Certificates will be payable in amounts
determined based on schedules as described herein
under "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions", provided that the prepayment speed
of the Mortgage Loans each month remains between
approximately % SPA and % SPA. However,
as discussed herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions", actual
principal distributions may be greater or less than
the described amounts. If the prepayment speed of
the Mortgage Loans is consistently higher than
% of SPA, then the Companion Certificates, as
defined below, will be retired before all of the
PAC Certificates are retired, and the rate of
principal distributions and the weighted average
lives of the remaining PAC Certificates will become
significantly more sensitive to changes in the
prepayment speed of the Mortgage Loans and
principal distribution thereon will be more likely
to deviate from the described amounts.]
[TAC Certificates: Principal distributions on the
TAC Certificates will be payable in amounts
determined based on schedules as described herein
under "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions", if the prepayment speed of the
Mortgage Loans were
S-13
<PAGE> 15
to remain at a constant level of approximately
% SPA. However, as discussed herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions", actual principal distributions are
likely to deviate from the described amounts,
because it is highly unlikely that the actual
prepayment speed of the Mortgage Loans each month
will remain at or near % SPA. If the Companion
Certificates are retired before all of the TAC
Certificates are retired, the rate of principal
distributions and the weighted average lives of the
remaining TAC Certificates will become
significantly more sensitive to changes in the
prepayment speed of the Mortgage Loans, and
principal distributions thereon will be more likely
to deviate from the described amounts.]
[Companion Certificates: Because of the application
of amounts available for principal distributions
among the Senior Certificates in any given month,
first to the [PAC] [TAC] Certificates up to the
described amounts and then to the Companion
Certificates, the rate of principal distributions
and the weighted average lives of the Companion
Certificates will be extremely sensitive to changes
in the prepayment speed of the Mortgage Loans. The
weighted average lives of the Companion
Certificates will be significantly more sensitive
to changes in the prepayment speed than that of
either the [PAC] [TAC] Certificates or a fractional
undivided interest in the Mortgage Loans.]
[Subordination features: As described herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions", during certain periods all or a
disproportionately large percentage of principal
prepayments on the Mortgage Loans will be allocated
among the Senior Certificates, and during certain
periods none or a disproportionately small
percentage (or, as compared to the Class B
Certificates during certain periods, a
disproportionately large percentage) of such
prepayments will be distributed on the Class M
Certificates. As a result, the weighted average
lives of the Class M Certificates will be extended
and, as a relative matter, the subordination
afforded the Senior Certificates by the Class M
Certificates (together with the Class B
Certificates) will be increased. [Similar
descriptions to be added to other classes with
subordination features.]]
See "DESCRIPTION OF THE
CERTIFICATES -- Distributions of Principal" and
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
herein, and "MATURITY AND PREPAYMENT
CONSIDERATIONS" in the Prospectus.
Special Yield
Considerations............. [The yield to maturity on the Certificates will
depend on the rate and timing of principal payments
(including prepayments, defaults, liquidations [and
purchases of Mortgage Loans converting to a fixed
rate]) on the Mortgage Loans, as well as other
factors such as changes in the Index, provisions of
the Mortgage Loans limiting changes in the Mortgage
Rates and the purchase price for such Certificates.
The Weighted Average Adjustable Pass-Through Rate
will be reduced to the extent that prepayments,
liquidations and purchases occur at a faster rate
for Mortgage Loans having higher Net Mortgage Rates
than for Mortgage Loans having lower Net Mortgage
Rates. [The yield to investors on the Certificates
will be adversely affected by any allocation
thereto of prepayment interest shortfalls on the
Mortgage Loans, which are expected to result from
the distribution of interest only to the date of
S-14
<PAGE> 16
prepayment (rather than a full month's interest) in
connection with prepayments in full, and the lack
of any distribution of interest on the amount of
any partial prepayments.]
See "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
herein, and "YIELD CONSIDERATIONS" in the
Prospectus.]
[The yield to maturity on each respective Class of
the Senior Certificates will depend on the rate and
timing of principal payments (including
prepayments, defaults and liquidations) on the
Mortgage Loans and the allocation thereof (and of
any losses on the Mortgage Loans) to reduce the
Certificate Principal Balance (or Notional Amount)
of such Class, as well as other factors such as the
Pass-Through Rate (and any adjustments thereto) and
the purchase price for such Certificates. [The
yield to investors on any Class of Senior
Certificates will be adversely affected by any
allocation thereto of prepayment interest
shortfalls on the Mortgage Loans, which are
expected to result from the distribution of
interest only to the date of prepayment (rather
than a full month's interest) in connection with
prepayments in full, and the lack of any
distribution of interest on the amount of any
partial prepayments.]
In general, if a Class of Senior Certificates is
purchased at a premium and principal distributions
thereon occur at a rate faster than anticipated at
the time of purchase, the investor's actual yield
to maturity will be lower than that assumed at the
time of purchase. Conversely, if a Class of Senior
Certificates is purchased at a discount and
principal distributions thereon occur at a rate
slower than that assumed at the time of purchase,
the investor's actual yield to maturity will be
lower than that originally anticipated.
The Senior Certificates were structured based on a
number of assumptions, including a prepayment
assumption of % SPA and weighted average lives
corresponding thereto as set forth herein under
"SPECIAL PREPAYMENT CONSIDERATIONS." The yield
assumptions for the respective Classes that are to
be offered hereunder will vary as determined at the
time of sale.
[The multiple Class structure of the Senior
Certificates causes the yield of certain Classes to
be particularly sensitive to changes in the
prepayment speed of the Mortgage Loans and other
factors, as follows [to be included as
appropriate]:]
[Interest strip and inverse floater Classes: The
yield to investors on the [identify Classes] will
be extremely sensitive to the rate and timing of
principal payments on the Mortgage Loans (including
prepayments, defaults and liquidations), which may
fluctuate significantly over time. A rapid rate of
principal payments on the Mortgage Loans could
result in the failure of investors in the [identify
interest strip and inverse floater strip Classes]
to recover their initial investments, and a slower
than anticipated rate of principal payments on the
Mortgage Loans could adversely affect the yield to
investors on the [identify non-strip inverse
floater Classes].]
[Variable Strip Certificates: In addition to the
foregoing, the yield on the Variable Strip
Certificates will be materially adversely affected
to a
S-15
<PAGE> 17
greater extent than the yields on the other Senior
Certificates if the Mortgage Loans with higher
Mortgage Rates prepay faster than the Mortgage
Loans with lower Mortgage Rates, because holders of
the Variable Strip Certificates generally have
rights to relatively larger portions of interest
payments on the Mortgage Loans with higher Mortgage
Rates than on Mortgage Loans with lower Mortgage
Rates.]
[Adjustable rate (including inverse floater)
Classes: The yields on the [identify floating rate
Classes] will be sensitive, and the yield on the
[identify inverse floater Classes] will be
extremely sensitive, to fluctuations in the level
of [the index]. The Pass-Through Rate on the
[identify inverse floater Classes] will vary
inversely with, and at a multiple of, [the index].]
[Inverse floater companion Classes: In addition to
the foregoing, in the event of relatively low
prevailing interest rates (including [the index])
and relatively high rates of principal prepayments
over an extended period, while investors in the
[identify inverse floater companion Classes] may
then be experiencing a high current yield on such
Certificates, such yield may be realized only over
a relatively short period, and it is unlikely that
such investors would be able to reinvest such
principal prepayments on such Certificates at a
comparable yield.]
[Subordination features: The yield to maturity on
the Class M Certificates will be extremely
sensitive to losses due to defaults on the Mortgage
Loans (and the timing thereof), to the extent such
losses are not covered by the Class B Certificates,
because the entire amount of such losses (rather
than a pro rata portion thereof) will be allocable
to the Class [M] Certificates, as described herein
under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses;
Subordination". [Similar descriptions to be added
for other Classes with subordination features.]]
[Residual Certificates: Holders of the Residual
Certificates are entitled to receive distributions
of principal and interest as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions"; however, holders of such
Certificates may have tax liabilities with respect
to their Certificates during the early years of
their term that substantially exceed the principal
and interest payable thereon during such periods.
[In addition, such distributions will be reduced to
the extent that they are subject to United States
federal income tax withholding.]]
See "CERTIFICATE YIELD AND PREPAYMENT
CONSIDERATIONS" [, especially "-- Yield
Considerations," "-- Yield Considerations" and
"-- Additional Yield Considerations Applicable
Solely to the Residual Certificates" and "FEDERAL
INCOME TAX CONSEQUENCES"] herein, and "YIELD
CONSIDERATIONS" in the Prospectus.
Federal Income Tax
Consequences............. [An election will be made to treat the Trust Fund
as a real estate mortgage investment conduit (a
"REMIC"). Upon the issuance of the Certificates,
, counsel to the Depositor, will
deliver its opinion generally to the effect that,
assuming compliance with all provisions of the
Pooling Agreement. The Trust Fund will qualify as a
S-16
<PAGE> 18
REMIC under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the "Code").
The assets of the REMIC will consist of the
Mortgage Loans and the other assets in the Trust
Fund. The Senior Certificates and the Class M
Certificates will be regular interests in the REMIC
and will be treated as debt instruments of the
REMIC for federal income tax purposes. The Class R
Certificates will be the "residual interests" in
the REMIC.
The Fixed Strip Certificates and Variable Strip
Certificates will be treated for federal income tax
reporting purposes as having been issued with
original issue discount. If the method for
computing original issue discount described in the
Prospectus results in a negative amount for any
period, a Fixed Strip Certificateholder and a
Variable Strip Certificateholder will be permitted
to offset such amounts only against the respective
figure income from such Fixed Strip Certificate or
Variable Strip Certificate, as the case may be.
Although uncertain, a Fixed Strip Certificateholder
and a Variable Strip Certificateholder may be
permitted to deduct a loss to the extent that their
respective remaining basis in such Fixed Strip
Certificate or Variable Strip Certificate exceeds
the maximum amount of future payments to which such
Fixed Strip Certificateholder and Variable Strip
Certificateholder are entitled, assuming no further
prepayments of the Mortgage Loans. The prepayment
assumption that will be used in determining the
rate of accrual of market discount and original
issue discount for federal income tax purposes will
be equal to % SPA (as defined herein under
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"). No
representation is made that the Mortgage Loans will
prepay at that rate or at any other rate.
For further information regarding the federal
income tax consequences of investing in the Senior
Certificates, see "FEDERAL INCOME TAX CONSEQUENCES"
herein and in the Prospectus.
[No election will be made to treat the Trust Fund
as a real estate mortgage investment conduit for
federal income tax purposes.
, counsel to the
Depositor, will deliver its opinion to the effect
that the Trust Fund will be classified as a grantor
trust under the Internal Revenue Code of 1986 (the
"Code"), and not as a partnership or an association
taxable as a corporation. For federal income tax
purposes, the Certificateholders will be treated as
owners of stripped bonds, see "FEDERAL INCOME TAX
CONSEQUENCES -- Grantor Trust Fractional Interest
Certificates" in the Prospectus. The
Certificateholders will therefore be required to
include their yield with respect to the Mortgage
Loans in gross income as it accrues, based on a
constant yield method in accordance with the
original issue discount rules, which may be in
advance of the receipt of cash attributable to such
income. In the absence of statutory or
administrative clarification, it is intended to
base information returns or reports to
Certificateholders and the Internal Revenue Service
on the use of a prepayment assumption of % CPR
(as defined herein under "FEDERAL INCOME TAX
CONSEQUENCES -- Special Tax Considerations
Applicable to Residual Certificates") and a
representative initial offering price for the
Certificates in computing such constant yield.
However, no representation is made that the
Mortgage Loans will prepay at that rate or at any
other rate.
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<PAGE> 19
Certificateholders should consult their tax
advisors as to the proper treatment of original
issue discount on the Mortgage Loans and the
application of the stripped bond rules. For further
information regarding the federal income tax
consequences of investing in the Certificates, see
"FEDERAL INCOME TAX CONSEQUENCES" herein and in the
Prospectus.]
ERISA Considerations....... See "ERISA CONSIDERATIONS" herein and in the
Prospectus.
Rating..................... It is a condition of the issuance of the [Offered]
Certificates that they be rated at least " "
by and
" " by
. [RATINGS ON THE
CERTIFICATES WILL NOT REPRESENT ANY ASSESSMENT OF
THE MASTER SERVICER'S ABILITY TO [PURCHASE] [SELL]
CONVERTING MORTGAGE LOANS OR CONVERTED MORTGAGE
LOANS. In the event that the Master Servicer does
not [purchase] [sell] a Converting Mortgage Loans
or Converted Mortgage Loan, investors in the
Certificates might suffer a lower than anticipated
yield.] 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. A security rating
does not address the frequency of prepayments of
Mortgage Loans, or the corresponding effect on
yield to investors. [The rating of the Fixed Strip
Certificates or Variable Strip Certificates does
not address the possibility that the holders of
such Certificates may fail to recover their initial
investment.] See "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" and "RATING" herein and "YIELD
CONSIDERATIONS" in the Prospectus.
Legal Investment........... The Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest
rating category by a Rating Agency. The
Certificates will not constitute "mortgage related
securities" for purposes of SMMEA. Institutions
whose investment activities are subject to legal
investment laws and regulations, regulatory capital
requirements or review by regulatory authorities
may be subject to restrictions on investment in the
[Offered] Certificates and should consult with
their legal advisors. See "LEGAL INVESTMENT" herein
and "LEGAL INVESTMENT MATTERS" in the Prospectus.
S-18
<PAGE> 20
RISK FACTORS
[Risks Presented by Convertible Mortgage Loans. Certain of the Mortgage
Loans allow the Mortgagors to convert the adjustable rates on such Mortgage
Loans to a fixed rate at some point during the life of such Mortgage Loans (each
such Mortgage Loan, a "Convertible Mortgage Loan"), generally during the period
from one to twelve years subsequent to the date of origination, depending upon
the length of the initial adjustment period. See "THE MORTGAGE POOLS -- The
Mortgage Loans" in the Prospectus and "DESCRIPTION OF THE MORTGAGE POOL" herein.
Convertible Mortgage Loans are a relatively new type of mortgage loan. The
Depositor is not aware of any publicly available statistics that set forth
conversion experience or forecasts of conversion of such loans over an extended
period of time, and its experience with respect to such loans is insufficient to
draw any conclusions with respect to the expected conversion rates. When, as
required by the Pooling Agreement, the Master Servicer [purchases a] [acts as a
remarketing agent with respect to such Converting Mortgage Loan and, in such
capacity arranges for the sale of a] Converting Mortgage Loan, the effect on the
Certificateholders is similar to a Principal Prepayment in full of such Mortgage
Loan. Consequently, the conversion of a Mortgage Loan will generally result in
the prepayment of principal with respect to the Mortgage Pool. Because
Mortgagors may attempt to limit the risk of a higher mortgage interest rate
during periods of rising interest rates by exercising the option to convert
Mortgage Loans and thereby "lock-in" a fixed rate, the yield on the Certificates
may be affected by such conversions at time when prepayments generally would not
be expected. Also, as described above, Mortgagors may attempt to "lock-in" a
fixed rate in a declining interest-rate environment and may elect to do so
through the conversion feature.
The rate at which Mortgagors exercise their conversion rights and the
resulting [purchase] [sale] of the related Mortgage Loans by the Master Servicer
will affect the rate of payment of principal of, and hence the effective yield
on the Certificates. The effective yield on the Certificates would also be
affected by the failure of the Master Servicer to [purchase] [sell] such
Mortgage Loans.]
[Risk of Higher Delinquencies Associated with Underwriting
Standards. Certain of the Mortgage Loans were acquired from Unaffiliated
Sellers as described in the Prospectus under the heading "MORTGAGE LOAN
PROGRAM." Such Sellers utilize their own underwriting standards which may vary
substantially from FNMA or FHLMC guidelines and the Guides utilized by
Affiliated Sellers, as described in the Prospectus under the heading "MORTGAGE
LOAN PROGRAM." Mortgage Loans originated by Unaffiliated Sellers under such
underwriting standards may experience rates of delinquency, foreclosure and
bankruptcy that are higher than mortgage loans originated under the Guides or
FNMA or FHLMC guidelines.]
S-19
<PAGE> 21
DESCRIPTION OF THE MORTGAGE POOL*
GENERAL
The Mortgage Pool will consist of Mortgage Loans with an aggregate
principal balance outstanding as of the Cut-off Date, after deducting payments
of principal due on such date, of approximately $ . The Mortgage Pool
will consist of conventional [fully-amortizing] [, level monthly payment] first
Mortgage Loans with [fixed] [adjustable] interest rates which have terms to
maturity of not less than years from the date of origination.
All of the Mortgage Loans were [originated] [acquired from ] by
the Seller, as more fully described herein and in the Prospectus. [Approximately
% and % of the Mortgage Loans, by aggregate principal balance as of the
Cut-off Date, are or will be subserviced by .]
Pursuant to the terms of the Pooling Agreement, the Depositor shall assign
the representations and warranties relating to the Mortgage Loans made by the
Seller to the Trustee for the benefit of the Certificateholders as of the
Delivery Date. To the extent that the Seller is not able to repurchase a
Mortgage Loan in the event of a breach of its representations and warranties
with respect to such Mortgage Loan, neither the Depositor [, the Master
Servicer] nor any of [their] [its] affiliates will be required to repurchase
such Mortgage Loan. If there was fraud in the origination of such Mortgage Loans
a limited amount of losses on such Mortgage Loans will be covered by the
[Subordination (as defined herein) provided by the Class M Certificates and
Class B Certificates as described herein under "DESCRIPTION OF THE
CERTIFICATES -- Allocation of Losses; Subordination."] [[name of credit
enhancement] as described herein under "DESCRIPTION OF CREDIT ENHANCEMENT."]
[FOR ARM LOAN MORTGAGE POOLS -- The Mortgage Rate on each Mortgage Loan
will adjust [monthly] [semi-]annually on a date specified in the related
Mortgage Note (the "Adjustment Date"). For approximately % of the Mortgage
Loans, by aggregate principal balance as of the Cut-off Date, the first
Adjustment Date occurred prior to the Cut-off Date.]
[FOR ARM LOAN MORTGAGE POOLS -- On each Adjustment Date, the Mortgage Rate
on a Mortgage Loan will be adjusted to equal the sum (rounded to the next
highest multiple of %) of (a) a rate per annum equal to [description of
applicable index to be provided] (the "Index") and as most recently available as
of the day days prior to such Adjustment Date or, in the event that such
Index is no longer
- ---------------
* The description herein of the Mortgage Pool and the Mortgaged Properties is
based upon the Mortgage Loans expected to be included in the Mortgage Pool at
the time the [Offered] Certificates are issued, using the principal balances
of such Mortgage Loans at the close of business on the Cut-off Date, after
deducting the scheduled principal payments due on or before such date, whether
or not actually received. All references herein to "principal balance" refer
to the principal balance as of the Cut-off Date, unless otherwise specifically
stated or required by the context. References herein to percentages of
Mortgage Loans refer in each case to the approximate percentage of the
aggregate principal balance of all Mortgage Loans, based on the outstanding
principal balances of the Mortgage Loans after giving effect to scheduled
principal payments due on or prior to the Cut-off Date, whether or not
received. References to weighted averages refer, in each case, to weighted
averages by principal balance as of the Cut-off Date of the related Mortgage
Loans (determined as described in the preceding sentence). Prior to the
issuance of the Certificates, Mortgage Loans may be removed from the Mortgage
Pool as a result of Principal Prepayments in full, delinquencies or otherwise.
In such event, other Mortgage Loans may be included in the Mortgage Pool. The
actual Mortgage Pool at the time the [Offered] Certificates are issued will
not vary by more than 5%, based on the principal balances of the Mortgage
Loans constituting the Mortgage Pool at such time, from the Mortgage Pool
described herein. The Depositor believes that the information set forth herein
with respect to the Mortgage Pool is representative of the characteristics of
the Mortgage Pool as it will actually be constituted at the time the [Offered]
Certificates are issued, although the range of Mortgage Rates and certain
other characteristics of the Mortgage Loans in the Mortgage Pool may vary. See
"-- Additional Information" herein.
S-20
<PAGE> 22
available, an index selected by the Master Servicer and reasonably acceptable to
the Trustee that is based on comparable information, and (b) the related Note
Margin, subject to the following limitations. The Mortgage Rate on the Mortgage
Loan on any Adjustment Date may not increase or decrease by more than the
Periodic Rate Cap applicable to such Mortgage Loan and, over the life of such
Mortgage Loan, generally may not exceed the Mortgage Rate at origination plus
the Lifetime Rate Cap, or be less than the Mortgage Rate at origination minus
any Lifetime Rate Floor, applicable to such Mortgage Loan. No Mortgage Loan
provides for payment caps on any Adjustment Date which would result in deferred
interest or negative amortization. Effective with the first payment due date on
a Mortgage Loan after an Adjustment Date therefor, the monthly principal and
interest payment will be adjusted to an amount that will fully amortize the then
outstanding principal balance of such Mortgage Loan at its stated maturity and
pay interest at the adjusted Mortgage Rate. Because the amortization schedule of
each Mortgage Loan will be recalculated [monthly] [semi-]annually, any partial
prepayments thereof will not reduce the term to maturity of such Mortgage Loan.
An increase in the Mortgage Rate on a Mortgage Loan will result in a larger
monthly payment and in a larger percentage of such monthly payment being
allocated to interest and a smaller percentage being allocated to principal, and
conversely, a decrease in the Mortgage Rate on the Mortgage Loan will result in
a lower monthly payment and in a larger percentage of each monthly payment being
allocated to principal and a smaller percentage being allocated to interest.]
[Description of source and availability of Index to be provided for ARM
Loan Mortgage Pools.]
[FOR ARM LOAN MORTGAGE POOLS -- Listed below are the historical values of
the Index since 1991. Such values may fluctuate significantly over time and may
not increase or decrease in a constant pattern from period to period. The
following does not purport to be representative of future values of the Index.
No assurance can be given as to the Index value to be applied on any future
Adjustment Date.
HISTORICAL LEVELS OF [NAME OF INDEX]
<TABLE>
<CAPTION>
MONTH 1991 1992 1993 1994 1995 1996
- ----------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
January..................................
February.................................
March....................................
April....................................
May......................................
June.....................................
July.....................................
August...................................
September................................
October..................................
November.................................
December.................................
</TABLE>
[FOR ARM LOAN MORTGAGE POOLS -- The initial Mortgage Rate in effect on a
Mortgage Loan generally will be lower than the sum of the Index that would have
been applicable at origination and the Note Margin. Absent a decline in the
Index subsequent to origination of a Mortgage Loan, the related Mortgage Rate
will generally increase on the first Adjustment Date following origination of
such Mortgage Loan. The repayment of such Mortgage Loans will be dependent on
the ability of the Mortgagor to make larger Monthly Payments following
adjustments of the Mortgage Rate. Moreover, because the maximum Mortgage Rate on
any Mortgage Loan is determined by adding the Lifetime Rate Cap to the Mortgage
Rate at origination, irrespective of the Index that would have been applicable
at origination, the maximum Mortgage Rate on a Mortgage Loan will generally be
less than the sum of the Index and the Note Margin that would have been
applicable at origination plus the Lifetime Rate Cap. Mortgage Loans that have
the same initial Mortgage Rate may not always bear interest at the same Mortgage
Rate because the Mortgage Loans may have different
S-21
<PAGE> 23
Adjustment Dates (and the Mortgage Rate therefore may reflect different Index
values), different Note Margins, different Lifetime Rate Caps and different
Lifetime Rate Floors, if any.]
[FOR ARM LOAN MORTGAGE POOLS WITH CONVERTIBLE MORTGAGE LOANS --
Approximately % of the Mortgage Loans, by aggregate principal balance as of
the Cut-off Date, are Convertible Mortgage Loans. The first month in which any
of the Mortgage Loans could convert was , and the last month in
which any of the Mortgage Loans may convert is , . Upon
conversion, the monthly payments of principal and interest will be adjusted to
provide for full amortization at scheduled maturity. Upon notification from a
Mortgagor of such Mortgagor's intent to convert from an adjustable rate to a
fixed rate and prior to the conversion thereof, the Master Servicer will be
obligated to [purchase the Converting Mortgage Loan] [act as remarketing agent
with respect to such Converting Mortgage Loan and, in such capacity, to use its
best efforts to arrange for the sale of such Converting Mortgage Loan at the
Conversion Price]. For a discussion of how the purchase of Converting Mortgage
Loans will affect the rate of payment of principal of, and hence the effective
yield on, the Certificates, see "RISK FACTORS" and "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.
In the event that the Master Servicer fails to [purchase] [sell] a
Converting Mortgage Loan or any such Mortgage Loan following its conversion (a
"Converted Mortgage Loan"), neither the Depositor, the Master Servicer or any of
their affiliates nor any other entity is obligated to purchase or arrange for
the purchase of any Converted Mortgage Loan. Any such Converted Mortgage Loan
will remain in the Mortgage Pool as a fixed-rate Mortgage Loan and will result
in the Mortgage Pool having both fixed rate and adjustable rate Mortgage Loans.
For a discussion of the effect on the yield to Certificateholders of such
Converted Mortgage Loans remaining in the Mortgage Pool, see "CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS" herein.
Following the purchase of any Converting Mortgage Loan or Converted
Mortgage Loan as described above, the purchaser will be entitled to receive an
assignment from the Trustee of such Mortgage Loan and the purchaser will
thereafter own such Mortgage Loan free of any further obligation to the Trustee
or the Certificateholders with respect thereto.]
The Principal Balance of any Mortgage Loan as of any time of determination
is the principal balance of such Mortgage Loan remaining to be paid by the
Mortgagor at the close of business on the Cut-off Date, after deduction of all
payments due on or before the Cut-off Date whether or not paid, reduced by all
amounts distributed to Certificateholders with respect to such Mortgage Loan and
reported to them as allocable to principal, including the principal components
of any Advances (as described below under "DESCRIPTION OF THE
CERTIFICATES -- Advances").
S-22
<PAGE> 24
[FOR ARM LOAN MORTGAGE POOLS -- The Mortgage Loans will have approximately
the following characteristics as of the Cut-off Date:
<TABLE>
<S> <C>
Number of Mortgage Loans.....................
Weighted Average Adjustable Pass-Through
Rate(1)
Mortgage Rates:
Weighted Average...........................
Range......................................
Range of Net Mortgage Rates..................
Note Margins:
Weighted Average...........................
Range......................................
Net Note Margin(2)...........................
Maximum Mortgage Rates:
Weighted Average...........................
Range......................................
Maximum Net Mortgage Rates(3):
Weighted Average...........................
Range......................................
Weighted Average Months to Next Adjustment
Date after , 19 (4).........
</TABLE>
- ---------------
(1) The Weighted Average Adjustable Pass-Through Rate is equal to the weighted
average of the Net Mortgage Rates on the Mortgage Loans.
(2) The Net Note Margin is the Note Margin on each Mortgage Loan minus the
Servicing Fee Rate [and the rate at which the Retained Yield accrues].
(3) The difference between the maximum Net Mortgage Rate and the Net Mortgage
Rate as of the Cut-off Date may be less than the Lifetime Rate Cap.
(4) The Weighted Average Months to the next Adjustment Date is equal to the
weighted average of the number of months until the Adjustment Date next
following , 19 .]
The Mortgage Loans in the Mortgage Pool will have the following
characteristics as of the Cut-off Date (except as otherwise indicated).
Percentages of the Mortgage Pool are percentages of the aggregate principal
balance of the Mortgage Loans having such characteristics relative to the
aggregate principal balance of all Mortgage Loans in the Mortgage Pool):
[FOR FIXED RATE MORTGAGE LOAN POOLS -- MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL PERCENTAGE OF
MORTGAGE RATES MORTGAGE LOANS BALANCE MORTGAGE POOL
--------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
%....................................... $ %
------- -------- ------
Total.............................. $ %
======= ======== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans will be approximately % per annum.]
S-23
<PAGE> 25
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
UNPAID
ORIGINAL MORTGAGE LOAN NUMBER OF PRINCIPAL PERCENTAGE OF
PRINCIPAL BALANCE MORTGAGE LOANS BALANCE MORTGAGE POOL
--------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
%....................................... $ %
------- -------- ------
Total.............................. $ %
======= ======== ======
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $ .
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
LOAN-TO-VALUE NUMBER OF PRINCIPAL PERCENTAGE OF
RATIO(%) MORTGAGE LOANS BALANCE MORTGAGE POOL
--------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
%....................................... $ %
------- -------- ------
Total.............................. $ %
======= ======== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans will have been approximately %.
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
UNPAID
NUMBER OF PRINCIPAL PERCENTAGE OF
STATE MORTGAGE LOANS BALANCE MORTGAGE POOL
--------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
........................................ $ %
Other(1).....................................
------- -------- ------
Total.............................. $ %
======= ======== ======
</TABLE>
- ---------------
(1) Other includes states and the District of Columbia with under 3%
concentrations individually.
No more than % of the Mortgage Loans will be secured by Mortgaged
Properties located in any one zip code area in California and no more than
% of the Mortgage Loans will be secured by Mortgaged Properties located in
any one zip code area outside California.
S-24
<PAGE> 26
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF PRINCIPAL PERCENTAGE OF
PROPERTY TYPE MORTGAGE LOANS BALANCE MORTGAGE POOL
- ----------------------------------------------------- -------------- --------- -------------
<S> <C> <C> <C>
Single-family detached............................... $ %
Planned Unit Developments (detached).................
Two- to four-family units............................
Condo Low-Rise (less than 5 stories).................
Condo Mid-Rise (5 to 8 stories)......................
Condo High-Rise (9 stories or more)..................
Townhouse............................................
Planned Unit Developments (attached).................
Leasehold............................................
------- -------- ------
Total:..................................... $ %
======= ======== ======
</TABLE>
[In connection with each Mortgage Loan that is secured by a leasehold
interest, the related Seller shall have represented to the Depositor that, among
other things: the use of leasehold estates for residential properties is an
accepted practice in the area where the related Mortgaged Property is located;
residential property in such area consisting of leasehold estates is readily
marketable; the lease is recorded and no party is in any way in breach of any
provision of such lease; the leasehold is in full force and effect and is not
subject to any prior lien or encumbrance by which the leasehold could be
terminated or subject to any change or penalty; and the remaining term of the
lease does not terminate less than ten years after the maturity date of each
such Mortgage Loan.]
None of the Mortgage Loans in the Mortgage Pool will have been originated
prior to , 19 or will have a scheduled maturity later than
, . No Mortgage Loan will have an unexpired term to stated
maturity as of the Cut-off Date of less than months. The weighted average
remaining term to stated maturity of the Mortgage Loans as of the Cut-off Date
will be approximately
months.
As of the Cut-off Date, no Mortgage Loan will be one month or more
delinquent in payment of principal and interest.
Mortgage Loans, constituting % of the Mortgage Pool, will
be Buydown Mortgage Loans.
Approximately % of the Mortgage Loans were equity refinance mortgage
loans made to mortgagors who used less than the entire amount of the proceeds to
refinance an existing mortgage loan. The weighted average Loan-to-Value Ratio at
origination of such Mortgage Loans, as of the Cut-off Date, is approximately
%. Approximately % of the Mortgage Loans were made to Mortgagors who
used the entire proceeds to refinance an existing Mortgage Loan. The weighted
average Loan-to-Value Ratio at origination of such Mortgage Loans, as of the
Cut-off Date, is approximately %.
Approximately % of the Mortgage Loans provide for deferred interest or
negative amortization.
Approximately % of the Mortgage Loans will have been underwritten
under the Rapid Processing Program described in the Prospectus under "MORTGAGE
LOAN PROGRAM -- Underwriting Standards." The weighted average Loan-to-Value
Ratio at origination of the Mortgage Loans in the Mortgage Pool which were
underwritten under the Rapid Processing Program will be approximately %.
Approximately % of the Mortgage Loans underwritten under the Rapid
Processing Program will be secured by Mortgaged Properties located in
California. See "POOLING AGREEMENT -- The Master Servicer" herein.
Approximately % of the Mortgage Loans will be secured by vacation or
second homes. Approximately % of the Mortgage Loans will be secured by
non-owner-occupied residences.
S-25
<PAGE> 27
[FOR ARM LOAN MORTGAGE POOLS -- The following table sets forth the number
and aggregate principal balance as of the Cut-off Date of Mortgage Loans having
their next Adjustment Dates in the month described therein. The table also
indicates the approximate percentage of Mortgage Loans with an Adjustment Date
in each such month.
<TABLE>
<CAPTION>
PERCENTAGE OF
MONTH OF NUMBER OF AGGREGATE MORTGAGE POOL
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE BALANCE
---------------------------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$ %
------- ------- -------
Total:........................ $ %]
======= ======= =======
</TABLE>
[FOR ARM LOAN MORTGAGE POOLS -- The following table sets forth the number
and average original principal balance of Mortgage Loans having original
principal balances in the ranges described therein, as of the Cut-off Date. The
table also indicates the approximate weighted average Mortgage Rate and the
approximate weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans in each given range, as of the Cut-off Date. Such weighted average
Loan-to-Value Ratio of the Mortgage Loans is equal to the average of the
Loan-to-Value Ratios at origination.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
ORIGINAL
NUMBER OF AVERAGE ORIGINAL WEIGHTED AVERAGE LOAN-TO-VALUE
ORIGINAL PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE MORTGAGE RATE RATIO
- ----------------------------------- -------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Total, Average or
Weighted Average....... $ % %
============ ============ ============= =============
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the
Mortgage Loans will be approximately $ .]
PRIMARY MORTGAGE INSURANCE AND PRIMARY HAZARD INSURANCE
Each Mortgage Loan is required to be covered by a standard hazard insurance
policy (a "Primary Hazard Insurance Policy"). In addition, each Mortgage Loan
with a Loan-to-Value Ratio at origination in excess of 80% is required to be
covered by a primary mortgage insurance policy covering the amount of such
Mortgage Loan in excess of 75% of the value of the related Mortgaged Property
used in determining such Loan-to-Value Ratio (a "Primary Insurance Policy").
Approximately % of the Mortgage Loans, by aggregate principal balance
as of the Cut-off Date, were required to be covered by Primary Insurance
Policies and, to the best of the Depositor's knowledge, such Mortgage Loans are
so covered. Substantially all of such Primary Insurance Policies were issued by
(together with the other primary mortgage guaranty
insurers for the Mortgage Loans, the "Primary Insurers"). The Master Servicer
shall keep or cause to be kept in full force and effect each such Primary
Insurance Policy until the principal balance of the related Mortgage Loan
secured by a Mortgaged Property is reduced to 80% or less of the appraised value
in the case of such a Mortgage Loan having a Loan-to-Value Ratio at origination
in excess of 80%, provided that such Primary Insurance Policy was in place as of
the Cut-off Date and the Depositor had knowledge of such Primary Insurance
Policy. [In the event that the Depositor gains knowledge that as of the Closing
Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in excess of 80%
and was not the subject of a Primary Insurance Policy and that such Mortgage
Loan has a then current Loan-to-Value Ratio in excess of 80%, then the Master
Servicer is required to use its reasonable efforts to obtain and maintain a
Primary Insurance Policy to the extent that such a policy is obtainable at a
reasonable price.] Each Primary Insurer has a claims-paying ability currently
acceptable to the Rating Agencies that have been requested to rate the
S-26
<PAGE> 28
Certificates; however, there is no assurance as to the actual ability of any
Primary Insurer to pay claims. See "PRIMARY MORTGAGE INSURANCE, HAZARD
INSURANCE; CLAIMS THEREUNDER" in the Prospectus.
ADDITIONAL INFORMATION
A Current Report on Form 8-K will be available to purchasers of the
[Offered] Certificates and will be filed, together with the Pooling 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 footnote on page
S-19, such removal or addition will be noted in the Current Report on Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
[The Series 19 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following Classes: (i) the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, (ii) Class A-4 Certificates (the "Fixed
Strip Certificates"), (iii) Class A-5 Certificates (the "Variable Strip
Certificates"; together with the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates and Fixed Strip Certificates, the "Senior Certificates"),
(iv) Class R Certificates (the "Residual Certificates") and (v) [ ] Classes of
Subordinate Certificates which are designated as the Class M Certificates and
the Class B Certificates (together, the "Subordinate Certificates"). The
Certificates will evidence in the aggregate the entire beneficial ownership in
the Trust Fund. The Trust Fund will consist of (i) the Mortgage Loans[,
exclusive of the Depositor's rights in and to the Retained Yield with respect to
each Mortgage Loan]; (ii) such assets as from time to time are identified as
deposited in respect of the Mortgage Loans in the Custodial Account and in the
Certificate Account and belonging to the Trust Fund; (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure; [and] (iv)
any applicable Primary Insurance Policies and Primary Hazard Insurance Policies
and all proceeds thereof; [and (v) the [name of credit enhancement] (or any
alternate form of credit support substituted therefor) and all proceeds thereof,
other than any amount drawn thereunder and deposited in a reserve fund.]
[The Certificates (the "DTC Registered Certificates")
will be issued, maintained and transferred on the book-entry records of DTC and
its Participants. The DTC Registered Certificates will be issued in minimum
denominations of $[ ] and integral multiples of $1 in excess thereof.]
The Certificates will be issued in registered, certificated form in minimum
denominations of $ and integral multiples of $ in excess
thereof, except for one Certificate, evidencing the sum of an
authorized denomination thereof and the remainder of the aggregate initial
Certificate Principal Balance of such Class of Certificates. The Residual
Certificates will be issued in registered, certificated form in minimum
denominations of a 20% Percentage Interest, except as otherwise set forth herein
under "FEDERAL INCOME TAX CONSEQUENCES."
[The DTC Registered Certificates will be represented by one or more
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. ("Cede"). No
Beneficial Owner will be entitled to receive a certificate representing such
person's interest (a "Definitive Certificate"), except as set forth in the
Prospectus under "DESCRIPTION OF THE CERTIFICATES -- Form of Certificates."
Unless and until Definitive Certificates are issued for the DTC Registered
Certificates under the limited circumstances described herein, all references to
actions by Certificateholders with respect to the DTC Registered Certificates
shall refer to actions taken by DTC upon instructions from its Participants, and
all references herein to distributions, notices, reports and statements to
Certificateholders with respect to the DTC Registered Certificates shall refer
to distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the DTC Registered Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures.
S-27
<PAGE> 29
BOOK-ENTRY REGISTRATION OF CERTAIN CERTIFICATES
General. Beneficial Owners that are not Participants or Intermediaries but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, the related DTC Registered Certificates may do so only through Participants
and Intermediaries. In addition, Beneficial Owners will receive all
distributions of principal of and interest on the related DTC Registered
Certificates from the Paying Agent through DTC and Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Certificates are issued for the related DTC Registered
Certificates, it is anticipated that the only registered Certificateholder of
such DTC Registered Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer as
Certificateholders, as such term is used in the Pooling Agreement, and
Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such DTC Registered
Certificates. Participants and Intermediaries with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are required
to make book-entry transfers and receive and transmit such distributions on
behalf of their respective Beneficial Owners. Accordingly, although Beneficial
Owners will not possess physical certificates evidencing their interests in DTC
Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Intermediaries, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Depositor, the Master Servicer or the Trustee will have any
liability for any actions taken by DTC or its nominee, including, without
limitation, actions for any aspect of the records relating to or payments made
on account of beneficial ownership interests in the DTC Registered Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
Definitive Certificates. Definitive Certificates will be issued to
Beneficial 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 -- Form of Certificates."
Upon the occurrence of an event described in the Prospectus in the third
paragraph under "DESCRIPTION OF THE CERTIFICATES -- Form of Certificates," the
Trustee is required to notify, through DTC, Participants who have ownership of
DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will reissue the DTC Registered Certificates as
Definitive Certificates issued in the respective principal amounts owned by
individual Beneficial Owners, and thereafter the Trustee and the Master Servicer
will recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling Agreement.
For additional information regarding DTC and the DTC Registered
Certificates, see "DESCRIPTION OF THE CERTIFICATES -- Form of Certificates" in
the Prospectus.]
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date is equal to
(i) the aggregate amount of scheduled payments on the Mortgage Loans due on the
related Due Date and received on or prior to the related Determination Date,
after deduction of the related master servicing fees and any subservicing fees
(collectively, the "Servicing Fees"), (ii) certain unscheduled payments,
including Mortgagor prepayments on the Mortgage Loans, Insurance Proceeds,
Liquidation Proceeds and proceeds from repurchases of and substitutions for the
Mortgage Loans occurring during the preceding calendar month and (iii) all
Advances made for such Distribution Date, in each case net of amounts
reimbursable therefrom to the Master Servicer
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and any Subservicer. In addition to the foregoing amounts, with respect to
unscheduled collections, not including Mortgagor prepayments, the Master
Servicer may elect to treat such amounts as included in the Available
Distribution Amount for the Distribution Date in the month of receipt, but is
not obligated to do so. As described herein under "-- Principal Distributions,"
any such amount with respect to which such election is so made shall be treated
as having been received on the last day of the preceding calendar month for the
purposes of calculating the amount of principal and interest distributions to
any Class of Certificates. With respect to any Distribution Date, (i) the Due
Date is the first day of the month in which such Distribution Date occurs and
(ii) the Determination Date is the th day of the month in which such
Distribution date occurs or, if such day is not a business day, the immediately
succeeding business day.
INTEREST DISTRIBUTIONS
[FOR ARM LOAN MORTGAGE POOLS -- Interest distributions to holders of
Certificates will be made on each Distribution Date based on their respective
Percentage Interests. The undivided Percentage Interest of a Certificate will be
equal to the percentage obtained by dividing the initial principal balance of
such Certificate by the aggregate initial principal balance of all Certificates,
which will equal the aggregate principal balance of the Mortgage Loans as of the
Cut-off Date.
Holders of Certificates will be entitled to receive distributions of
interest on each Distribution Date, to the extent of the Available Distribution
Amount, in an aggregate amount equal to one month's interest, at the then
applicable Weighted Average Adjustable Pass-Through Rate on the principal
balance of the Mortgage Loans outstanding as of the close of business on the
immediately preceding Distribution Date (or, in the case of the first
Distribution Date, outstanding as of the Cut-off Date), subject to reduction in
the event of any interest shortfalls not covered by the [name of credit
enhancement], including any Net Prepayment Interest Shortfalls (as defined
below), as well as the interest portions of Realized Losses (including Special
Hazard Losses in excess of the Special Hazard Amount ("Excess Special Hazard
Losses"), Fraud Losses in excess of the Fraud Loss Amount ("Excess Fraud
Losses"), Bankruptcy Losses in excess of the Bankruptcy Loss Amount ("Excess
Bankruptcy Losses") and losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ("Extraordinary
Losses")) not covered by the [name of credit enhancement]. The Weighted Average
Adjustable Pass-Through Rate for any Distribution Date will equal the average of
the Net Mortgage Rates (expressed as a percentage rounded to four decimal
places) on the Mortgage Loans (weighted by the principal balances of such
Mortgage Loans as of the Due Date occurring in the preceding month). Subject to
the following limitations, for each period beginning on the related Adjustment
Date therefor, the Net Mortgage Rate on a Mortgage Loan will equal the sum of
the Index (rounded to the nearest multiple of %) and the Net Note Margin.
The Net Note Margin for each Mortgage Loan will be %. The Net Mortgage
Rate on any Mortgage Loan on any Adjustment Date may not increase or decrease by
more than the Periodic Rate Cap, and the Net Mortgage Rate on any Mortgage Loan
will not exceed the maximum Net Mortgage Rate (the "Maximum Net Mortgage Rate")
applicable to such Mortgage Loan as specified in the Pooling Agreement. The
difference between the Net Mortgage Rate as of the Cut-off Date and the Maximum
Net Mortgage Rate will not exceed, and may be less than, the Lifetime Rate Cap.
With respect to each Mortgage Loan, the Net Mortgage Rate is the rate per annum
equal to the Mortgage Rate for such Mortgage Loan, net of the Servicing Fee Rate
[and the per annum rate at which the Retained Yield accrues]. See "DESCRIPTION
OF THE MORTGAGE POOL" and "POOLING AGREEMENT -- Servicing and Other Compensation
and Payment of Expenses;" herein.]
[FOR FIXED RATE MORTGAGE LOAN POOLS -- Holders of each Class of
Certificates will be entitled to receive distributions in an amount equal to the
Accrued Certificate Interest on such Class on each Amount for such Distribution
Date[, provided however, in the case of the Tiered Certificates, that following
the Credit Support Depletion Date such distributions shall be made in the
priority set forth in the th paragraph under the heading "Principal
Distributions"]. With respect to any Distribution Date, Accrued Certificate
Interest will be equal to (a) in the case of each Class of Offered Certificates
other than the Variable Strip Certificates, one month's interest accrued on the
Certificate Principal Balance of the Certificates of such Class at the
Pass-Through Rate on such Class and (b) in the case of the Variable Strip
Certificates, one month's interest accrued on the Notional Amount (as defined
below) of the Certificates of
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<PAGE> 31
such Class at the then applicable Pass-Through Rate on such Class for such
Distribution Date; in each case less interest shortfalls, if any, for such
Distribution Date not covered by the Subordination provided by the Subordinate
Certificates, including in each case (i) any Net Prepayment Interest Shortfall
(as defined below), (ii) the interest portions of Realized Losses (including
Special Hazard Losses in excess of the Special Hazard Amount ("Excess Special
Hazard Losses"), Fraud Losses in excess of the Fraud Loss Amount ("Excess Fraud
Losses"), Bankruptcy Losses in excess of the Bankruptcy Amount ("Excess
Bankruptcy Losses") and losses occasioned by war, civil insurrection, certain
governmental actions, nuclear reaction and certain other risks ("Extraordinary
Losses")) not covered by the Subordination [(which with respect to the pro rata
portion thereof allocated to the Tiered Certificates, to the extent such losses
are Default Losses, will be allocated first to the Class A-4 Certificates and
then to the Class A-1 Certificates)] (iii) the interest portion of any Advances
that were made with respect to delinquencies that were ultimately determined to
be Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses
or Extraordinary Losses and (iv) any other interest shortfalls not covered by
Subordination, including interest shortfalls relating to the Relief Act (as
defined in the Prospectus) or similar legislation or regulations, all allocated
as described below. The Variable Strip Certificates will not receive any
interest distributions with respect to their Certificate Principal Balance.
Accrued Certificate Interest is calculated on the basis of a 360-day year
consisting of twelve 30-day months.
The Notional Amount of the Variable Strip Certificates as of any date of
determination is equal to the aggregate Certificate Principal Balance of the
Certificates of all Classes, including the Subordinate Certificates, as of such
date.
If the Available Distribution Amount for any Distribution Date is less than
the aggregate amount of the Accrued Certificate Interest required to be
distributed on the Senior Certificates on such date (the "Senior Interest
Distribution Amount"), the shortfall will be allocated among the holders of all
Classes of Senior Certificates pro rata based on the Accrued Certificate
Interest of each such Distribution Date, and will be distributable to holders of
the Certificates of such Classes, on subsequent Distribution Dates, to the
extent of available funds, provided, however, that following the Credit Support
Depletion Date distributions will be made to the Tiered Certificates in the
priority set forth in the eighth paragraph under the heading "PRINCIPAL
DISTRIBUTIONS" and therefore the pro rata portion of such shortfall that is
allocated to the Tiered Certificates will be allocated first to the Class A-4
Certificates. Shortfalls could occur, for example, if loses realized on the
Mortgage Loans in the Trust Fund were exceptionally high and were concentrated
in a particular month and if advances by the Master Servicer did not cover the
shortfall. Any such amount so carried forward will not bear interest.
The Pass-Through Rate on each Class of Offered Certificates, other than the
Variable Strip Certificates, is set forth on the cover hereof and is fixed for
each Distribution Date. The Pass-Through Rate on the Fixed Strip Certificates is
equivalent to a fixed interest rate of approximately % on the aggregate
Certificate Principal Balance of all of the Class A-1 and Fixed Strip
Certificates. The Pass-Through Rate on the Variable Strip Certificates for each
Distribution Date will equal the weighted average, as determined as of the Due
Date in the month preceding the month in which such Distribution Date occurs, of
the Pool Strip Rates on each of the Mortgage Loans in the Mortgage Pool. The
Pool Strip Rate on any Mortgage Loan is equal to the Net Mortgage Rate thereon
minus %. The Net Mortgage Rate on each Mortgage Loan is equal to the
Mortgage Rate thereon minus the Servicing Fee Rate. The initial Pass-Through
Rate on the Class A-5 Certificates is approximately %.
As described herein, the Accrued Certificate Interest allocable to each
Class of Offered Certificates is based on the Certificate Principal Balance
thereof or in the case of the Variable Strip Certificates, on the Notional
Amount. The Certificate Principal Balance of any Certificate as of any date of
determination is equal to the initial Certificate Principal Balance thereof,
reduced by the aggregate of (a) all amounts allocable to principal previously
distributed with respect to such Certificate and (b) any reductions in the
Certificate Principal Balance thereof deemed to have occurred in connection with
allocations of Realized Losses (as defined herein) in the manner described
herein. The Notional Amount of the Variable Strip Certificates as of any date of
determination is equal to the aggregate Certificate Principal Balance of the
Certificates of all Classes (including the Variable Strip Certificates, Residual
Certificates and Subordinate Certificates) as of
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such date. Reference to the Notional Amount of a Variable Strip Certificate is
solely for convenience in certain calculations and does not represent the right
to receive any distributions allocable to principal other than such Class's
initial Certificate Principal Balance.]
The Prepayment Interest Shortfall for any Distribution Date is equal to the
aggregate shortfall, if any, in collections of interest (adjusted to the related
Net Mortgage Rates) resulting from Mortgagor prepayments on the Mortgage Loans
during the preceding calendar month. Such shortfalls will result because
interest on prepayments in full is paid only to the date of prepayment, and no
interest is paid on prepayments in part, as such prepayments are applied to
reduce the outstanding principal balance of the related Mortgage Loan as of the
Due Date in the month of prepayment. The Net Prepayment Interest Shortfall for
any Distribution Date is the Prepayment Interest Shortfall for such Distribution
Date not funded by the Master Servicer as Compensating Interest. The Net
Prepayment Interest Shortfall, the interest portions of Realized Losses not
covered by the [name of credit enhancement] [Subordination] interest shortfalls
relating to the Relief Act (as defined herein) or similar legislation and other
interest shortfalls not covered by the [name of credit enhancement]
[Subordination] on any Distribution Date will be allocated [to] [among] the
holders of [all Classes of] [the] Certificates [(including the Subordinate and
Residual Certificates), in proportion to the respective amounts of Accrued
Certificate Interest for such Distribution Date on each such Class] [pro rata
based on distributions of interest to be made on such Distribution Date], before
taking into account any such reduction [(except with respect to interest
portions of such Realized Losses that are Default Losses that are allocated as
described in the fourth preceding paragraph)].
PRINCIPAL DISTRIBUTIONS
[FOR ARM LOAN MORTGAGE POOLS -- Holders of the Certificates will be
entitled to receive on each Distribution Date, to the extent of available funds
after distributions of interest as set forth above, an amount equal to the
"Principal Distribution Amount" for such Distribution Date, which will equal the
sum of: (a) the principal portion of any Advances for such Distribution Date;
(b) any amount required to be paid by the Master Servicer due to the operation
of a deductible clause in any blanket policy maintained by it to cover hazard
losses on the Mortgage Loans as described in the Prospectus under "PRIMARY
MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER"; (c) all payments in
respect of the Mortgage Loans on account of principal (including, without
limitation, Principal Prepayments, the principal portion of any Liquidation
Proceeds and Insurance Proceeds, the principal portion of proceeds from
repurchased Mortgage Loans and the principal portion of proceeds from the sale
of Converting Mortgage Loans and Converted Mortgage Loans) on deposit in the
Custodial Account on the Determination Date immediately preceding such
Distribution Date, except (i) Liquidation Proceeds, Insurance Proceeds (other
than draws or payments under the [name of credit enhancement]) and Principal
Prepayments received during the month in which such Distribution Date occurs
(unless such amounts are deemed to have been received in the prior month
pursuant to the Pooling Agreement as described below), (ii) scheduled payments
of principal due on a date or dates subsequent to the first day of the month in
which such Distribution Date occurs, (iii) late payments of principal which have
been the subject of a previous Advance or Advances that have not been reimbursed
to the Master Servicer (on behalf of itself or on behalf of any Subservicer) and
(iv) an amount equal to liquidation expenses incurred by the Master Servicer to
the extent not reimbursed from related Liquidation Proceeds; and (d) all amounts
required to be deposited in the Certificate Account on the Business Day
immediately preceding such Distribution Date, with respect to draws or payments
under the [name of credit enhancement] which are allocable to payments on
account of principal of the Mortgage Loans, except for payments of principal
which have been the subject of a previous Advance or Advances and which are
eligible for withdrawal in reimbursement to the Master Servicer or any
Subservicer.
Distributions for any Distribution Date will be reduced if net Liquidation
Proceeds or net Insurance Proceeds (including receipt of any amounts payable as
described below under "DESCRIPTION OF CREDIT ENHANCEMENT") received on a
defaulted Mortgage Loan during the month preceding the month in which such
Distribution Date occurs are less than the outstanding principal balance of such
Mortgage Loan, plus interest thereon at the related Net Mortgage Rate. If an
Advance by the Master Servicer was previously made in respect of a defaulted
Mortgage Loan, any late payments of principal and interest,
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<PAGE> 33
Insurance Proceeds and Liquidation Proceeds remitted to the Master Servicer
relating to such Mortgage Loan will be subject to withdrawal by the Master
Servicer from the Custodial Account in reimbursement to itself for such Advance
prior to being made available to the Certificateholders. To the extent that an
Advance is not made, the distributions for such Distribution Date will be
reduced accordingly. Reimbursement of the Master Servicer or the Depositor for
any other advances or expenses reimbursable to either as described in the
Prospectus, out of amounts otherwise distributable to the Certificateholders,
will also reduce the distributions for the related Distribution Date.
Distributions for any Distribution Date will be reduced to the extent that
losses on any Mortgage Loans in the Mortgage Pool are not covered by the [name
of credit enhancement] or any substitute form of credit enhancement.]
[FOR FIXED RATE MORTGAGE LOAN POOLS -- Holders of the Senior Certificates
will be entitled to receive on each Distribution Date, to the extent of the
portion of the Available Distribution Amount remaining after the Senior Interest
Distribution Amount is distributed to such holders, a distribution allocable to
principal in the following amount:
(i) the product of (A) the then applicable Senior Percentage and (B)
the aggregate of the following amounts:
(1) the principal portion of the all scheduled monthly payments on
the Mortgage Loans due on the related Due Date, whether or not received
on or prior to the related Determination Date, less the principal
portion of Debt Service Reductions (as defined below) which together
with other Bankruptcy Losses are in excess of the Bankruptcy Amount;
(2) the principal portion of all proceeds of the repurchase of any
Mortgage Loan as required by any applicable Mortgage Loan Purchase
Agreement during the preceding calendar month;
(3) the principal portion of all other unscheduled collections
received during the preceding calendar month (other than full and
partial Principal Prepayments made by the respective mortgagors and any
amounts received in connection with a Final Disposition (as defined
below) of a Mortgage Loan described in clause (ii) below), to the extent
applied as recoveries of principal;
(ii) in connection with the Final Disposition of a Mortgage Loan (x)
that occurred in the preceding calendar month and (y) that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the Stated Principal Balance of such
Mortgage Loan and (b) the then-applicable Senior Accelerated Distribution
Percentage (as defined below) of the related collections, including
Insurance Proceeds and Liquidation Proceeds to the extent applied as
recoveries of principal;
(iii) the then applicable Senior Accelerated Distribution Percentage
of the aggregate of all full and partial Principal Prepayments made by the
respective Mortgagors during the preceding calendar month;
(iv) any Excess Subordinate Principal Amount (as defined below) for
such Distribution Date;
(v) any amounts allocable to principal for any previous Distribution
Date (calculated pursuant to clauses (i) through (iii) above) that remain
undistributed to the extent any such amounts are not attributable to
Realized Losses which are allocated to the Subordinate Certificates.
Holders of the Class M Certificates will be entitled to receive a
distribution of principal on each Distribution Date, to the extent of the
portion of the Available Distribution Amount remaining after (i) distributions
in respect of interest and principal to the holders of the Senior Certificates
[and distributions of the Retained Yield], (ii) reimbursement for certain
Advances to the Master Servicer and (iii) distributions in respect of interest
to the holders of the Class M Certificates. Such principal distributions will be
made as to the Class M Certificates in the amounts described herein.
With respect to any Distribution Date on which the Certificate Principal
Balance of the most subordinate Class or Classes of Certificates then
outstanding is to be reduced to zero and on which Realized Losses are to be
allocated to such Class or Classes, the "Excess Subordinate Principal Amount" is
equal to the amount, if any, by which (i) the amount that would otherwise be
distributable in respect of principal on such Class or
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<PAGE> 34
Classes of Certificates on such Distribution Date is greater than (ii) the
excess, if any, of the aggregate of the Certificate Principal Balance of such
Class or Classes of Certificates immediately prior to such Distribution Date
over the aggregate amount of Realized Losses to be allocated to such Class or
Classes of Certificates on such Distribution Date.
A "Final Disposition" of a defaulted Mortgage Loan is deemed to have
occurred upon a determination by the Master Servicer that it has received all
Insurance Proceeds, Liquidation Proceeds and other payments or cash recoveries
which the Master Servicer reasonably and in good faith expects to be finally
recoverable with respect to such Mortgage Loan.
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
Classes of Certificates on or before the date of determination.
The Senior Percentage, which initially will equal approximately % and
will in no event exceed 100%, will be adjusted for each Distribution Date to be
the percentage equal to the aggregate Certificate Principal Balance of the
Senior Certificates immediately prior to such Distribution Date divided by the
aggregate Stated Principal Balance of all of the Mortgage Loans immediately
prior to such Distribution Date. The Subordinate Percentage as of any date of
determination is equal to 100% minus the Senior Percentage as of such date.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring during the first five years following the Delivery Date after the
Delivery Date will equal 100%. Thereafter, the Senior Accelerated Distribution
Percentage will be subject to gradual reduction as described in the following
paragraph. This disproportionate allocation of certain unscheduled payments in
respect of principal will have the effect of accelerating the amortization of
the Senior Certificates while, in the absence of Realized Losses allocated to
the Subordinate Certificates, increasing the proportionate interest in the Trust
Fund evidenced by the Subordinate Certificates. Increasing the proportionate
interest of the Subordinate Certificates relative to that of the Senior
Certificates is intended to preserve the availability of the subordination
provided by the Subordinate Certificates.
The Senior Accelerated Distribution Percentage for any Distribution Date
occurring after the first five years will be as follows: for any Distribution
Date falling in the sixth year after the Delivery Date, the Senior Percentage
for such Distribution Date plus 70% of the Subordinate Percentage (as defined
below) for such Distribution Date; for any Distribution Date falling in the
seventh year after the Delivery Date, the Senior Percentage for such
Distribution Date plus 60% of the Subordinate Percentage for such Distribution
Date; for any Distribution Date falling in the eighth year after the Delivery
Date, the Senior Percentage for such Distribution Date plus 40% of the
Subordinate Percentage for such Distribution Date; for any Distribution Date
falling in the ninth year after the Delivery Date, the Senior Percentage for
such Distribution Date plus 20% of the Subordinate Percentage for such
Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any such Distribution Date the
Senior Percentage exceeds the initial Senior Percentage, in which case the
Senior Accelerated Distribution Percentage for such Distribution Date will once
again equal 100%). The scheduled reductions in the Senior Accelerated
Distribution percentage occurring in the sixth and subsequent years after the
Delivery Date will be postponed on the Distribution Date on which such reduction
is scheduled to occur if certain criteria regarding the delinquency and loss
experience of the Mortgage Loans are not met. See "SUBORDINATION" in the
Prospectus.
On each Distribution Date occurring prior to the Credit Support Depletion
Date, (i) the product of (a) the Senior Principal Distribution Amount times (b)
the Variable Strip Percentage (as defined below) will be distributed in
reduction Certificates, and (ii) the excess of the Senior Principal Distribution
Amount over the amount described in clause (i) of Certificates as follows:
first, concurrently to the Class A-1 and Class A-4 Certificates, with the amount
to be distributed allocated as between such Classes on a pro rata basis in
proportion to the respective Certificate Principal Balances thereof, until the
Certificate Principal Balance of each such Class is reduced to zero; second, to
the Class A-2 Certificates until the Certificate Principal Balance
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thereof is reduced to zero; and third, to the Class A-3 Certificates until the
Certificate Principal Balance thereof is reduced to zero.
On each Distribution Date occurring on or after the Credit Support
Depletion Date, all priorities relating to sequential distributions in respect
of principal among the various Classes of Certificates will be disregarded, and
the Senior Principal Distribution Amount will be distributed to all Classes of
Certificates pro rata in accordance with their respective outstanding
Certificate Principal Balances; provided, that the aggregate amount
distributable to the Class A-1 and Class A-4 Certificates (the "Tiered
Certificates") in respect of Accrued Certificate Interest thereof and in respect
of their pro rata portion of the Senior Principal Distribution Amount shall be
distributed among the Tiered Certificates in the amounts and priority as
follows: first to the Class A-1 Certificates, up to an amount equal to the
Accrued Certificate Interest thereon; second to the Class A-1 Certificates, up
to an amount equal to the Optimal Principal Distribution Amount thereof (as
defined below) in reduction of the Certificate Principal Balance thereof; third
to the Class A-4 Certificates, up to an amount equal to the Accrued Certificate
Interest thereon; and fourth to the Class A-4 Certificates the remainder of the
amount so distributable among the Tiered Certificates.
The "Credit Support Depletion Date" is the first Distribution Date on which
the Senior Percentage equals 100%, with respect to any Distribution Date, the
"Variable Strip Percentage" is equal to a fraction, expressed as a percentage,
the numerator of which is the Certificate Principal Balance of the Variable
Strip Certificates as of the Cut-off Date and the denominator of which is the
aggregate Certificate Principal Balance of all Classes of Senior Certificates as
of the Cut-off Date. The "Optimal Principal Distribution Amount" is equal to the
product of (a) the then applicable Optimal Percentage and (b) the amounts
described in clauses (i), (ii) and (iii) of the eighth preceding paragraph. The
"Optimal Percentage" is equal to a fraction, expressed as a percentage, the
numerator of which is the aggregate Certificate Principal Balance of the Class
A-1 Certificates immediately prior to the applicable Distribution Date and the
denominator of which is the aggregate Certificate Principal Balance of all
Senior Certificates immediately prior to such Distribution Date.]
The Master Servicer may elect to treat Insurance Proceeds, Liquidation
Proceeds and other unscheduled collections (not including prepayments by the
mortgagors) received in any calendar month, as included in the Available
Distribution Amount [and the Senior Principal Distribution Amount] for the
Distribution Date in the month of receipt, but is not obligated to do so. If the
Master Servicer so elects, such amounts will be deemed to have been received
(and any related Realized Loss [which requires a [draw on] [claim under] the
[name of credit enhancement] shall be deemed to have occurred) on the last day
of the month prior to the receipt thereof.
[ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses which are not Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses will be allocated
first to the Class B Certificates until the Certificate Principal Balance of the
Class B Certificates has been reduced to zero, then to the Class M Certificates
until the Certificate Principal Balance of the Class M Certificates has been
reduced to zero, and then except as provided below on a pro rata basis to the
Senior Certificates based on their then outstanding Certificate Principal
Balance or the Accrued Certificate Interest thereon, as applicable. Any
allocation of a Realized Loss (other than a Debt Service Reduction) to a Senior
Certificate will be made by reducing the Certificate Principal Balance thereof,
in the case of the principal portion of such Realized Loss, and the Accrued
Certificate Interest thereon, in the case of the interest portion of such
Realized Loss, by the amount so allocated as of the Distribution Date occurring
in the month following the calendar month in which such Realized Loss was
incurred. Allocations of Realized Losses which are Default Losses (as defined
below) to Senior Certificates will be made on a pro rata basis, based on their
then outstanding Certificate Principal Balances, or the Accrued Certificate
Interest thereon, as applicable, between the Tiered Certificates and the Class
A-2, Class A-3 and Variable Strip Certificates. Any such Realized Losses so
allocated to the Tiered Certificates will be allocated first to the Class A-4
Certificates until the Certificate Principal Balance thereof is reduced to zero
and then to the Class A-1 Certificates. "Default Losses" are Realized Losses
that are attributable to the Mortgagor's failure to make any payment of
principal or interest as required under the
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Mortgage Note, and do not include Special Hazard Losses (or any other loss
resulting from damage to a Mortgaged Property), Bankruptcy Losses, Fraud Losses,
or other losses of a type not covered by the Subordination. Allocations of Debt
Service Reductions to the Subordinate Certificates will result from the priority
of distributions to the Senior Certificateholders of the Available Distribution
Amount as described under the captions "Interest Distributions" and "Principal
Distributions" herein. An allocation of the interest portion of a Realized Loss
as well as the principal portion of Debt Service Reductions will not be treated
as Subordination, as such term is defined herein, until an amount in respect
thereof has been actually disbursed to the Senior Certificateholders or the
Class M Certificateholders, as applicable. Any Excess Special Hazard Losses,
Excess Fraud Losses, Excess Bankruptcy Losses, or the Class M
Certificateholders, as applicable Extraordinary Losses or other losses of a type
not covered by Subordination will be allocated on a pro rata basis among the
Senior Certificates, [, the Retained Yield (in the case of the interest portion
of any such Realized Losses)] and the Subordinate Certificates (any such which
are allocated to the Senior Certificates will be allocated without priority
among the various Classes of Senior Certificates).
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or any Subservicer for Advances and expenses; including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses and Bankruptcy Losses
are referred to herein as "Realized Losses." As used herein, "Debt Service
Reductions" means reductions in the amount of monthly payments due to certain
bankruptcy proceedings, but does not include any forgiveness of principal.
In order to maximize the likelihood of distribution in full of the Senior
Interest Distribution Amount and the Senior Principal Distribution Amount,
holders of Senior Certificates will have a prior right, on each Distribution
Date, to the Available Distribution Amount, to the extent necessary to satisfy
the Senior Interest Distribution Amount and the Senior Principal Distribution
Amount. The Senior Principal Distribution Amount is subject to adjustment on
each Distribution Date to reflect the then applicable Senior Percentage and the
Senior Accelerated Distribution Percentage, as described herein under "Principal
Distributions," each of which may be increased (to not more than 100%) in the
event of delinquencies or Realized Losses on the Mortgage Loans. The application
of the Senior Accelerated Distribution Percentage when it exceeds the Senior
Percentage to determine the Senior Principal Distribution Amount, together with
amounts, if any, paid on Senior Certificates in respect of Unrecovered Senior
Portions, will accelerate the amortization of the Senior 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 Subordinate Certificates), thereby increasing, as a relative
matter, the Subordination afforded by the Subordinate Certificates. Similarly,
holders of Class A-1 Certificates will have a prior right, on each Distribution
Date occurring on or after the Credit Support Depletion Date, to that portion of
the Available Distribution Amount allocated to the Tiered Certificates, to the
extent necessary to satisfy the Accrued Certificate Interest on the Class A-1
Certificates and the Optimal Principal Distribution Amount. Therefore, any
shortfalls in the amounts that would otherwise be distributable to Class A-1
Certificateholders, whether resulting from Mortgage Loan delinquencies or
Realized Losses will be borne by the holders of the Class A-4 Certificates.
The total amount of Realized Losses which may be allocated solely to the
Subordinate Certificates through the operation of the subordination provisions
described above ("Subordination") in connection with Special Hazard Losses (the
"Special Hazard Amount") will equal $ less the sum of (A) any amounts
allocated solely to the Subordinate Certificates through Subordination in
respect of Special Hazard Losses and (B) the Adjustment Amount. The Adjustment
Amount on each anniversary of the Cut-off Date will be equal to the amount, if
any, by which the Special Hazard Amount, without giving effect to the deduction
of the Adjustment Amount for such anniversary, exceeds the greater of (i) 1%
(or, if greater than
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<PAGE> 37
1%, the highest percentage of Mortgage Loans, by principal balance, in any
California zip code area) times the aggregate principal balance of all of the
Mortgage Loans in the Mortgage Pool on such anniversary and (ii) twice the
principal balance of the single Mortgage Loan in the Mortgage Pool having the
largest principal balance. As used in this Prospectus Supplement, "Special
Hazard Losses" has the same meaning set forth in the Prospectus except that
Special Hazard Losses will not include and the Subordination will not cover
Extraordinary Losses and Special Hazard Losses will not exceed the lesser of the
cost of repair or replacement of the related Mortgaged Properties.
The total amount of Realized Losses which may be allocated to the
Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") from Subordination shall initially be equal to $ . As of any
date of determination after the Cut-off Date the Fraud Loss Amount shall equal
(X) prior to the first anniversary of the Cut-off Date an amount equal to %
of the aggregate principal balance of all of the Mortgage Loans as of the
Cut-off Date minus the aggregate amounts allocated solely to the Subordinate
Certificates through Subordination with respect to Fraud Losses up to such date
of determination, and (Y) from the first through fifth anniversary of the
Cut-off Date, an amount equal to (1) the lesser of (a) the Fraud Loss Amount as
of the most recent anniversary of the Cut-off Date and (b) % of the aggregate
principal balance of all of the Mortgage Loans as of the most recent anniversary
of the Cut-off Date minus (2) the aggregate amounts allocated solely to the
Subordinate Certificates through Subordination with respect to Fraud Losses
since the most recent anniversary of the Cut-off Date up to such date of
determination. After the fifth anniversary of the Cut-off Date the Fraud Loss
Amount shall be zero and no allocation solely to the Subordinate Certificates
through Subordination shall be made with respect to Fraud Losses.
The total amount of Realized Losses which may be allocated solely to the
Subordinate Certificates in connection with Bankruptcy Losses (the "Bankruptcy
Amount") from Subordination will equal $ less the sum of any amounts
allocated solely to the Subordinate Certificates through Subordination for such
losses up to such date of determination. As of any day of determination on or
after the first anniversary of the Cut-off Date, the Bankruptcy Amount will
equal the excess, if any, of (1) the lesser of (a) the Bankruptcy Amount as of
the business day next preceding the most recent anniversary of the Cut-off Date
(the "Relevant Anniversary") and (b) the greater of (A) an amount calculated
pursuant to the terms of the Pooling Agreement, which amount as calculated will
provide for a reduction in the Bankruptcy Amount, if delinquency rates and
losses on the Mortgage Loans do not exceed certain levels as set forth in the
Pooling Agreement and (B) the excess of (i) the aggregate of all monthly
payments on the largest Mortgage Loan in the Mortgage Pool secured by a
non-primary residence over the remaining term of such Mortgage Loan over (ii)
the aggregate of all monthly payments that would be made on such Mortgage Loan
over such remaining term if the related Mortgage Rate were equal to 6% per
annum, over (2) the aggregate amount of Bankruptcy Losses allocated solely to
the Subordinate Certificate through Subordination since such anniversary.
Notwithstanding the foregoing, the provisions relating to Subordination
will not be applicable in connection with a Bankruptcy Loss so long as the
Master Servicer has notified the Trustee in writing that the Master Servicer is
diligently pursuing any remedies that may exist in connection with the
representations and warranties made regarding the related Mortgage Loan and
either (A) the related Mortgage Loan is not in default with regard to payments
due thereunder or (B) delinquent payments of principal and interest under the
related Mortgage Loan and any premiums on any applicable Primary Hazard
Insurance Policy and any related escrow payments in respect of such Mortgage
Loan are being advanced on a current basis by the Master Servicer or a
Subservicer.]
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds, advances made by a Subservicer, or funds held in
the Custodial Account (as described in the Prospectus) for future distribution
or withdrawal) with respect to any payments of principal and interest (net of
the related Servicing Fees [and the Retained Yield]) which were due on the
Mortgage Loans on the immediately preceding Due Date and delinquent on the
business day next preceding the related Determination Date, but only if the
Master Servicer believes that the amount advanced will be recoverable from
related late collections,
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<PAGE> 38
Insurance Proceeds [(including [draws on] [payments under] the [name of credit
enhancement)] [or] [,] Liquidation Proceeds [or amounts otherwise payable to the
holders of the Subordinate Certificates].
The purpose of making such Advances is to maintain a regular cash flow to
the Certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
Debt Service Reductions or the application of the Relief Act or similar
legislation. Any failure by the Master Servicer to make an Advance as required
under the Pooling Agreement will constitute an Event of Default thereunder, in
which case the Trustee, as successor Master Servicer, will be obligated to make
any such advance, in accordance with the terms of the Pooling Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from [either (a)] late collections, Insurance Proceeds
[(including [draws on] [payments under] the [name of credit enhancement)] and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made [or (b) as to any Advance that remains unreimbursed following
the final liquidation of the related Mortgage Loan, from amounts otherwise
distributable on the Subordinate Certificates; provided however that only the
Subordinate Percentage of such Advances are reimbursable from amounts otherwise
distributable on the Subordinate Certificates in the event that such Advances
were made with respect to delinquencies which ultimately were determined to be
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses and the Senior Percentage of such Advances which may not be
so reimbursed from amounts otherwise distributable on the Subordinate
Certificates may be reimbursed to the Master Servicer out of any funds in the
Custodial Account or Certificate Account prior to distributions on the Senior
Certificates. In the latter event, the aggregate amount otherwise distributable
on the Senior Certificates will be reduced by an amount equal to the Senior
Percentage of such Advances.] In addition, [if the Certificate Principal Balance
of the Subordinate Certificates has been reduced to zero,] any Advances
previously made which are deemed by the Master Servicer to be nonrecoverable
from related late collections, Insurance Proceeds [(including [draws on]
[payments under] the [name of credit enhancement])] and Liquidation Proceeds may
be reimbursed to the Master Servicer out of any funds in the Custodial Account
or Certificate Account prior to distributions on the Senior Certificates.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The effective yield to the holders of [Offered] Certificates will be lower
than the yield otherwise produced by the applicable [Weighted Average
Adjustable] Pass-Through Rate and purchase price because monthly distributions
will not be made to such holders until the th day (or if such day is not a
business day, then on the next succeeding business day) of the month following
the month in which interest accrues on the Mortgage Loans (without any
additional distributions of interest or earnings thereon in respect of such
delay). See "YIELD CONSIDERATIONS" in the Prospectus.
The yield to maturity and the aggregate amount of distributions on the
[Offered] Certificates will be directly related to the rate of payment of
principal on the Mortgage Loans. Such yield may be adversely affected by a
higher or lower than anticipated rate of payment of principal on the Mortgage
Loans in the Trust Fund. The rate of payment of principal on such Mortgage Loans
will in turn be affected by the amortization schedules of the Mortgage Loans
[(which will change periodically as described above)], the rate of principal
prepayments thereon by the Mortgagors, liquidations of defaulted Mortgage Loans
and purchases of Mortgage Loans due to certain breaches of representations [or
the conversion of Convertible Mortgage Loans. The principal component of the
monthly payments on the Mortgage Loans may change on each related Adjustment
Date.] [The Mortgage Loans may be prepaid by the Mortgagors at any time without
payment of any prepayment fee or penalty.] All of the Mortgage Loans contain
due-on-sale clauses. In addition, the amortization schedule of a Mortgage Loan
may be changed in connection with the receipt of a partial prepayment thereon,
provided however that such changes will not include a change in the maturity
date of the related Mortgage Loan. See "Description of the Mortgage
Pool -- General" herein. [As described under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions" herein, all or a disproportionate
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<PAGE> 39
percentage of principal prepayments on the Mortgage Loans will be distributed to
the Senior Certificates during not less than the first nine years after the
Delivery Date.]
Factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, mortgage market interest rates,
unemployment, mortgagors' net equity in the mortgaged properties, changes in the
value of the mortgaged properties and servicing decisions. If prevailing
mortgage rates fell significantly below the Mortgage Rates on the Mortgage
Loans, the rate of prepayment (and refinancing) would be expected to increase.
Conversely, if prevailing mortgage rates rose significantly above the Mortgage
Rates on the Mortgage Loans, the rate of prepayment on the Mortgage Loans would
be expected to decrease. There can be no certainty as to the rate of prepayments
on[, or conversions of,] the Mortgage Loans during any period or over the life
of the Certificates.] [However, in the event that substantial numbers of
Mortgagors exercise their conversion rights, and the Master Servicer [purchases]
[sells] the Converting and Converted Mortgage Loans, the Mortgage Pool will
experience substantial prepayment of principal.]
[The yield to maturity on the Variable Strip Certificates and, in
particular, on the Fixed Strip Certificates, which Classes are expected to be
sold at substantial premiums, will be extremely sensitive to both the timing of
receipt of prepayments and the overall rate of principal prepayments and
defaults on the Mortgage Loans, which rate may fluctuate significantly from time
to time. The yield to maturity on the Fixed Strip Certificates is particularly
sensitive to the rate of principal payments because the Certificate Principal
Balance of the Fixed Strip Certificates is paid down on a pro rata basis with
the Certificate Principal Balance of the Class A-1 Certificates and Class A-4
Certificates before distributions to other Classes of Senior Certificates. The
yields to investors on all of the Offered Certificates will also be adversely
affected by any interest shortfalls of a type not covered by Subordination,
including Net Prepayment Interest Shortfalls. In addition, holders of Variable
Strip Certificates generally have rights to relatively larger portions of
interest payments on Mortgage Loans with higher Mortgage Rates; thus, the yield
on the Variable Strip Certificates will be materially adversely affected to a
greater extent than on the other Senior Certificates if the Mortgage Loans with
the higher Mortgage Rates prepay faster than the rate assumed by investors.
There can be no assurance that the Mortgage Loans will prepay at any particular
rate or that the cash flows on the Fixed Strip Certificates or Variable Strip
Certificates will conform to the cash flows described herein. Investors in the
Fixed Strip Certificates and Variable Strip Certificates should fully consider
the associated risks, including 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.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates (other than the Variable Strip Certificates) are
fixed, such rates will not change in response to changes in market interest
rates. The Pass-Through Rate on the Variable Strip Certificates is based on the
weighted average of the Pool Strip Rates on the Mortgage Loans, and such rates
will also not change in response to changes in market interest rates.
Accordingly, if market interest rates or market yields for securities similar to
the Offered Certificates were to rise, the market value of the Offered
Certificates may decline. In addition, if prevailing mortgage rates fell
significantly below the Mortgage Rates on the Mortgage Loans, the rate of
prepayments (including refinancings) would be expected to increase. Conversely,
if prevailing mortgage rates rose significantly above the Mortgage Rates on the
Mortgage Loans, the rate of prepayment on the Mortgage Loans would be expected
to decrease.
The rate of defaults on the Mortgage Loans will also affect the rate of
payment of principal on the Mortgage Loans. In general, defaults on mortgage
loans are expected to occur with greater frequency in their early years. The
rate of default on mortgage loans which are equity refinance mortgage loans may
be higher than for other types of Mortgage Loans. Prepayments, liquidations and
purchases of the Mortgage Loans will result in distributions to
Certificateholders of principal amounts which would otherwise be distributed
over the remaining terms of the Mortgage Loans. Furthermore, the rate of
prepayments, defaults and liquidations on the Mortgage Loans will be affected by
the general economic condition of the region of the country in which the related
Mortgaged Properties are located. The risk of delinquencies and loss is greater
and prepayments are less likely in regions where a weak or deteriorating economy
exists, as may be evidenced by, among other factors, increasing unemployment or
falling property values. See "MATURITY AND PREPAYMENT CONSIDERATIONS" in the
Prospectus. Since the rates of payment of principal on the Mortgage Loans will
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<PAGE> 40
depend on future events and on a variety of factors (as described more fully
herein and in the Prospectus under "YIELD CONSIDERATIONS" and "MATURITY AND
PREPAYMENT CONSIDERATIONS"), no assurance can be given as to such rate or the
rate of principal prepayments on the Certificates.
[The periodic increase in the interest paid by the Mortgagor of a Buydown
Mortgage Loan during or at the end of the applicable Buydown Period may create a
greater financial burden for the Mortgagor, who might not have otherwise
qualified for a mortgage under the applicable lender's underwriting guidelines,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan. See "MORTGAGE LOAN PROGRAM -- Underwriting Standards" in the
Prospectus.]
The amount of interest otherwise payable to holders of the Certificates
will be reduced by any interest shortfalls not covered by Subordination,
including Net Prepayment Interest Shortfalls. Such shortfalls will not be offset
by a reduction in the Servicing Fees payable to the Master Servicer or
otherwise. Net Prepayment Interest Shortfalls on any Distribution Date will be
allocated [to] [among] the holders of [all Classes of] [the] Certificates
[(including the Subordinate and Residual Certificates), in proportion to the
respective amounts of accrued Certificate Interest for such Distribution Date on
each such Class] [pro rata based on distributions of interest to be made on such
Distribution Date]. See "YIELD CONSIDERATIONS" in the Prospectus and
"DESCRIPTION OF THE CERTIFICATES -- Interest Distributions" for a discussion of
the effect of principal prepayments on the Mortgage Loans on the yield to
maturity of the Certificates and certain possible shortfalls in the collection
of interest.
The timing of changes in the rate of prepayments, liquidations and
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Because all or a
disproportionate percentage of principal prepayments will be allocated to the
Senior Certificates during not less than the first nine years after the Delivery
Date, the rate of prepayments on the Mortgage Loans during this period may
significantly affect the yield to maturity of the Offered Certificates.
In addition, the yield to maturity of the Certificates will depend on the
price paid by the holders of the Certificates and the related Pass-Through Rate.
The extent to which the yield to maturity of a Certificate may vary from the
anticipated yield thereon will depend upon the degree to which it is purchased
at a discount or premium and the degree to which the timing of payments thereon
is sensitive to prepayments. Because principal distributions are paid to certain
Classes of Offered Certificates before other Classes, holders of Classes of
Offered Certificates having a later priority of payment bear a greater risk of
losses than holders of Classes of Offered Certificates having earlier priorities
for distribution of principal. In addition, the Class A-4 Certificates bear a
greater risk of losses than the other Tiered Certificates because Default Losses
on the Mortgage Loans not covered by the Subordination which are allocated to
the Tiered Certificates are allocated first to the Class A-4 Certificates prior
to allocation to the Class A-1 Certificates to the extent described herein. For
additional considerations relating to the yield on the Certificates, see YIELD
CONSIDERATIONS" and "MATURITY AND PREPAYMENT CONSIDERATIONS" in the Prospectus.
The assumed final Distribution Date with respect to each Class of
Certificates is , 20 . The assumed final Distribution Date is the
Distribution Date immediately following the latest scheduled maturity date of
any Mortgage Loan in the Mortgage Pool.
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security until a dollar amount in payment of
principal equal to the original principal balance of such security (less losses)
is distributed to the investor. The weighted average life of the Certificates
will be influenced by among other things, the rate at which principal of the
Mortgage Loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
standard prepayment assumption ("SPA"), represents an assumed rate of prepayment
each month relative to the then outstanding principal balance of a pool of new
mortgage loans. A prepayment assumption of 100% SPA assumes constant prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgage loans in the first month of the life of the
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<PAGE> 41
mortgage 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 mortgage loans, 100% SPA assumes a constant
prepayment rate of 6% per annum each month. As used in the table below, "0% SPA"
assumes prepayment rates equal to 0% of SPA. Correspondingly, % SPA" assumes
prepayment rates equal to % of SPA, and so forth. SPA does not purport to be
a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans.
The table set forth below has been prepared on the basis of assumptions
regarding the characteristics of the Mortgage Loans and of the Certificates as
follows: (i) as of the date of issuance of the Certificates, the aggregate
principal balance of the Mortgage Loans is approximately $ and each
Mortgage Loan has a Mortgage Rate of %, an original term of months, a
remaining term to maturity of months, and a related Servicing Fee of %,
(ii) the scheduled monthly payment for each Mortgage Loan has been based on its
outstanding balance, interest rate and remaining term to maturity, such that the
Mortgage Loan will amortize in amounts sufficient for repayment thereof by its
remaining term to maturity, (iii) in the aggregate, the Senior Certificates
represent an initial interest of % in the Mortgage Loans, (iv) the Senior
Certificates will have the following Pass-Through Rates and initial Certificate
Principal Balances as of the Cut-off Date; Class A-1, %, $ ; Class
A-2, %, $ , Class A-3, %, $ , Class A-4, %,
$ , Class A-5, %, $ (v) the Subordinate Certificates
represent an initial interest of % in the Mortgage Loans, have a Pass-Through
Rate of % and have an initial Certificate Principal Balance of approximately
$ , (vi) the Seller, the Master Servicer or the Depositor will not
repurchase any Mortgage Loan, as described under "MORTGAGE LOAN
PROGRAM -- Representations by Sellers" and "DESCRIPTION OF THE
CERTIFICATES -- Assignment of the Mortgage Loans" in the Prospectus, and the
Master Servicer and the Depositor will not exercise their options to purchase
the Mortgage Loans and thereby cause a termination of the Trust Fund, (vii)
there are no delinquencies and principal payments on the Mortgage Loans will be
timely received at the respective percentages of SPA set forth in the table,
(viii) there is no Net Prepayment Interest Shortfall or any other interest
shortfall in any month, (ix) and (x) there are no additional ongoing Trust Fund
expenses payable out of the Trust Fund. SOME OF THE FOREGOING ASSUMPTIONS
REGARDING THE CHARACTERISTICS OF THE MORTGAGE LOANS AND THE CERTIFICATES DIFFER
FROM THE ACTUAL CHARACTERISTICS THEREOF.
The discrepancies between the assumptions used in constructing the tables
and the actual characteristics of the Mortgage Loans and the Certificates
underscore the hypothetical nature of the table beginning on page S- , which is
provided to give a general sense of principal cash flows under varying
prepayment scenarios. Likewise, it is very unlikely that the Mortgage Loans will
prepay at a constant level of SPA until maturity or that all of the Mortgage
Loans will prepay at the same level of SPA. Any difference between such
assumptions and the actual characteristics of the Mortgage Loans or of the
Certificates, or the actual prepayment experience of the Mortgage Loans may
result in percentages of the initial Certificate Principal Balance outstanding
and weighted average lives of the Classes of Senior Certificates different from
those shown. Moreover, the diverse remaining terms to maturity of the Mortgage
Loans could produce slower or faster principal distributions than indicated in
the table at the various constant percentages of SPA specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is months.
The assumed Pass-Through Rate on the Fixed Strip Certificates was
calculated to be approximately equal to (i) the excess, as of the Cut-off Date,
of (a) % aggregate assumed Certificate Principal Balances of the Tiered
Certificates, over (b) the sum of (1) % of the assumed Certificate Principal
Balance of the Class A-1 Certificates and (2) % of the assumed Certificate
Principal Balance of the Class A-4 Certificates divided by (ii) the assumed
Certificate Principal Balance of the Fixed Strip Certificates.
Based upon the foregoing assumptions, the following table indicates the
projected weighted average life of each Class of Senior Certificates and sets
forth the percentages of the initial Certificate Principal Balance of each such
Class of Senior Certificates that would be outstanding after each of the dates
shown at various percentages of SPA.
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<PAGE> 42
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3
------------------------------- ------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
DISTRIBUTION DATE........ % % % % % % % % % % % % % % %
Initial Percentage.......
</TABLE>
- ---------------
Weighted Average Life in Years (**) . . . .
* Indicates a number that is greater than zero but less than .5%.
** The weighted average life of a Certificate of any Class is determined by (i)
multiplying the amount of each distribution in reduction of Certificate
Principal Balance by the number of years from the date of issuance of the
Certificate to the related Distribution Date, (ii) adding the results, and
(iii) dividing the sum by the initial Certificate Principal Balance of the
Certificate.
FIXED STRIP CERTIFICATES AND VARIABLE STRIP CERTIFICATES YIELD CONSIDERATIONS
The following tables indicate the sensitivity of the yield on the Fixed
Strip Certificates and Variable Strip Certificates to various rates of
prepayment by projecting the monthly aggregate payments of principal and
interest on the Fixed Strip Certificates and Variable Strip Certificates and the
corresponding pre-tax yields on a corporate bond equivalent basis, based on
distributions being made on the Mortgage Loans that are assumed to be included
in the Trust Fund, as described in the assumptions stated in clauses (i) through
(x) of the fourth paragraph preceding the table commencing on page S-
(including the assumptions regarding the characteristics of the Mortgage Loans
and the Certificates, which differ in certain respects from the actual
characteristics thereof), and assuming, further, that (i) principal prepayments
on the Mortgage Loans will be received at the respective percentages of SPA set
forth in the following table, (ii) the Certificates will be purchased on
, 19 , and (iii) payments on the Fixed Strip Certificates and the
Variable Strip Certificates will be received on the th Day of each month,
commencing , 19 .
PRE-TAX YIELD TO MATURITY ON THE FIXED STRIP CERTIFICATES
AND THE VARIABLE STRIP CERTIFICATES AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
FIXED STRIP CERTIFICATES
-----------------------------------
<S> <C> <C> <C> <C> <C>
Assumed Purchase Price.................................. % % % % %
</TABLE>
<TABLE>
<CAPTION>
VARIABLE STRIP CERTIFICATES
-----------------------------------
<S> <C> <C> <C> <C> <C>
Assumed Purchase Price.................................. % % % % %
</TABLE>
The pre-tax yield set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
streams of cash flows to be paid on the Fixed Strip Certificates and Variable
Strip Certificates, would cause the discounted present value of such assumed
streams of cash flows to equal the assumed purchase prices listed as percentages
of the original Certificate Principal Balances in the table for the Fixed Strip
Certificates and Variable Strip Certificates, respectively. Yields shown are
corporate bond equivalent and are based on the assumed prices given in the
tables. The prices shown do not include accrued interest but an amount of
accrued interest consistent with the assumptions was computed and was used to
arrive at these yields. Implicit in the use of any discounted present value or
internal rate of return calculation such as these in the assumption that cash
flows are reinvested at the discount rate or internal rate of return. Thus,
these calculations do not take into account the different interest rates at
which investors may be able to reinvest funds received by them as distributed on
the Fixed Strip Certificates or Variable Strip Certificates. Consequently these
yields do not purport to reflect the return on any investment in the Fixed Strip
Certificates or Variable Strip Certificates when such reinvestment rates are
considered.
The preceding tables are based on a set of assumptions that vary from other
information provided herein. The differences between such assumptions and the
actual characteristics of the Mortgage Loans and of the Certificates may result
in actual yields being different from those shown in such tables. For example,
the Pass-
S-41
<PAGE> 43
Through Rate on the Fixed Strip Certificates is chosen to be approximately
equivalent to the formula given in the second paragraph immediately preceding
the table entitled "Percent of Initial Certificate Principal Balance
Outstanding." This formula references various Certificate Principal Balances for
the purposes of making the computations for the subsequent tables. The actual
Pass-Through Rate computed by applying the formula using actual Certificate
Principal Balances may vary from these assumptions. Likewise, the Pass-Through
Rate on the Variable Strip Certificates, which is assumed to be fixed throughout
the life of the Certificates, will actually be likely to change from one period
to the next, and the rate assumed may be different from the actual initial
Pass-Through Rate on the Variable Strip Certificates. Such discrepancies between
assumed and actual characteristics underscore the hypothetical nature of the
tables, which are provided to give a general sense of the sensitivity of yields
in varying prepayment scenarios.
Notwithstanding the assumed prepayment rates reflected in the preceding
table, it is highly unlikely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of 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 yields on the Fixed Strip
Certificates and Variable Strip Certificates are likely to differ from those
shown in such table, even if all of the Mortgage Loans prepay at the indicated
percentages of SPA over any given time period or over the entire life of the
Certificates. No representation is made as to the actual rate of principal
payment on the Mortgage Loans for any period or over the life of the
Certificates or as to the yield on the Certificates. In addition, the various
remaining terms to maturity of the Mortgage Loans could produce slower or faster
principal distributions than indicated in the preceding tables at the various
constant percentages of SPA specified, even if the weighted average remaining
term to maturity of the Mortgage Loans is months. Investors are urged to make
their investment decisions based on their determinations as to anticipated rates
of prepayment under a variety of scenarios.
[Certain of the Mortgage Loans provide that the Mortgagors may, during a
specified period of time, convert the adjustable rate of such Mortgage Loans to
a fixed rate. The Depositor is not aware of any publicly available statistics
that set forth principal prepayment or conversion experience or prepayment or
conversion forecasts of adjustable rate mortgage loans over an extended period
of time, and its experience with respect to adjustable rate mortgages is
insufficient to draw any conclusions with respect to the expected prepayment or
conversion rates on the adjustable rate Mortgage Loans included in the Mortgage
Pool. The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors. As is
the case with conventional fixed rate mortgage loans, adjustable rate mortgage
loans may be subject to a greater rate of principal prepayments or purchases due
to their conversion to fixed interest rate loans in a low interest rate
environment. For example, if prevailing interest rates fall significantly,
adjustable rate mortgage loans could be subject to higher prepayment and
conversion rates than if prevailing interest rates remain constant because the
availability of fixed rate or other adjustable rate mortgage loans at
competitive interest rates may encourage Mortgagors to refinance their
adjustable rate mortgages to "lock in" a lower fixed interest rate or take
advantage of the availability of such other adjustable rate mortgage loans, or,
in the case of convertible adjustable rate mortgage loans, to exercise their
option to convert the adjustable interest rates to fixed interest rates. The
conversion feature may also be exercised in a rising interest rate environment
as Mortgagors attempt to limit their risk of higher rates. Such a rising
interest rate environment may also result in an increase in the rate of defaults
on the Mortgage Loans. In the event that the Master Servicer [purchases] [sells]
Converting or Converted Mortgage Loans, a Mortgagor's exercise of the conversion
option will result in a pro rata distribution of the principal portion thereof
to the Certificateholders, as described herein. Alternatively, to the extent the
Master Servicer fails in its obligation to [purchase] [sell] Converting Mortgage
Loans, as described herein, the Mortgage Pool will include fixed rate Mortgage
Loans, which will have the effect of limiting the extent to which the Weighted
Average Adjustable Pass-Through Rate can increase or decrease in accordance with
changes in the Index and accordingly may affect the yield to
Certificateholders.]
The existence of Periodic Rate Caps, Lifetime Rate Caps and any Lifetime
Rate Floors also will affect the likelihood of prepayments resulting from
refinancing and the exercise of the conversion option. Although the Mortgage
Rates on the Mortgage Loans will adjust periodically, such increases and
decreases will be limited by the Periodic Rate Caps, Lifetime Rate Caps and any
Lifetime Rate Floors on each Mortgage Loan
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<PAGE> 44
and will be based on the Index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margins (which may be different
from the prevailing margins on other mortgage loans). As a result, the Mortgage
Rates on the Mortgage Loans at any time may not equal the prevailing rates for
other adjustable rate loans and accordingly, the rate of prepayment may be lower
or higher than would otherwise be anticipated.
With respect to those Mortgage Loans having Lifetime Rate Floors, if
prevailing mortgage rates were to fall below the minimum Mortgage Rates, the
rate of prepayment on such Mortgage Loans may be expected to increase and such
Mortgage Loans may prepay at a rate higher than would otherwise be anticipated
for adjustable rate mortgage loans.
All of the Mortgage Loans are assumable under certain circumstances if, in
the sole judgment of the Master Servicer or any applicable Subservicer, the
prospective purchaser of a Mortgaged Property is creditworthy and the security
for such Mortgage Loan is not impaired by the assumption. The extent to which
the Mortgage Loans are assumed by purchasers of the Mortgaged Properties rather
than prepaid by the related mortgagors in connection with the sales of the
Mortgaged Properties will affect the weighted average life of the Certificates
and may result in a prepayment experience on the Mortgage Loans that differs
from that on other conventional mortgage loans.
The yield to maturity of the Certificates will depend on the rate of
payment of principal (including principal prepayments, purchases of Mortgage
Loans which are Converting Mortgage Loans or Converted Mortgage Loans or in
respect of which a breach of a representation or warranty has occurred, and
liquidation of defaulted Mortgage Loans) on the Mortgage Loans, the price paid
by the holders of Certificates and the Weighted Average Adjustable Pass-Through
Rate in effect from time to time. Such yield may be adversely affected by a
higher or lower than anticipated rate of prepayments on the Mortgage Loans.
Because the Weighted Average Adjustable Pass-Through Rate at any time is the
weighted average of the Net Mortgage Rates on the Mortgage Loans, the Weighted
Average Adjustable Pass-Through Rate (and the yield on the Certificates) will be
reduced as a result of prepayments, liquidations and purchases at a faster rate
for Mortgage Loans having higher Net Mortgage Rates as opposed to Mortgage Loans
having lower Net Mortgage Rates. Because Mortgage Loans having higher Net
Mortgage Rates generally have higher Mortgage Rates, such Mortgage Loans are
generally more likely to be prepaid at a faster rate under most circumstances
than are Mortgage Loans having lower Net Mortgage Rates.
The rate of default on the Mortgage Loans will also affect the rate of
payment of principal on the Mortgage Loans. In general, defaults on mortgage
loans are expected to occur with greater frequency in their early years,
although little data is available with respect to the rate of default on
adjustable rate mortgage loans. Increases in the monthly payments to an amount
in excess of the preceding monthly payment required at the time of origination
may result in a default rate higher than that on level payment mortgage loans.
Furthermore, the Mortgagor under each Mortgage Loan was qualified on the basis
of the Mortgage Rate in effect at origination. The repayment of such Mortgage
Loans will be dependent on the ability of the Mortgagor to make larger monthly
payments following adjustments of the Mortgage Rate. The rate of default on
Mortgage Loans which are equity refinance mortgage loans may be higher than for
other types of Mortgage Loans.
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to Certificateholders of principal amounts which would
otherwise be distributed over the remaining terms of the Mortgage Loans.
Furthermore, the rate of prepayments, defaults and liquidations on, or
conversions of, the Mortgage Loans will be affected by the general economic
condition of the region of the country where the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by increasing unemployment or falling property values. See "MATURITY
AND PREPAYMENT CONSIDERATIONS" in the Prospectus. Since the rates of payment of
principal on the Mortgage Loans will depend on future events and a variety of
factors (as described more fully herein and in the Prospectus under "YIELD
CONSIDERATIONS" and "MATURITY AND PREPAYMENT CONSIDERATIONS"), no assurance can
be given as to such rate or the rate of principal prepayments on the
Certificates.
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<PAGE> 45
[The amount of interest passed through to holders of the Certificates will
be reduced by shortfalls in collections of interest resulting from full or
partial principal prepayments or otherwise, which will not be offset by a
reduction in the Servicing Fees payable to the Master Servicer or otherwise. See
"YIELD CONSIDERATIONS" in the Prospectus and "DESCRIPTION OF THE
CERTIFICATES -- Distributions" herein for a discussion of the effect of
principal prepayments on the Mortgage Loans on the yield to maturity of the
Certificates.]
The timing of changes in the rate of prepayments, liquidations and
repurchases of the Mortgage Loans may significantly affect an investor's actual
yield to maturity, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation.
In addition, the yield to maturity of the Certificates will depend on the
price paid by holders of the Certificates. If any Certificate is purchased at
initial issuance at a discount and the rate of prepayments on the Mortgage Loans
is lower than that originally anticipated, the purchaser's yield to maturity
will be lower than that assumed at the time of purchase. Conversely, if any
Certificate is purchased at initial issuance at a premium and the rate of
prepayments on the Mortgage Loans is higher than that originally anticipated,
the purchaser's yield to maturity will be lower than that assumed at the time of
purchase.
The first distribution on the Certificates reflecting an adjustment to the
scheduled monthly payments on a related Mortgage Loan will be passed through to
holders of Certificates on the second Distribution Date following the date on
which the adjustment to such Mortgage Rate was made. Furthermore, adjustments in
the Net Mortgage Rates are based on the Index as reported days prior to the
Adjustment Date. Accordingly, the yield to Certificateholders will be adjusted
on a delayed basis relative to movements in the Index. Although the Net Mortgage
Rate of each Mortgage Loan will be adjusted pursuant to the Index, such rate is
subject to the Periodic Rate Cap and is also limited by the Lifetime Rate Cap
and any Lifetime Rate Floor applicable to such Mortgage Loan. With respect to
certain Mortgage Loans the difference between the Net Mortgage Rate as of the
Cut-off Date and the maximum Net Mortgage Rate will be less than the Lifetime
Rate Cap. Therefore, if the Index changes substantially between Adjustment
Dates, the Net Mortgage Rate may be lower than if the Net Mortgage Rate could be
adjusted based on the Index without such caps.
A number of factors affect the performance of the Index and may cause the
Index to move in a manner different from other indices. To the extent that the
Index may reflect changes in the general level of interest rates less quickly
than other indices, in a period of rising interest rates, increases in the yield
to Certificateholders due to such rising interest rates may occur later than
that which would be produced by other indices, and in a period of declining
rates, the Index may remain higher than other market interest rates which may
result in a higher level of prepayments of Mortgage Loans which adjust in
accordance with the Index than mortgage loans which adjust in accordance with
other indices.]
For additional considerations relating to the yield on the Certificates,
see "YIELD CONSIDERATIONS" and "MATURITY AND PREPAYMENT CONSIDERATIONS" in the
Prospectus.
[YIELD CONSIDERATIONS RELATING TO THE CLASS M CERTIFICATES
The following tables indicate the sensitivity of the yields to maturity on
the Class M Certificates to various rates of prepayment and varying levels of
aggregate Realized Losses by projecting the monthly aggregate cash flows on the
Class M Certificates and computing the corresponding pre-tax yields to maturity
on a corporate bond equivalent basis. The tables are based on the assumptions
described in the fourth paragraph preceding the table entitled "Percent of
Initial Certificate Principal Balance Outstanding at the Following Percentages
of SPA" under the heading "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS -- General" herein, including the assumptions regarding the
characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof, and assuming further that (i)
defaults and final liquidations occur on the last day of each month at the
respective SDA percentages set forth in the tables, (ii) each liquidation
results in a Realized Loss allocable to principal equal to the percentage
indicated (the "Loss Severity Percentage") times the principal balances of the
Mortgage Loans assumed to be liquidated, (iii) there are no delinquencies on the
Mortgage Loans, and principal
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<PAGE> 46
payments on the Mortgage Loans (other than those on Mortgage Loans assumed to be
liquidated) will be timely received together with prepayments, if any, at the
respective constant percentages of SPA set forth in the tables before giving
effect to defaults in such periods, (iv) there are no Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses,
and (v) the purchase prices of the Class M Certificates will be $ ,
including accrued interest. Investors should also consider the possibility that
aggregate losses incurred may not in fact be materially reduced by higher
prepayment speeds because mortgage loans that would otherwise ultimately default
and be liquidated may be less likely to be prepaid. Any differences between such
assumptions and the actual characteristics and performance of the Mortgage Loans
and of the Certificates may result in yields different from those shown in such
tables. Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of the tables, which are provided only to
give a general sense of the sensitivity of yields in varying Realized Loss and
prepayment scenarios.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS M CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
CLASS M CERTIFICATES
<TABLE>
<CAPTION>
PERCENTAGE OF
SDA LOSS SEVERITY PERCENTAGE PERCENTAGE OF SPA
- ------------- ----------------------------------- --------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
% N/A................................ % % % % %
% %.................................. % % % % %
% %.................................. % % % % %
% %.................................. % % % % %
</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 M Certificates, as
applicable, would cause the discounted present value of such assumed stream of
cash flows to equal the assumed purchase price referred to above, and converting
such rate to a semi-annual corporate bond equivalent yield. Accrued interest, if
any, 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 M Certificates, and thus do not
reflect the return on any investment in the Class M Certificates when any
reinvestment rates other than the discount rates are considered.
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Certificates in the aggregate under each of the
scenarios in the preceding table, expressed as a percentage of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-off Date:
<TABLE>
<CAPTION>
AGGREGATE REALIZED LOSSES
--------------------------------------------------
PERCENTAGE OF
SDA LOSS SEVERITY PERCENTAGE PERCENTAGE OF SPA
- ------------- ----------------------------------- --------------------------------------------------
<C> <S> <C> <C> <C> <C> <C>
% %.................................. % % % % %
% %.................................. % % % % %
% %.................................. % % % % %
% %.................................. % % % % %
</TABLE>
Notwithstanding the assumed Percentages of SDA, Loss Severity Percentages
and prepayment rates reflected in the preceding tables, it is highly unlikely
that the Mortgage Loans will be prepaid or that Realized Losses will be incurred
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yields to maturity on
the Class M Certificates are likely to differ from those shown in the tables.
There can be no assurance that the Mortgage Loans will prepay at any particular
rate or that Realized Losses will be incurred at any particular level or that
the yields on the Class M Certificates will conform to the yields described
herein. Moreover, the various remaining terms to maturity of the Mortgage Loans
could produce slower or faster principal distributions than indicated in the
preceding
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<PAGE> 47
tables at the various constant percentages of SPA specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is as
assumed.]
POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") dated as of , 19 , among the
Depositor, the Master Servicer and the Trustee. Reference is made to the
Prospectus for important information additional to that set forth herein
regarding the terms and conditions of the Pooling Agreement and the [Offered]
Certificates. [The Trustee will appoint to serve as
Custodian in connection with the Certificates]. The [Offered] Certificates will
be transferable and exchangeable at the corporate trust office of the Trustee,
which will serve as Certificate Registrar and Paying Agent. The Depositor will
provide a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling Agreement. Requests should be
addressed to BankAmerica Mortgage Securities, Inc., 345 Montgomery Street, Lower
Level #2, Unit #8152, San Francisco, California, 94104, Attention: Rebecca Cull.
THE MASTER SERVICER
Bank of America [, Federal Savings Bank] [National Trust and Savings
Association] [, the corporate parent of the Depositor,] will act as master
servicer for the Certificates pursuant to the Pooling Agreement. For a general
description of Bank of America [FSB] [NT&SA] and its activities, as well as
certain information regarding its delinquency, foreclosure and loss experience
on the portfolio of one- to four-family first mortgage loans owned by Affiliated
Sellers and serviced by it, see "MORTGAGE LOAN PROGRAM -- Certain Affiliated
Sellers -- Bank of America [, Federal Savings Bank] [National Trust and Savings
Association]," "-- Residential Mortgage Loan Servicing Activities" and
"-- Delinquency, Foreclosure and Loss Experience" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES[; RETAINED YIELD]
The Servicing Fees for each Mortgage Loan are payable out of the interest
payments on such Mortgage Loan. The Servicing Fees in respect of each Mortgage
Loan will be at least % and not more than % per annum of the outstanding
principal balance of each Mortgage Loan. The Servicing Fees consist of (a)
servicing compensation payable to any Master Servicer in respect of its master
servicing activities, and (b) subservicing and other related compensation
payable to any Subservicer (including such compensation paid to the Master
Servicer as the direct servicer of a Mortgage Loan for which there is no
Subservicer). The primary compensation to be paid to the Master Servicer in
respect of its master servicing activities will be % per annum of the
outstanding principal balance of each Mortgage Loan (the "Master Servicing
Fee"). As described more fully in the Prospectus, a Subservicer, or the Master
Servicer if it is the direct servicer of a Mortgage Loan, is entitled to
servicing compensation in a minimum amount equal to % per annum of the
outstanding principal balance of each Mortgage Loan serviced by it (the "Primary
Servicing Fee"). The Master Servicer is obligated to pay certain ongoing
expenses associated with the Trust Fund and incurred by the Master Servicer in
connection with its responsibilities under the Pooling Agreement[, including the
expenses of the [name of credit enhancement] and any substitute credit support].
See "THE POOLING AGREEMENT -- Servicing and Other Compensation and Payment of
Expenses; Retained Yield" in the Prospectus for information regarding other
possible compensation to the Master Servicer and Subservicers and for
information regarding expenses payable by the Master Servicer.
[Pursuant to the terms of the Pooling Agreement, the Master Servicer will
be obligated to remit to the Depositor or its designee, a portion of the
interest collected on each Mortgage Loan (the "Retained Yield"). The rate at
which the Retained Yield on each Mortgage Loan accrues will be equal to % per
annum.]
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<PAGE> 48
TERMINATION
The circumstances under which the obligations created by the Pooling
Agreement will terminate in respect of the Certificates are described in "THE
POOLING AGREEMENT -- Termination; Retirement of Certificates" in the Prospectus.
The Master Servicer or the Depositor will have the option to purchase all
remaining Mortgage Loans and other assets in the Trust Fund, thereby effecting
early retirement of the Certificates, but such option will not be exercisable
until such time as the aggregate principal balance of the Mortgage Loans as of
the Distribution Date on which the purchase proceeds are to be distributed to
the Certificateholders is less than [5] [10]% of the aggregate principal balance
of the Mortgage Loans as of the Cut-off Date. Any such purchase of Mortgage
Loans and other assets of the Trust Fund shall be made at a price equal to the
sum of (a) 100% of the unpaid principal balance of each Mortgage Loan (or the
fair market value of the related underlying Mortgaged Properties with respect to
defaulted Mortgage Loans as to which title to such Mortgaged Properties has been
acquired if such fair market value is less than such unpaid principal balance)
(net of any unreimbursed Advance attributable to principal) plus (b) accrued
interest thereon at the [Net] [Weighted Average Pass-Through] Rate to, but not
including, the first day of the month of repurchase.
Upon presentation and surrender of the Certificates in connection with the
termination of the Trust Fund under the circumstances described above, the
holders of [each Class of Offered][the] Certificates will receive[, in
proportion to their respective Percentage Interests, an amount equal to the sum
of the principal balances of the Mortgage Loans plus one month's accrued
interest thereon at the then applicable Weighted Average Adjustable Pass-Through
Rate.] [An amount equal to the Certificate Principal Balance of such Class plus
one month's interest thereon (or with respect to the Variable Strip
Certificates, one month's interest on the Notional Amount) at the applicable
Pass-Through Rate plus any previously unpaid Accrued Certificate Interest.] An
amount equal to the Certificate Principal Balance of such Class plus one month's
interest thereon (or with respect to the Variable Strip Certificates, one
month's interest on the Notional Amount) at the applicable Pass-Through Rate
plus any previously unpaid Accrued Certificate Interest.]
[DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
All of the Mortgage Loans are the subject of credit support coverage
provided by the [name of credit enhancement]. In addition, each Mortgage Loan is
covered by a Primary Hazard Insurance Policy as described under "PRIMARY
MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER" in the Prospectus. See
also "DESCRIPTION OF THE MORTGAGE POOL -- Primary Mortgage Insurance" herein.]
[Description of types and amounts of losses covered by any applicable
credit enhancement, procedures and conditions to filing claims or making draws
under any applicable credit enhancement, any rights of the Master Servicer to
substitute a different form of credit enhancement for any initial form of credit
enhancement and a general description of the credit enhancement provider
(including financial statements of credit enhancement provider if credit
enhancement is material) and its activities.]
FEDERAL INCOME TAX CONSEQUENCES
[With respect to the Offered Certificates, Orrick, Herrington & Sutcliffe,
counsel to the Depositor ("Special Tax Counsel"), are of the opinion that,
assuming compliance with all provisions of the Pooling Agreement, for federal
income tax purposes, the Trust Fund will qualify as a REMIC under the Code. The
following general discussion of the anticipated federal income tax consequences
of the purchase, ownership and disposition of the Offered Certificates together
with the discussion under the heading "FEDERAL INCOME TAX
CONSEQUENCES -- REMICs" in the Prospectus represents the opinion of Special Tax
Counsel, subject to any qualifications set forth herein and therein. Special Tax
Counsel have prepared or reviewed the statements in this Prospectus Supplement
under the heading "FEDERAL INCOME TAX
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<PAGE> 49
CONSEQUENCES" and in the Prospectus under the heading "FEDERAL INCOME TAX
CONSEQUENCES -- REMICs," and are of the opinion that such statements are correct
in all material respects. A copy of the opinion of Special Tax Counsel relating
to such statements will be included in a Current Report on Form 8-K filed within
15 days of the Delivery Date. Such statements are intended as an explanatory
discussion of the possible effects of the classification of the Trust Fund as a
REMIC for federal income tax purposes on investors generally and of related tax
matters affecting investors generally, but do not purport to furnish information
in the level of detail or with attention to an investor's specific tax
circumstances that would be provided by an investor's own tax advisor.
Accordingly, each investor is advised to consult its own tax advisors with
regard to the tax consequences to it of investing in the Offered Certificates.
For federal income tax purposes, the Class R Certificates will be the sole
class of "residual interests" in the Trust Fund and the Offered Certificates
(other than the Residual Certificates) and Class B Certificates will represent
ownership of "regular interests" in the Trust Fund and will generally be treated
as representing ownership of debt instruments of the Trust Fund. See "FEDERAL
INCOME TAX CONSEQUENCES -- REMICs" in the Prospectus.
The Certificates will not be treated as having been issued with
original issue discount for federal income tax reporting purposes. The
Certificates will 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 % SPA. No representation is made that
the Mortgage Loans will prepay at that rate or at any other rate. See "FEDERAL
INCOME TAX CONSEQUENCES -- REMICs -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" in the Prospectus.
The OID Regulations suggest that original issue discount with respect to
securities such as the Stripped Interests Certificates that represent multiple
uncertificated REMIC regular interests, in which ownership interests will be
issued simultaneously to the same buyer and which are required under the Pooling
Agreement to be transferred together, should be computed on an aggregate method.
In the absence of further guidance from the IRS, original issue discount with
respect to the uncertificated regular interests represented by the Stripped
Interests Certificates will be reported to the IRS and the Certificateholders on
an aggregate method based on a single overall constant yield and the prepayment
assumption stated above, treating all such uncertificated regular interests as a
single debt instrument as set forth in the OID Regulations.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificateholder (in particular, the Stripped Interests Certificateholders),
the amount of original issue discount allocable to such period would be zero and
such Certificateholder will be permitted to offset such negative amount only
against future original issue discount (if any) attributable to such
Certificates. Although the matter is not free from doubt, a Stripped Interests
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount of
future payments to which such Certificateholder is entitled, assuming no further
prepayments of the Mortgage Loans. Any such loss might be treated as a capital
loss.
Although they are unclear on the issue, in certain circumstances the OID
Regulations appear to permit the holder of a debt instrument to recognize
original issue discount under a method that differs from that used by the
issuer. Accordingly, it is possible that the holder of a Certificate may be able
to select a method for recognizing original issue discount that differs from
that used by the Master Servicer in preparing reports to the Certificateholders
and the IRS. See "FEDERAL INCOME TAX CONSEQUENCES -- REMICs -- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount" in the
Prospectus.
Certain Classes of the Offered Certificates may be treated for federal
income tax purposes as having been issued at a premium. Whether any holder of
such a 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 such Classes of
Certificates should consult their own tax advisors regarding the possibility of
making an
S-48
<PAGE> 50
election to amortize such premium. See "FEDERAL INCOME TAX
CONSEQUENCES -- REMICs -- Taxation of Owners of REMIC Regular Certificates" and
"-- Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(5)(A)
of the Code generally in the same proportion that the assets of the Trust Fund
would be so treated. In addition, interest on the Offered Certificates will be
treated as "interest on obligations secured by mortgages on real property" under
Section 856(c)(3)(B) of the Code generally to the extent that such Offered
Certificates are treated as "real estate assets" under Section 856(c)(5)(A) of
the Code. Moreover, the Offered Certificates (other than the Residual
Certificates) will be "qualified mortgages" within the meaning of Section
860G(a)(3) of the Code. However, prospective investors in Offered Certificates
that will be generally treated as assets described in Section 860G(a)(3) of the
Code should note that, notwithstanding such treatment, any repurchase of such a
Certificate pursuant to the right of the Master Servicer or the Depositor to
repurchase such Offered Certificates may adversely affect any REMIC that holds
such Offered Certificates if such repurchase is made under circumstances giving
rise to a Prohibited Transaction Tax. See "THE POOLING AGREEMENT -- Termination"
herein and "FEDERAL INCOME TAX CONSEQUENCES -- REMICs -- Characterization of
Investments in REMIC Certificates" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "FEDERAL INCOME TAX
CONSEQUENCES -- REMICs" in the Prospectus.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL CERTIFICATES
The IRS has issued regulations under the provisions of the Code related to
REMICs (the "REMIC Regulations") that significantly affect holders of Residual
Certificates. The REMIC Regulations impose restrictions on the transfer or
acquisition of certain residual interests, including the Residual Certificates.
In addition, the REMIC Regulations contain restrictions that apply to: (i)
thrift institutions holding residual interests lacking "significant value" and
(ii) the transfer of "noneconomic" residual interests to United States persons.
Pursuant to the Pooling Agreement, the Residual Certificates may not be
transferred to non-United States persons.
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 Residual 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 Residual Certificates which will be in an amount equal to
all or virtually all of the taxable income includable by holders of the Residual
Certificates. See "FEDERAL INCOME TAX CONSEQUENCES -- REMICs -- Taxation of
Owners of REMIC Residual Certificates -- Excess Inclusions" in the Prospectus.
The REMIC Regulations also provide that a transfer to a United States
person of "noneconomic" residual interests will be disregarded for all federal
income tax purposes, and that the purported transferor of "noneconomic" residual
interests will continue to remain liable for any taxes due with respect to the
income on such residual interests, unless "no significant purpose of the
transfer was to impede the assessment or collection of tax." Based on the REMIC
Regulations, the Residual Certificates may constitute noneconomic residual
interests during some or all of their terms for purposes of the REMIC
Regulations and, accordingly, unless no significant purpose of a transfer is to
impede the assessment or collection of tax, transfers of the Residual
Certificates may be disregarded and purported transferors may remain liable for
any taxes due with respect to the income on the Residual Certificates. All
transfers of the Residual Certificates will be subject to certain restrictions
under the terms of the Pooling Agreement that are intended to reduce the
possibility of any such transfer being disregarded to the extent that the
Residual Certificates constitute noneconomic residual interests. See "FEDERAL
INCOME TAX CONSEQUENCES -- REMICs -- Taxation of Owners of REMIC Residual
Certificates -- Noneconomic REMIC Residual Certificates" in the Prospectus.
The Residual Certificateholders may be required to report an amount of
taxable income with respect to the earlier accrual periods of the Trust Fund's
term that significantly exceeds the amount of cash distributions
S-49
<PAGE> 51
received by such Class Residual 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, Residual
Certificateholders should have other sources of funds sufficient to pay any
federal income taxes due in the earlier years of the Trust Funds' term as a
result of their ownership of the Residual 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 Residual Certificate (or possibly later under the "wash sale" rules of
Section 1091 of the Code) may cause the Residual Certificateholders' after-tax
rate of return to be zero or negative even if the Residual Certificateholders'
pre-tax rate of return is positive. that is, on a present value basis, the
Residual Certificateholders' resulting tax liabilities could substantially
exceed the sum of any tax benefits and the amount of any cash distributions on
such Residual Certificates over their life.
The Master Servicer will be designated as the "tax matters person" with
respect to the Trust Fund as defined in the REMIC Provisions (as defined in the
Prospectus), and in connection therewith will be required to hold not less than
0.01% of the Residual Certificates.
Purchasers of the Residual Certificates are strongly advised to consult
their own tax advisors as to the economic and tax consequences of investment in
such Residual Certificates.
For further information regarding the federal income tax consequences of
investing in the Residual Certificates, see "CERTAIN YIELD AND PREPAYMENT
CONSIDERATION -- Additional Yield Considerations Applicable Solely to the
Residual Certificates" herein and " FEDERAL INCOME TAX
CONSEQUENCES -- REMICs -- Taxation of Owners of REMIC Residual Certificates" in
the Prospectus.]
[No election will be made to treat the Trust Fund as a real estate mortgage
investment conduit for federal income tax purposes. Orrick, Herrington &
Sutcliffe, counsel to the Depositor ("Special Tax Counsel"), are of the opinion
that the Trust Fund will be classified as a grantor trust under Subpart E, Part
I of Subchapter J of the Code, and not as a partnership or an association
taxable as a corporation. The following general discussion of the anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Offered Certificates together with the discussion under the heading "FEDERAL
INCOME TAX CONSEQUENCES -- Grantor Trust Funds" in the Prospectus represents the
opinion of Special Tax Counsel, subject to any qualifications set forth herein
and therein. Special Tax Counsel have prepared or reviewed the statements in
this Prospectus Supplement under the heading "FEDERAL INCOME TAX CONSEQUENCES"
and in the Prospectus under the heading "FEDERAL INCOME TAX
CONSEQUENCES -- Grantor Trust Funds," and are of the opinion that such
statements are correct in all material respects. A copy of the opinion of
Special Tax Counsel relating to such statements will be included in a Current
Report on Form 8-K filed within 15 days of the Delivery Date. Such statements
are intended as an explanatory discussion of the possible effects of the
classification of the Trust Fund as a grantor trust for federal income tax
purposes on investors generally and of related tax matters affecting investors
generally, but do not purport to furnish information in the level of detail or
with attention to an investor's specific tax circumstances that would be
provided by an investor's own tax advisor. Accordingly, each investor is advised
to consult its own tax advisors with regard to the tax consequences to it of
investing in the Offered Certificates.
Taxpayers and preparers of tax returns (including those filed by any REMIC
or other issuer) should be aware that under applicable Treasury regulations a
provider of advice on specific issues of law is not considered an income tax
return preparer unless the advice is (i) given with respect to events that have
occurred at the time the advice is rendered and is not given with respect to the
consequences of contemplated actions, and (ii) is directly relevant to the
determination of any entry on a tax return. Accordingly, taxpayers should
consult their own tax advisors and tax return preparers regarding the
preparation of any item on a tax return, even where the anticipated tax
treatment has been discussed herein.
Each Certificateholder will generally be treated as an owner of an interest
in the Mortgage Loans, which will be treated as an interest in "stripped bonds".
Accordingly, the Certificateholders will be required to include their yield with
respect to the Mortgage Loans in gross income as it accrues, based on a constant
yield method in accordance with the original issue discount rules, which may
result in income being recognized for
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<PAGE> 52
tax purposes in advance of the receipt of cash attributable to such income. See
"FEDERAL INCOME TAX CONSEQUENCES -- Grantor Trust Funds -- TAXATION OF OWNERS OF
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES -- IF STRIPPED BOND RULES APPLY"
in the Prospectus.
In the absence of statutory or administrative clarification, it is intended
that information returns or reports to Certificateholders and the Internal
Revenue Service (the "IRS") will be based on the use of a prepayment assumption
of % [SPA.] [of the Constant Prepayment Rate ("CPR")] and on a representative
initial offering price for the Certificates in computing the constant yield.
[The Constant Prepayment Rate or CPR represents a constant assumed rate of
prepayment each month relative to the outstanding principal balance of a pool of
mortgage loans for the life of such mortgage loans.] However, no representation
is made that the Mortgage Loans will in fact prepay at that rate or at any other
rate and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports, even
if otherwise accepted as accurate by the IRS, will in any event be accurate only
as to the initial Certificateholders. The Certificateholders should consult
their own tax advisors as to the proper treatment of their investment in the
Mortgage Loans under the stripped bond rules.
The Certificates will represent interests in "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code, "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code and as "qualifying real property loans" within the meaning of Section
593(d) of the Code, and the interest thereon will be treated as "interest on
obligations secured by mortgages on real property" within the meaning of Section
856(c)(3)(B) of the Code. In addition, the Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3)(A) of the Code. See "FEDERAL
INCOME TAX CONSEQUENCES -- Grantor Trust Funds -- Characterization of
Investments in Grantor Trust Certificates -- Grantor Trust Fractional Interest
Certificates" in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Certificates, see "FEDERAL INCOME TAX CONSEQUENCES-Grantor
Trust Funds" in the Prospectus.]
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
dated , 19 , the Underwriter[s] [has] [have] agreed to purchase and
the Depositor has agreed to sell to the Underwriter[s] [the] [each class of
Offered] Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter[s] to pay for and accept delivery of the [Offered] 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[s] 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 Certificates, before deducting expenses payable
by the Depositor, will be % of the aggregate Certificate Principal Balance of
the [Offered] Certificates plus accrued interest thereon from the Cut-off Date.
The Underwriter[s] may effect such transactions by selling the [Offered]
Certificates to or through dealers, and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
Underwriter for whom they act as agent. In connection with the sale of the
[Offered] Certificates, the Underwriter[s] may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. The
Underwriter[s] and any dealers that participate with the Underwriter[s] 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.
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<PAGE> 53
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter[s], and under limited circumstances the Underwriter[s] will
indemnify the Depositor, against certain civil liabilities under the Securities
Act of 1933, 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 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. 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.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon for
the Depositor by Orrick, Herrington & Sutcliffe, San Francisco, California and
for the Underwriter by .
RATING
It is a condition to the issuance of the [Offered] Certificates that they
be rated not lower than " " by [and
" " by ].
The ratings of on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions on the
underlying mortgage loans to which they are entitled. ratings on
pass-through certificates do not represent any assessment of the likelihood that
principal prepayments will be made by mortgagors or the degree to which such
prepayments might differ from that originally anticipated. [ ratings on
pass-through certificates do not represent any assessment of the Master
Servicer's ability to [purchase] [sell] Converting Mortgage Loans or Converted
Mortgage Loans. In the event that the Master Servicer [purchases] [sells] a
Converting or Converted Mortgage Loan, investors might suffer a lower than
anticipated yield.] The rating does not address the possibility that
Certificateholders might suffer a lower than anticipated yield.
The Depositor has not requested a rating on the [Offered] Certificates by
any rating agency other than [and ]. However, there can be
no assurance as to whether any other rating agency will rate the [Offered]
Certificates, or, if it does, what rating would be assigned by any such other
rating agency. A rating on the [Offered] Certificates by another rating agency,
if assigned at all, may be lower than the rating assigned to the [Offered]
Certificates by and .
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. The rating of the Fixed Strip Certificates or Variable
Strip Certificates does not address the possibility that the holders of such
Certificates may fail to fully recover their initial investment. In the event
that the rating initially assigned to the [Offered] Certificates is subsequently
lowered for any reason, no person or entity is obligated to provide any
additional support or credit enhancement with respect to the [Offered]
Certificates.
LEGAL INVESTMENT
The Certificates will constitute "mortgage related securities" for purposes
of SMMEA so long as they are rated in at least the second highest rating
category by one of the Rating Agencies, and, as such, are legal investments for
certain entities to the extent provided by SMMEA. SMMEA provides, however, that
states could override its provisions on legal investment and restrict or
condition investment in mortgage related
S-52
<PAGE> 54
securities by taking statutory action on or prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Certificates will not constitute "mortgage related securities" for
purposes of SMMEA.
The Depositor makes no representation as to the proper characterization of
[any Class of the Offered] [the] Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase [any Class of
the Offered] [the] Certificates under applicable legal investment restrictions.
These uncertainties may affect the liquidity of [any Class of Offered] [the]
Certificates. Accordingly, 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 legal
advisors in determining whether and to what extent [any Class of the Offered]
[the] Certificates constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "LEGAL INVESTMENT MATTERS" in the Prospectus.
ERISA CONSIDERATIONS
Any fiduciary or other Plan Asset Investor that proposes to use Plan Assets
to acquire any [Offered] Certificates should consult with its counsel with
respect to the potential consequences under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"), of the acquisition and ownership
of such Certificates with Plan Assets. See "ERISA CONSIDERATIONS" in the
Prospectus.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
To qualify for exemption under PTCE 83-1 (see "ERISA
CONSIDERATIONS -- Prohibited Transaction Class Exemptions" in the Prospectus), a
Certificate (i) must entitle its holder to more than nominal pass-through
payments of both principal and interest from the Mortgage Loans and (ii) must
not be subordinated to other Classes of Certificates with respect to the right
to receive payments in the event of defaults or delinquencies on the underlying
Mortgage Loans. See "ERISA CONSIDERATIONS -- Prohibited Transaction Class
Exemption 83-1" in the Prospectus.
[Because the Certificates, which are
subordinated to the extent specified herein (see "DESCRIPTION OF THE
CERTIFICATES -- Subordination and Allocation of Losses" herein), and the
Residual Certificates do not qualify for exemption under PTCE 83-1, exemptive
relief will not be available under PTCE 83-1 to Plans or other persons that use
Plan Assets to acquire such Certificates from the prohibited transaction rules
of ERISA and Section 4975 of the Code. However, other prohibited transaction
class exemptions issued by the U.S. Department of Labor may apply with respect
to such Certificates. See "ERISA CONSIDERATIONS -- Prohibited Transaction Class
Exemption 83-1" in the Prospectus.]
[UNDERWRITER'S PTE]
[ (the "Underwriter") is the recipient of a
final prohibited transaction exemption (the "Underwriter's PTE") which may
afford protection from violations under Section 406 and 407 of ERISA and Section
4975 of the Code for Plans or Plan Asset Investors that acquire [Offered]
Certificates [(other than the or Residual
Certificates)]. Plans or Plan Asset Investors that acquire [Offered]
Certificates [(other than the or Residual
Certificates)] may be eligible for protection under the Underwriter's PTE if:
(a) The [Class of such] Certificates acquired with Plan Assets is not
subordinated to other Classes of Certificates with respect to the right to
receive payment in the event of defaults or delinquencies on the underlying
Mortgage Loans;
(b) The Plan or Plan Asset Investor is an "accredited investor" (as
defined in Rule 501(a)(1) of Regulation D under the Securities Act of 1933,
as amended (the "Act"));
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<PAGE> 55
(c) At the time of such acquisition, the [Class of] Certificates
acquired by the Plan or Plan Asset Investor has received a rating in one of
the three highest generic rating categories from Standard & Poor's Ratings
Services, Moody's Investors Service, Inc. Duff & Phelps, Inc. or Fitch
Investors Service, L.P.;
(d) The Trustee is not an affiliate of any member of the Restricted
Group (as defined in paragraph (3) below);
(e) The [Offered] Certificates evidence ownership in Trust Assets that
do not include subordinate certificates backed by mortgages or mortgage
participations (unless interest and principal payable with respect to such
mortgage certificates are guaranteed by the GNMA, FHLMC or FNMA);
(f) The acquisition of such Certificates with Plan Assets is on terms
(including the price paid for the Certificates) that are at least as
favorable to the Plan or Plan Asset Investor as they would be in an arm's
length transaction with an unrelated party; and
(g) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of such Certificates represents not more
than reasonable compensation for underwriting such Certificates; the sum of
all payments made to and retained by the Depositor pursuant to the sale of
the Mortgage Loans to the Trust Fund represents not more than the fair
market value of the Mortgage Loans; and the sum of all payments made to and
retained by the Master Servicer and any Subservicer represents not more
than reasonable compensation for its services under the Pooling Agreement
and reimbursement of its reasonable expenses in connection therewith.
In addition, the Underwriter's PTE will not provide exemptive relief for
certain transactions prohibited by Section 406(b) of ERISA or Section
4975(c)(1)(E) or (F) of the Code with may result from apply to a Plan's
investment in Certificates if:
(1) The Plan's investment in any [Class of such] Certificates exceeds
25% of the outstanding Certificates [of that Class] at the time of
acquisition;
(2) Immediately after such acquisition, 25% or more of the Plan assets
with respect to which the fiduciary or other Plan Asset Investor has
discretionary authority or renders investment advice are invested in
certificates evidencing interests in trusts sponsored or containing assets
sold or serviced by the same entity;
(3) The Plan is sponsored by the Depositor, the Underwriter, the
Trustee, the Master Servicer, any Subservicer, any Pool, Special Hazard or
Primary Insurer or the obligor under any credit support mechanism, a
Mortgagor with respect to obligations constituting more than 5% of the
aggregate unamortized principal balance of the Trust Fund on the Closing
Date (a "Major Obligor"), or any of their affiliates (together, the
"Restricted Group");
(4) The fiduciary or other Plan Asset Investor responsible for the
decision to invest any Plan Assets, or any of its affiliates, is a Major
Obligor; or
(5) In the case of an acquisition in connection with the initial
issuance of Certificates, at least 50% of [each Class of] [the]
Certificates in which Plans have invested is acquired by persons
independent of the members of the Restricted Group and at least 50% of the
aggregate interest in the Trust Fund is acquired by persons independent of
the Restricted Group.
Whether the conditions of the Underwriter's PTE will be satisfied with
respect to [Offered] Certificates [(other than the
Certificates and the Residual Certificates, for which the
Underwriter's PTE will not afford protection) of a particular Class] will depend
upon the facts and circumstances existing at the time Plan Assets are used to
acquire Certificates [of that Class]. Any fiduciary or other Plan Asset Investor
that proposes to use Plan Assets to acquire such Certificates in reliance upon
the Underwriter's PTE should determine whether such acquisition will satisfy all
applicable conditions and consult with its counsel regarding other factors that
may affect the applicability of the Underwriter's PTE.]
[Because the Certificates and the Residual
Certificates will not qualify for the exemptions under PTCE 83-1, [or the
Underwriter's PTE,] transfers of such Certificates to any Plan or
S-54
<PAGE> 56
Plan Asset Investor will not be registered unless the transferee provides an
opinion of counsel satisfactory to the Trustee and the Depositor that the
purchase of any such Certificate by, on behalf of or with Plan Assets of any
Plan is permissible under applicable law, will not constitute or result in a
non-exempt prohibited transaction under ERISA or Section 4975 of the Code, and
will not subject the Master Servicer, the Depositor or the Trustee to any
obligation in addition to those undertaken in the Pooling Agreement.]
S-55
<PAGE> 57
PROSPECTUS
- ----------
BANKAMERICA MORTGAGE SECURITIES, INC.
MORTGAGE PASS-THROUGH CERTIFICATES
BankAmerica Mortgage Securities, Inc. (the "Depositor") intends to sell
from time to time, as described in the related Prospectus Supplement and on
terms to be determined at the time of sale, one or more Series (each, a
"Series") of certificates (the "Certificates") consisting of one or more Classes
(each, a "Class") evidencing beneficial ownership interests in a trust (the
"Trust Fund"), to be created by the Depositor.
The property of each Trust Fund will consist primarily of a segregated pool
(a "Mortgage Pool") of conventional one- to four-family residential first
mortgage loans (the "Mortgage Loans") or interests therein, conveyed to such
Trust Fund by the Depositor. The Depositor will acquire the assets of any
Mortgage Pool from Bank of America National Trust and Savings Association ("Bank
of America NT&SA"), Bank of America, Federal Savings Bank ("Bank of America,
FSB") and/or one or more other affiliated or unaffiliated institutions specified
in the applicable Prospectus Supplement (collectively, the "Sellers"). Each
Mortgage Pool will consist of one or more of the various types of Mortgage Loans
described herein under the caption "THE MORTGAGE POOLS." The general
characteristics of the Mortgage Loans to be evidenced by the Certificates of a
Series will be set forth in the related Prospectus Supplement.
Each Class of Certificates of any Series will represent the right, which
right may be senior or subordinate to the rights of one or more other Classes of
the Certificates for such Series, to receive a specified portion of payments of
principal or interest (or both) on the Mortgage Loans in the related Trust Fund
in the manner described herein and in the related Prospectus Supplement. A
Series may include one or more Classes of Certificates entitled to principal
distributions, with disproportionate, nominal or no interest distributions, or
to interest distributions, with disproportionate, nominal or no principal
distributions. A Series may include two or more Classes of Certificates which
differ as to the timing, sequential order, priority of payment, rate of interest
or amount of distributions of principal or interest or both.
The Depositor's only obligations with respect to a Series of Certificates
will be pursuant to certain representations and warranties made by the
Depositor. The master servicer (the "Master Servicer") for each Series of
Certificates, which will be an affiliate of the Depositor, will be named in the
related Prospectus Supplement. The principal obligations of the Master Servicer
will be pursuant to its contractual servicing obligations (which include its
limited obligation to make certain advances in the event of delinquencies in
payment on the Mortgage Loans). See "DESCRIPTION OF THE CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
Series of Certificates may include any one or any combination of a mortgage pool
insurance policy, letter of credit, bankruptcy bond, special hazard insurance
policy, certificate insurance policy, reserve fund or other form of credit
support. In addition to or in lieu of the foregoing, credit enhancement may be
provided by means of subordination. See "DESCRIPTION OF CREDIT ENHANCEMENTS."
One or more separate elections may be made to treat a Trust Fund as a real
estate mortgage investment conduit ("REMIC") for federal income tax purposes. If
applicable, the Prospectus Supplement for a Series of Certificates will specify
which Class or Classes of the related 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 "FEDERAL INCOME TAX CONSEQUENCES" herein.
SEE "RISK FACTORS" ON PAGE 10 HEREIN FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BEFORE PURCHASING CERTIFICATES OF ANY SERIES.
PROCEEDS FROM THE ASSETS IN THE RELATED TRUST FUND WILL BE THE ONLY SOURCE OF
PAYMENTS ON THE CERTIFICATES OF EACH SERIES. THE CERTIFICATES DO NOT REPRESENT
AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, BANKAMERICA CORPORATION, BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, BANK OF AMERICA, FEDERAL SAVINGS
BANK OR ANY OF THEIR AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS OR OTHER ASSETS OF A TRUST FUND ARE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY
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.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
"METHODS OF DISTRIBUTION" herein and in the related Prospectus Supplement.
Affiliates of the Depositor may from time to time act as agents or underwriters
in connection with the sale of the Certificates.
There will be no secondary market for any Series of Certificates prior to
the offering thereof. The Certificates will not be listed on any securities
exchange. There can be no assurance that a secondary market for any of the
Certificates will develop or, if it does develop, that it will continue.
This Prospectus may not be used to consummate sales of Certificates unless
accompanied by a Prospectus Supplement. An index indicating where certain terms
used herein are defined appears at the end of the Prospectus under the caption
"INDEX OF PRINCIPAL DEFINITIONS."
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 58
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT................................................................. 3
AVAILABLE INFORMATION................................................................. 3
REPORTS TO CERTIFICATEHOLDERS......................................................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE....................................... 3
SUMMARY OF PROSPECTUS................................................................. 5
RISK FACTORS.......................................................................... 10
THE MORTGAGE POOLS.................................................................... 11
THE DEPOSITOR......................................................................... 15
MORTGAGE LOAN PROGRAM................................................................. 15
DESCRIPTION OF THE CERTIFICATES....................................................... 23
SUBORDINATION......................................................................... 36
DESCRIPTION OF CREDIT ENHANCEMENTS.................................................... 39
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER....................... 45
THE POOLING AGREEMENT................................................................. 48
YIELD CONSIDERATIONS.................................................................. 52
MATURITY AND PREPAYMENT CONSIDERATIONS................................................ 54
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS........................... 56
FEDERAL INCOME TAX CONSEQUENCES....................................................... 61
STATE AND OTHER TAX CONSEQUENCES...................................................... 87
ERISA CONSIDERATIONS.................................................................. 87
LEGAL INVESTMENT MATTERS.............................................................. 90
USE OF PROCEEDS....................................................................... 92
METHODS OF DISTRIBUTION............................................................... 92
RATING................................................................................ 93
LEGAL MATTERS......................................................................... 93
FINANCIAL INFORMATION................................................................. 93
ADDITIONAL INFORMATION................................................................ 93
INDEX OF PRINCIPAL DEFINITIONS........................................................ 94
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF EACH SUPPLEMENT TO THIS PROSPECTUS, ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES COVERED BY SUCH
SUPPLEMENT, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE
REQUIRED TO DELIVER SUCH SUPPLEMENT AND THIS PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A SUPPLEMENT AND PROSPECTUS WHEN ACTING AS
UNDERWRITERS OF SECURITIES COVERED BY SUCH SUPPLEMENT AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND EACH SUPPLEMENT
TO THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR
A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CERTIFICATES
OFFERED HEREBY, NOR AN OFFER OF THE CERTIFICATES TO ANY PERSON IN ANY STATE OR
OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS
PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE
THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS WILL BE
AMENDED OR SUPPLEMENTED ACCORDINGLY.
2
<PAGE> 59
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to the Certificates of each Series to be
offered hereunder will, among other things, set forth with respect to such
Certificates, as appropriate: (i) a description of the Class or Classes of
Certificates and the Pass-Through Rate or method of determining the amount of
interest, if any, to be passed through to each such Class; (ii) the aggregate
initial principal amount and Distribution Dates relating to such Series, the
method used to calculate the aggregate amount of principal to be distributed
with respect to the Certificates of such Series on each Distribution Date, the
order of the application of principal distributions to the respective Classes
and the allocation of principal to be so applied, and, if applicable, the
initial and final scheduled Distribution Dates for each Class; (iii) information
as to the assets comprising the Trust Fund, including the general
characteristics of the Mortgage Loans included therein and, if applicable,
included in the Trust Fund; (iv) the circumstances, if any, under which the
Trust Fund may be subject to early termination; (v) additional information with
respect to the plan of distribution of such Certificates; (vi) whether a REMIC
election will be made and designation of the regular interests and residual
interests; (vii) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each Class of Certificates; (viii) information as
to the Trustee; (ix) information as to the nature and extent of subordination
with respect to any Class of Certificates that is subordinate in right of
payment to any other Class; and (x) identity of the applicable Master Servicer.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus and the Prospectus
Supplement relating to each Series of 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 of which
this Prospectus is a part. For further information, reference is made to such
Registration Statement and the exhibits thereto. In addition, the Depositor will
be subject to the information requirements of the Securities Exchange Act of
1934, as amended, and in accordance therewith, will file reports and other
information with the Commission. Such Registration Statement, the exhibits
thereto and any reports or other information filed with the Commission 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:
Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Avenue,
Chicago, Illinois 60661-2511; and Northeast Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, such Registration
Statement, the exhibits thereto and any reports or other information filed with
the Commission through its Electronic Data Gathering, Analysis, and Retrieval
system are publicly available through the Commission's Web site
(http://www.sec.gov).
REPORTS TO CERTIFICATEHOLDERS
The trustee for each Series of Certificates (the "Trustee") will provide or
cause to be provided to holders of the Certificates (the "Certificateholders")
of such Series monthly reports concerning the Mortgage Pool underlying their
respective Certificates. See "DESCRIPTION OF THE CERTIFICATES -- Reports to
Certificateholders" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed or caused to be filed by the Depositor with the
Commission relating to the offering of Certificates referred to in the
accompanying Prospectus Supplement pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934, prior to the termination of any offering
of the Certificates described in such Prospectus Supplement, shall be
incorporated by reference in this Prospectus and be a part of this Prospectus
from the date of the filing of such documents. Copies of the documents
incorporated herein by reference, other than the exhibits to such documents,
unless such exhibits are specifically incorporated by reference in such
documents, will be provided to each person to whom this Prospectus and the
related Prospectus Supplement is delivered in connection with the offering of
one or more Classes of Certificates upon written or oral request of such person.
Requests should be directed to: BankAmerica Mortgage Securities,
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Inc., 345 Montgomery Street, Lower Level #2, Unit #8152, San Francisco,
California 94104, Attention: David M. Grout, telephone number (415) 445-4855.
Each Series of Certificates will be issued under a separate Pooling and
Servicing Agreement (each a "Pooling Agreement"), among the Depositor, the
Master Servicer and the trustee for such Series (the "Trustee"), substantially
in the form (the "Form of Pooling Agreement") filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The summaries of
certain provisions of the Certificates and such Form of Pooling Agreement
included in this Prospectus do not purport to be complete and are subject to,
and qualified in their entirety by reference to, all of the provisions of the
Form of Pooling Agreement, and the final Pooling Agreement executed in
connection with the issuance of a Series. Section references herein are
references to the Form of Pooling Agreement. An index indicating where certain
terms used herein are defined appears at the end of this Prospectus. Terms used
but not defined herein have the meanings assigned to them in the Form of Pooling
Agreement. References herein to the Master Servicer, the Trustee or the
Depositor include, unless otherwise specified, any agents acting on behalf of
the Master Servicer, the Trustee or the Depositor, any subcontractor of the
Master Servicer, the Trustee or the Depositor, any of which agents or
subcontractors may be the Depositor or one of its affiliates.
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SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of such Series. Capitalized terms used in this summary that are not
otherwise defined shall have the meanings ascribed thereto in this Prospectus.
Title of Certificates........... Mortgage Pass-Through Certificates, issuable
in Series (the "Certificates").
Depositor....................... BankAmerica Mortgage Securities, Inc., a
wholly-owned subsidiary of Bank of America
National Trust and Savings Association ("Bank
of America NT&SA"). See "THE DEPOSITOR."
Master Servicer................. The entity named as Master Servicer in the
related Prospectus Supplement, which will be
either be Bank of America NT&SA, the
corporate parent of the Depositor, or Bank of
America, Federal Savings Bank ("Bank of
America, FSB"). See "MORTGAGE LOAN
PROGRAM -- Certain Affiliated Sellers -- Bank
of America National Trust and Savings
Association" and "-- Bank of America, Federal
Savings Bank" and "THE POOLING
AGREEMENT -- Certain Matters Regarding the
Master Servicer and the Depositor."
Trustee......................... The trustee (the "Trustee") for each Series
of Certificates will be specified in the
related Prospectus Supplement.
Description of Certificates..... Each Series of Certificates will include one
or more Classes of Certificates which will
represent in the aggregate the entire
beneficial ownership interest in a segregated
pool (a "Mortgage Pool") of conventional one-
to four-family residential first mortgage
loans (the "Mortgage Loans") or interests
therein and certain monies on deposit in
certain bank accounts, obligations,
properties or agreements, in each case as
specified in the related Prospectus
Supplement (collectively, a "Trust Fund") and
will be issued pursuant to a pooling and
servicing agreement among the Depositor, the
Trustee and the Master Servicer (each, a
"Pooling Agreement"). Except for any Strip
Certificates (defined in the following
paragraph), each Series of Certificates, or
Class of Certificates in the case of a Series
consisting of two or more Classes, will have
a stated principal balance (a "Certificate
Principal Balance") and will be entitled to
distributions of interest based on a
specified interest rate or rates (each, a
"Pass-Through Rate"). Each Series or Class of
Certificates may have a different
Pass-Through Rate, which may be a fixed,
variable or adjustable Pass-Through Rate, or
any combination of two or more such
Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through Rate
or Rates for each Series or Class of
Certificates, or the initial Pass-Through
Rate or Rates and the method for determining
subsequent changes to the Pass-Through Rate
or Rates.
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A Series may include one or more Classes of
Certificates ("Strip Certificates") entitled
(i) to principal distributions, with
disproportionate, nominal or no interest
distributions, or (ii) to interest
distributions, with disproportionate, nominal
or no principal distributions. In addition, a
Series may include two or more Classes of
Certificates which differ as to timing,
sequential order, priority of payment,
Pass-Through Rate or amount of distributions
of principal or interest or both, or as to
which distributions of principal or interest
or both on any Class may be made upon the
occurrence of specified events, in accordance
with a schedule or formula, or on the basis
of collections from designated portions of
the Mortgage Pool, which Series may include
one or more Classes of Certificates ("Accrual
Certificates") as to which certain accrued
interest will not be distributed but rather
will be added to the Certificate Principal
Balance thereof on each Distribution Date, as
hereinafter defined, in the manner described
in the related Prospectus Supplement.
If so provided in the related Prospectus
Supplement, a Series of Certificates may
include one or more Classes of Certificates
(collectively, the "Senior Certificates")
which are senior to one or more Classes
(collectively, the "Subordinate
Certificates") in respect of certain
distributions of principal and interest and
allocations of losses on Mortgage Loans. In
addition, certain Classes of Senior (or
Subordinate) Certificates may be senior to
other Classes of Senior (or Subordinate)
Certificates in respect of such distributions
or losses.
As to each Series, 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" or "REMIC" as
defined in the Internal Revenue Code of 1986
(the "Code"). See "DESCRIPTION OF THE
CERTIFICATES."
Proceeds from the assets in the related Trust
Fund will be the only source of payments on
the Certificates of each Series. The
Certificates do not represent an obligation
of or interest in the Depositor, BankAmerica
Corporation ("BankAmerica"), Bank of America
NT&SA, Bank of America, FSB or any of their
affiliates. Neither the Certificates nor the
underlying Mortgage Loans or other assets of
a Trust Fund will be guaranteed or insured by
any governmental agency or instrumentality or
by the Depositor, BankAmerica, Bank of
America NT&SA, Bank of America, FSB or any of
their affiliates.
The Mortgage Pools.............. Each Trust Fund will consist primarily of
Mortgage Loans or interests therein secured
by first liens on one- to four-family
residential properties, located in any one of
the 50 states or the District of Columbia
(the "Mortgaged Properties"). The Mortgage
Loans will have been purchased by the
Depositor from Bank of America NT&SA, Bank of
America, FSB and/or one or more other
affiliated or unaffiliated institutions
specified in the applicable Prospectus
Supplement (collectively, the "Sellers") on
or before the date of initial issuance of the
related
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Series of Certificates. See "MORTGAGE LOAN
PROGRAM." For a description of the types of
Mortgage Loans that may be included in the
Mortgage Pools, see "THE MORTGAGE
POOLS -- The Mortgage Loans."
A Current Report on Form 8-K will be
available upon request to purchasers of the
related Series of Certificates and will be
filed, together with the related Pooling
Agreement, with the Commission within fifteen
days after such initial issuance.
Interest Distributions.......... Except as otherwise specified in the related
Prospectus Supplement, interest on each Class
of Certificates of each Series, other than
Strip Certificates or Accrual Certificates
(prior to the time when accrued interest
becomes payable thereon), will be remitted at
the applicable Pass-Through Rate (which may
be a fixed, variable or adjustable rate or
any combination thereof) on such Class's
outstanding Certificate Principal Balance, on
the 25th day (or if such day is not a
business day, the next succeeding business
day) of each month, commencing with the month
following the month in which the Cut-off Date
(as defined in the applicable Prospectus
Supplement) occurs (each, a "Distribution
Date"). Distributions, if any, with respect
to interest on Strip Certificates will be
made on each Distribution Date as described
herein and in the related Prospectus
Supplement. Interest that has accrued but is
not yet payable on any Accrual Certificates
will be added to the principal balance of
such Class on each Distribution Date, and
will thereafter bear interest. Distributions
of interest with respect to any Series of
Certificates (or accruals thereof in the case
of Accrual Certificates), or with respect to
one or more Classes included therein, may be
reduced to the extent of interest shortfalls
not covered by advances or the applicable
form of credit support, including shortfalls
(a "Prepayment Interest Shortfall") in
collections of a full month's interest in
connection with prepayments. See "YIELD
CONSIDERATIONS" and "DESCRIPTION OF THE
CERTIFICATES."
Principal Distributions......... Except as otherwise specified in the related
Prospectus Supplement, principal
distributions on the Certificates of each
Series will be payable on each Distribution
Date, commencing with the Distribution Date
in the month following the month in which the
Cut-off Date occurs, to the holders of the
Certificates of such Series, or of the Class
or Classes of Certificates then entitled
thereto, on a pro rata basis among all such
Certificates or among the Certificates of any
such Class, in proportion to their respective
outstanding Certificate Principal Balances,
or in the priority and manner otherwise
specified in the related Prospectus
Supplement. Strip Certificates with no
Certificate Principal Balance will not
receive distributions in respect of
principal. Distributions of principal with
respect to any Series of Certificates, or
with respect to one or more Classes included
therein, may be reduced to the extent of
certain delinquencies not covered by advances
or losses not covered by the applicable form
of credit enhancement. See "THE MORTGAGE
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POOLS," "MATURITY AND PREPAYMENT
CONSIDERATIONS" and "DESCRIPTION OF THE
CERTIFICATES."
Subordination................... If specified in the related Prospectus
Supplement, credit support to provide partial
coverage for certain defaults and losses
relating to the Mortgage Loans with respect
to one or more Classes of Certificates in
Series may be provided in the form of
subordination of one or more Classes of such
Series under which losses are first allocated
to any Subordinate Certificates up to
specified limits. To the extent not set forth
herein, the amount and types of coverage, the
terms of any subordination and related
information will be set forth in the
Prospectus Supplement relating to a Series of
Certificates. See "SUBORDINATION."
Credit Enhancements............. If specified in the related Prospectus
Supplement, the Trust Fund with respect to
any Series of Certificates may include any
one or any combination of a letter of credit,
mortgage pool insurance policy, special
hazard insurance policy, certificate
insurance policy, bankruptcy bond, reserve
fund or other type of credit support to
provide partial coverage for certain defaults
and losses relating to the Mortgage Loans.
Any form of credit enhancement may have
certain limitations and exclusions from
coverage thereunder, which will be described
in the related Prospectus Supplement. Losses
not covered by any form of credit enhancement
will be borne by the holders of the related
Certificates (or certain Classes thereof). To
the extent not set forth herein, the amount
and types of coverage, the identification of
any entity providing the coverage and related
information will be set forth in the
Prospectus Supplement relating to a Series of
Certificates. See "DESCRIPTION OF CREDIT
ENHANCEMENT."
Advances........................ Unless otherwise specified in the applicable
Prospectus Supplement, the Master Servicer
will be obligated to make certain advances
with respect to delinquent scheduled payments
on the Mortgage Loans, but only to the extent
that the Master Servicer believes that such
amounts will be recoverable by it. Any
advance made by the Master Servicer with
respect to a Mortgage Loan is recoverable by
it as provided herein under "DESCRIPTION OF
THE CERTIFICATES -- Advances" either from
recoveries on the specific Mortgage Loan or,
with respect to any advance subsequently
determined to be nonrecoverable, out of funds
otherwise distributable to the holders of the
related Series of Certificates, which may
include the holders of any Senior
Certificates of such Series.
Certificateholders will be notified of the
amounts of any advances made by the Master
Servicer or recovery of any advances
previously made and subsequently determined
to be nonrecoverable in the monthly
distribution report to Certificateholders
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Reports to
Certificateholders."
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<PAGE> 65
Optional Termination............ If specified in the applicable Prospectus
Supplement, the Master Servicer, the
Depositor or the holder of the residual
interest in a REMIC may at its option effect
early retirement of a Series of Certificates
through the purchase of the assets in the
related Trust Fund under the circumstances
and in the manner set forth herein under "THE
POOLING AGREEMENT -- Termination; Retirement
of Certificates" and in the related
Prospectus Supplement.
Rating.......................... At the date of issuance, as to each Series,
each Class of Certificates offered by means
of this Prospectus and the related Prospectus
Supplement will be rated at the request of
the Depositor in one of the four highest
rating categories by one or more nationally
recognized statistical rating agencies (each,
a "Rating Agency"). See "RATING" herein and
in the related Prospectus Supplement.
Legal Investment................ Unless otherwise specified in the related
Prospectus Supplement, each Class of
Certificates offered by means of this
Prospectus and the related Prospectus
Supplement that is rated in one of the two
highest rating categories by at least one
Rating Agency will constitute "mortgage
related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"). See "LEGAL INVESTMENT
MATTERS" herein.
ERISA Considerations............ Fiduciaries of employee benefit plans and
certain other retirement plans and
arrangements, including individual retirement
accounts and annuities, Keogh plans, and
collective investment funds and separate
accounts in which such plans, accounts,
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 (each, a "Plan")
should carefully review with their legal
advisors whether the purchase or holding of
Certificates could give rise to a transaction
that is prohibited or is not otherwise
permissible either under ERISA or Section
4975 of the Code. Investors are advised to
consult their counsel and to review "ERISA
CONSIDERATIONS" herein.
Federal Income Tax
Consequences.................. Certificates of each Series offered hereby
will constitute either (i) interests
("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust under
applicable provisions of the Code, or (ii)
"regular interests" ("REMIC Regular
Certificates") or "residual interests"
("REMIC Residual Certificates") in a Trust
Fund, or a portion thereof, treated as a
REMIC under Sections 860A through 860G of the
Code.
Investors are advised to consult their tax
advisors and to review "FEDERAL INCOME TAX
CONSEQUENCES" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Certificates:
Limited Liquidity. There can be no assurance that a secondary market for
the Certificates of any Series will develop or, if it does develop, that it will
provide Certificateholders with liquidity of investment or that it will continue
for the life of the Certificates of any Series. The Prospectus Supplement for
any Series of Certificates may indicate that an underwriter specified therein
intends to establish a secondary market in such Certificates; however, no
underwriter will be obligated to do so and offerings may be effected hereunder
without participation by any underwriter. The Certificates will not be listed on
any securities exchange.
Limited Obligations. The Certificates will not represent an interest in or
obligation of the Depositor, BankAmerica Corporation ("BankAmerica"), Bank of
America National Trust and Savings Association ("Bank of America NT&SA"), Bank
of America, Federal Savings Bank ("Bank of America, FSB") or any of their
affiliates. The only obligations of the foregoing entities with respect to the
Certificates or the Mortgage Loans will be (i) the obligations (if any) of any
such entity pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans sold by it and (ii) the Master Servicer's
servicing obligations under the related Pooling Agreement (including its limited
obligation to make certain advances in the event of delinquencies on the
Mortgage Loans, but only to the extent deemed recoverable), and, if and to the
extent expressly described in the related Prospectus Supplement, certain limited
obligations of the Master Servicer in connection with an obligation under the
Pooling Agreement to purchase or act as remarketing agent with respect to a
Convertible Mortgage Loan upon conversion to a fixed rate Mortgage Loan. Neither
the Certificates nor the underlying Mortgage Loans will be guaranteed or insured
by any governmental agency or instrumentality, or by the Depositor, BankAmerica,
Bank of America NT&SA, Bank of America, FSB or any of their affiliates. Proceeds
of the assets included in the related Trust Fund for each Series of Certificates
(including the Mortgage Loans and any form of credit enhancement) will be the
sole source of payments on the Certificates, and there will be no recourse to
the Depositor, BankAmerica, Bank of America NT&SA, Bank of America, FSB or any
other entity in the event that such proceeds are insufficient or otherwise
unavailable to make all payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancements. With
respect to each Series of Certificates, credit enhancement may be provided in
limited amounts to cover certain types of losses on the underlying Mortgage
Loans. Credit enhancement will be provided in one or more of the forms referred
to herein, including, but not limited to: subordination of other Classes of
Certificates of the same Series; a Letter of Credit; a Mortgage Pool Insurance
Policy; a Special Hazard Insurance Policy; a Certificate Insurance Policy; a
Bankruptcy Bond; a Reserve Fund; or any combination thereof. See "SUBORDINATION"
and "DESCRIPTION OF CREDIT ENHANCEMENTS" herein. Regardless of the form of
credit enhancement provided, the amount of coverage will be limited in amount
and in most cases will be subject to periodic reduction in accordance with a
schedule or formula. Furthermore, such credit enhancements may provide only very
limited coverage as to certain types of losses or risks, and may provide no
coverage as to certain other types of losses or risks. In the event losses
exceed the amount of coverage provided by any credit enhancement or losses of a
type not covered by any credit enhancement occur, such losses will be borne by
the holders of the related Certificates (or certain Classes thereof). All or a
portion of the credit enhancement for any Series of Certificates will generally
be permitted to be reduced, terminated or substituted for, if each applicable
Rating Agency indicates that the then-current rating thereof will not be
adversely affected. The rating of any Series of Certificates by any applicable
Rating Agency may be lowered following the initial issuance thereof as a result
of the downgrading of the obligations of any applicable credit support provider,
or as a result of losses on the related Mortgage Loans in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
Neither the Depositor, BankAmerica, Bank of America NT&SA, Bank of America, FSB
nor any of their affiliates will have any obligation to replace or supplement
any credit enhancement, or to take any other action to maintain any rating of
any Series of Certificates. See "DESCRIPTION OF CREDIT ENHANCEMENTS -- Reduction
of Credit Enhancement."
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Sensitivity of Mortgage Loan Collections to Residential Real Estate
Values. An investment in securities such as the Certificates which generally
represent interests in mortgage loans may be affected by, among other things, a
decline in real estate values. No assurance can be given that values of the
Mortgaged Properties (as defined herein) have remained or will remain at their
levels on the dates of origination of the related Mortgage Loans. If the
residential real estate market should experience an overall decline in property
values such that the outstanding balances of the Mortgage Loans, and any
secondary financing on the Mortgaged Properties, in a particular Mortgage Pool
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry. To the extent
that such losses are not covered by the applicable credit enhancement, holders
of Certificates of the Series evidencing interests in the related Mortgage Pool
will bear all risk of loss resulting from default by Mortgagors and will have to
look primarily to the value of the Mortgaged Properties for recovery of the
outstanding principal and unpaid interest on the defaulted Mortgage Loans.
Certain of the types of loans which may be included in the Mortgage Pools may
involve additional uncertainties not present in traditional types of loans. For
example, certain of the Mortgage Loans provide for escalating or variable
payments by the borrower under the Mortgage Loan (the "Mortgagor"), as to which
the Mortgagor is generally qualified on the basis of the initial payment amount.
In some instances, the Mortgagors may not be able to make their loan payments as
such payments increase and thus the likelihood of default will increase.
Geographic Concentration of Mortgage Loans. 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
underlying 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.
Failure of Sellers to Repurchase Mortgage Loans in the Event of a Breach of
a Representation or Warranty. Any Mortgage Loan for which a breach of a
representation or warranty exists will remain in the related Trust Fund in the
event that a Seller is unable, or disputes its obligation, to repurchase such
Mortgage Loan. In such event, any resulting losses will be borne by the related
form of credit enhancement, to the extent available.
Yield and Prepayment Uncertainty. The yield to maturity of the Certificates
of each Series will depend on the rate and timing of principal payments
(including prepayments, liquidations due to defaults, and repurchase) on the
Mortgage Loans and the price paid by Certificateholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments on
the related Mortgage Loans. The yield to maturity on Strip Certificates will be
extremely sensitive to the rate of prepayments on the related Mortgage Loans. In
addition, the yield to maturity on certain other types of Classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other Classes in a
Series including more than one Class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
Classes of Certificates. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional economic
conditions and homeowner mobility. See "YIELD CONSIDERATIONS" and "MATURITY AND
PREPAYMENT CONSIDERATIONS" herein.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of conventional Mortgage Loans,
minus any portion of the interest payable thereon retained by the Depositor or a
Seller (the "Retained Yield"), if any, evidenced by
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<PAGE> 68
promissory notes (the "Mortgage Notes") secured by first mortgages or first
deeds of trust or other similar security instruments (the "Mortgages") creating
a first lien on one- to four-family residential properties (the "Mortgaged
Properties"), or interests in such Mortgage Loans. The Mortgaged Properties will
consist primarily of owner-occupied attached or detached single-family dwelling
units, two- to four-family dwelling units, condominiums, townhouses, row houses,
individual units in planned-unit developments and certain other dwelling units,
and the fee, leasehold or other interests in the underlying real property. The
Mortgaged Properties may include vacation, second and non-owner-occupied homes.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Mortgage Pool from among those originated by Bank of America NT&SA, Bank of
America, FSB or another affiliate of the Depositor (each, an "Affiliated
Seller") or purchased either directly or through its affiliates from banks,
savings associations, mortgage bankers, investment banking firms, the FDIC and
other mortgage loan originators or sellers not affiliated with the Depositor
("Unaffiliated Sellers"), all as described below under "MORTGAGE LOAN PROGRAM."
Affiliated Sellers and Unaffiliated Sellers are collectively referred to herein
as "Sellers". The characteristics of the Mortgage Loans are as described in the
related Prospectus Supplement. Other mortgage loans available for purchase by
the Depositor may have characteristics which would make them eligible for
inclusion in a Mortgage Pool but were not selected for inclusion in such
Mortgage Pool.
Each Series of Certificates will evidence interests in one Mortgage Pool
including Mortgage Loans having an aggregate principal balance of not less than
approximately $10,000,000 as of the Cut-off Date. Each Certificate will evidence
an interest in only the related Mortgage Pool and corresponding Trust Fund, and
not in any other Mortgage Pool or Trust Fund.
THE MORTGAGE LOANS
All of the Mortgage Loans in a Mortgage Pool will (i) have monthly payments
due on the first of each month, (ii) be secured by Mortgaged Properties located
in any of the 50 states or the District of Columbia and (iii) be of one of the
following types of mortgage loans described or referred to in paragraphs
numbered (1) through (4):
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans) providing for
level monthly payments of principal and interest over the terms of such
Mortgage Loans;
(2) Fully-amortizing adjustable-rate mortgage loans ("ARM Loans")
having an original term to maturity of not more than 40 years, with a
related interest rate (a "Mortgage Rate") which generally adjusts initially
either one, three or six months or one, three, five, seven or ten years
subsequent to the initial payment date, and thereafter at either one-month,
six-month, one-year or other intervals (with corresponding adjustments in
the amount of monthly payments) over the term of the mortgage loan to equal
the sum of a fixed percentage set forth in the related Mortgage Note (the
"Note Margin") and an index*. The related Prospectus Supplement will set
forth the relevant index and the highest, lowest and weighted average Note
Margin with respect to the ARM Loans in the related Mortgage Pool. The
related Prospectus Supplement will also indicate any periodic or lifetime
limitations on changes in any per annum Mortgage Rate at the time of any
adjustment. If specified in the related Prospectus Supplement, an ARM Loan
may include a provision that allows the Mortgagor to convert the adjustable
Mortgage
- ---------------
* The index (the "Index") for a particular Mortgage Pool will be specified in
the related Prospectus Supplement and may include one of the following
indices: (i) the twelve-month average of monthly yields on actively traded
U.S. Treasury securities adjusted to a constant maturity of one year, (ii) the
weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year, (iii) the weekly average of the secondary market
interest rates on six-month negotiable certificates of deposit, (iv) the
average of interbank offered rates for six-month U.S. dollar-denominated
deposits in the London market, or (v) the monthly weighted average cost of
funds for member institutions of the Federal Home Loan Bank of San Francisco,
each calculated as of a date prior to each scheduled interest rate adjustment
date which will be specified in the related Prospectus Supplement.
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Rate to a fixed rate at some point during the term of such ARM Loan
generally during the period from one to twelve years subsequent to the
initial payment date;
(3) Mortgage Loans having an original term to maturity of not more
than 30 years with a Mortgage Rate which adjusts initially five years
subsequent to the initial payment date, and thereafter at one-month,
six-month, one-year or other intervals (with corresponding adjustments in
the amount of monthly payments) over the term of the mortgage loan to equal
the sum of the related Note Margin and Index, and providing for monthly
payments of interest only prior to the date of the initial Mortgage Rate
adjustment and monthly payments of principal and interest thereafter
sufficient to fully-amortize the Mortgage Loans over their remaining terms
to maturity ("Net 5 Loans"). The related Prospectus Supplement will set
forth the relevant index and the highest, lowest and weighted average Note
Margin with respect to the Net 5 Loans in the related Mortgage Pool. The
related Prospectus Supplement will also indicate any periodic or lifetime
limitations on changes in any per annum Mortgage Rate at the time of any
adjustment; or
(4) Balloon mortgage loans ("Balloon Loans"), which are fixed-rate
mortgage loans having original terms to maturity of generally five or seven
years as described in the related Prospectus Supplement, with level monthly
payments of principal and interest based on a 30-year amortization
schedule. The amount of the monthly payment will remain constant until the
maturity date, upon which date the full outstanding principal balance on
such Balloon Loan will be due and payable (such amount, the "Balloon
Amount").
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans underlying
each Series of Certificates, will be supplied in the related Prospectus
Supplement. The Loan-to-Value Ratio at origination is defined generally as the
ratio, expressed as a percentage, of the principal amount of the Mortgage Loan
at origination to the lesser of (x) the appraised value determined in an
appraisal obtained at origination of such Mortgage Loan and (y) the sales price
for the related Mortgaged Property. The lesser of the items described in (x) and
(y) of the preceding sentence is hereinafter referred to as the "Appraised
Value."
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and the
remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to refinance
an existing mortgage loan or loans (which may include a junior lien) primarily
in order to change the interest rate or other terms thereof. The Mortgage Loans
may be mortgage loans which have been consolidated and/or have had various terms
changed, mortgage loans which have been converted from adjustable rate mortgage
loans to fixed rate mortgage loans, or construction loans which have been
converted to permanent mortgage loans. The Mortgagors may be required to or have
the option to make payments by means of automatic debits from their checking or
savings accounts. In addition, a Mortgaged Property may be subject to secondary
financing at the time of origination of the Mortgage Loan or thereafter.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates on
such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally during the period from one to twelve years subsequent to the date of
origination, depending upon the length of the initial adjustment period. If
specified in the related Prospectus Supplement, upon any conversion, the
Depositor or the applicable Master Servicer, Seller or a third party may have
the obligation or the option to purchase the converted Mortgage Loan as and to
the extent set forth in the related Prospectus Supplement. If specified in the
related Prospectus Supplement, the Depositor or the applicable Master Servicer
(or another party specified therein) may agree to act as remarketing agent with
respect to such converted Mortgage Loans and, in such capacity, to use its best
efforts to arrange for the sale of converted Mortgage Loans in the event that
such party does not exercise its option to purchase such converted Mortgage
Loans. Upon the failure of any party to fulfill its obligation or exercise its
option to purchase any such converted Mortgage Loan or the
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inability of any remarketing agent to arrange for the sale of the converted
Mortgage Loan, the related Mortgage Pool will thereafter include both fixed rate
and adjustable rate Mortgage Loans. In addition, the Prospectus Supplement
relating to any Series of Certificates may specify other arrangements relating
to the Convertible Loans upon their conversion.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during the
early years of the Mortgage Loan (the "Buydown Period") will be less than the
scheduled monthly payments on the Mortgage Loan, the resulting difference to be
made up from (i) an amount (such amount, exclusive of investment earnings
thereon, being hereinafter referred to as "Buydown Funds") contributed by the
seller of the Mortgaged Property or another source and placed in a custodial
account (the "Buydown Account"), (ii) if the Buydown Funds are contributed on a
present value basis, investment earnings on such Buydown Funds or (iii)
additional buydown funds to be contributed over time by the Mortgagor's employer
or another source. The applicable Prospectus Supplement or Current Report on
Form 8-K will contain information with respect to any Buydown Mortgage Loans,
including information on the interest rate initially payable by the Mortgagor,
increases in the interest rate paid by the Mortgagor over the term of the
related Buydown Mortgage Loan and the length of the Buydown Period.
The Prospectus Supplement for each Series of Certificates will contain
information as to the type of Mortgage Loans which will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a Series of
Certificates will include certain information, generally as of the Cut-off Date
and to the extent then available to the Depositor, on an approximate basis, as
to (i) the aggregate principal balance of the Mortgage Loans, (ii) the type of
property securing the Mortgage Loans, (iii) the original terms to maturity of
the Mortgage Loans, (iv) the range of principal balances of the Mortgage Loans
at origination, (v) the earliest origination date and latest maturity date of
the Mortgage Loans, (vi) the Loan-to-Value Ratios of the Mortgage Loans, (vii)
the Mortgage Rate or range of Mortgage Rates borne by the Mortgage Loans, (viii)
if any of the Mortgage Loans are ARM Loans or Net 5 Loans, the applicable Index,
the range of Note Margins and the weighted average Note Margin, (ix) the
geographical distribution of the Mortgage Loans, (x) the number and aggregate
principal balance of Buydown Mortgage Loans, if applicable, and (xi) the percent
of ARM Loans which are convertible to fixed-rate mortgage loans, if applicable.
A Current Report on Form 8-K will be available to the Purchasers of the
related Series of Certificates at or before the initial issuance of such Series
of Certificates and will be filed, together with the related Pooling Agreement,
with the Securities and Exchange Commission within fifteen days after the
initial issuance of such Certificates. In the event that Mortgage Loans are
added to or deleted from the Trust Fund after the date of the related Prospectus
Supplement, such addition or deletion will be noted in the Current Report on
Form 8-K. In addition, specific information with respect to the Mortgage Loans
in a particular Mortgage Pool and any applicable credit enhancements which is
not included in the related Prospectus Supplement will generally be included in
such Current Report on Form 8-K.
The Depositor will cause the Mortgage Loans constituting each Mortgage Pool
to be assigned to the Trustee named in the related Prospectus Supplement, for
the benefit of the holders of all of the Certificates of a Series. The Master
Servicer named in the related Prospectus Supplement, which will be either Bank
of America NT&SA or Bank of America, FSB, will service the Mortgage Loans,
pursuant to a Pooling Agreement, and will receive a fee for such services. See
"MORTGAGE LOAN PROGRAM" and "DESCRIPTION OF THE CERTIFICATES." Certain Mortgage
Loans may be serviced for the Master Servicer by other mortgage servicing
institutions ("Subservicers"), which may be affiliates of the Depositor and the
Master Servicer. With respect to those Mortgage Loans serviced by the Master
Servicer through a Subservicer, the Master Servicer will remain liable for its
servicing obligations under the related Pooling Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
As specified in the related Prospectus Supplement, (i) the Depositor may
assign certain limited representations and warranties regarding the Mortgage
Loans, and (ii) the Depositor may have made certain limited representations and
warranties regarding the Mortgage Loans. The Depositor's assignment of the
Mortgage Loans to the Trustee will be without recourse. See "DESCRIPTION OF THE
CERTIFI-
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CATES -- Assignment of Mortgage Loans." The Master Servicer's obligations with
respect to the Mortgage Loans will consist principally of its contractual
servicing obligations under the related Pooling Agreement (including its
obligation to enforce certain purchase and other obligations of Sellers and
Subservicers, if any, as more fully described herein under "MORTGAGE LOAN
PROGRAM--Representations and Warranties by Sellers," and "DESCRIPTION OF THE
CERTIFICATES -- Assignment of Mortgage Loans," and its obligation to make
certain cash advances in the event of delinquencies in payments on or with
respect to the Mortgage Loans in amounts described herein under "DESCRIPTION OF
THE CERTIFICATES -- Advances"). The obligation of the Master Servicer to make
advances will be limited to amounts which the Master Servicer believes
ultimately would be reimbursable out of the proceeds of liquidation of the
Mortgage Loans or any applicable form of credit support. See "DESCRIPTION OF THE
CERTIFICATES -- Advances."
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on May 6, 1996 and
is a wholly-owned subsidiary of Bank of America NT&SA. It is not expected that
the Depositor will have any business operations other than offering Certificates
and related similar activities.
The principal executive offices of the Depositor are located at 345
Montgomery Street, Lower Level #2, Unit #8152, San Francisco, California 94104.
The Depositor's telephone number is (415) 445-4855.
MORTGAGE LOAN PROGRAM
The Depositor will purchase the Mortgage Loans, either directly or
indirectly through its affiliates, from Sellers. The Prospectus Supplement
related to any Series of Certificates will specify the entity that will act as
Master Servicer pursuant to the Pooling Agreement relating to such Series of
Certificates, which will be either Bank of America NT&SA or Bank of America,
FSB.
The Mortgage Pools may consist of Mortgage Loans purchased from Affiliated
Sellers, Unaffiliated Sellers or both Unaffiliated Sellers and Affiliated
Sellers. Descriptions of certain Affiliated Sellers are given below under
"Certain Affiliated Sellers," and the Prospectus Supplement related to any
Series of Certificates for which the underlying Mortgage Pool contains a
substantial number of Mortgage Loans purchased from any other Affiliated Seller
will describe such Affiliated Seller. The Mortgage Loans purchased from
Affiliated Sellers will generally have been originated in accordance with the
underwriting standards of the Affiliated Sellers, as described below under
"Underwriting Standards."
The Prospectus Supplement related to any Series of Certificates for which
the underlying Mortgage Pool contains a substantial number of Mortgage Loans
purchased from an Unaffiliated Seller will describe such Unaffiliated Seller.
The Mortgage Loans purchased from Unaffiliated Sellers may have been originated
in accordance with underwriting standards that vary substantially from those
used by Affiliated Sellers. See "Underwriting Standards" and "Qualifications of
Unaffiliated Sellers" below.
CERTAIN AFFILIATED SELLERS
Bank of America National Trust and Savings Association
With more than $163 billion in assets as of December 31, 1995, Bank of
America NT&SA is the primary subsidiary of BankAmerica Corporation, the nation's
third largest bank holding company, and is currently the third largest
commercial bank in the United States and the largest in California. In
California it operates more than 1,000 full-service branches as well as major
consumer lending, residential lending, small business banking, and commercial
banking operations. It also maintains corporate banking offices in major U.S.
cities, and branches and other facilities in more than 30 countries and
territories around the world. Its residential lending and home loan servicing
operation, combined with that of Bank of America, FSB, ranks among the top ten
in the United States, according to Inside Mortgage Finance, with originations of
more than $10 billion for 1995 and with a combined servicing portfolio of $63
billion as of December 31, 1995.
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Bank of America NT&SA's deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC") to the extent provided by law. Bank of
America NT&SA has been approved as a mortgagee and Seller/Servicer by the
Federal Housing Administration ("FHA"), the Veterans Administration ("VA"), the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
Bank of America NT&SA began conducting business in San Francisco, California, as
Bank of Italy in 1904 and adopted its present name in 1930. Bank of America has
been originating and servicing mortgage loans similar to the Mortgage Loans to
be included in the Mortgage Pools since 1913. It originates both fixed and
adjustable rate loans and purchases mortgage loans in negotiated transactions
from other Affiliated and Unaffiliated Sellers. See "-- Residential Mortgage
Loan Servicing Activities" and "-- Delinquency, Foreclosure and Loss Experience"
for a description of Bank of America NT&SA's loan servicing operations and
activities.
The principal executive offices of Bank of America NT&SA are located at 555
California Street, San Francisco, California 94104.
Bank of America, Federal Savings Bank
With more than $8 billion in assets as of December 31, 1995, Bank of
America, FSB, a subsidiary of BankAmerica Corporation, originates and services
home loans nationwide through retail, wholesale, and other specialized channels,
and originates and services manufactured housing loans throughout the United
States. In addition, Bank of America, FSB's Hawaii Division is a full-service
bank with 45 branches on four Hawaiian islands; its Midwest Retail Division
operates ATMs and a small network of Financial Service Centers, primarily in the
Chicago metropolitan area; and its Community Development Division finances
affordable housing projects and offers government-guaranteed small business
loans in 11 states.
Bank of America, FSB's deposits are insured by the FDIC to the extent
provided by law. Bank of America, FSB has been approved as a mortgagee and
Seller/Servicer by the Department of Housing and Urban Development, the VA,
GNMA, FNMA and FHLMC. Bank of America, FSB has been an active one-to four-family
residential real estate mortgage lender since 1992. It originates both fixed and
adjustable rate loans throughout the United States. See "-- Residential Mortgage
Loan Servicing Activities" and "-- Delinquency, Foreclosure and Loss Experience"
for a description of Bank of America, FSB's loan servicing operations and
activities.
Bank of America, FSB's headquarters is located in Portland, Oregon, and its
administrative offices are located at 555 California Street, San Francisco,
California 94104 (telephone 415-622-2220).
UNDERWRITING STANDARDS
The Affiliated Sellers have written, and are continuously updating,
underwriting guides for the origination of one- to four-family residential first
mortgage loans (as modified from time to time, the "Guides"). The underwriting
standards as set forth in the Guides are continuously revised based on
prevailing conditions in the residential mortgage market, evolving credit
standards of the Affiliated Sellers and the investment market for residential
mortgage loans.
The underwriting standards set forth in the Guides are intended to assess
the prospective borrower's ability and willingness to repay the debt and the
adequacy of the property as collateral for the loan requested. Credit policies
of the Affiliated Sellers require that loan underwriters be satisfied that the
value of the property being financed supports the outstanding loan balance with
sufficient value at loan origination to mitigate the effects of adverse shifts
in real estate values. The emphasis, however, remains on the borrowers' ability
to repay debt.
The real estate lending processes of the Affiliated Sellers for one- to
four-family mortgage loans follow standard procedures, designed to comply with
applicable federal and state laws and regulations. Initially, a prospective
borrower is required to fill out a detailed application designed to provide to
the underwriter pertinent information about the prospective borrower, the
property to be financed and the type of loan desired. Information regarding the
property to be financed may be provided by the prospective borrower after the
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applicable Affiliated Seller has approved, subject to review of the property to
be financed, a loan to the prospective borrower. As part of the description of
the prospective borrower's financial condition, the Affiliated Sellers require a
description of assets and liabilities and income and expenses and an
authorization to the applicable Affiliated Seller to apply for a credit report
which summarizes the prospective borrower's credit history with merchants and
lenders and any public records, such as bankruptcy. In most cases, employment
verification is obtained providing current and historical income information.
Such employment verification is obtained either through the applicable
Affiliated Seller's analysis of the prospective borrower's W-2 forms for the
most recent two years and year-to-date earnings statement or most recent two
years' tax returns or from the prospective borrower's employer, wherein the
employer reports the length of employment and current salary with that
organization. Self-employed prospective borrowers are required to submit their
federal tax returns for the past two years plus year-to-date financial
statements if the loan application is made 120 days or longer after the end of
the most recent tax year for which a federal tax return was provided. In
general, an employment verification is obtained, and with respect to certain
loans, a telephonic employment confirmation is obtained by the Affiliated
Seller.
Beginning in April 1994, the Affiliated Sellers began using an automated
process to assist in making credit decisions on certain residential real estate
loans. A prospective borrower's credit history is assigned a score based on
standard criteria designed to predict the possibility of a default by the
prospective borrower on a mortgage loan. An application from a prospective
borrower whose score indicates a high probability of default may be declined on
the basis of the score, although applications for certain types of mortgage
loans will receive a judgmental review from an underwriter who may override a
decision based on the credit score. An application from a prospective borrower
whose score indicates a low probability of default is subject to less stringent
underwriting guidelines and documentation standards to verify the information in
the application.
Once the employment verification (or confirmation) and the credit report
are received by the underwriter considering the loan application, a
determination is made as to whether the prospective borrower has sufficient
monthly income available to meet the borrower's monthly obligations on the
proposed loan and other expenses related to the residence as well as to meet
other financial obligations and monthly living expenses. The Affiliated Sellers
have established as general lending guidelines that the mortgage payments plus
applicable real property taxes, condominium or homeowner association common
charges, hazard insurance premiums and premiums on any Primary Mortgage
Insurance Policy (as defined herein) generally should not exceed 33% of the
borrower's gross income, and that all monthly payments, including those
mentioned above and other obligations, such as car payments, generally should
not exceed 38% of gross income. However, other credit considerations may cause
an underwriter to depart from these guidelines. The Affiliated Sellers follow
standard exceptions procedures pursuant to which underwriters generally have
delegated authority to approve or recommend the approval of loan applications
when certain lending guidelines are not met, including when the ratios of the
borrower's housing and fixed expenses to gross income exceed 40%. Where there
are two individuals co-signing any mortgage note, the income and payment
obligations of both may be included in the computation. With respect to ARM
Loans with Mortgage Rates that adjust initially five or more years after their
origination and Net 5 Loans, these ratios are calculated using the initial
Mortgage Rates. With respect to all other ARM Loans, these ratios are generally
calculated using the fully-indexed Mortgage Rate.
Prior to final loan approval a prospective borrower generally is expected
to have liquid assets sufficient to cover the down-payment, closing costs and
cash reserves that could be used to pay future housing expenses in a depository
or related account of the borrower. However, the Affiliated Sellers do not
require prospective borrowers to have such liquid assets when they originate
rate and term refinance loans.
An appraisal is made of each property to be financed. The appraisal is
conducted by either a staff appraiser of the applicable Affiliated Seller, or in
some instances, an independent fee appraiser licensed in the jurisdiction where
such property is located. Generally, as part of the loan origination process,
the appraiser personally visits the property and estimates its market value on
the basis of comparable properties and other factors.
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The Affiliated Sellers have generally not made one- to four-family mortgage
loans having Loan-to-Value Ratios above 80% unless they have obtained or caused
the borrowers to obtain Primary Mortgage Insurance Policies.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS -- Anti-Deficiency Legislation and Other Limitations on Lenders."
The underwriting standards contained in the Guides applicable to all states
(including anti-deficiency states) require that the value of the property being
financed, as indicated by the appraisal, currently supports and is anticipated
to support in the future the outstanding loan balance, although there can be no
assurance that such value will support the loan balance in the future.
In addition, the Depositor will purchase Mortgage Loans which may not fully
conform to the underwriting standards set forth in the Guides. Certain of the
Mortgage Loans will be purchased either directly or through an affiliate of the
Depositor in negotiated transactions, and such negotiated transactions may be
governed by agreements ("Master Commitments") relating to ongoing purchases of
Mortgage Loans by the Depositor or such affiliate of the Depositor, from
Unaffiliated Sellers who will represent that the Mortgage Loans have been
originated in accordance with underwriting standards agreed to by the Depositor
or such affiliate of the Depositor. The Depositor or an affiliate of the
Depositor will generally review only a sample of the Mortgage Loans in any
delivery of such Mortgage Loans from the related Unaffiliated Seller for credit
quality.
The underwriting standards utilized in negotiated transactions and Master
Commitments with Unaffiliated Sellers may vary substantially from the
underwriting standards set forth in the Guides. Such underwriting standards are
generally intended to provide an underwriter with information to evaluate the
borrower's repayment ability and the adequacy of the Mortgaged Property as
collateral. Due to the variety of underwriting standards and review procedures
that may be applicable to the Mortgage Loans included in any Mortgage Pool, the
related Prospectus Supplement generally will not distinguish among the various
underwriting standards applicable to the Mortgage Loans nor describe any review
for compliance with applicable underwriting standards performed by the Depositor
or an affiliate of the Depositor. Moreover, there can be no assurance that every
Mortgage Loan was originated in conformity with the applicable underwriting
standards in all material respects, or that the quality or performance of
Mortgage Loans underwritten pursuant to varying standards as described above
will be equivalent under all circumstances.
QUALIFICATION OF UNAFFILIATED SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller will be required to satisfy the qualifications set forth
herein. Each Unaffiliated Seller must be an institution experienced in
originating and servicing Mortgage Loans of the type contained in the related
Mortgage Pool in accordance with practices and guidelines which are generally
accepted by established originators and servicers of such types of mortgage
loans must maintain satisfactory facilities to originate and service those
Mortgage Loans, must be a seller/servicer approved by either FNMA or FHLMC and
must be a mortgagee approved by the FHA or an institution the deposit accounts
in which are insured by the FDIC. In addition, the Depositor will evaluate the
financial condition of each Unaffiliated Seller. However, the Depositor makes no
representation regarding the financial condition of any such Unaffiliated
Seller.
REPRESENTATIONS AND WARRANTIES BY SELLERS
As specified in the related Prospectus Supplement, (i) each Seller may have
made representations and warranties in respect of the Mortgage Loans sold by
such Seller to the Depositor which the Depositor will assign to the related
Trust Fund on the date of initial issuance of the related Series of
Certificates, and (ii) the Depositor may have made representations and
warranties in respect of each Mortgage Loan on the date of initial issuance of
the related Series of Certificates. Such representations and warranties
generally include, among other things, that at the time of the sale by the
Depositor of each Mortgage Loan to the applicable
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Trust Fund: (i) the information set forth in the schedule of Mortgage Loans is
true and correct in all material respects; (ii) title insurance (or in the case
of Mortgaged Properties located in areas where such policies are generally not
available, an attorney's certificate of title) and any required hazard and
primary mortgage insurance were effective at the origination of each Mortgage
Loan, and each policy (or certificate of title) remains in full force and
effect; (iii) the Seller has good title to each such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims except as may
be provided under the Relief Act and except to the extent that any buydown
agreement exists for a Buydown Mortgage Loan; (iv) each Mortgage is a valid
first lien on an unencumbered estate in fee simple or leasehold interest in the
Mortgaged Property (subject only to (a) liens for current real property taxes
and special assessments, (b) covenants, conditions and restrictions, rights of
way, easements and other matters of public record as of the date of recording of
such Mortgage, such exceptions appearing of record being acceptable to mortgage
lending institutions generally or specifically reflected in the mortgage
originator's appraisal, (c) exceptions set forth in the title insurance policy
covering such Mortgaged Property and (d) other matters to which like properties
are commonly subject which do not materially interfere with the benefits of the
security intended to be provided by the Mortgage); (v) each Mortgaged Property
is free from material damage and in generally good repair, except for ordinary
wear and tear; (vi) there are no delinquent tax or assessment liens against the
Mortgaged Property; (vii) if a Primary Mortgage Insurance Policy is required
with respect to a Mortgage Loan, such Mortgage Loan is the subject of such a
policy; (viii) each Mortgage Loan was made in compliance with all applicable
local, state and federal laws in all material respects; and (ix) that the
Mortgage Note and documents relating to each Mortgage Loan are genuine and that
each is the legal, valid and binding obligation of the maker thereof, subject to
certain customary exceptions.
In the event of a breach of a Seller's representation or warranty that
materially adversely affects the interests of the Certificateholders in a
Mortgage Loan, the related Seller will be obligated to cure such breach or
repurchase or substitute another Mortgage Loan for such Mortgage Loan as
described below. Promptly upon becoming aware of any breach of a representation
or warranty which materially and adversely affects the interests of the
Certificateholders with respect to a Mortgage Loan or Mortgage Loans, the Master
Servicer shall be required to provide notice to the related Seller and request
that such Seller either cure such breach or repurchase or substitute another
Mortgage Loan for such Mortgage Loan. However, there can be no assurance that a
Seller will honor its obligation to cure such breach or repurchase or substitute
another Mortgage Loan for any Mortgage Loan as to which such a breach of a
representation or warranty arises.
If a Seller cannot cure a breach of any representation or warranty made by
it in respect of a Mortgage Loan which materially and adversely affects the
interests of the Certificateholders in such Mortgage Loan within 90 days after
notice from the Master Servicer, such Seller will be obligated to purchase such
Mortgage Loan. The Purchase Price for any such Mortgage Loan will be equal to
the principal balance thereof as of the date of purchase plus accrued and unpaid
interest to the first day of the month following the month of repurchase at the
Pass-Through Rate. If specified in the related Prospectus Supplement, as to any
such Mortgage Loan required to be purchased by the related Seller as provided
above, rather than repurchase the Mortgage Loan, the related Seller may, at its
sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan") from the
Trust Fund and substitute in its place another Mortgage Loan of like kind (a
"Qualified Substitute Mortgage Loan"); however, such substitution must be
effected within 120 days of the date of the initial issuance of the Certificates
with respect to a Trust Fund for which no REMIC election is to be made. With
respect to a Trust Fund for which a REMIC election is to be made, such
substitution of a defective Mortgage Loan must be effected within two years of
the date of the initial issuance of the Certificates, and may not be made if
such substitution would cause the Trust Fund to not qualify as a REMIC or result
in a prohibited transaction tax under the Internal Revenue Code of 1986 (the
"Code"). Any Qualified Substitute Mortgage Loan generally will, on the date of
substitution, (i) have an outstanding principal balance, after deduction of the
principal portion of the monthly payment due in the month of substitution, not
in excess of the outstanding principal balance of the Deleted Mortgage Loan (the
amount of any shortfall to be deposited in a custodial account (the "Custodial
Account") in the month of substitution for distribution to the
Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate not less
than (and not more than one percentage point greater than) the Mortgage Rate and
Net Mortgage Rate, respectively, of the Deleted Mortgage Loan as of the date of
substitution, (iii) have a Loan-to-Value Ratio at the time of substitution no
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higher than that of the Deleted Mortgage Loan at the time of substitution, (iv)
have a remaining term to maturity not greater than (and not more than one year
less than) that of the Deleted Mortgage Loan, and (v) comply with all of the
representations and warranties set forth in the related mortgage loan purchase
agreement as of the date of substitution. (Section 2.04) The related Pooling
Agreement may include additional requirements relating to ARM Loans, Net 5 Loans
or other specific types of Mortgage Loans, or additional provisions relating to
meeting the foregoing requirements on an aggregate basis where a number of
substitutions occur contemporaneously. This substitution or repurchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for any such breach.
RESIDENTIAL MORTGAGE LOAN SERVICING ACTIVITIES
Residential mortgage loans originated by the Affiliated Sellers, or
purchased from Unaffiliated Sellers, including the Mortgage Loans, are serviced
currently by Bank of America NT&SA at its servicing facility located in Cypress,
California (the "Cypress Center") or by Bank of America, FSB at its servicing
facility located in Richmond, Virginia (the "Richmond Center"). On March 31,
1996, the Cypress Center was servicing approximately 397,000 mortgage loans with
an aggregate principal balance of $46,000,000,000 and the Richmond Center was
servicing approximately 232,000 mortgage loans with an aggregate principal
balance of $20,000,000,000. On February 29, 1996, Bank of America, FSB entered
into an agreement to acquire servicing rights to approximately 184,000 mortgage
loans with an aggregate outstanding principal balance of approximately
$13,600,000,000 from FBS Mortgage Corporation. Pursuant to that agreement, Bank
of America, FSB will begin servicing these mortgages on several dates in 1996.
The Cypress Center and Richmond Center are responsible for answering
customers inquiries, receiving loan payments, reporting to investors,
maintaining hazard insurance or a blanket hazard policy, monitoring payment of
taxes, assessments and, when applicable, Primary Mortgage Insurance Policies,
and all mortgage accounting and record keeping. The Cypress Center and Richmond
Center also are responsible for collection efforts on delinquent residential
mortgage loans and foreclosures thereon. Separate units exist within affiliates
of BankAmerica to manage and dispose of other real estate owned.
Because both Centers service loans for governmental and quasi-governmental
agencies of the U.S. Government, the Centers are regularly examined by either
Bank of America NT&SA's or Bank of America, FSB's internal and external auditors
and periodically by FNMA, FHLMC, GNMA, the Comptroller of the Currency or the
Office of Thrift Supervision ("OTS"), as applicable, and HUD. Certain financial
records of Bank of America NT&SA and Bank of America, FSB relating to their
mortgage servicing activities are reviewed annually by their independent public
accountants.
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
The delinquency, foreclosure and loss experience on the portfolios of one-
to four-family first mortgage loans owned and serviced by each of Bank of
America NT&SA and Bank of America, FSB, respectively, are set forth in the
following tables.* The delinquency, foreclosure and loss experience indicated
for Bank of America NT&SA excludes certain loans originated by its private
banking unit. Most of the loans serviced by Bank of America, FSB in 1994 were
not originated by Bank of America, FSB. The portfolios of mortgage loans
serviced by Bank of America NT&SA and Bank of America, FSB include both fixed
and adjustable interest rate mortgage loans, including Buydown Mortgage Loans,
loans with stated maturities of 15 to 40 years and other types of mortgage loans
having a variety of payment characteristics, and includes mortgage loans secured
by mortgaged properties in geographic locations that may not be representative
of the geographic distribution or concentration of the Mortgaged Properties
securing the Mortgage Loans. There can be no assurance that the delinquency,
foreclosure and loss experience set forth below with respect to the
- ---------------
* The delinquency, foreclosure and loss experience set forth for Bank of America
NT&SA includes certain Mortgage Loans, with an aggregate principal balance
that does not exceed 5% of the total portfolio by dollar amount for any period
indicated, that are owned by an affiliate of Bank of America NT&SA and
serviced by Bank of America NT&SA.
20
<PAGE> 77
portfolio of one- to four-family first mortgage loans owned by Bank of America
NT&SA and serviced by Bank of America NT&SA and Bank of America, FSB,
respectively, will be similar to the results that may be experienced with
respect to the Mortgage Loans underlying any Series of Certificates. In
addition, because Bank of America, FSB did not begin servicing mortgage loans
for BankAmerica until August 31, 1994, the delinquency, foreclosure and loss
experience set forth below with respect to the mortgage loans owned and serviced
by Bank of America, FSB should not be considered representative of its
historical experience servicing mortgage loans similar to the Mortgage Loans or
indicative of future servicing performance.
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE OF BANK OF AMERICA NT&SA
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------- AT OR FOR THE SIX-MONTH
PERIOD ENDED JUNE 30,
1993 1994 1995 1996
----------------------- ----------------------- ----------------------- -----------------------
BY DOLLAR BY DOLLAR BY DOLLAR BY DOLLAR
BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF BY AMOUNT OF
NO. OF LOANS NO. OF LOANS NO. OF LOANS NO. OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
------- ------------- ------- ------------- ------- ------------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio........... 173,825 $25,118.5 175,323 $25,513.8 170,017 $25,460.0 166,305 $26,288.7
Average Portfolio
Balance(1).............. 170,520 24,430.7 173,760 25,286.6 175,016 25,777.7 168,285 26,099.8
Period of Delinquency
31 to 59 days........... 2,759 356.6 2,317 299.1 2,673 360.2 2,737 360.3
60 to 89 days........... 687 106.2 652 98.4 776 117.3 682 102.5
90 days or more(2)...... 1,179 243.1 1,017 194.9 876 161.4 649 112.5
------- --------- ------- --------- ------- --------- ------- ---------
Total Delinquent Loans.... 4,625 $ 705.9 3,986 $ 592.4 4,325 $ 638.9 4,068 $ 575.2
Delinquency Ratio......... 2.66% 2.81% 2.27% 2.32% 2.54% 2.51% 2.45% 2.19%
Foreclosures Pending(3)... 956 $ 233.6 693 $ 162.9 1,099 $ 215.7 1,064 $ 198.8
Foreclosure Ratio......... 0.55% 0.93% 0.40% 0.64% 0.65% 0.85% 0.64% 0.76%
Losses(4)................. 608 $ 68.4 975 $ 101.6 1,286 $ 112.6 465 $ 28.5
Loss Ratio(5)............. 0.36% 0.28% 0.56% 0.40% 0.73% 0.44% 1.10% 0.44%
Excess Recovery(6)........ (7) (7) (7) (7) 12 $ 0.3 1 $ 0.1
</TABLE>
- ---------------
(1) Average Portfolio Balance for the period indicated is based on end of month
balances divided by the number of months in the period indicated.
(2) Does not include Foreclosures Pending.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted and title to which had not been acquired by BankAmerica NT&SA, a
third party or by an insurer at the date indicated.
(4) Losses are the sum of losses less net gains (Excess Recoveries) on all
mortgage loans liquidated during the period indicated. Loss for any mortgage
loan is equal to the difference between (a) the sum of the outstanding
principal balance plus accrued interest, lost interest income accrued at
Bank of America NT&SA's internal reinvestment rate from the date such
mortgage loan became a REO mortgage loan until the date it was liquidated,
Servicing Advances and all liquidation expenses related to such mortgage
loan and (b) all amounts received in connection with the liquidation of the
related mortgaged property. Losses are included in the year in which they
were expensed or written down.
(5) Loss Ratios are computed by dividing the Losses during the period indicated
by the Average Portfolio Balance during such period.
(6) Excess Recovery is calculated only with the respect to defaulted mortgage
loans as to which the liquidation of the related mortgaged property resulted
in recoveries in excess of the sum of the outstanding principal balance plus
accrued interest thereon, Servicing Advances and all liquidation expenses
related to such mortgage loan.
(7) Excess Recovery cannot be computed for the indicated period.
21
<PAGE> 78
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE OF BANK OF AMERICA, FSB
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------- AT OR FOR THE SIX-MONTH
PERIOD ENDED
1994 1995 JUNE 30, 1996
----------------------- ----------------------- -----------------------
BY BY DOLLAR BY BY DOLLAR BY BY DOLLAR
NO. AMOUNT OF NO. AMOUNT OF NO. AMOUNT OF
OF LOANS OF LOANS OF LOANS
LOANS (IN MILLIONS) LOANS (IN MILLIONS) LOANS (IN MILLIONS)
----- ------------- ----- ------------- ----- -------------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............. 931 $ 105.8 4,846 $ 875.2 8,301 $ 1,845.4
Average Portfolio
Balance(1)................ 703 78.0 3,206 530.8 6,579 1,388.4
Period of Delinquency
31 to 59 days............. 1 0.1 55 7.4 78 15.2
60 50 89 days............. 1 0.0 3 1.0 13 2.5
90 days or more(2)........ 4 0.3 1 0.3 3 0.7
---- ------- ----- ------- ----- ---------
Total Delinquent Loans...... 6 $ 0.4 59 $ 8.7 94 $ 18.4
Delinquency Ratio........... 0.64 % 0.41% 1.22% 0.98% 1.13% 1.00%
Foreclosures Pending(3)..... 0 $ 0.0 2 $ 0.3 6 $ 0.8
Foreclosure Ratio........... 0.00 % 0.00% 0.04% 0.04% 0.07% 0.04%
Losses...................... 0 $ 0 0 $ 0 0 $ 0
Loss Ratio(5)............... 0.00 % 0.00% 0.00% 0.00% 0.00% 0.00%
</TABLE>
- ---------------
(1) Average Portfolio Balance for the period indicated is based on end of month
balances divided by the number of months in the period indicated.
(2) Does not include Foreclosures Pending.
(3) Includes mortgage loans for which foreclosure proceedings had been
instituted and title to which had not been acquired by Bank of America FSB,
a third party or by an insurer at the date indicated.
(4) Losses are the sum of losses less net gains (Excess Recoveries) on all
mortgage loans liquidated during the period indicated. Loss for any mortgage
loan is equal to the difference between (a) the sum of the outstanding
principal balance plus accrued interest, lost interest income accrued at
Bank of America, FSB's internal reinvestment rate from the date such
mortgage loan became a REO mortgage loan until the date it was liquidated,
Servicing Advances and all liquidation expenses related to such mortgage
loan and (b) all amounts received in connection with the liquidation of the
related mortgaged property. Losses are included in the year in which they
were expensed or written down. Excess Recovery is calculated only with the
respect to defaulted mortgage loans as to which the liquidation of the
related mortgaged property resulted in recoveries in excess of the sum of
the outstanding principal balance plus accrued interest thereon, Servicing
Advances and all liquidation expenses related to such mortgage loan.
(5) Loss Ratios are computed by dividing the Losses during the period indicated
by the Average Portfolio Balance during such period.
22
<PAGE> 79
DESCRIPTION OF THE CERTIFICATES
GENERAL
Each Series of Certificates will be issued pursuant to a Pooling Agreement,
similar to the form filed as an exhibit to the Registration Statement of which
this Prospectus is a part. Each Pooling Agreement will be filed with the
Securities and Exchange Commission as an exhibit to a Current Report on Form
8-K. The following summaries (together with additional summaries under "THE
POOLING AGREEMENT" below) describe certain provisions relating to the
Certificates common to each Pooling Agreement. References in this Prospectus to
the relevant articles, sections and exhibits of the applicable Pooling Agreement
appear in parenthesis. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Pooling Agreement for each Trust Fund and the related
Prospectus Supplement. Wherever particular sections or defined terms of the
Pooling Agreement are referred to herein, such sections or defined terms are
thereby incorporated herein by reference.
Certificates of each Series covered by a particular Pooling Agreement will
evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. (Article I and Sections 5.01 and
5.02) A Trust Fund will consist of, to the extent provided in the Pooling
Agreement: (i) such Mortgage Loans (and the related mortgage documents) or
interests therein underlying a particular Series of Certificates as from time to
time are subject to the Pooling Agreement (exclusive of any Retained Yield
(described below)); (ii) such assets including, without limitation, all payments
and collections in respect of the Mortgage Loans due after the related Cut-off
Date, as from time to time are identified as deposited in respect thereof in the
Custodial Account and in the related Certificate Account; (iii) property
acquired by foreclosure of such Mortgage Loans or deed in lieu of foreclosure;
(iv) hazard insurance policies and Primary Mortgage Insurance Policies, if any,
and certain proceeds thereof; and (v) any combination, as and to the extent
specified in the related Prospectus Supplement, of a Letter of Credit, Mortgage
Pool Insurance Policy, Special Hazard Insurance Policy, Certificate Insurance
Policy, Bankruptcy Bond or other type of credit enhancement as described under
"DESCRIPTION OF CREDIT ENHANCEMENTS." To the extent that any Trust Fund includes
certificates of interest or participations in Mortgage Loans, the related
Prospectus Supplement will describe the material terms and conditions of such
certificates or participations. (Article I)
Each Series of Certificates may consist of any one or a combination of the
following: (i) a single Class of Certificates; (ii) two or more Classes of
Certificates, one or more Classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other Classes
("Subordinate Certificates"), and as to which certain Classes of Senior (or
Subordinate) Certificates may be senior to other Classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus Supplement
(any such Series, a "Senior/Subordinate Series"); (iii) two or more Classes of
Certificates, one or more Classes ("Strip Certificates") of which will be
entitled to (a) principal distributions, with disproportionate, nominal or no
interest distributions or (b) interest distributions, with disproportionate,
nominal or no principal distributions; (iv) two or more Classes of Certificates
which differ as to the timing, sequential order, rate, pass-through rate or
amount of distributions of principal or interest or both, or as to which
distributions of principal or interest or both on any Class may be made upon the
occurrence of specified events, in accordance with a schedule or formula
(including "planned amortization Classes" and "targeted amortization Classes"),
or on the basis of collections from designated portions of the Mortgage Pool,
which Series may include one or more Classes of Certificates ("Accrual
Certificates") with respect to which certain accrued interest will not be
distributed but rather will be added to the principal balance thereof on each
Distribution Date for the period described in the related Prospectus Supplement;
or (v) other types of Classes of Certificates, as described in the related
Prospectus Supplement. Credit support for each Series of Certificates will be
provided by a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
Certificate Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve Fund or
other credit enhancement as described under "DESCRIPTION OF CREDIT
ENHANCEMENTS," by the subordination of one or more Classes of Certificates as
described under "SUBORDINATION" or by any combination of the foregoing, as
specified in the Prospectus Supplement applicable for such Series.
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<PAGE> 80
If so specified in the Prospectus Supplement relating to a Series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or designated portion thereof, as a REMIC. If such an election is made with
respect to a Series of Certificates, one of the Classes of Certificates will be
designated as evidencing the sole Class of "residual interests" in each related
REMIC, as defined in the Code; alternatively, a separate Class of ownership
interests will evidence such residual interests. All other Classes of
Certificates in such Series will constitute "regular interests" in the related
REMIC, as defined in the Code and will be designated as such. As to each Series,
all Certificates offered hereby will be rated in one of the four highest rating
categories by one or more Rating Agencies. As to each Series of Certificates as
to which a REMIC election is to be made, the Depositor, or such other person
specified in the related Prospectus Supplement, will be obligated to take
certain specified actions required in order to comply with applicable laws and
regulations.
FORM OF CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates of a Series will be issued as physical certificates in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferable and exchangeable at the corporate trust
office of the Certificate Registrar named in the related Prospectus Supplement.
(Section 5.02) No service charge will be made for any registration of exchange
or transfer of Certificates, but the Trustee may require payment of a sum
sufficient to cover any tax or other governmental charge. (Section 5.02) The
term "Certificateholder" or "Holder" as used herein refers to the entity whose
name appears on the records of the Certificate Registrar (or, if applicable, the
Transfer Agent) as the registered holder thereof.
If so specified in the related Prospectus Supplement, one or more Classes
of Certificates of a Series ("Book-Entry Certificates") may be initially
represented by one or more certificates registered in the name of The Depository
Trust Company ("DTC") or other securities depository and be available only in
the form of book-entries. Any Book-Entry Certificates will initially be
registered in the name of Cede & Co., the nominee of DTC. Certificateholders may
also hold Certificates of a Series through CEDEL or Euroclear (in Europe), if
they are participants in such systems or indirectly through organizations that
are participants in such systems. CEDEL and Euroclear will hold omnibus
positions on behalf of their participants through customers' certificates
accounts in CEDEL's and Euroclear's names on the books of their respective
Depositaries which in turn will hold such positions in customers' certificates
accounts in the Depositaries' names on the books of DTC. Citibank, N.A.
("Citibank"), will act as depositary for CEDEL and Morgan Guaranty Trust Company
of New York ("Morgan") will act as depositary for Euroclear (in such capacities,
the "Depositaries").
Transfers between DTC participants will occur in the ordinary way in
accordance with DTC rules. Transfers between CEDEL Participants and Euroclear
Participants will occur in the ordinary way in accordance with their applicable
rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules an procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving certificates in DTC,
and making or receiving payment in accordance with normal procedures for
same-day funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of certificates received in CEDEL
or Euroclear as a result of a transaction with a DTC participant will be made
during subsequent certificates settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
certificates settled during such processing will be reported to the relevant
Euroclear or CEDEL participant on such business day. Cash received in CEDEL or
Euroclear as a result of sales of certificates by or through a CEDEL Participant
or a Euroclear Participant to a DTC Participant will be received with value on
the DTC settlement
24
<PAGE> 81
date but will be available in the relevant CEDEL or Euroclear cash account only
as of the business day following settlement in DTC. For information with respect
to tax documentation procedures relating to the Certificates, see "FEDERAL
INCOME TAX CONSEQUENCES -- Prohibited Transactions and Other Possible REMIC
Taxes -- Foreign Investors in REMIC Certificates" herein.
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code, and a
"clearing agency" registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC accepts securities for deposit
from its participating organizations ("Participants") and facilitates the
clearance and settlement of securities transactions between Participants in such
securities through electronic book-entry changes in accounts of Participants,
thereby eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers, banks and trust companies and clearing
corporations and may include certain other organizations. Indirect access to the
DTC system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Beneficial owners ("Owners") that are not Participants but desire to
purchase, sell or otherwise transfer ownership of Book-Entry Certificates may do
so only through Participants (unless and until Definitive Certificates, as
defined below, are issued). In addition, Owners will receive all distributions
of principal of, and interest on, the Book-Entry Certificates from the Trustee
or any Trustee, as the case may be, through DTC and Participants. Owners will
not receive or be entitled to receive certificates representing their respective
interests in the Book-Entry Certificates, except under the limited circumstances
described below.
Unless and until Definitive Certificates (as defined below) are issued, it
is anticipated that the only "holder" of Book-Entry Certificates of any Series
will be Cede & Co., as nominee of DTC. Owners will only be permitted to exercise
the rights of holders indirectly through Participants and DTC.
While any Book-Entry Certificates of a Series are outstanding (except under
the circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Book-Entry Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Book-Entry Certificates.
Participants with whom Owners have accounts with respect to Book-Entry
Certificates are similarly required to make book-entry transfers and receive and
transmit such distributions on behalf of their respective Owners. Accordingly,
although Owners will not possess certificates, the Rules provide a mechanism by
which Owners will receive distributions and will be able to transfer their
interests.
Unless and until Definitive Certificates are issued, Owners who are not
Participants may transfer ownership of Book-Entry Certificates of a Series only
through Participants by instructing such Participants to transfer Book-Entry
Certificates, by book-entry transfer, through DTC for the account of the
purchasers of such Book-Entry Certificates, which account is maintained with
their respective Participants. Under the Rules and in accordance with DTC's
normal procedures, transfers of ownership of Book-Entry Certificates will be
executed through DTC and the accounts of the respective Participants at DTC will
be debited and credited. Similarly, the respective Participants will make debits
or credits, as the case may be, on their records on behalf of the selling and
purchasing Owners.
Book-Entry Certificates of a Series will be issued in registered form to
Owners, or their nominees, rather than to DTC (such Book-Entry Certificates
being referred to herein as "Definitive Certificates") only under the
circumstances provided in the related Pooling Agreement, which generally will
include, except if otherwise provided therein, if (i) the Depositor advises the
Trustee in writing that DTC is no longer willing or able to discharge properly
its responsibilities as nominee and depository with respect to the Book-Entry
Certificates of such Series and the Trustee and the Depositor are unable to
locate a qualified successor, (ii) the Depositor, at its sole option, elects to
terminate the book-entry system through DTC or (iii) after the occurrence of an
event of default under the Pooling Agreement, a majority of the aggregate
Percentage Interest of any Class of Certificates of such Series advises DTC in
writing that the continuation of a book-entry system through DTC
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<PAGE> 82
(or a successor thereto) to the exclusion of any physical certificates being
issued to Owners is no longer in the best interests of Owners of such Class of
Certificates. Upon issuance of Definitive Certificates of a Series to Owners,
such Book-Entry Certificates will be transferable directly (and not exclusively
on a book-entry basis) and registered holders will deal directly with the
Trustee with respect to transfers, notices and distributions.
DTC has advised the Master Servicer and the Depositor that, unless and
until Definitive Certificates are issued, DTC will take any action permitted to
be taken by a holder only at the direction of one or more Participants to whose
DTC accounts the Certificates are credited. DTC has advised the Master Servicer
and the Depositor that DTC will take such action with respect to any Percentage
Interests of the Book-Entry Certificates of a Series only at the direction of
and on behalf of such Participants with respect to such Percentage Interests of
the Book-Entry Certificates. DTC may take actions, at the direction of the
related Participants, with respect to some Book-Entry Certificates which
conflict with actions taken with respect to other Book-Entry Certificates.
Centrale de Livraison de Valeurs Mobilieres S.A. ("CEDEL") is incorporated
under the laws of Luxembourg as a professional depository. CEDEL holds
securities for its participating organizations ("CEDEL Participants") and
facilitates the clearance and settlement of securities transactions between
CEDEL Participants through electronic book-entry changes in accounts of CEDEL
Participants, thereby eliminating the need for physical movement of securities.
Transactions may be settled in CEDEL in any of 28 currencies, including United
States dollars. CEDEL provides to its Participants, among other things, services
for safekeeping, administration, clearance and settlement of internationally
traded securities and securities lending and borrowing. CEDEL interfaces with
domestic markets in several countries. As a professional depository, CEDEL is
subject to regulation by the Luxembourg Monetary Institute. CEDEL Participants
are recognized financial institutions around the world including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include any underwriters, agents or
dealers with respect to a Series of Certificates offered hereby. Indirect access
to CEDEL is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
The Euroclear System ("Euroclear") was created in 1968 to hold securities
for participants of the Euroclear System ("Euroclear Participants") and to clear
and settle transactions between Euroclear Participants through simultaneous
electronic book-entry delivery against payment, thereby eliminating the need for
physical movement of certificates and any risk from lack of simultaneous
transfers of securities and cash. Transactions may now be settled in any of 27
currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries generally similar to the
arrangements for cross-market transfers with DTC described above. The Euroclear
System is operated by Morgan Guaranty Trust Company of New York, Brussels,
Belgium office (the "Euroclear Operator"), under contract with Euroclear
Clearance System S.C., a Belgian cooperative corporation (the "Cooperative").
All operations are conducted by the Euroclear Operator, and all Euroclear
securities clearance accounts and Euroclear cash accounts are accounts with the
Euroclear Operator, not the Cooperative. The Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers with respect to
a Series of Certificates offered hereby. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Certificates clearance accounts and cash accounts with the Euroclear
Operator are governed by the Terms and Conditions Governing Use of Euroclear and
the related Operating Procedures of Euroclear and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear and
26
<PAGE> 83
receipts of payments with respect to securities in the Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions with respect to Certificates held through CEDEL or Euroclear
will be credited to the cash accounts of CEDEL Participants or Euroclear
Participants in accordance with the relevant systems' rules and procedures, to
the extent received by its Depositary. Such distributions will be subject to tax
reporting in accordance with relevant United States tax laws and regulations.
See "FEDERAL INCOME TAX CONSEQUENCES" herein. CEDEL or the Euroclear Operator,
as the case may be, will take any other action permitted to be taken by a
Certificateholder under the Pooling Agreement or the relevant Supplement on
behalf of a CEDEL Participant or Euroclear Participant only in accordance with
its relevant rules and procedures and subject to its Depositary's ability to
effect such actions on its behalf through DTC.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of a Series of Certificates, the Depositor will
cause the Mortgage Loans being included in the related Trust Fund to be assigned
to the Trustee (or its nominee), together with all principal and interest
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. If specified in
the related Prospectus Supplement, the Depositor or a Seller may retain the
Retained Yield, if any, for itself or transfer the same to others. (Sections
2.01 and 3.10) The Trustee will, concurrently with such assignment, deliver a
Series of Certificates to the Depositor in exchange for the Mortgage Loans.
(Section 2.05) Each Mortgage Loan will be identified in a schedule appearing as
an exhibit to the related Pooling Agreement. Such schedule will include, among
other things, information as to the principal balance of each Mortgage Loans as
of the Cut-off Date, as well as information respecting the Mortgage Rate, the
currently scheduled monthly payment of principal and interest, the maturity of
the Mortgage Note and the Loan-to-Value Ratio at origination (without regard to
any secondary financing). (Article I)
In addition, the Depositor will, as to each Mortgage Loan, deliver to the
Trustee (or to the custodian described below) the Mortgage Note (and any
modification or amendment thereto) endorsed without recourse either in blank or
to the order of the 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 in recordable form of the Mortgage 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 secured by Mortgaged Properties located in the same county, if
permitted by law. In the event that, with respect to any Mortgage Loan, the
Depositor cannot deliver the Mortgage or any 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 Trustee or the custodian
a true and correct photocopy of such Mortgage or assignment. The Depositor will
deliver or cause to be delivered to the Trustee or the custodian such Mortgage
or assignment with evidence of recording indicated thereon after receipt thereof
from the public recording office or from the related Seller. Assignments of the
Mortgage Loans 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. (Section 2.01)
The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the Certificateholders, and generally will
review such documents within 45 days after receipt thereof in the case of
documents delivered concurrently with the execution and delivery of the related
Pooling Agreement, and within the time period specified in the related Pooling
Agreement in the case of all other documents delivered. If any such document is
found to be missing or defective in any material respect, the Trustee (or such
custodian) shall promptly so notify the Master Servicer and the Depositor, the
former of which shall notify the related Seller. If the Seller does not cure the
omission or defect within 60 days after notice is given
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to the Master Servicer, the Seller will be obligated to purchase within 90 days
of such notice the related Mortgage Loan from the Trustee at its Purchase Price
(or, if so specified in the related Prospectus Supplement, will be permitted to
substitute for such Mortgage Loan under the conditions specified herein and in
the related Prospectus Supplement). The Master Servicer will be obligated to
enforce this obligation of the Seller to the extent described above under
"MORTGAGE LOAN PROGRAM -- Representations and Warranties by Sellers" but subject
to the provisions described below under "-- Realization Upon Defaulted Mortgage
Loans." There can be no assurance that the applicable Seller will fulfill its
obligation to purchase any Mortgage Loan as described above. Neither the Master
Servicer nor the Depositor will be obligated to purchase or substitute for such
Mortgage Loan if the Seller defaults on its obligation to do so. This obligation
to purchase or substitute for any such Mortgage Loan constitutes the sole remedy
available to the Certificateholders or the Trustee for omission of, or a
material defect in, a constituent document. Any Mortgage Loan not so purchased
or substituted for shall remain in the related Trust Fund.
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, to maintain possession of and, if applicable, to review the documents
relating to the Mortgage Loans 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. Unless
otherwise specified in the Prospectus Supplement related to a Series of
Certificates, such custodian may not be an affiliate of the Depositor or the
Master Servicer. (Section 8.11)
If specified in the Prospectus Supplement related to a Series of
Certificates, during the period that any Class of Certificates of that Series
are outstanding and so long as the ratings of the long-term senior unsecured
debt of BankAmerica Corporation satisfy the rating conditions set forth in the
Prospectus Supplement, the Master Servicer identified in the Prospectus
Supplement will hold the original documentation relating to each Mortgage Loan,
including the related Mortgage Note and Mortgage (such original documentation,
the "Mortgage File"), as custodian and agent for the Trustee. If BankAmerica's
long-term senior unsecured debt rating does not satisfy the above-described
conditions, the Mortgage Files will be delivered to the Trustee or an
independent custodian on behalf of the Trustee within 90 days of the date such
conditions are not satisfied. Under the related Pooling Agreement, the Trustee
will be appointed attorney-in-fact for the Depositor with power to prepare,
execute and record assignments of the Mortgages in the event that the Depositor
fails to do so on a timely basis. See "RISK FACTORS -- Creditors' Rights and
Bankruptcy Considerations" in the applicable Prospectus Supplement for a
description of the risks to Certificateholders with respect to any such Series.
Pursuant to each Pooling Agreement, the Master Servicer, either directly or
through Subservicers, will service and administer the Mortgage Loans assigned to
the Trustee as more fully set forth below.
RETAINED YIELD
For certain Series of Certificates, the Depositor or a Seller may retain a
portion of the interest payable on each Mortgage Loan (the "Retained Yield").
The Retained Yield will either be set as a fixed rate or will be calculated by
subtracting the Master Servicing Fee and the Pass-Through Rate from the Mortgage
Rate. Any such Retained Yield and any earnings from reinvestments thereof will
not be part of the Trust Fund.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO CERTIFICATE ACCOUNT
The Master Servicer will deposit or will cause to be deposited into the
Custodial Account on a daily basis certain payments and collections received by
it subsequent to the Cut-off Date (other than payments due on or before the
Cut-off Date), as specifically set forth in the related Pooling Agreement, which
generally will include the following except as otherwise provided therein:
(i) all payments on account of principal, including principal payments
received in advance of the date on which the related monthly payment is due
(the "Due Date") ("Principal Prepayments"), on the Mortgage Loans
comprising a Trust Fund;
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(ii) all payments on account of interest on the Mortgage Loans
comprising such Trust Fund, net of the portion of each payment thereof
retained by the Master Servicer or any Subservicer, if any, as its
servicing or other compensation;
(iii) all amounts (net of unreimbursed liquidation expenses and
insured expenses incurred, and unreimbursed Servicing Advances made, by any
related Subservicer) received and retained in connection with the
liquidation of any defaulted Mortgage Loan, by foreclosure or otherwise
("Liquidation Proceeds"), including all proceeds of any Special Hazard
Insurance Policy, Bankruptcy Bond, Mortgage Pool Insurance Policy,
Certificate Insurance Policy, Primary Mortgage Insurance Policy and any
title, hazard or other insurance policy covering any Mortgage Loan in such
Mortgage Pool (together with any payments under any Letter of Credit,
"Insurance Proceeds") or proceeds from any alternative arrangements
established in lieu of any such insurance and described in the applicable
Prospectus Supplement, other than proceeds to be applied to the restoration
of the related property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures;
(iv) any Buydown Funds (and, if applicable, investment earnings
thereon) required to be paid to Certificateholders, as described below;
(v) all proceeds of any Mortgage Loan in such Trust Fund purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Depositor, any Seller or any other person
pursuant to the terms of the Pooling Agreement. See "MORTGAGE LOAN
PROGRAM -- Representations and Warranties by Sellers" and "-- Assignment of
Mortgage Loans" above;
(vi) any amount required to be deposited by the Master Servicer in
connection with losses realized on investments of funds held in the
Custodial Account, as described below; and
(vii) any amounts required to be transferred from the Certificate
Account to the Custodial Account.
In addition to the Custodial Account, the Master Servicer will establish
and maintain, in the name of the Trustee for the benefit of the holders of each
Series of Certificates, an account for the disbursement of payments on the
Mortgage Loans evidenced by each Series of Certificates (the "Certificate
Account"). Both the Custodial Account and the Certificate Account must be either
(i) maintained with a depository institution whose debt obligations at the time
of any deposit therein are rated by the Rating Agency or Agencies that rated one
or more Classes of Certificates of the related Series not less than a specified
level comparable to the rating category of such Certificates, (ii) an account or
accounts the deposits in which are fully insured to the limits established by
the FDIC, provided that any deposits not so insured shall be otherwise
maintained such that, as evidenced by an opinion of counsel, the
Certificateholders have a claim with respect to the funds in such accounts or a
perfected first priority security interest in any collateral securing such funds
that is superior to the claims of any other depositors or creditors of the
depository institution with which such accounts are maintained, (iii) in the
case of the Certificate Account, a trust account or accounts maintained at the
Trustee, or (iv) such other account or accounts acceptable to the Rating Agency
or Agencies that rated one or more Classes of Certificates of such Series (an
"Eligible Account"). The collateral that is eligible to secure amounts in an
Eligible Account is limited to certain permitted investments, which are
generally limited to United States government securities and other investments
that are rated, at the time of acquisition, in one of the categories permitted
by the related Pooling Agreement ("Permitted Investments"). (Article I and
Section 3.07) A Certificate Account may be maintained as an interest-bearing or
a non-interest-bearing account, or funds therein may be invested in Permitted
Investments as described below. The Custodial Account may contain funds relating
to more than one Series of Mortgage Pass-Through Certificates as well as
payments received on other mortgage loans serviced or master serviced by the
Master Servicer that have been deposited into the Custodial Account.
Not later than the business day preceding each Distribution Date (the
"Certificate Account Deposit Date"), the Master Servicer will withdraw from the
Custodial Account and deposit into the applicable Certificate Account, in
immediately available funds, the amount to be distributed therefrom to
Certificateholders on such Distribution Date. The Master Servicer or the Trustee
will also deposit or cause to be
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deposited into the Certificate Account the amount of any advances made by the
Master Servicer as described herein under "Advances," any payments under any
Letter of Credit, any amounts required to be transferred to the Certificate
Account from a Reserve Fund, as described under "Credit Enhancements" below, any
amounts required to be paid by the Master Servicer out of its own funds due to
the operation of a deductible clause in any blanket policy maintained by the
Master Servicer to cover hazard losses on the Mortgage Loans as described under
"PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER" below and any
other amounts as specifically set forth in the related Pooling Agreement.
The portion of any payment received by the Master Servicer in respect of a
Mortgage Loan that is allocable to Retained Yield will generally be deposited
into the Custodial Account, but will not be deposited in the Certificate Account
for the related Series of Certificates and will be distributed as provided in
the related Pooling Agreement.
Funds on deposit in the Custodial Account may be invested in Permitted
Investments maturing in general not later than the business day preceding the
next Distribution Date and funds on deposit in the related Certificate Account
may be invested in Permitted Investments maturing, in general, no later than the
Distribution Date. All income and gain realized from any such investment will be
for the account of the Master Servicer. The amount of any loss incurred in
connection with any such investment must be deposited in the Custodial Account
or in the Certificate Account, as the case may be, by the Master Servicer out of
its own funds upon realization of such loss. (Sections 3.07 and 4.01).
With respect to each Buydown Mortgage Loan, the Master Servicer will
deposit the related Buydown Funds provided to it in a Buydown Account which will
comply with the requirements set forth herein with respect to a Custodial
Account. Unless otherwise specified in the related Prospectus Supplement, the
terms of all Buydown Mortgage Loans provide for the contribution of Buydown
Funds in an amount equal to or exceeding either (i) the total payments to be
made from such funds pursuant to the related buydown plan or (ii) if such
Buydown Funds are to be deposited on a discounted basis, that amount of Buydown
Funds which, together with investment earnings thereon at a rate that will
support the scheduled level of payments due under the Buydown Mortgage Loan.
Neither the Master Servicer nor the Depositor will be obligated to add to any
such discounted Buydown Funds any of its own funds should investment earnings
prove insufficient to maintain the scheduled level of payments. To the extent
that any such insufficiency is not recoverable from the Mortgagor or, in an
appropriate case, from the Seller, distributions to Certificateholders may be
affected. With respect to each Buydown Mortgage Loan, the Master Servicer will
withdraw from the Buydown Account and remit to the Custodial Account on or
before the date specified in the Subservicing Agreement described above the
amount, if any, of the Buydown Funds (and, if applicable, investment earnings
thereon) for each Buydown Mortgage Loan that, when added to the amount due from
the Mortgagor on such Buydown Mortgage Loan, equals the full monthly payment
which would be due on the Buydown Mortgage Loan if it were not subject to the
buydown plan. The Buydown Funds will in no event be a part of the related Trust
Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Master Servicer will withdraw from
the Buydown Account and remit to the Mortgagor or such other designated party in
accordance with the related buydown plan any Buydown Funds remaining in the
Buydown Account. Generally, if a prepayment by a Mortgagor during the Buydown
Period together with Buydown Funds will result in full prepayment of a Buydown
Mortgage Loan, the Master Servicer will be required to withdraw from the Buydown
Account and deposit in the Custodial Account the Buydown Funds and investment
earnings thereon, if any, which together with such prepayment will result in a
prepayment in full. Any Buydown Funds so remitted to the Master Servicer in
connection with a prepayment described in the preceding sentence will be deemed
to reduce the amount that would be required to be paid by the Mortgagor to repay
fully the related Mortgage Loan if the Mortgage Loan were not subject to the
buydown plan. Any investment earnings remaining in the Buydown Account after
prepayment or after termination of the Buydown Period will be remitted to the
related Mortgagor or such other designated party pursuant to the agreement
relating to each Buydown Mortgage Loan (the "Buydown Agreement"). If the
Mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage
Loan and the property securing such Buydown Mortgage Loan is sold in liquidation
(either by the Master Servicer, the Primary Mortgage Insurer, the insurer under
the Mortgage Pool Insurance Policy (the "Pool Insurer") or any other insurer),
the Master
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Servicer will withdraw from the Buydown Account the Buydown Funds and all
investment earnings thereon, if any, and deposit the same in the Custodial
Account or pay the same to the Primary Mortgage Insurer or the Pool Insurer if
the Mortgaged Property is transferred to such insurer and such insurer pays all
of the loss incurred in respect of such default.
WITHDRAWALS FROM THE CUSTODIAL ACCOUNT
The Master Servicer may, from time to time, make withdrawals from the
Custodial Account for certain purposes, as specifically set forth in the related
Pooling Agreement, which generally will include the following except as
otherwise provided therein:
(i) to make deposits to the Certificate Account in the amounts and in
the manner provided in the Pooling Agreement and described in "Payments on
Mortgage Loans; Deposits to Certificate Account";
(ii) to reimburse itself or any Subservicer for Advances, or for
amounts advanced in respect of taxes, insurance premiums or similar
expenses ("Servicing Advances") as to any Mortgaged Property, out of late
payments or collections on the related Mortgage Loan with respect to which
such Advances or Servicing Advances were made;
(iii) to pay to itself or any Subservicer unpaid Servicing Fees and
Subservicing Fees, out of payments or collections of interest on each
Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Custodial Account, and, if so
provided in the Pooling Agreement, any profits realized upon disposition of
a Mortgaged Property acquired by deed in lieu of foreclosure or otherwise
allowed under the Pooling Agreement;
(v) to pay to the Seller all amounts received with respect to each
Mortgage Loan repurchased pursuant to the terms of the Pooling Agreement
and not required to be distributed as of the date on which the related
Purchase Price is determined;
(vi) to pay the Depositor or the Seller, as applicable, or its
assignee all amounts constituting Retained Yield, if any, out of
collections or payments which represent interest on each Mortgage Loan
(including any Mortgage Loan as to which title to the underlying Mortgaged
Property was acquired);
(vii) to reimburse itself or any Subservicer for any Advance or
Servicing Advance previously made which the Master Servicer has determined
to not be ultimately recoverable from Liquidation Proceeds, Insurance
Proceeds or otherwise (a "Nonrecoverable Advance"), subject, in the case of
a Senior/Subordinate Series, to certain limitations set forth in the
Pooling Agreement as described in the related Prospectus Supplement;
(viii) to reimburse itself or the Depositor for certain other expenses
incurred for which it or the Depositor is entitled to reimbursement or
against which it or the Depositor is indemnified pursuant to the Pooling
Agreement; and
(ix) to clear the Custodial Account of amounts relating to the
corresponding Mortgage Loans in connection with the termination of the
Trust Fund pursuant to the Pooling Agreement, as described in "THE POOLING
AGREEMENT -- Termination; Retirement of Certificates." (Section 3.10)
DISTRIBUTIONS
Beginning on the Distribution Date in the month next succeeding the month
in which the Cut-off Date occurs (or such other date as may be set forth in the
related Prospectus Supplement) for a Series of Certificates, distributions of
principal and interest (or, where applicable, of principal only or interest
only) on each Class of Certificates entitled thereto will be made either by the
Trustee, the Master Servicer acting on behalf of the Trustee or a paying agent
appointed by the Trustee (the "Paying Agent"), to the persons who are registered
as the Holders of such Certificates at the close of business on the last
business day of the preceding month (the "Record Date") in proportion to their
respective Percentage Interests. If so specified in the
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related Prospectus Supplement, interest which accrues and is not payable on a
Class of Certificates will be added to the principal balance of each Certificate
of such Class in proportion to its Percentage Interest. The undivided percentage
interest (the "Percentage Interest") represented by a 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
aggregate initial amount or notional balance of all the Certificates of such
Class. Distributions will be made in immediately available funds (by wire
transfer or otherwise) to the account of a Certificateholder at a bank or other
entity having appropriate facilities therefor, if such Certificateholder has so
notified the Trustee, the Master Servicer or the Paying Agent, as the case may
be, and the applicable Pooling Agreement provides for such form of payment, or
by check mailed to the address of the person entitled thereto as it appears on
the Certificate Register; provided, however, that the final distribution in
retirement of the Certificates will be made only upon presentation and surrender
of the Certificates at the office or agency of the Trustee specified in the
notice to Certificateholders of such final distribution. (Article I and Sections
4.01 and 9.01)
PRINCIPAL AND INTEREST ON THE CERTIFICATES
The method of determining, and the amount of, distributions of principal
and interest (or, where applicable, of principal only or interest only) on a
particular Series of Certificates will be described in the related Prospectus
Supplement. Distributions of interest on each Class of Certificates will be made
prior to distributions of principal thereon. Each Class of Certificates (other
than certain Classes of Strip Certificates) may have a different Pass-Through
Rate, which may be a fixed, variable or adjustable Pass-Through Rate, or any
combination of two or more such Pass-Through Rates. The related Prospectus
Supplement will specify the Pass-Through Rate or Rates for each Class, or the
initial Pass-Through Rate or Rates and the method for determining the
Pass-Through Rate or Rates. If so specified in the related Prospectus
Supplement, interest on any Class of Certificates for any Distribution Date may
be limited to the extent of available funds for such Distribution Date. Unless
otherwise specified in the related Prospectus Supplement, interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
On each Distribution Date for a Series of Certificates, the Trustee or the
Master Servicer on behalf of the Trustee will distribute or cause the Paying
Agent to distribute, as the case may be, to each holder of record on the Record
Date of a Class of Certificates, an amount equal to the Percentage Interest
represented by the Certificate held by such holder multiplied by such Class's
Distribution Amount. The Distribution Amount for a Class of Certificates for any
Distribution Date will be the portion, if any, of the Principal Distribution
Amount (as defined in the related Prospectus Supplement) allocable to such Class
for such Distribution Date, as described in the related Prospectus Supplement,
plus, if such Class is entitled to payments of interest on such Distribution
Date, one month's interest at the applicable Pass-Through Rate on the principal
balance or notional balance of such Class specified in the applicable Prospectus
Supplement, less certain interest shortfalls, as specified in the Prospectus
Supplement, which generally will include (i) any Deferred Interest added to the
principal balance of the Mortgage Loans and/or the outstanding balance of one or
more Classes of Certificates on the related Due Date, (ii) any other interest
shortfalls (including, without limitation, shortfalls resulting from application
of the Relief Act or similar legislation or regulations as in effect from time
to time) allocable to Certificateholders which are not covered by advances or
the applicable credit enhancement and (iii) unless otherwise specified in the
related Prospectus Supplement, shortfalls (a "Prepayment Interest Shortfall") in
collections of interest on Mortgage Loans resulting from Mortgagor prepayments
during the month preceding the month of distribution, in each case in such
amount that is allocated to such Class on the basis set forth in the Prospectus
Supplement.
In the case of a Series of Certificates which includes two or more Classes
of Certificates, the timing, sequential order, priority of payment or amount of
distributions in respect of principal, and any schedule or formula or other
provisions applicable to the determination thereof (including distributions
among multiple Classes of Senior Certificates or Subordinate Certificates) of
each such Class shall be as set forth in the related Prospectus Supplement.
Distributions in respect of principal of any Class of Certificates will be made
on a pro rata basis among all of the Certificates of such Class.
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Except as otherwise provided in the related Pooling Agreement, on or prior
to the 15th day (or if such day is not a business day, the next succeeding
business day) of the month of distribution (the "Determination Date"), the
Master Servicer will determine the amounts of principal and interest which will
be passed through to Certificateholders on the immediately succeeding
Distribution Date. Prior to the close of business on the business day next
succeeding each Determination Date, the Master Servicer will furnish a statement
to the Trustee (the information in such statement to be made available to
Certificateholders by the Master Servicer on request) setting forth, among other
things, the amount to be distributed on the next succeeding Distribution Date.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will agree to advance (either out of its own funds, funds advanced to
it by Subservicers or funds being held in the Custodial Account for future
distribution to the holders of such Certificates), for the benefit of the
holders of the Certificates of the related Series, on or before each
Distribution Date, an amount equal to the aggregate of all scheduled payments of
principal (other than any Balloon Amount in the case of a Balloon Loan) and
interest at the applicable Pass-Through Rate or Net Mortgage Rate, as the case
may be (an "Advance"), which were delinquent as of the close of business on the
business day preceding the related Determination Date on the Mortgage Loans in
the related Mortgage Pool, but only to the extent that such advances would, in
the judgment of the Master Servicer, be recoverable out of late payments by the
Mortgagors, Liquidation Proceeds, Insurance Proceeds or otherwise. (Article I
and Sections 3.07 and 4.04)
The Master Servicer will make such advances in order to maintain a regular
flow of scheduled interest and principal payments to holders of the relevant
Classes of Certificates; such advances do not represent an obligation of the
Master Servicer to guarantee or insure against losses. If advances have been
made by the Master Servicer from cash being held for future distribution to
Certificateholders, the Master Servicer will replace such funds on or before any
future Distribution Date to the extent that funds in the applicable Certificate
Account on such Distribution Date would be less than payments required to be
made to Certificateholders on such date. Any Master Servicer funds advanced as
described above will be reimbursable to the Master Servicer out of recoveries on
the related Mortgage Loans for which such amounts were advanced (e.g., late
payments made by the related Mortgagor, any related Liquidation Proceeds,
proceeds of any applicable form of credit enhancement, or proceeds of any
Mortgage Loan purchased by a Seller under the circumstances described above).
Such advances by the Master Servicer will also be reimbursable to the Master
Servicer (or Subservicer) from cash otherwise distributable to
Certificateholders to the extent that the Master Servicer shall determine that
any such advances previously made are not ultimately recoverable from proceeds
of the applicable Mortgage Loan. The Master Servicer will also be obligated to
make advances for the purpose of protecting any Mortgaged Property or the Trust
Fund's security interest therein, including certain taxes and insurance premiums
not paid by Mortgagors on a timely basis, but only to the extent that such
advances would, in the judgment of the Master Servicer, be recoverable out of
Liquidation Proceeds or other proceeds of the related Mortgage Loan. Funds so
advanced will also be reimbursable to the Master Servicer from cash otherwise
distributable to Certificateholders to the extent that the Master Servicer shall
determine that any such advances previously made are not ultimately recoverable
from proceeds of the applicable Mortgage Loan. Notwithstanding the foregoing, if
the Master Servicer exercises its option, if any, to purchase the assets of a
Trust Fund as described under "THE POOLING AGREEMENT -- Termination; Retirement
of Certificates" below, the Master Servicer will be deemed to have been
reimbursed for all related advances previously made by it and not theretofore
reimbursed to it. The Master Servicer's obligation to make advances may be
supported as described in the related Pooling Agreement. In the event that the
short-term or long-term obligations of the provider of such support are
downgraded by a Rating Agency rating the related Certificates or if any
collateral supporting such obligation is not performing or is removed pursuant
to the terms of any agreement described in the related Prospectus Supplement,
the Certificates may also be downgraded. (Article I and Sections 3.08, 3.10 and
4.04)
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REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular Class, the
Trustee will forward or cause to be forwarded to each holder of record of such
Class of Certificates a statement or statements with respect to the related
Trust Fund setting forth the information specifically described in the related
Pooling Agreement, which generally will include the following as applicable
except as otherwise provided therein:
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest,
and, with respect to a Senior/Subordinate Series of Certificates, the
amount, if any, of any shortfall in the amount of interest and principal
distributed;
(iii) the aggregate unpaid principal balance of the Mortgage Loans
after giving effect to the distribution of principal on such Distribution
Date;
(iv) with respect to a Series consisting of two or more Classes the
outstanding principal balance or notional amount of each Class after giving
effect to the distribution of principal on such Distribution Date;
(v) the number and aggregate principal balances of Mortgage Loans in
the related Mortgage Pool that are delinquent (a) one month, (b) two months
and (c) three months, and that are in foreclosure;
(vi) the book value of any real estate acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(vii) the balance of the Reserve Fund, if any, at the close of
business on such Distribution Date;
(viii) the Senior Percentages and Senior Accelerated Distribution
Percentage, if applicable, after giving effect to the distributions on such
Distribution Date;
(ix) the amount of coverage under any Letter of Credit, Mortgage Pool
Insurance Policy, Certificate Insurance Policy or other form of credit
enhancement covering default risk as of the close of business on the
applicable Determination Date and a description of any credit enhancement
substituted therefor;
(x) the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount
as of the close of business on the applicable Distribution Date and a
description of any change in the calculation of such amounts; and
(xi) in the case of Certificates benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date.
Each amount set forth pursuant to clause (i) and (ii) above will be
expressed as a dollar amount per Single Certificate. As to a particular Class of
Certificates, a "Single Certificate" generally will evidence a Percentage
Interest obtained by dividing $1,000 by the initial principal balance or
notional balance of all the Certificates of such Class, except as otherwise
provided in the related Pooling Agreement. In addition to the information
described above, reports to Certificateholders will contain such other
information as is set forth in the applicable Pooling Agreement, which may
include, without limitation, information as to Advances, reimbursements to
Subservicers and the Master Servicer and losses borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each calendar
year, the Master Servicer will furnish a report to each holder of record of a
Class of Certificates at any time during such calendar year which, among other
things, will include information as to the aggregate of amounts reported
pursuant to clauses (i) and (ii) above for such calendar year or, in the event
such person was a holder of record of a Class of Certificates during a portion
of such calendar year, for the applicable portion of such a year. (Section 4.02
or 4.03)
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COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Subservicers, as the case may be,
will make reasonable efforts to collect all payments required under the Mortgage
Loans and will, consistent with the Pooling Agreement and any Letter of Credit,
Mortgage Pool Insurance Policy, Certificate Insurance Policy, Primary Mortgage
Insurance Policy, Bankruptcy Bond or applicable alternative credit enhancement
arrangements, follow such collection procedures as it would employ in its good
faith business judgment and which are normal and usual in its general mortgage
servicing activities. Consistent with the foregoing, the Master Servicer may in
its discretion (i) waive payments of interest or principal, (ii) accept a deed
in lieu of foreclosure, (iii) waive any late payment charge or any prepayment
charge or penalty interest in connection with the prepayment of a Mortgage Loan
or (iv) extend the Due Date for payments due on a Mortgage Loan, provided,
however, that the Master Servicer shall first determine that any such action
will not impair the coverage of any related insurance policy or materially
adversely affect the lien of the related Mortgage.
In any case in which property subject to a Mortgage Loan (other than an ARM
Loan described below) is being conveyed by the Mortgagor, the Master Servicer,
directly or through a Subservicer, shall in general be obligated, to the extent
it has knowledge of such conveyance, to exercise its rights to accelerate the
maturity of such Mortgage Loan under any due-on-sale clause applicable thereto,
but only if the exercise of such rights is permitted by applicable law and only
to the extent it would not adversely affect or jeopardize coverage under any
Primary Mortgage Insurance Policy or applicable credit enhancement arrangements.
The original Mortgagor may be released from liability on a Mortgage Loan if the
Master Servicer or Subservicer shall have determined in good faith that such
release will not adversely affect the collectability of the Mortgage Loan. An
ARM Loan may be assumed if such ARM Loan is by its terms assumable and if, in
the reasonable judgment of the Master Servicer or the Subservicer, the proposed
transferee of the related Mortgaged Property establishes its ability to repay
the loan and the security for such ARM Loan would not be impaired by the
assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM
Loan without consent, such ARM Loan may be declared due and payable. Any fee
collected by the Master Servicer or Subservicer for entering into an assumption
or substitution of liability agreement will be retained by the Master Servicer
or Subservicer as additional servicing compensation. See "CERTAIN LEGAL ASPECTS
OF MORTGAGE LOANS AND RELATED MATTERS -- Enforceability of Certain Provisions"
herein. In connection with any such assumption, the Mortgage Rate borne by the
related Mortgage Note may not be altered. Mortgagors may, from time to time,
request partial releases of the Mortgaged Properties, easements, consents to
alteration or demolition and other similar matters. The Master Servicer or the
related Subservicer may approve such a request if it has determined, exercising
its good faith business judgment in the same manner as it would if it were the
owner of the related Mortgage Loan, that such approval will not adversely affect
the security for, and the timely and full collectability of, the related
Mortgage Loan. Any fee collected by the Master Servicer or the Subservicer for
processing such request will be retained by the Master Servicer or Subservicer
as additional servicing compensation. (Section 3.13)
The Master Servicer is required to maintain a fidelity bond and errors and
omissions policy with respect to its officers and employees and other persons
acting on behalf of the Master Servicer in connection with its activities under
the Pooling Agreement. (Section 3.12)
REALIZATION UPON DEFAULTED MORTGAGE LOANS
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Certificateholders
of the related Series. Notwithstanding any such acquisition of title and
cancellation of the related Mortgage Loan, such Mortgage Loan (an "REO Mortgage
Loan") will be considered for most purposes to be an outstanding Mortgage Loan
held in the Trust Fund until such time as the Mortgaged Property is sold and all
recoverable Liquidation Proceeds and Insurance Proceeds have been received with
respect to such defaulted Mortgage Loan (a "Liquidated Mortgage Loan"). For
purposes of calculations of amounts distributable to Certificateholders in
respect of an REO Mortgage Loan, the amortization schedule in effect at the time
of any such acquisition of title (before any adjustment thereto by reason of any
bankruptcy or any similar proceeding or any moratorium or similar waiver or
grace period) will be deemed to have
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continued in effect (and, in the case of an ARM Loan, such amortization schedule
will be deemed to have adjusted in accordance with any interest rate changes
occurring on any adjustment date therefor) so long as such REO Mortgage Loan is
considered to remain in the Trust Fund. Any Mortgaged Property so acquired by
the Trust Fund must be disposed of, if a REMIC election has been made, in
accordance with applicable federal income tax regulations and consistent with
the status of the Trust Fund as a REMIC. Any income (net of expenses and other
than gains described below) received by the Master Servicer or a Subservicer on
such Mortgaged Property prior to its disposition will be deposited in the
Custodial Account upon such disposition and will be available at such time to
the extent provided in the related Pooling Agreement, for making payments to
Certificateholders. (Section 3.14)
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one such
remedy is more likely to result in a greater recovery. Upon the first to occur
of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted Mortgage
Loan as having been finally liquidated if substantially all amounts expected to
be received in connection therewith have been received. Any additional
liquidation expenses relating to such Mortgage Loan thereafter incurred will be
reimbursable to the Master Servicer (or any Subservicer) from any amounts
otherwise distributable to holders of Certificates of the related Series, or may
be offset by any subsequent recovery related to such Mortgage Loan.
Alternatively, for purposes of determining the amount of related Liquidation
Proceeds to be distributed to Certificateholders, the amount of any Realized
Loss or the amount required to be drawn under any applicable form of credit
support, the Master Servicer may take into account minimal amounts of additional
receipts expected to be received, as well as estimated additional liquidation
expenses expected to be incurred in connection with such defaulted Mortgage
Loan. With respect to certain Series of Certificates, if so provided in the
related Prospectus Supplement, the applicable form of credit enhancement may
provide, to the extent of coverage thereunder, that a defaulted Mortgage Loan or
REO Mortgage Loan will be removed from the Trust Fund prior to the final
liquidation thereof. In the case of a Senior/Subordinate Series, if a final
liquidation of a Mortgage Loan resulted in a Realized Loss and within two years
thereafter the Master Servicer receives a subsequent recovery specifically
related to such Mortgage Loan (in connection with a related breach of a
representation or warranty or otherwise), such subsequent recovery shall be
distributed to current Certificateholders of the Class or Classes to which such
Realized Loss was allocated (with the amounts to be distributed allocated among
such Classes in the same proportions as such Realized Loss was allocated),
provided that no such distribution shall result in distributions on the
Certificates of any such Class in excess of the total amounts of principal and
interest that would have been distributable thereon if such Mortgage Loan had
been liquidated with no Realized Loss. In the case of a Series of Certificates
other than a Senior/Subordinate Series, if so provided in the related Prospectus
Supplement, the applicable form of credit enhancement may provide for
reinstatement subject to certain conditions in the event that, following the
final liquidation of a Mortgage Loan and a draw under such credit enhancement,
subsequent recoveries are received. If a defaulted Mortgage Loan or REO Mortgage
Loan is not so removed from the Trust Fund, then, upon the final liquidation
thereof, if a loss is realized which is not covered by any applicable form of
credit enhancement or other insurance, the Certificateholders will bear such
loss. However, if a gain results from the final liquidation of an REO Mortgage
Loan which is not required by law to be remitted to the related Mortgagor, the
Master Servicer will be entitled to retain such gain as additional servicing
compensation. For a description of the Master Servicer's obligations to maintain
and make claims under applicable forms of credit enhancement and insurance
relating to the Mortgage Loans, see "DESCRIPTION OF CREDIT ENHANCEMENTS" and
"PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER."
SUBORDINATION
A Senior/Subordinate Series of Certificates will consist of one or more
Classes of Senior Certificates and one or more Classes of Subordinate
Certificates, as specified in the related Prospectus Supplement.
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Subordination of the Subordinate Certificates of any Senior/Subordinate Series
of Certificates will be effected by the following method, unless an alternative
method is specified in the related Prospectus Supplement. In addition, certain
Classes of Senior (or Subordinated Certificates may be senior to other Classes
of Senior (or Subordinate) Certificates, as specified in the related Prospectus
Supplement, in which case the following discussion is qualified in its entirety
by reference to the related Prospectus Supplement with respect to the various
priorities and other rights as among the various Classes of Senior Certificates
or Subordinate Certificates, as the case may be.
With respect to any Senior/Subordinate Series of Certificates, the total
amount available for distribution on each Distribution Date, as well as the
method for allocating such amount among the various Classes of Certificates
included in such Series, will be described in the related Prospectus Supplement.
Generally, the amount available for distribution will be allocated first to
interest on the Senior Certificates of such Series, and then to principal of the
Senior Certificates up to the amounts determined as specified in the related
Prospectus Supplement, prior to allocation to the Subordinate Certificates of
such Series.
In the event of any Realized Losses (as defined below) on Mortgage Loans
not in excess of the limitations described below, other than Extraordinary
Losses, the rights of the Subordinate Certificateholders to receive
distributions with respect to the Mortgage Loans will be subordinate to the
rights of the Senior Certificateholders. With respect to any defaulted Mortgage
Loan that is finally liquidated, through foreclosure sale, disposition of the
related Mortgaged Property if acquired by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any (as more fully described in the
related Pooling Agreement, a "Realized Loss"), will equal the portion of the
Stated Principal Balance remaining after application of all amounts recovered
(net of amounts reimbursable to the Master Servicer for related Advances and
expenses) towards interest and principal owing on the Mortgage Loan. With
respect to a Mortgage Loan the principal balance of which has been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss.
Except as noted below, Realized Losses will be allocated to the Subordinate
Certificates of the related Series, until the Certificate Principal Balance (as
defined in the related Prospectus Supplement) of such Subordinate Certificates
thereof has been reduced to zero. Additional Realized Losses, if any, will be
allocated to the Senior Certificates (or, if such Series includes more than one
Class of Senior Certificates, either on a pro rata basis among all of the Senior
Certificates in proportion to their respective outstanding Certificate Principal
Balances or as otherwise provided in the related Prospectus Supplement).
With respect to certain Realized Losses resulting from physical damage to
Mortgaged Properties which are generally of the same type as are covered under a
Special Hazard Insurance Policy, the amount thereof that may be allocated to the
Subordinate Certificates of the related Series may be limited to an amount (the
"Special Hazard Amount") specified in the related Prospectus Supplement. See
"DESCRIPTION OF CREDIT ENHANCEMENTS -- Special Hazard Insurance Policies." If
so, any Special Hazard Losses in excess of the Special Hazard Amount will be
allocated among all outstanding Classes of Certificates of the related Series,
either on a pro rata basis in proportion to their outstanding Certificate
Principal Balances, regardless of whether any Subordinate Certificates remain
outstanding, or as otherwise provided in the related Prospectus Supplement. The
respective amounts of other specified types of losses (including Fraud Losses
and Bankruptcy Losses) that may be borne solely by the Subordinate Certificates
may be similarly limited to an amount (with respect to Fraud Losses, the "Fraud
Loss Amount" and with respect to Bankruptcy Losses, the "Bankruptcy Amount"),
and the Subordinate Certificates may provide no coverage with respect to certain
other specified types of losses, as described in the related Prospectus
Supplement, in which case such losses would be allocated on a pro rata basis
among all outstanding Classes of Certificates. Each of the Special Hazard
Amount, Fraud Loss Amount and Bankruptcy Amount may be subject to periodic
reductions under provisions described in the related Prospectus Supplement. Each
such amount may be subject to further reduction or termination, without the
consent of the Certificateholders, upon the written confirmation from each
applicable Rating Agency that the then-current rating of the related Series of
Certificates will not be adversely affected thereby.
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Generally, any allocation of a Realized Loss (including a Special Hazard
Loss) to a Certificate in a Senior/Subordinate Series will be made by reducing
the Certificate Principal Balance thereof as of the Distribution Date following
the calendar month in which such Realized Loss was incurred. If so provided in
the related Prospectus Supplement, in the event of certain Realized Losses, the
Senior Certificateholders may be entitled to receive a distribution of
principal, to be paid from and to the extent of funds otherwise distributable to
the Subordinate Certificateholders, equal to the product of the then applicable
Senior Percentage (as defined below) and the amount, if any, by which (i) the
Stated Principal Balance of the related Mortgage Loan exceeds (ii) the total
amount of the related unscheduled recovery which is allocable to principal (as
more fully described in the related Pooling Agreement, the "Unrecovered Senior
Portion"). Payments to the Senior Certificateholders in respect of any
Unrecovered Senior Portion on any Distribution Date will only be made with
respect to Realized Losses incurred in connection with Mortgage Loans that were
finally liquidated during the preceding calendar month, and will not be made as
to any Special Hazard Losses in excess of the Special Hazard Amount, Fraud
Losses in excess of the Fraud Loss Amount or Bankruptcy Losses in excess of the
Bankruptcy Amount (or other specified types of losses in excess of any
applicable coverage limitations), if applicable. See "DESCRIPTION OF CREDIT
ENHANCEMENTS -- Special Hazard Insurance Policies." As with any other
distribution of principal, any payment to the holders of Senior Certificates
attributable to an Unrecovered Senior Portion will be applied to reduce the
Certificate Principal Balance thereof. At any given time, the percentage of the
Certificate Principal Balances of all of the Certificates evidenced by the
Senior Certificates is the "Senior Percentage," determined in the manner set
forth in the related Prospectus Supplement. The "Stated Principal Balance" of
any Mortgage Loan as of any date of determination is equal to the principal
balance thereof as of the Cut-off Date, after application of all scheduled
principal payments due on or before the Cut-off Date whether or not received,
reduced by all amounts allocable to principal that are distributed to
Certificateholders on or before the date of determination, and as further
reduced to the extent that any Realized Loss thereon has been allocated to one
or more Classes of Certificates on or before the date of determination.
As set forth above, the rights of holders of the various Classes of
Certificates of any Series to receive distributions of principal and interest is
determined by the aggregate Certificate Principal Balance of each such Class
(or, if applicable, the related notional amount). The Certificate Principal
Balance of any Certificate will be reduced by all amounts previously distributed
on such Certificate in respect of principal, and by any Realized Losses
allocated thereto. If there are no Realized Losses or prepayments of principal
on any of the Mortgage Loans, the respective rights of the holders of
Certificates of any Series to future distributions generally would not change.
However, to the extent so provided in the related Prospectus Supplement, holders
of Senior Certificates may be entitled to receive a disproportionately larger
amount of prepayments received during certain specified periods, which will have
the effect (absent offsetting losses) of accelerating the amortization of the
Senior Certificates and increasing the respective percentage ownership interest
evidenced by the Subordinate Certificates in the related Trust Fund (with a
corresponding decrease in the Senior Percentage), thereby preserving the
availability of the subordination provided by the Subordinate Certificates. In
addition, as set forth above, certain Realized Losses generally will be
allocated first to Subordinate Certificates by reduction of the Certificate
Principal Balance thereof, which will have the effect of increasing the
respective ownership interest evidenced by the Senior Certificates in the
related Trust Fund.
If so provided in the related Prospectus Supplement, certain amounts
otherwise payable on any Distribution Date to holders of Subordinate
Certificates may be deposited into a reserve fund. Amounts held in any reserve
fund may be applied as described under "DESCRIPTION OF CREDIT
ENHANCEMENTS -- Reserve Funds" and in the related Prospectus Supplement.
In lieu of the foregoing provisions, subordination may be effected in the
following manner, or in any other manner as may be described in the related
Prospectus Supplement. The rights of the holders of Subordinate Certificates to
receive any or a specified portion of distributions with respect to the Mortgage
Loans may be subordinated to the extent of the amount set forth in the related
Prospectus Supplement (the "Subordinate Amount"). As specified in the related
Prospectus Supplement, the Subordinate Amount may be subject to reduction based
upon the amount of losses borne by the holders of the Subordinate Certificates
as a result of such subordination, a specified schedule or such other method of
reduction as such Prospectus Supplement
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may specify. If so specified in the related Prospectus Supplement, additional
credit support for this form of subordination may be provided by the
establishment of a reserve fund for the benefit of the holders of the Senior
Certificates (which may, if such Prospectus Supplement so provides, initially be
funded by a cash deposit) into which certain distributions otherwise allocable
to the holders of the Subordinate Certificates may be placed; such funds would
thereafter be available to cure shortfalls in distributions to holders of the
Senior Certificates.
With respect to any Senior/Subordinate Series of Certificates, the terms
and provisions of the subordination may vary from those described above; any
such variation and any related additional credit support will be described in
the related Prospectus Supplement.
DESCRIPTION OF CREDIT ENHANCEMENTS
Unless otherwise provided in the applicable Prospectus Supplement, credit
support with respect to each Series of Certificates may be comprised of one or
more of the following components. Each component will have a dollar limit and
will provide coverage with respect to Realized Losses that are (i) attributable
to the Mortgagor's failure to make any payment of principal or interest as
required under the Mortgage Note, but not including Special Hazard Losses,
Extraordinary Losses or other losses resulting from damage to a Mortgaged
Property, Bankruptcy Losses or Fraud Losses (any such loss, a "Defaulted
Mortgage Loss"); (ii) of a type generally covered by a Special Hazard Insurance
Policy (as defined below) (any such loss, a "Special Hazard Loss"); (iii)
attributable to certain actions which may be taken by a bankruptcy court in
connection with a Mortgage Loan, including a reduction by a bankruptcy court of
the principal balance of or the Mortgage Rate on a Mortgage Loan or an extension
of its maturity (any such loss, a "Bankruptcy Loss"); and (iv) incurred on
defaulted Mortgage Loans as to which there was fraud in the origination of such
Mortgage Loans (any such loss, a "Fraud Loss"). Defaulted Mortgage Losses,
Special Hazard Losses, Bankruptcy Losses and Fraud Losses in excess of the
amount of coverage provided therefor and losses occasioned by war, civil
insurrection, certain governmental actions, nuclear reaction and certain other
risks ("Extraordinary Losses") will not be covered. To the extent that the
credit enhancement for any Series of Certificates is exhausted, the
Certificateholders will bear all further risks of loss not otherwise insured
against.
As set forth below and in the applicable Prospectus Supplement, (i)
coverage with respect to Defaulted Mortgage Losses may be provided by one or
more of a Letter of Credit, a Certificate Insurance Policy or a Mortgage Pool
Insurance Policy, (ii) coverage with respect to Special Hazard Losses may be
provided by one or more of a Letter of Credit, a Certificate Insurance Policy or
a Special Hazard Insurance Policy (any instrument, to the extent providing such
coverage, a "Special Hazard Instrument"), (iii) coverage with respect to
Bankruptcy Losses may be provided by one or more of a Letter of Credit, a
Certificate Insurance Policy or a Bankruptcy Bond and (iv) coverage with respect
to Fraud Losses may be provided by one or more of a Letter of Credit, a
Certificate Insurance Policy, Mortgage Pool Insurance Policy or mortgage
repurchase bond. In addition, if provided in the applicable Prospectus
Supplement, in lieu of or in addition to any or all of the foregoing
arrangements, credit enhancement may be in the form of a Reserve Fund to cover
such losses, in the form of subordination of one or more Classes of Subordinate
Certificates to provide credit support to one or more Classes of Senior
Certificates as described under "SUBORDINATION," or in the form of the
applicable Seller's agreement to repurchase certain mortgage loans, which
obligation may be supported by a Letter of Credit, surety bonds or other types
of insurance policies, certain other secured or unsecured corporate guarantees
or in such other form as may be described in the related Prospectus Supplement,
or in the form of a combination of two or more of the foregoing. The credit
support may be provided by an assignment of the right to receive certain cash
amounts, a deposit of cash into a Reserve Fund or other pledged assets, or by
banks, insurance companies, guarantees or any combination thereof identified in
the applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof (the "Credit Enhancer"), if applicable, with respect to each
Series of Certificates will be set forth in the related Prospectus Supplement.
The Pooling Agreement or other documents may be modified in connection with the
provisions of any credit enhancement arrangement to provide for reimbursement
rights, control rights or other provisions
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that may be required by the Credit Enhancer. To the extent provided in the
applicable Prospectus Supplement and the Pooling Agreement, the credit
enhancement arrangements may be periodically modified, reduced and substituted
for based on the aggregate outstanding principal balance of the Mortgage Loans
covered thereby. See "DESCRIPTION OF CREDIT ENHANCEMENTS -- Reduction or
Substitution of Credit Enhancement." If specified in the applicable Prospectus
Supplement, credit support for a Series of Certificates may cover one or more
other Series of Certificates.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder do not
purport to be complete and are qualified in their entirety by reference to the
actual forms of such policies, copies of which will be filed as an exhibit to a
Current Report on Form 8-K within 15 days of issuance of the Certificates of
such Series.
LETTER OF CREDIT
If any component of credit enhancement as to any Series of Certificates is
to be provided by a letter of credit (the "Letter of Credit"), a bank (the
"Letter of Credit Bank") will deliver to the Trustee an irrevocable Letter of
Credit. The Letter of Credit may also provide for the payment of advances which
the Master Servicer would be obligated to make with respect to delinquent
monthly mortgage payments. The Letter of Credit Bank and certain information
with respect thereto, as well as the amount available under the Letter of Credit
with respect to each component of credit enhancement, will be specified in the
applicable Prospectus Supplement. The Letter of Credit will expire on the
expiration date set forth in the related Prospectus Supplement, unless earlier
terminated or extended in accordance with its terms. A copy of any Letter of
Credit for a Series will be filed with the Commission as an exhibit to a Current
Report on Form 8-K within 15 days of the issuance of the Certificates of such
Series.
MORTGAGE POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, an insurance policy
covering Defaulted Mortgage Losses (a "Mortgage Pool Insurance Policy") will be
obtained for a particular Series of Certificates. Each Mortgage Pool Insurance
Policy will, subject to the limitations described in the applicable Prospectus
Supplement, cover Defaulted Mortgage Losses in an amount equal to a percentage
specified in the applicable Prospectus Supplement of the aggregate principal
balance of the Mortgage Loans on the Cut-off Date. As set forth under
"Maintenance of Credit Enhancement," the Master Servicer will use its best
reasonable efforts to maintain the Mortgage Pool Insurance Policy and to present
claims thereunder to the Pool Insurer on behalf of itself, the Trustee and the
Certificateholders. The Mortgage Pool Insurance Policies, however, are not
blanket policies against loss, since claims thereunder may only be made
respecting particular defaulted Mortgage Loans and only upon satisfaction of
certain conditions precedent, which typically include, among other things, that
(i) any required Primary Mortgage Insurance Policy is in effect for the
defaulted Mortgage Loan and a claim thereunder has been submitted and settled,
(ii) hazard insurance on the property securing any such Mortgage Loan has been
kept in force and real estate taxes and other protection and preservation
expenses have been paid by the Master Servicer, (iii) if there has been physical
loss or damage to the applicable Mortgaged Property, it has been restored to its
condition (reasonable wear and tear excepted) at the Cut-off Date and (iv) the
insured has acquired good and merchantable title to the applicable Mortgaged
Property free and clear of liens except certain permitted encumbrances, as more
fully described in the applicable Prospectus Supplement. Unless specified in the
related Prospectus Supplement, the Mortgage Pool Insurance Policies may not
cover losses due to a failure to pay or denial of a claim under a Primary
Mortgage Insurance Policy, irrespective of the reason therefor. A copy of any
Mortgage Pool Insurance Policy for a Series will be filed with the Commission as
an exhibit to a Current Report on Form 8-K within 15 days of the issuance of the
Certificates of such Series.
SPECIAL HAZARD INSURANCE POLICIES
If so provided in the related Prospectus Supplement, an insurance policy
covering Special Hazard Losses (a "Special Hazard Insurance Policy") will be
obtained for a particular Series of Certificates. Each Special Hazard Insurance
Policy will, subject to limitations and satisfaction of certain conditions
precedent described
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in the applicable Prospectus Supplement, protect holders of the related Series
of Certificates from (i) losses due to direct physical damage to a Mortgaged
Property other than any loss of a type covered by a hazard insurance policy or a
flood insurance policy, if applicable, and (ii) losses from partial damage
caused by reason of the application of the co-insurance clauses contained in
hazard insurance policies ("Special Hazard Losses"). See "PRIMARY MORTGAGE
INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER." A Special Hazard Insurance
Policy will not cover losses occasioned by war, civil insurrection, certain
governmental actions, errors in design, faulty workmanship or materials (except
under certain circumstances), nuclear reaction, chemical contamination, waste by
the Mortgagor and certain other risks. A copy of any Special Hazard Insurance
Policy for a Series will be filed with the Commission as an exhibit to a Current
Report on Form 8-K within 15 days of the issuance of the Certificates of such
Series.
As indicated under "DESCRIPTION OF THE CERTIFICATES -- Assignment of
Mortgage Loans" above and to the extent set forth in the applicable Prospectus
Supplement, coverage in respect of Special Hazard Losses for a Series of
Certificates may be provided, in whole or in part, by a type of Special Hazard
Instrument other than a Special Hazard Insurance Policy.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that
the bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor at an amount less than the then outstanding principal balance of the
Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation"). The
amount of the secured debt could then be reduced to such value, and, thus, the
holder of such Mortgage Loan would become an unsecured creditor to the extent
the outstanding principal balance of such Mortgage Loan exceeds the value
assigned to the Mortgaged Property by the bankruptcy court. In addition, certain
other modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including a reduction in the amount of the Monthly Payment on the
related Mortgage Loan (a "Debt Service Reduction"; Debt Service Reductions and
Deficient Valuations, collectively referred to herein as "Bankruptcy Losses").
See "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS -- Anti-
Deficiency Legislation and Other Limitations on Lenders." Any Bankruptcy Bond to
provide coverage for Bankruptcy Losses for proceedings under the federal
Bankruptcy Code obtained by the Depositor for a Trust Fund will be issued by an
insurer named in the applicable Prospectus Supplement. The level of coverage
under each Bankruptcy Bond will be set forth in the applicable Prospectus
Supplement. A copy of any Bankruptcy Bond for a Series will be filed with the
Commission as an exhibit to a Current Report on Form 8-K within 15 days of the
issuance of the Certificates of such Series.
CERTIFICATE INSURANCE POLICIES
If so provided in the related Prospectus Supplement, one or more insurance
policies (each, a "Certificate Insurance Policy") will be obtained for a
particular Series of Certificates guaranteeing timely distributions of interest
and full 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 for such Series or for one or more Classes of Certificates
of such Series. If so specified in the related Prospectus Supplement, a
Certificate Insurance Policy will also guarantee against any payment made to a
Certificateholder which is subsequently treated as a "voidable preference"
payment under the Bankruptcy Code. A copy of any Certificate Insurance Policy
for a Series will be filed with the Commission as an exhibit to a Current Report
on Form 8-K within 15 days of the issuance of the Certificates of such Series.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of all or a portion of amounts
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otherwise payable on any related Subordinate Certificates, from Retained Yield
or otherwise. To the extent that the funding of the Reserve Fund is dependent on
amounts otherwise payable on related Subordinate Certificates, Retained Yield or
other cash flows attributable to the related Mortgage Loans or on reinvestment
income, the Reserve Fund may provide less coverage than initially expected if
the cash flows or reinvestment income on which such funding is dependent are
lower than anticipated. In addition, with respect to any Series of Certificates
as to which credit enhancement includes a Letter of Credit, if so specified in
the related Prospectus Supplement, under certain circumstances the remaining
amount of the Letter of Credit may be drawn by the Trustee and deposited in a
Reserve Fund. Amounts in a Reserve Fund may be distributed to
Certificateholders, or applied to reimburse the Master Servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, any such Reserve Fund will not be deemed to be
part of the related Trust Fund. If set forth in the related Prospectus
Supplement, a Reserve Fund may provide coverage to more than one Series of
Certificates.
In connection with the establishment of any Reserve Fund, unless otherwise
specified in the related Prospectus Supplement, the Reserve Fund will be
structured so that the Trustee will have a perfected security interest for the
benefit of the Certificateholders in the assets in the Reserve Fund. However, to
the extent that the Depositor, any affiliate thereof or any other entity has an
interest in any Reserve Fund, in the event of the bankruptcy, receivership or
insolvency of such entity, there could be delays in withdrawals from the Reserve
Fund and corresponding payments to the Certificateholders which could adversely
affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a Series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus Supplement.
MAINTENANCE OF CREDIT ENHANCEMENT
If a Letter of Credit, Certificate Insurance Policy or alternate form of
credit enhancement has been obtained for a Series of Certificates, the Master
Servicer will be obligated under the applicable Pooling Agreement to exercise
its best reasonable efforts to keep or cause to be kept such Letter of Credit,
Certificate Insurance Policy or alternate form of credit support in full force
and effect throughout the term of such Pooling Agreement, unless coverage
thereunder has been exhausted through payment of claims or otherwise, or
substitution therefor is made as described below under "Reduction or
Substitution of Credit Enhancement." Unless otherwise specified in the
applicable Prospectus Supplement, if a Letter of Credit obtained for a Series of
Certificates is scheduled to expire prior to the date the final distribution on
such Certificates is made and coverage under such Letter of Credit has not been
exhausted and no substitution has occurred, the Trustee will draw the amount
available under the Letter of Credit and maintain such amount in trust for such
Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a Series of
Certificates, the Master Servicer will be obligated under the applicable Pooling
Agreement to exercise its best reasonable efforts to keep each Mortgage Pool
Insurance Policy (or an alternate form of credit support) in full force and
effect throughout the term of such Pooling Agreement, unless coverage thereunder
has been exhausted through payment of claims or until such Mortgage Pool
Insurance Policy is replaced in accordance with the terms of such Pooling
Agreement. The Master Servicer or the Trustee, as specified in the related
Prospectus Supplement, will agree to pay from collections received on the
Mortgage Loans the premiums for each Mortgage Pool Insurance Policy on a timely
basis. In the event the Pool Insurer ceases to be a Qualified Insurer (such term
being defined to mean a private mortgage guaranty insurance company duly
qualified as such under the laws of the state of its incorporation and each
state having jurisdiction over the insurer in connection with the Mortgage Pool
Insurance Policy and approved as an insurer by FHLMC, FNMA or any successor
entity) because it ceases to be qualified under any such law to transact such
insurance business or coverage is terminated for any reason other than
exhaustion of such coverage, the Master Servicer will use its best reasonable
efforts to obtain from another Qualified Insurer a replacement insurance policy
comparable to the Mortgage Pool Insurance Policy with a total coverage equal to
the then outstanding coverage of such Mortgage Pool Insurance Policy,
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provided that, if the cost of the replacement policy is greater than the cost of
such Mortgage Pool Insurance Policy, the coverage of the replacement policy
will, unless otherwise agreed to by the Depositor, be reduced to a level such
that its premium rate does not exceed the premium rate on such Mortgage Pool
Insurance Policy. In the event that the Pool Insurer ceases to be a Qualified
Insurer because it ceases to be approved as an insurer by FHLMC, FNMA or any
successor entity, the Master Servicer will agree to review, not less often than
annually, the financial condition of the Pool Insurer and will monitor the
credit ratings of the Pool Insurer, in each case with a view toward determining
whether recoveries under the Mortgage Pool Insurance Policy are jeopardized for
reasons related to the financial condition of the Pool Insurer. If the Master
Servicer determines that recoveries are so jeopardized, it has agreed to
exercise its best reasonable efforts to obtain from another Qualified Insurer a
replacement insurance policy as described above, subject to the same cost limit.
Any losses associated with any reduction or withdrawal in rating by an
applicable Rating Agency shall be borne by the Certificateholders. (Article I
and Section 3.11)
In lieu of the Master Servicer's obligation to maintain a Letter of Credit,
Mortgage Pool Insurance Policy, Certificate Insurance Policy or other form of
credit enhancement as provided above, the Master Servicer may obtain a
substitute Letter of Credit, Mortgage Pool Insurance Policy, Certificate
Insurance Policy or an alternate form of credit enhancement. If the Master
Servicer obtains such a substitute Letter of Credit, Mortgage Pool Insurance
Policy, Certificate Insurance Policy or other form of credit enhancement, it
will maintain and keep such Letter of Credit, Mortgage Pool Insurance Policy,
Certificate Insurance Policy or alternate form of credit enhancement in full
force and effect as provided herein. Prior to its obtaining any substitute
Letter of Credit, Mortgage Pool Insurance Policy, Certificate Insurance Policy
or alternate form of credit enhancement, the Master Servicer will obtain written
confirmation from the Rating Agency or Agencies that rated the related Series of
Certificates that the substitution of such Mortgage Pool Insurance Policy,
Letter of Credit, Certificate Insurance Policy or alternate form of credit
enhancement for the existing credit enhancement will not adversely affect the
then-current ratings assigned to such Certificates by such Rating Agency or
Agencies.
If a Special Hazard Instrument has been obtained for a Series of
Certificates, the Master Servicer will also be obligated under the applicable
Pooling Agreement to exercise its best reasonable efforts to maintain and keep
such Special Hazard Instrument in full force and effect throughout the term of
such Pooling Agreement, unless coverage thereunder has been exhausted through
payment of claims or otherwise or substitution therefor is made as described
below under "Reduction or Substitution of Credit Enhancement." If the Special
Hazard Instrument takes the form of a Special Hazard Insurance Policy, such
policy will provide coverage against risks of the type described herein under
"DESCRIPTION OF CREDIT ENHANCEMENTS -- Special Hazard Insurance Policies." The
Master Servicer may obtain a substitute Special Hazard Instrument for the
existing Special Hazard Instrument if prior to such substitution the Master
Servicer obtains written confirmation from the Rating Agency or Agencies that
rated the Certificates that such substitution shall not adversely affect the
then-current ratings assigned to the Certificates by such Rating Agency or
Agencies. (Sections 3.12 and 3.16)
If a Bankruptcy Bond has been obtained for a Series of Certificates, the
Master Servicer will be obligated under the applicable Pooling Agreement to
exercise its best reasonable efforts to maintain and keep such Bankruptcy Bond
in full force and effect throughout the term of such Pooling Agreement, unless
coverage thereunder has been exhausted through payment of claims or substitution
therefor is made as described below under "Reduction or Substitution of Credit
Enhancement." The Master Servicer may obtain a substitute Bankruptcy Bond or
other credit enhancement for the existing Bankruptcy Bond if prior to such
substitution the Master Servicer obtains written confirmation from the Rating
Agency or Agencies that rated the Certificates that such substitution shall not
adversely affect the then-current ratings assigned to the Certificates by such
Rating Agency or Agencies. (Sections 3.16 and 3.21) See "DESCRIPTION OF CREDIT
ENHANCEMENTS -- Bankruptcy Bonds."
The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, will provide the Trustee information required for the
Trustee to draw under the Letter of Credit and will present claims to each Pool
Insurer, to the issuer of each Special Hazard Insurance Policy or other Special
Hazard Instrument, to the issuer of each Bankruptcy Bond and, in respect of
defaulted Mortgage Loans for which there is no
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Subservicer, to each Primary Mortgage Insurer and take such reasonable steps as
are necessary to permit recovery under such Letter of Credit, Certificate
Insurance Policies or other insurance policies or comparable coverage respecting
defaulted Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy
proceeding. As set forth above, all collections by the Master Servicer under any
Mortgage Pool Insurance Policy, any Primary Mortgage Insurance Policy or any
Bankruptcy Bond and, where the related property has not been restored, any
Special Hazard Instrument, are to be deposited initially in the Custodial
Account and ultimately in the Certificate Account, subject to withdrawal as
described above. All draws under any Letter of Credit or Certificate Insurance
Policy will be initially deposited in the Certificate Account. In those cases in
which a Mortgage Loan is serviced by a Subservicer, the Subservicer, on behalf
of itself, the Trustee and the Certificateholders will present claims to the
Primary Mortgage Insurer, and all collections thereunder shall initially be
deposited in a segregated account generally comparable to the Custodial Account.
(Sections 3.11, 3.12, 3.21 and 4.01)
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Letter of Credit, Mortgage
Pool Insurance Policy or any related Primary Mortgage Insurance Policy, the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more Classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation Proceeds
or Insurance Proceeds. If recovery under any Letter of Credit, Mortgage Pool
Insurance Policy, other credit enhancement or any related Primary Mortgage
Insurance Policy is not available because the Master Servicer has been unable to
make the above determinations, has made such determinations incorrectly or
recovery is not available for any other reason, the Master Servicer is
nevertheless obligated to follow such normal practices and procedures (subject
to the preceding sentence) as it deems necessary or advisable to realize upon
the defaulted Mortgage Loan and in any such event is entitled to reimbursement
of its expenses in connection with such restoration prior to payments to
Certificateholders. (Section 3.14)
The failure of the Master Servicer to maintain a Letter of Credit,
Certificate Insurance Policy, Mortgage Pool Insurance Policy, Special Hazard
Instrument, Bankruptcy Bond or other form of credit enhancement under any
applicable Pooling Agreement, as provided above, which continues unremedied for
30 days (15 days in the case of a failure to pay the required premium) after the
giving of written notice of such failure to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of any Class of Certificates of the related Series evidencing not
less than 25% of the aggregate Percentage Interest constituting such Class, will
constitute an Event of Default by the Master Servicer under such Pooling
Agreement. See "THE POOLING AGREEMENT -- Rights Upon Event of Default" for a
discussion of the rights of the Depositor, the Trustee and the Certificateholder
during an Event of Default.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of
credit support provided pursuant to any of the credit enhancements (including,
without limitation, a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, Certificate Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve
Fund, or any alternative form of credit enhancement) may be reduced under
certain specified circumstances. In most cases, the amount available pursuant to
any credit enhancement will be subject to periodic reduction in accordance with
a schedule or formula on a nondiscretionary basis pursuant to the terms of the
related Pooling Agreement. Additionally, in most cases, such credit support (and
any replacements therefor) may be replaced, reduced or terminated, and the
formula used in calculating the amount of coverage with respect to Bankruptcy
Losses, Special Hazard Losses or Fraud Losses may be changed, without the
consent of the Certificateholders, upon the written assurance from each
applicable Rating Agency that the then-current rating of the related Series of
Certificates will not be adversely affected. Furthermore, in the event that the
credit rating of any obligor under any applicable credit enhancement is
downgraded, the credit rating of the related Certificates may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to obtain replacement
credit support in
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order to restore the rating of the Certificates. The Master Servicer will also
be permitted to replace such credit support with other credit enhancement
instruments issued by obligors whose credit ratings are equivalent to such
downgraded level and in lower amounts which would satisfy such downgraded level,
provided that the then-current rating of the related Series of Certificates is
maintained. Where the credit support is in the form of a Reserve Fund, a
permitted reduction in the amount of credit enhancement will result in a release
of all or a portion of the assets in the Reserve Fund to the Depositor, the
Master Servicer or such other person that is entitled thereto. Any assets so
released will not be available for distributions in future periods.
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Mortgage Insurance Policy. The following is only a brief description of certain
insurance policies and does not purport to summarize or describe all of the
provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers, unless such
underwriting and approval authority has been delegated to the applicable lender.
The descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder do not purport to be complete
and are qualified in their entirety by reference to such forms of policies,
sample copies of which are available upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio at origination of over 80% is
required by the Depositor to be covered by a primary mortgage guaranty insurance
policy (a "Primary Mortgage Insurance Policy") insuring against default on such
Mortgage Loan up to at least the minimum amount required to be covered by FNMA
and FHLMC, unless and until the principal balance of the Mortgage Loan is
reduced to a level that would produce a Loan-to-Value Ratio equal to or less
than 80%, and (ii) the applicable Seller will represent and warrant that, to the
best of such Seller's knowledge, such Mortgage Loans are so covered. The
Mortgagor with respect to each Mortgage Loan covered by a Primary Mortgage
Insurance Policy will be required to pay the premiums allocable to such Mortgage
Loan under any applicable Primary Mortgage Insurance Policy. However, the
foregoing standard may vary significantly depending on the characteristics of
the Mortgage Loans and the applicable underwriting standards. A Mortgage Loan
will not be considered to be an exception to the foregoing standard if no
Primary Mortgage Insurance Policy was obtained at origination but the Mortgage
Loan has amortized to below an 80% Loan-to-Value Ratio level as of the
applicable Cut-off Date. In addition, unless otherwise specified in the
Prospectus Supplement, the Master Servicer will have the ability to cancel any
Primary Mortgage Insurance Policy if the Loan-to-Value Ratio of the Mortgage
Loan is reduced below a specified percentage, which typically will be either 75%
or 80%, either based on an appraisal of the Mortgaged Property after the related
Cut-off Date or as a result of principal payments that reduce the principal
balance of the Mortgage Loan after such Cut-off Date, or if necessary to comply
with applicable law.
While the terms and conditions of the Primary Mortgage Insurance Policies
issued by one primary mortgage guaranty insurer (a "Primary Mortgage Insurer")
will differ from those in Primary Mortgage Insurance Policies issued by other
Primary Mortgage Insurers, each Primary Mortgage Insurance Policy will in
general provide substantially the following coverage. The amount of the loss as
calculated under a Primary Mortgage Insurance Policy covering a Mortgage Loan
(herein referred to as the "Loss") will generally consist of the unpaid
principal amount of such Mortgage Loan and accrued and unpaid interest thereon
and limited reimbursement of certain expenses, less (i) rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from the related Mortgaged Property, (ii) hazard
insurance proceeds in excess of the amount required to restore such Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan,
(iii) amounts expended but not approved by the Primary Mortgage Insurer, (iv)
claim payments previously made on such Mortgage Loan and (v) unpaid premiums and
certain other amounts.
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The Primary Mortgage Insurer will generally be required to pay either: (i)
the insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Mortgage Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Mortgage Insurer under certain Primary Mortgage Insurance Policies, the sum of
the delinquent monthly payments plus any advances made by the insured, both to
the date of the claim payment and, thereafter, monthly payments in the amount
that would have become due under the Mortgage Loan if it had not been discharged
plus any advances made by the insured until the earlier of (a) the date the
Mortgage Loan would have been discharged in full if the default had not occurred
or (b) an approved sale.
As conditions precedent to the filing or payment of a claim under a Primary
Mortgage Insurance Policy, in the event of default by the Mortgagor, the insured
will typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Mortgage Insurer, real estate taxes, protection and preservation
expenses and foreclosure and related costs; (ii) in the event of any physical
loss or damage to the Mortgaged Property, have the Mortgaged Property restored
to at least its condition at the effective date of the Primary Mortgage
Insurance Policy (ordinary wear and tear excepted); and, if requested by the
Primary Mortgage Insurer, (iii) tender to the Primary Mortgage Insurer good and
merchantable title to, and possession of, the Mortgaged Property. Because the
Master Servicer will not be required to make Servicing Advances deemed to be
nonrecoverable, conditions (i) and (ii) above may not be satisfied with respect
to some claims under the Primary Mortgage Insurance Policies. In any such event,
Losses that would otherwise have been recoverable under the applicable Primary
Mortgage Insurance Policy may not be paid under such policy and, as a result,
will be borne by the Certificateholders.
For any Certificates offered hereunder, the Master Servicer will maintain
or cause any applicable Subservicer to maintain in full force and effect and to
the extent coverage is available a Primary Mortgage Insurance Policy with regard
to each Mortgage Loan for which such coverage is required under the standard
described above, provided that such Primary Mortgage Insurance Policy was in
place as of the Cut-off Date and the Master Servicer had knowledge of such
Primary Mortgage Insurance Policy. In the event that the Master Servicer gains
knowledge that as of the Closing Date, a Mortgage Loan had a Loan-to-Value Ratio
at origination in excess of 80% and was not the subject of a Primary Mortgage
Insurance Policy (and was not included in any exception to such standard
disclosed in the related Prospectus Supplement) and that such Mortgage Loan has
a then current Loan-to-Value Ratio in excess of 80%, then the Master Servicer is
required to use its reasonable efforts to obtain and maintain a Primary Mortgage
Insurance Policy to the extent that such a policy is obtainable at a reasonable
price. The Master Servicer will not cancel or refuse to renew any such Primary
Mortgage Insurance Policy in effect at the time of the initial issuance of a
Series of Certificates that is required to be kept in force under the applicable
Pooling Agreement unless the replacement Primary Mortgage Insurance Policy for
such cancelled or non-renewed policy is maintained with an insurer whose
claims-paying ability is acceptable to the Rating Agency or Agencies that rated
such Series of Certificates for mortgage pass-through certificates having a
rating equal to or better than the then-current ratings of such Series of
Certificates. (Section 3.11) The premiums allocable to a Mortgage Loan covered
by any Primary Mortgage Insurance Policy, to the extent not paid by the related
Mortgagor, will be reimbursed to the Master Servicer from collections on the
Mortgage Pool. For further information regarding the extent of coverage under
any Mortgage Pool Insurance Policy or Primary Mortgage Insurance Policy, see
"DESCRIPTION OF CREDIT ENHANCEMENTS -- Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy with extended coverage customary in the state in which the
related Mortgaged Property is located for their Mortgage Loan. Additionally, the
Pooling Agreement for each Series of Certificates will require the Master
Servicer to cause to be maintained for each Mortgage Loan a hazard insurance
policy providing for no less than the coverage of the standard form of fire
insurance policy with extended coverage customary in the state in which the
property is located. Such coverage generally will be in an amount equal to the
lesser of the principal balance owing on such Mortgage Loan or 100% of the
insurable value of the improvements securing
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the Mortgage Loan except that, if generally available, such coverage must not be
less than the minimum amount required under the terms thereof to fully
compensate for any damage or loss on a replacement cost basis. The ability of
the Master Servicer to ensure that hazard insurance proceeds are appropriately
applied may be dependent on its being named as an additional insured or loss
payee under any hazard insurance policy and under any flood insurance policy
referred to below, or upon the extent to which information in this regard is
furnished to the Master Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited initially in
the Custodial Account and ultimately in the Certificate Account, subject to
permitted withdrawals. The Pooling Agreement provides that the Master Servicer
may satisfy its obligation to cause hazard policies to be maintained by
maintaining a blanket policy insuring against losses on the Mortgage Loans. If
such blanket policy contains a deductible clause, the Master Servicer will
deposit in the Custodial Account or the applicable Certificate Account all sums
which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil commotion,
subject to the conditions and exclusions specified in each policy. Although the
policies relating to the Mortgage Loans 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, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all inclusive. Where
the improvements securing a Mortgage Loan are located in a federally designated
flood area in participating communities at the time of origination of such
Mortgage Loan, the Pooling Agreement requires the Master Servicer to cause to be
maintained for each such Mortgage Loan serviced, flood insurance (to the extent
available) in an amount equal in general to the lesser of the amount required to
compensate for any loss or damage on a replacement cost basis or the maximum
insurance available under the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all times
to carry insurance of a specified percentage (generally 80% to 90%) of the full
replacement value of the improvements on the property in order to recover the
full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause generally provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements damaged or destroyed less physical
depreciation or (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, hazard insurance proceeds could be
insufficient to restore fully the damaged property in the event of a partial
loss. See "SUBORDINATION" above for a description of when subordination is
provided, the protection (limited to the Special Hazard Amount as described in
the related Prospectus Supplement) afforded by such subordination, and
"DESCRIPTION OF CREDIT ENHANCEMENTS -- Special Hazard Insurance Policies" for a
description of the limited protection afforded by any Special Hazard Insurance
Policy against losses occasioned by hazards which are otherwise uninsured
against (including losses caused by the application of the co-insurance clause
described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally required to
present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of
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the Trustee and Certificateholders, is obligated to present claims under any
Special Hazard Insurance Policy or other Special Hazard Instrument and any
blanket insurance policy insuring against hazard losses on the Mortgaged
Properties. However, the ability of the Master Servicer to present such claims
is dependent upon the extent to which information in this regard is furnished to
the Master Servicer or the Subservicers by Mortgagors. (Section 3.12)
THE POOLING AGREEMENT
As described above under "DESCRIPTION OF THE CERTIFICATES -- General," each
Series of Certificates will be issued pursuant to a Pooling Agreement as
described in that section. The following summaries describe certain additional
provisions common to each Pooling Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; RETAINED YIELD
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for each Series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be retained
by it from collections of interest on such Mortgage Loan in the related Trust
Fund (after provision has been made for the payment of interest at the
applicable Pass-Through Rate to Certificateholders and for the payment of any
Retained Yield) at the time such collections are deposited into the applicable
Custodial Account. As compensation for its servicing duties, a Subservicer or,
if there is no Subservicer, the Master Servicer will be entitled to a monthly
servicing fee as described in the related Prospectus Supplement, which may vary
under certain circumstances from the amounts described in the Prospectus
Supplement. Certain Subservicers, in their capacity as Sellers, may also be
entitled to Retained Yield as additional compensation for the sale of the
applicable Mortgage Loans.
The Master Servicer will pay or cause to be paid certain ongoing expenses
associated with each Trust Fund and incurred by it in connection with its
responsibilities under the Pooling Agreement, including, without limitation,
payment of any fee or other amount payable in respect of any alternative credit
enhancement arrangements, payment of the fees and disbursements of the Trustee,
any custodian appointed by the Trustee, the Certificate Registrar and any Paying
Agent, and payment of expenses incurred in enforcing the obligations of
Subservicers and Sellers. The Master Servicer will be entitled to reimbursement
of expenses incurred in enforcing the obligations of Subservicers and Sellers
under certain limited circumstances. In addition, as described above under
"DESCRIPTION OF THE CERTIFICATES -- Advances," the Master Servicer will be
entitled to reimbursements for certain expenses incurred by it in connection
with Liquidated Mortgage Loans and in connection with the restoration of
Mortgaged Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related Liquidation Proceeds (including
Insurance Proceeds).
The Prospectus Supplement for a Series of Certificates will specify whether
there will be any Retained Yield. Any such Retained Yield will be a specified
portion of the interest payable on each Mortgage Loan in a Mortgage Pool. Any
such Retained Yield will be established on a loan-by-loan basis and the amount
thereof with respect to each Mortgage Loan in a Mortgage Pool will be specified
on an exhibit to the related Pooling Agreement. Any Retained Yield in respect of
a Mortgage Loan will represent a specified portion of the interest payable
thereon and will not be part of the related Trust Fund. Any partial recovery of
interest in respect of a Mortgage Loan will be allocated between the owners of
any Retained Yield and the holders of Classes of Certificates entitled to
payments of interest as provided in the Prospectus Supplement and the applicable
Pooling Agreement.
EVIDENCE AS TO COMPLIANCE
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, a firm of independent public accountants will
furnish a statement to the Depositor and the Trustee to the effect that, on the
basis of an examination by such firm conducted substantially in compliance with
the Uniform Single Audit Program for
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Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing of mortgage loans under agreements (including the related Pooling
Agreement) substantially similar to each other was conducted in compliance with
such agreements except for such significant exceptions or errors in records
that, in the opinion of the firm, the Uniform Single Audit Program for Mortgage
Bankers or the Audit Program for Mortgages serviced for FHLMC requires it to
report. (Section 3.19)
Each Pooling Agreement will also provide for delivery (on or before a
specified date in each year) to the Trustee of an annual statement signed by an
officer of the Master Servicer to the effect that the Master Servicer 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. (Section 3.18)
Copies of the annual statement of the Master Servicer may be obtained by
Certificateholders without charge upon written request to the Trustee.
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE DEPOSITOR
The Pooling Agreement for each Series of Certificates will provide that the
Master Servicer may not resign from its obligations and duties thereunder except
upon a determination that performance of such duties is no longer permissible
under applicable law or except in connection with a permitted transfer of
servicing. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Pooling Agreement. (Section 6.04)
Each Pooling Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Depositor, nor any director, officer, employee
or agent of the Master Servicer or the Depositor will be under any liability to
the Trust Fund or the Certificateholders for any action taken or for refraining
from the taking of any action in good faith pursuant to the Pooling Agreement,
or for errors in judgment; provided, however, that neither the Master Servicer,
the Depositor, nor any such person will be protected against any liability which
would otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. Each Pooling Agreement will further provide
that the Master Servicer, the Depositor, and any director, officer, employee or
agent of the Master Servicer or the Depositor is entitled to indemnification by
the Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling Agreement
or the related Series of Certificates, other than any loss, liability or expense
related to any specific Mortgage Loan or Mortgage Loans (except any such loss,
liability or expense otherwise reimbursable pursuant to the Pooling Agreement)
and any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. In addition,
each Pooling Agreement will provide that neither the Master Servicer nor the
Depositor will be under any obligation to appear in, prosecute or defend any
legal or administrative action that is not incidental to its respective duties
under the Pooling Agreement and which in its opinion may involve it in any
expense or liability. The Master Servicer or the Depositor may, however, in its
discretion undertake any such action which it may deem necessary or desirable
with respect to the Pooling Agreement and the rights and duties of the parties
thereto and the interests of the Certificateholders thereunder. In such event,
the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Trust Fund and the
Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor out of funds otherwise distributable to Certificateholders.
(Section 6.03)
Any person into which the Master Servicer may be merged or consolidated,
any person resulting from any merger or consolidation to which the Master
Servicer is a party or any person succeeding to the business of the Master
Servicer will be the successor of the Master Servicer under the Pooling
Agreement, provided that (i) such person is qualified to service mortgage loans
on behalf of FNMA or FHLMC and (ii) such merger, consolidation or succession
does not adversely affect the then-current rating of the Classes of Certificates
of the related Series that have been rated. In addition, notwithstanding the
prohibition on its resignation, the
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Master Servicer may assign its rights under a Pooling Agreement to any person to
whom the Master Servicer is transferring a substantial portion of its mortgage
servicing portfolio, provided clauses (i) and (ii) above are satisfied and such
person is reasonably satisfactory to the Depositor and the Trustee. In the case
of any such assignment, the Master Servicer will be released from its
obligations under such Pooling Agreement, exclusive of liabilities and
obligations incurred by it prior to the time of such assignment. (Section 6.02)
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a Series of
Certificates, unless otherwise specified in the Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is the
Paying Agent, to distribute to the holders of any Class of Certificates of such
Series any required payment which continues unremedied for 5 days after the
giving of written notice of such failure to the Master Servicer by the Trustee
or the Depositor, or to the Master Servicer, the Depositor and the Trustee by
the holders of Certificates of such Class evidencing not less than 25% of the
aggregate Percentage Interests constituting such Class; (ii) any failure by the
Master Servicer duly to observe or perform in any material respect any other of
its covenants or agreements in the Pooling Agreement with respect to such Series
of Certificates which continues unremedied for 30 days (15 days in the case of a
failure to pay the premium for any insurance policy which is required to be
maintained under the Pooling Agreement) after the giving of written notice of
such failure to the Master Servicer by the Trustee or the Depositor, or to the
Master Servicer, the Depositor and the Trustee by the holders of any Class of
Certificates of such Series evidencing not less than 25% of the aggregate
Percentage Interests constituting such Class; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings regarding the Master Servicer and certain actions by the
Master Servicer indicating its insolvency or inability to pay its obligations.
(Section 7.01)
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Depositor or
the Trustee may, and at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate undivided interests (or, if so specified in
the related Prospectus Supplement, voting rights) in the related Trust Fund
(except as otherwise provided for in the related Pooling Agreement with respect
to the Credit Enhancer) the Trustee shall, by written notification to the Master
Servicer and to the Depositor or the Trustee, as applicable, terminate all of
the rights and obligations of the Master Servicer under the Pooling Agreement
covering such Trust Fund and in and to the Mortgage Loans and the proceeds
thereof, whereupon the Trustee or, upon notice to the Depositor and with the
Depositor's consent, its designee will succeed to all responsibilities, duties
and liabilities of the Master Servicer under such Pooling Agreement and will be
entitled to similar compensation arrangements. In the event that the Trustee
would be obligated to succeed the Master Servicer but is unwilling so to act, it
may appoint (or if it is unable so to act, it shall appoint) or petition a court
of competent jurisdiction for the appointment of, a FNMA- or FHLMC-approved
mortgage servicing institution with a net worth of at least $10,000,000 to act
as successor to the Master Servicer under the Pooling Agreement (unless
otherwise set forth in the Pooling Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Pooling
Agreement. (Sections 7.01 and 7.02)
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement (except as
otherwise provided for in the related Pooling Agreement with respect to the
Credit Enhancer) 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 60 days
after receipt of such request and indemnity has neglected or refused to
institute any such proceeding. (Section 11.03) 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
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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. (Section 8.02)
AMENDMENT
Each Pooling Agreement may be amended by the Depositor, the Master Servicer
and the Trustee, 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 Custodial Account or the Certificate Account or to
change the name in which the Custodial Account is maintained; provided that (a)
the Certificate Account Deposit Date would in no event be later than the related
Distribution Date, (b) such change would not adversely affect in any material
respect the interests of any Certificateholder, as evidenced by an opinion of
counsel, and (c) 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 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 (a) such action is necessary or desirable to maintain such
qualification or to avoid or minimize such risk, and (b) 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, (v) to make any other provisions with respect to
matters or questions arising under such Pooling Agreement which are not
materially inconsistent with the provisions thereof, 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 Depositor, the Master
Servicer and the Trustee (except as otherwise provided for in the related
Pooling Agreement with respect to the Credit Enhancer) with the consent of the
holders of Certificates of each Class affected thereby evidencing, in each case,
not less than 66% 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 entitled 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 Depositor or the Trustee in accordance with
such amendment will not result in the imposition of a tax on the related Trust
Fund or cause such Trust Fund to fail to qualify as a REMIC. (Section 11.01)
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling Agreement for each Series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Depositor, respectively) will terminate upon the payment to
Certificateholders of that Series of all amounts held in the Certificate Account
or by the Master
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Servicer and required to be paid to them pursuant to such Pooling Agreement
following the earlier of (i) the final payment or other liquidation or
disposition (or any advance with respect thereto) of the last Mortgage Loan
subject thereto and all property acquired upon foreclosure or deed in lieu of
foreclosure of any such Mortgage Loan and (ii) the purchase by the Master
Servicer or the Depositor or, if specified in the related Prospectus Supplement,
by the holder of the REMIC Residual Certificates (see "FEDERAL INCOME TAX
CONSEQUENCES" below) from the Trust Fund for such Series of all remaining
Mortgage Loans and all property acquired in respect of such Mortgage Loans. In
no event, however, will the trust created by the Pooling Agreement continue
beyond the expiration of 21 years from the death of the survivor of certain
persons named in such Pooling Agreement. Written notice of termination of the
Pooling Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. (Section 9.01) If the Certificateholders
are permitted to terminate the trust under the applicable Pooling Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that would
be foregone by the Master Servicer because of such termination.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a Series of Certificates shall be made at the option
of the Master Servicer or the Depositor or, if applicable, the holder of the
REMIC Residual Certificates at the price specified in the related Prospectus
Supplement. The exercise of such right will effect early retirement of the
Certificates of that Series, but the right of the Master Servicer or the
Depositor or, if applicable, such holder to so purchase is subject to the
aggregate principal balance of the Mortgage Loans for that Series as of the
Distribution Date on which the purchase proceeds are to be distributed to
Certificateholders being less than the percentage specified in the related
Prospectus Supplement of the aggregate principal balance of the Mortgage Loans
at the Cut-off Date for that Series. The Prospectus Supplement for each Series
of Certificates will set forth the amounts that the holders of such Certificates
will be entitled to receive upon such early retirement. Such early termination
may adversely affect the yield to holders of certain Classes of such
Certificates. If a REMIC election has been made, the termination of the related
Trust Fund will be effected in a manner consistent with applicable federal
income tax regulations and its status as a REMIC. (Sections 9.01 and 9.02)
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank or trust company serving as Trustee
may have normal banking relationships with the Depositor and/or its affiliates,
including Bank of America NT&SA or Bank of America, FSB.
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 evidencing not less than 51% of the aggregate undivided interests
(or, if so specified in the related Prospectus Supplement, voting rights) in the
related Trust Fund. 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. (Section 8.07)
YIELD CONSIDERATIONS
The yield to maturity of a Certificate will depend on the price paid by the
holder for such Certificate, the Pass-Through Rate on any such Certificate
entitled to payments of interest (which Pass-Through Rate may vary if so
specified in the related Prospectus Supplement) and the rate and timing of
principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if applicable)
and other factors. See "RISK FACTORS -- Yield and Prepayment Uncertainty" above.
Each monthly interest payment on a Mortgage Loan will be calculated as
one-twelfth of the applicable Mortgage Rate multiplied by the principal balance
of such Mortgage Loan outstanding as of the first day of
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the month prior to the month in which the Distribution Date for the related
Series of Certificates occurs, after giving effect to the payment of principal
due on such first day, subject to any Deferred Interest. The amount of such
payments with respect to each Mortgage Loan distributed (or accrued in the case
of Deferred Interest or Accrual Certificates) monthly to holders of a Class of
Certificates entitled to payments of interest will be similarly calculated on
the basis of such Class's specified percentage of each such payment of interest
(or accrual in the case of Accrual Certificates) and will be expressed as a
fixed, adjustable or variable Pass-Through Rate payable on the outstanding
principal balance or notional amount of such Certificate, or any combination of
such Pass-Through Rates, calculated as described herein and in the related
Prospectus Supplement. Holders of Strip Certificates or a Class of Certificates
having a Pass-Through Rate that varies based on the weighted average Mortgage
Rate of the underlying Mortgage Loans will be affected by disproportionate
prepayments and repurchases of Mortgage Loans having higher Net Mortgage Rates
or rates applicable to the Strip Certificates, as applicable.
The effective yield to maturity to each holder of Certificates entitled to
payments of interest will be below that otherwise produced by the applicable
Pass-Through Rate and purchase price of such Certificate because, while interest
will accrue on each Mortgage Loan from the first day of each month, the
distribution of such interest will be made on the 25th day (or, if such day is
not a business day, the next succeeding business day) of the month following the
month of accrual.
A Class of Certificates may be entitled to payments of interest at a fixed
Pass-Through Rate, a variable Pass-Through Rate or adjustable Pass-Through Rate,
or any combination of such Pass-Through Rates, each as specified in the related
Prospectus Supplement. A variable Pass-Through Rate may be calculated based on
the weighted average of the Mortgage Rates (net of servicing fees and any
Retained Yield (each, a "Net Mortgage Rate")) of the related Mortgage Loans for
the month preceding the Distribution Date if so specified in the related
Prospectus Supplement. As will be described in the related Prospectus
Supplement, the aggregate payments of interest on a Class of Certificates, and
the yield to maturity thereon, will be affected by the rate of payment of
principal on the Certificates (or the rate of reduction in the notional balance
of Certificates entitled only to payments of interest) and, in the case of
Certificates evidencing interests in ARM Loans or Net 5 Loans, by changes in the
Net Mortgage Rates on the ARM Loans or Net 5 Loans, as applicable. See "MATURITY
AND PREPAYMENT CONSIDERATIONS" below. The yield on the Certificates will also be
affected by liquidations of Mortgage Loans following Mortgagor defaults and by
purchases of Mortgage Loans in the event of breaches of representations made in
respect of such Mortgage Loans by the Sellers, or conversions of ARM Loans to a
fixed interest rate. See "MORTGAGE LOAN PROGRAM -- Representations and
Warranties by Sellers" and "Descriptions of the Certificates -- Assignment of
Mortgage Loans" above.
In general, if a Class of Certificates is purchased at initial issuance at
a premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a Class of Certificates is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a rate
slower than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that originally anticipated. The effect of
principal prepayments, liquidations and purchases on yield will be particularly
significant in the case of a Series of Certificates having a Class entitled to
payments of interest only or to payments of interest that are disproportionately
high relative to the principal payments to which such Class is entitled. Such a
Class will likely be sold at a substantial premium to its principal balance and
any faster than anticipated rate of prepayments will adversely affect the yield
to holders thereof. In certain circumstances extremely rapid prepayments may
result in the failure of such holders to recoup their original investment. In
addition, the yield to maturity on certain other types of Classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with or at a multiple of an index or certain
other Classes in a Series including more than one Class of Certificates, may be
relatively more sensitive to the rate of prepayment on the related Mortgage
Loans than other Classes of Certificates. See "RISK FACTORS -- Yield and
Prepayment Uncertainty" above.
The timing of changes in the rate of principal payments on or repurchases
of the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments
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experienced over time is consistent with an investor's expectation. In general,
the earlier a prepayment of principal on the underlying Mortgage Loans or a
repurchase thereof, 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
and repurchases occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of a Series
of Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
When a full prepayment is made on a Mortgage Loan, the Mortgagor is charged
interest on the principal amount of the Mortgage Loan so prepaid for the number
of days in the month actually elapsed up to the date of the prepayment, at a
daily rate determined by dividing the Mortgage Rate by 365. Unless otherwise
specified in the related Prospectus Supplement, the effect of prepayments in
full will be to reduce the amount of interest paid in the following month to
holders of Certificates entitled to payments of interest because interest on the
principal amount of any Mortgage Loan so prepaid will be paid only to the date
of prepayment rather than for a full month. A partial prepayment of principal is
applied so as to reduce the outstanding principal balance of the related
Mortgage Loan as of the first day of the month in which such partial prepayment
is received. As a result, unless otherwise specified in the related Prospectus
Supplement, the effect of a partial prepayment on a Mortgage Loan will be to
reduce the amount of interest passed through to holders of Certificates in the
month following the receipt of such partial prepayment by an amount equal to one
month's interest at the applicable Pass-Through Rate or Net Mortgage Rate, as
the case may be, on the prepaid amount. If specified in the related Prospectus
Supplement, such shortfalls in collections of a full month's interest in
connection with prepayments (a "Prepayment Interest Shortfall") will be paid to
the Certificateholders by the Master Servicer to the extent described in such
Prospectus Supplement. See "DESCRIPTION OF THE CERTIFICATES -- Interest
Distributions" and "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" in the related
Prospectus Supplement. Neither full nor partial principal prepayments are passed
through until the month following receipt. See "MATURITY AND PREPAYMENT
CONSIDERATIONS."
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on mortgage loans are expected to occur with
greater frequency in their early years. The rate of default on Mortgage Loans
which are refinance mortgage loans, and on Mortgage Loans with high
Loan-to-Value Ratios, may be higher than for other types of Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic condition of the
region of the country in which the related Mortgaged Properties are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
For each Mortgage Pool, if all necessary advances are made and if there is
no unrecoverable loss on any Mortgage Loan, the net effect of each distribution
respecting interest will be to pass-through to each holder of a Class of
Certificates entitled to payments of interest an amount which is equal to one
month's interest at the applicable Pass-Through Rate on such Class's principal
balance or notional balance, as adjusted downward to reflect any decrease in
interest caused by any principal prepayments and the addition of any Deferred
Interest to the principal balance of any Mortgage Loan. See "DESCRIPTION OF THE
CERTIFICATE -- Principal and Interest on the Certificates."
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "THE MORTGAGE POOLS," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon
the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a Series of Certificates will contain information with respect to
the types and maturities of the Mortgage Loans in the related Mortgage Pool.
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans may be prepaid without penalty in full or in part at any time.
The prepayment experience of the Mortgage Loans in a Mortgage Pool will affect
the life and yield of the related Series of Certificates. For a discussion of
the prepayment risks associated with any Series
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of Certificates for which the related Mortgage Pool contains Convertible
Mortgage Loans, see "RISK FACTORS -- Risks Presented by Convertible Mortgage
Loans" and "DESCRIPTION OF THE MORTGAGE POOL" in the related Prospectus
Supplement.
With respect to Balloon Loans, payment of the Balloon Amount (which, based
on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will depend
on a number of factors prevailing at the time refinancing or sale is required,
including, without limitation, real estate values, the Mortgagor's financial
situation, prevailing mortgage loan interest rates, the Mortgagor's equity in
the related Mortgaged Property, tax laws and prevailing general economic
conditions. Neither the Seller or the Depositor, Bank of America NT&SA, Bank of
America, FSB nor any of their affiliates will be obligated to refinance or
repurchase any Mortgage Loan or to sell the Mortgaged Property.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates,
solicitations and the availability of mortgage funds, affect prepayment
experience. Unless otherwise specified in the related Prospectus Supplement, all
Mortgage Loans (other than ARM Loans) will contain due-on-sale provisions
permitting the mortgagee to accelerate the maturity of the Mortgage Loan upon
sale or certain transfers by the Mortgagor of the underlying Mortgaged Property.
The Master Servicer will generally enforce any due-on-sale clause to the extent
it has knowledge of the conveyance or proposed conveyance of the underlying
Mortgaged Property and it is entitled to do so under applicable law, provided,
however, that the Master Servicer will not take any action in relation to the
enforcement of any due-on-sale provision which would adversely affect or
jeopardize coverage under any applicable insurance policy. An ARM Loan is
assumable under certain conditions if the proposed transferee of the related
Mortgaged Property establishes its ability to repay the Mortgage Loan and, in
the reasonable judgment of the Master Servicer or any related Subservicer, the
security for the ARM Loan would not be impaired by the assumption. The extent to
which ARM Loans are assumed by purchasers of the Mortgaged Properties rather
than prepaid by the related Mortgagors in connection with the sales of the
Mortgaged Properties will affect the weighted average life of the related Series
of Certificates. See "DESCRIPTION OF THE CERTIFICATES -- Collection and Other
Servicing Procedures" and "Certain Legal Aspects of the Mortgage Loans and
Related Matters -- Enforceability of Certain Provisions" for a description of
certain provisions of the Pooling Agreement and certain legal developments that
may affect the prepayment experience on the Mortgage Loans.
At the request of the Mortgagor, the Master Servicer may allow the
refinancing of a Mortgage Loan in any Trust Fund by accepting prepayments
thereon and permitting a new loan secured by a mortgage on the same property. In
the event of such a refinancing, the new loan would not be included in the
related Trust Fund and, therefore, such refinancing would have the same effect
as a prepayment in full of the related Mortgage Loan. The Master Servicer may,
from time to time, implement programs designed to encourage refinancing. Such
programs may include, without limitation, modifications of existing loans,
general or targeted solicitations, the offering of pre-approved applications,
reduced origination fees or closing costs, or other financial incentives. In
addition, the Master Servicer may encourage the refinancing of Mortgage Loans,
including defaulted Mortgage Loans, that would permit creditworthy borrowers to
assume the outstanding indebtedness of such Mortgage Loans.
All statistics known to the Depositor that have been compiled with respect
to prepayment experience on mortgage loans indicate that while some mortgage
loans may remain outstanding until their stated maturities, a substantial number
will be paid prior to their respective stated maturities.
Although the Mortgage Rates on ARM Loans and Net 5 Loans will be subject to
periodic adjustments, such adjustments generally will, as specified in the
related Prospectus Supplement, (i) not increase or decrease such Mortgage Rates
by more than a stated percentage amount on each adjustment date, (ii) not
increase such Mortgage Rates over a fixed percentage amount during the life of
any ARM Loan and (iii) be based on an index (which may not rise and fall
consistently with mortgage interest rates) plus the related Note Margin (which
may be different from margins being used at the time for newly originated
adjustable rate
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mortgage loans). As a result, the Mortgage Rates on the ARM Loans or Net 5
Loans, as applicable, in a Mortgage Pool at any time may not equal the
prevailing rates for similar, newly originated mortgage loans. In certain rate
environments, the prevailing rates on fixed-rate mortgage loans may be
sufficiently low in relation to the then-current Mortgage Rates on ARM Loans or
Net 5 Loans that the rate of prepayment may increase as a result of
refinancings. There can be no certainty as to the rate of prepayments on the
Mortgage Loans during any period or over the life of any Series of Certificates.
Under certain circumstances, the Master Servicer or the Depositor or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the Mortgage Loans in a
Trust Fund. See "THE POOLING AGREEMENT -- Termination; Retirement of
Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by state law (which laws may differ substantially from state to
state), the summaries do not purport to be complete, to reflect the laws of any
particular state or to encompass the laws of all states in which the Mortgaged
Properties may be situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans will be secured by either deeds of trust or mortgages,
depending upon the prevailing practice in the state in which the related
Mortgaged Property is located. In some states, a mortgage or deed of trust
creates a lien upon the real property encumbered by the mortgage. In other
states, the mortgage or deed of trust conveys legal title to the property to the
mortgagee subject to a condition subsequent (i.e., the payment of the
indebtedness secured thereby). It is not prior to the lien for real estate taxes
and assessments and other charges imposed under governmental police powers.
Priority with respect to such instruments depends on their terms and in some
cases on the terms of separate subordination or inter-creditor agreements, and
generally on the order of recordation of the mortgage in the appropriate
recording office. There are two parties to a mortgage, the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title to
the property is held by a land trustee under a land trust agreement of which the
borrower is the beneficiary; at origination of a mortgage loan, the borrower
executes a separate undertaking to make payments on the mortgage note. Although
a deed of trust is similar to a mortgage, a deed of trust has three parties: the
trustor, who is the borrower/homeowner; the beneficiary, who is the lender; and
a third-party grantee called the trustee. Under a deed of trust, the borrower
grants the property, irrevocably until the debt is paid, in trust, generally
with a power of sale, to the trustee to secure payment of the obligation. The
trustee's authority under a deed of trust and the mortgagee's authority under a
mortgage are governed by the law of the state in which the real property is
located, the express provisions of the deed of trust or mortgage and, in certain
deed of trust transactions, the directions of the beneficiary.
FORECLOSURE
Although a deed of trust may also be foreclosed by judicial action,
foreclosure of a deed of trust is generally accomplished by a nonjudicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In addition to any notice requirements
contained in a deed of trust, in some states, the trustee must record a notice
of default and send a copy to the borrower/trustor and to any person who has
recorded a request for a copy of notice of default and notice of sale. In
addition, in some states, the trustee must provide notice to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within a specified
period, a notice of sale must be posted in a public place and, in most states,
published for a specific period of time in one or more newspapers. In addition,
some states'
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laws require that a copy of the notice of sale be posted on the property and
sent to all parties having an interest of record in the real property.
Foreclosure of a mortgage generally is accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may result from difficulties in locating and serving
necessary parties, including borrowers located outside the jurisdiction in which
the mortgaged property is located. If the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In general,
in such states, the borrower, or any other person having a junior encumbrance on
the real estate, may, during a reinstatement period, cure the default by paying
the entire amount in arrears plus the costs and expenses incurred in enforcing
the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee generally is a
public sale. However, because of the difficulty a potential buyer at the sale
would have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume the burdens of ownership, including obtaining hazard insurance and making
such repairs at its own expense as are necessary to render the property suitable
for sale. Generally, the lender will obtain the services of a real estate broker
and pay the broker's commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property and, in some
states, the lender may be entitled to a deficiency judgment. Any loss may be
reduced by the receipt of any mortgage insurance proceeds or other forms of
credit enhancement for a Series of Certificates. See "DESCRIPTION OF CREDIT
ENHANCEMENTS."
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 or other parties are given
a statutory period (generally ranging from six months to two years) in which to
redeem the property from the foreclosure sale. In some states, redemption may
occur only upon payment of the entire principal balance of the loan, accrued
interest and expenses of foreclosure. In other states, redemption may be
authorized if the former borrower pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The rights of redemption would defeat
the title of any purchaser subsequent to foreclosure or sale under a deed of
trust. 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.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states (including California), statutes limit the right of the beneficiary or
mortgagee to obtain a deficiency judgment against the borrower following
foreclosure. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender. In
the case of a Mortgage Loan secured by a property owned by a trust where the
Mortgage Note is executed on behalf of the trust, a deficiency judgment against
the trust following foreclosure or sale under a deed of trust, even if
obtainable under applicable law, may be of little value to the mortgagee or
beneficiary if there are no trust assets against which such deficiency judgment
may be executed. Some state statutes require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in
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an attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, in those states permitting
such election, is that lenders will usually proceed against the security first
rather than bringing a personal action against the borrower.
Finally, in certain other states, statutory provisions limit any deficiency
judgment against the borrower following a foreclosure to the excess of the
outstanding debt over the fair value of the property at the time of the public
sale. The purpose of these statutes is generally to prevent a beneficiary or
mortgagee from obtaining a large deficiency judgment against the former borrower
as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon its collateral and/or
enforce a deficiency judgment. For example, under the federal bankruptcy law,
all actions against the debtor, the debtor's property and any co-debtor are
automatically stayed upon the filing of a bankruptcy petition. Moreover, a court
having federal bankruptcy jurisdiction may permit a debtor through its Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule, even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property which is not the principal
residence of the debtor may be modified. These courts have allowed modifications
that include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule, forgiving all or a portion of the
debt and reducing the lender's security interest to the value of the residence,
thus leaving the lender a general unsecured creditor for the difference between
the value of the residence and the outstanding balance of the loan. Generally,
however, the terms of a mortgage loan secured only by a mortgage on real
property that is the debtor's principal residence may not be modified pursuant
to a plan confirmed pursuant to Chapter 11 or Chapter 13 except with respect to
mortgage payment arrearages, which may be cured within a reasonable time period.
Certain tax liens arising under the Code may, in certain circumstances,
have priority over the lien of a mortgage or deed of trust. This may have the
effect of delaying or interfering with the enforcement of rights with respect to
a defaulted Mortgage Loan. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These laws impose specific statutory
liabilities upon lenders who originate mortgage loans and who fail to comply
with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
ENVIRONMENTAL LEGISLATION
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Most environmental statutes create obligations for any
party that can be classified as the "owner" or "operator" of a "facility"
(referring to both operating facilities and to real property). Under the laws of
some states and under the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, a lender may be liable, as an "owner" or
"operator," for costs arising out of releases or threatened releases of
hazardous substances that require remedy at a mortgaged property, if agents or
employees of the lender have become sufficiently involved in the operations of
the borrower or, subsequent to a foreclosure, in the management of
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the property. Such liability may arise regardless of whether the environmental
damage or threat was caused by a prior owner.
Under federal and certain state laws, contamination of a property may give
rise to a lien on the property to assure the payment of clean-up costs. Under
federal law and in several states, such a lien has priority over the lien of an
existing mortgage against such property. If a lender is or becomes directly
liable for environmental remediation as an "owner" following a foreclosure, it
may be precluded from bringing an action for contribution against the owner or
operator who created the environmental hazard. Such clean-up costs may be
substantial. It is possible that such costs could become a liability of the
related Trust Fund and occasion a loss to Certificateholders in certain
circumstances described above if such remedial costs were incurred.
At the time the Mortgage Loans were originated, no environmental assessment
or a very limited environment assessment of the Mortgaged Properties will have
been conducted.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, the Mortgage Loans
generally contain due-on sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses was limited or denied. However, the Garn-St Germain Depository
Institutions Act of 1982 (the "Garn-St Germain Act") preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the mortgaged
property may have occurred. These include intra-family transfers, certain
transfers by operation of law, leases of fewer than three years and the creation
of a junior encumbrance. Regulations promulgated under the Garn-St Germain Act
also prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have required that lenders reinstate
loans or recast payment schedules in order to accommodate borrowers who are
suffering from temporary financial disability. In other cases, courts have
limited the right of the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
affecting the property. Finally, some courts have been faced with the issue of
whether or not federal or state constitutional provisions reflecting due process
concerns for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
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APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 ("Title V"), provides that state usury limitations shall not apply
to certain types of residential first mortgage loans originated by certain
lenders after March 31, 1980. A similar federal statute was in effect with
respect to mortgage loans made during the first three months of 1980. The Office
of Thrift Supervision is authorized to issue rules and regulations and to
publish interpretations governing implementation of Title V. The statute
authorized any state to reimpose interest rate limits by adopting, before April
1, 1983, a law or constitutional provision which expressly rejects application
of the federal law. In addition, even where Title V is not so rejected, any
state is authorized by the law to adopt a provision limiting discount points or
other charges on mortgage loans covered by Title V. Certain states have taken
action to reimpose interest rate limits or to limit discount points or other
charges.
As indicated above under "MORTGAGE LOAN PROGRAM -- Representations and
Warranties by Sellers," each Seller of a Mortgage Loan will have represented
that each Mortgage Loan sold by it was originated in compliance with then
applicable state laws, including usury laws, in all material respects. However,
the Mortgage Rates on the Mortgage Loans will be subject to applicable usury
laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ("Title VIII"). Title VIII provides that, notwithstanding
any state law to the contrary, (i) state-chartered banks may originate
alternative mortgage instruments in accordance with regulations promulgated by
the Comptroller of the Currency with respect to origination of alternative
mortgage instruments by national banks, (ii) state-chartered credit unions may
originate alternative mortgage instruments in accordance with regulations
promulgated by the National Credit Union Administration with respect to
origination of alternative mortgage instruments by federal credit unions and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mutual savings banks and mortgage banking companies, may originate alternative
mortgage instruments in accordance with the regulations promulgated by the
Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision,
with respect to origination of alternative mortgage instruments by federal
savings and loan associations. Title VIII provides that any state may reject
applicability of the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
such provisions. Certain states have taken such action.
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
borrower 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 borrowers 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 mortgage loans that may be affected by the Relief Act. With
respect to Mortgage Loans included in a Trust Fund, application of the Relief
Act would adversely affect, for an indeterminate period of time, the ability of
the Master Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which would
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not be recoverable from the related Mortgage Loans, would result in a reduction
of the amounts distributable to the holders of the related Certificates, and
would not be covered by Advances or any form of credit enhancement provided in
connection with the related Series of Certificates. In addition, the Relief Act
imposes limitations that would impair the ability of the Master Servicer to
foreclose on an affected Mortgage Loan during the Mortgagor's period of active
duty status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that the Relief Act or similar legislation
or regulations applies to any Mortgage Loan which goes into default, there may
be delays in payment and losses on the related Certificates in connection
therewith. Any other interest shortfalls, deferrals or forgiveness of payments
on the Mortgage Loans resulting from similar legislation or regulations may
result in delays in payments or losses to Certificateholders of the related
Series.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Code (generally, property other than (i) property
held for sale to customers or (ii) real, tangible personal, property used in a
trade or business) and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. Further, the authorities on which this discussion, and
the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of tax
returns (including those filed by any REMIC or other issuer) should be aware
that under applicable Treasury regulations a provider of advice on specific
issues of law is not considered an income tax return preparer unless the advice
(i) is given with respect to events that have occurred at the time the advice is
rendered and is not given with respect to the consequences of contemplated
actions, and (ii) is directly relevant to the determination of an entry on a tax
return. Accordingly, taxpayers should consult their own tax advisors and tax
return preparers regarding the preparation of any item on a tax return, even
where the anticipated tax treatment has been discussed herein. In addition to
the federal income tax consequences described herein, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Certificates. See "STATE AND OTHER TAX
CONSEQUENCES." Certificateholders are advised to consult their own tax advisors
concerning the federal, state, local or other tax consequences to them of the
purchase, ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") which the Master Servicer will covenant not to elect
to have treated as a real estate mortgage investment conduit ("REMIC"), and (ii)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, which the Master Servicer will covenant to elect to have
treated as a REMIC under Sections 860A through 860G (the "REMIC Provisions") of
the Code. The Prospectus Supplement for each Series of Certificates will
indicate whether a REMIC election (or elections) will be made for the related
Trust Fund and, if such an election is to be made, will identify all "regular
interests" and "residual interests" in the REMIC. For purposes of this tax
discussion, references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations, which are effective with respect
to debt instruments issued on or after April 4, 1994, do not adequately address
certain issues relevant to, and in some instances provide that they are not
applicable to, securities such as the Certificates.
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GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Certificates, Orrick,
Herrington & Sutcliffe, counsel to the Depositor ("Special Tax Counsel"), is of
the opinion that, assuming compliance with all provisions of the related Pooling
Agreement, the related Grantor Trust Fund will be Classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Fund. The following general
discussion of the anticipated federal income tax consequences of the purchase,
ownership and disposition of the Grantor Trust Certificates together with the
discussion, if any, under the heading "FEDERAL INCOME TAX CONSEQUENCES" in the
Prospectus Supplement represents the opinion of Special Tax Counsel, subject to
any qualifications set forth herein and therein. Special Tax Counsel have
prepared or reviewed the statements in this Prospectus under the heading
"FEDERAL INCOME TAX CONSEQUENCES," and are of the opinion that such statements
are correct in all material respects. Such statements are intended as an
explanatory discussion of the possible effects of the classification of the
Trust Fund as a grantor trust for federal income tax purposes on investors
generally and of related tax matters affecting investors generally, but do not
purport to furnish information in the level of detail or with attention to an
investor's specific tax circumstances that would be provided by an investor's
own tax advisor. Accordingly, each investor is advised to consult its own tax
advisors with regard to the tax consequences to it of investing in the Grantor
Trust Certificates.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Retained Yield) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to such
Grantor Trust Fund will be referred to as a "Grantor Trust Strip Certificate." A
Grantor Trust Strip Certificate may also evidence a nominal ownership interest
in the principal of the Mortgage Loans constituting the related Grantor Trust
Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
Grantor Trust Fractional Interest Certificates
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, counsel to the
Depositor will deliver an opinion that, in general, Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii)
"loans . . . secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; (iii) "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code; and (iv) "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, counsel to the
Depositor will deliver an opinion that interest on Grantor Trust Fractional
Interest Certificates will be considered "interest on obligations secured by
mortgages on real property or on interests in real property" within the meaning
of Section 856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. No directly applicable precedents exist
with respect to the federal income tax treatment or the characterization of
investments in Buydown Mortgage Loans. Accordingly, holders of Grantor Trust
Certificates should consult their own tax advisors with respect to the
characterization of
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investments in Grantor Trust Certificates representing an interest in a Grantor
Trust Fund that includes Buydown Mortgage Loans.
Grantor Trust Strip Certificates
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code,
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of the
Code, and the interest on which is "interest on obligations secured by mortgages
on real property" within the meaning of Section 856(c)(3)(B) of the Code, it is
unclear whether the Grantor Trust Strip Certificates, and the income therefrom,
will be so characterized. However, the policies underlying such sections
(namely, to encourage or require investments in mortgage loans by thrift
institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which . . . [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest Certificates
Holders of a particular Series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple Classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the Classes of Grantor Trust Certificates
using a method that recognizes that each such Class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the Internal Revenue Service (the "IRS") and Certificateholders on a
method that allocates such expenses among Classes of Grantor Trust Certificates
with respect to each period based on the distributions made to each such Class
during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any Series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a Class of Grantor
Trust Strip Certificates is issued as part of the same Series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the
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Mortgage Loans. Further, the IRS has ruled that an unreasonably high servicing
fee retained by a seller or servicer will be treated as a retained ownership
interest in mortgages that constitutes a stripped coupon. For purposes of
determining what constitutes reasonable servicing fees for various types of
mortgages the IRS has established certain "safe harbors." The servicing fees
paid with respect to the Mortgage Loans for certain Series of Grantor Trust
Certificates may be higher than the "safe harbors" and, accordingly, may not
constitute reasonable servicing compensation. The related Prospectus Supplement
will include information regarding servicing fees paid to the Master Servicer,
any subservicer or their respective affiliates necessary to determine whether
the preceding "safe harbor" rules apply.
If Stripped Bond Rules Apply
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"-- Taxation of Owners of Grantor Trust Fractional Interest
Certificates -- Market Discount." Under the stripped bond rules, the holder of a
Grantor Trust Fractional Interest Certificate (whether a cash or accrual method
taxpayer) will be required to report interest income from its Grantor Trust
Fractional Interest Certificate for each month in an amount equal to the income
that accrues on such Certificate in that month calculated under a constant yield
method, in accordance with the rules of the Code relating to original issue
discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, as well as such
Certificate's share of reasonable servicing fees and other expenses, other than
payments of "qualified stated interest," if any. See "-- Taxation of Owners of
Grantor Trust Fractional Interest Certificates -- If Stripped Bond Rules Do Not
Apply" for a definition of "qualified stated interest." In general, the amount
of such income that accrues in any month would equal the product of such
holder's adjusted basis in such Grantor Trust Fractional Interest Certificate at
the beginning of such month (see "Sales of Grantor Trust Certificates") and the
yield of such Grantor Trust Fractional Interest Certificate to such holder. Such
yield would be computed at the rate (assuming compounding based on the regular
interval between payment dates) that, if used to discount the holder's share of
future payments on the Mortgage Loans, would cause the present value of those
future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any ownership interest in the Mortgage
Loans retained by the Depositor, the Master Servicer, any subservicer or their
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a prepayment assumption may be required or permitted in the absence of
such regulations. It is also uncertain, if a prepayment assumption is used,
whether the assumed prepayment rate would be determined based on conditions at
the time of the first sale of the Grantor Trust Fractional Interest Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Fractional Interest Certificate by that holder. Certificateholders
are advised to consult their own tax advisors concerning reporting original
issue discount in general and, in particular, whether a prepayment assumption
should be used in reporting original issue discount with respect to Grantor
Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption would not
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ordinarily have any significant effect on the yield used in calculating accruals
of interest income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than or
greater than such principal amount, respectively), the use of a prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. See
"-- REMICs -- Taxation of Owners of REMIC Regular Certificates -- Original Issue
Discount." It is unclear what adjustments would be required to reflect
differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is
currently intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each Class of Certificates. However,
neither the Depositor nor the Master Servicer will make any representation that
the Mortgage Loans will in fact prepay at a rate conforming to such Prepayment
Assumption or any other rate and Certificateholders should bear in mind that the
use of a representative initial offering price will mean that such information
returns or reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial Certificateholders of each Series
who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "-- Taxation of Owners of
Grantor Trust Fractional Interest Certificates -- If Stripped Bond Rules Do Not
Apply" and "-- Market Discount."
If Stripped Bond Rules Do Not Apply
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Mortgage Loans in accordance with such Certificateholder's normal method of
accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
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stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, or at a
"qualified floating rate," an "objective rate," a combination of a single fixed
rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" that generally
does not operate in a manner that accelerates or defers interest payments on
such Mortgage Loan. In general, the issue price of a Mortgage Loan will be the
amount received by the borrower from the lender under the terms of the Mortgage
Loan, less any "points" paid by the borrower, and the stated redemption price of
a Mortgage Loan will equal its principal amount, unless the Mortgage Loan
provides for an initial below-market rate of interest or the acceleration or the
deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined, as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of the payment and the
denominator of which is the stated redemption price of the Mortgage Loan. Under
the OID Regulations, original issue discount of only a de minimis amount (other
than de minimis original issue discount attributable to a so-called "teaser"
rate or initial interest holiday) will be included in income as each payment of
stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Mortgage Loan. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. See "-- Taxation of Owners of
Grantor Trust Fractional Interest Certificates -- Market Discount" below.
If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a Mortgage Loan will be required to be
accrued and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be used in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each Series to determine whether and in what manner
the original issue discount rules will apply to Mortgage Loans in such Series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will also
be required to include in gross income such Certificate's daily portions of any
original issue discount with respect to such Mortgage Loans. However, each such
daily portion will be reduced, if the cost of such Grantor Trust Fractional
Interest Certificate to such purchaser is in excess of such Certificate's
allocable portion of the aggregate "adjusted issue prices" of the Mortgage Loans
held in the related Trust Fund, approximately in proportion to the ratio such
excess bears to such Certificate's allocable portion of the aggregate original
issue discount remaining to be accrued on such Mortgage Loans. The adjusted
issue price of a Mortgage Loan on any given day equals the sum of (i) the
adjusted issue price (or, in the case of the first accrual period, the issue
price) of such Mortgage Loan at the beginning of the accrual period that
includes such day and (ii) the daily portions of original issue discount for all
days during such accrual period prior to such day. The adjusted issue price of a
Mortgage Loan at the beginning of any accrual period will equal the issue price
of such
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Mortgage Loan, increased by the aggregate amount of original issue discount with
respect to such Mortgage Loan that accrued in prior accrual periods, and reduced
by the amount of any payments made on such Mortgage Loan in prior accrual
periods of amounts included in its stated redemption price.
The Trustee will provide to any holder of a Grantor Trust Fractional
Interest Certificate such information as such holder may reasonably request from
time to time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Certificates. See "Grantor Trust Reporting" below.
Market Discount
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above), or in the case of a Mortgage Loan issued with original issue discount,
at a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the rules described in the next
paragraph) through such month that has not previously been included in income,
but limited, in the case of the portion of such discount that is allocable to
any Mortgage Loan, to the payment of stated redemption price on such Mortgage
Loan that is received by (or, in the case of accrual basis Certificateholders,
due to) the Trust Fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues (under a constant yield method
based on the yield of the Certificate to such holder) rather than including it
on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder
during or after the first taxable year to which such election applies. In
addition, the OID Regulations would permit a Certificateholder to elect to
accrue all interest, discount (including de minimis market or original issue
discount) and premium in income as interest, based on a constant yield method.
If such an election were made with respect to a Mortgage Loan with market
discount, the Certificateholder would be deemed to have made an election to
include market discount in income currently with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election and thereafter, and possibly previously
acquired instruments. Similarly, a Certificateholder that made this election for
a Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See
"-- REMICs -- Taxation of Owners of REMIC Regular Certificates -- Premium"
below. Each of these elections to accrue interest, discount and premium with
respect to a Certificate on a constant yield method or as interest is
irrevocable.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Conference Committee Report (the
"Committee Report") accompanying the Tax Reform Act of 1986 will apply. Under
those rules, in each accrual period market discount on the Mortgage Loans should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a Mortgage Loan issued without original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the stated interest paid in the accrual period bears to the total
stated interest remaining to be paid on the Mortgage Loan as of the beginning of
the accrual period, or (iii) in the case of a Mortgage Loan issued with original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual period
bears to the total original issue discount remaining at the beginning of the
accrual period. The prepayment assumption, if any, used in calculating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. The effect of using a prepayment assumption could be to
accelerate the reporting of such discount income. Because the regulations
referred to in this paragraph have not been issued, it is not possible to
predict what effect such regulations might have on the tax treatment of a
Mortgage Loan purchased at a discount in the secondary market.
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Since the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is not greater than or equal to 0.25% of the stated
redemption price of the Mortgage Loans multiplied by the number of complete
years to maturity remaining after the date of its purchase. In interpreting a
similar rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption used,
if any. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. If market discount is treated as de minimis
under the foregoing rule, it appears that actual discount would be treated in a
manner similar to original issue discount of a de minimis amount. See
"-- Taxation of Owners of Grantor Trust Fractional Interest Certificates -- If
Stripped Bond Rules Do Not Apply."
Further, under the rules described in "-- REMICs -- Taxation of Owners of
REMIC Regular Certificates -- Market Discount," below, any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
Premium
If a Certificateholder is treated as acquiring the underlying Mortgage
Loans at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect under Section 171 of the Code
to amortize such premium using a constant yield method. Amortizable premium is
treated as an offset to interest income on the related Mortgage Loans rather
than as a separate interest deduction. Premium allocable to Mortgage Loans for
which an amortization election is not made should be allocated among the
payments on the Mortgage Loan representing stated redemption price and be
allowed as an ordinary deduction as such -- payments are made (or, for a
Certificateholder using the accrual method of accounting, when such payments are
due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "-- REMICs -- Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear what adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "-- Taxation of
Owners of Grantor Trust Fractional Interest Certificates -- If Stripped Bond
Rules Apply," no regulations or published rulings under Section 1286 of the Code
have been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject
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to the discussion under "Possible Application of Proposed Contingent Payment
Rules" and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Mortgage Loans. See "-- Taxation of Owners of Grantor Trust Fractional
Interest Certificates -- If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each Class of
Certificates. However, neither the Depositor nor the Master Servicer will make
any representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each Series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Mortgage Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate is
treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to the
portion of the adjusted issue price of the Grantor Trust Strip Certificate that
is allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments. As in the case of the OID Regulations generally, the
regulations addressing
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contingent payment debt instruments do not specifically address securities, such
as the Grantor Trust Strip Certificates, that are subject to the stripped bond
rules of Section 1286 of the Code.
If the contingent payment rules under the OID Regulations were to apply,
the holder of a Grantor Trust Strip Certificate would be required to apply a
"noncontingent bond method." Under that method, the issuer of a Grantor Trust
Strip Certificate would determine a projected payment schedule with respect to
such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
Certificateholders should consult their tax advisors concerning the
possible application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates
Except as described below, any gain or loss recognized on the sale of a
Grantor Trust Certificate generally will be capital gain or loss, and will be
equal to the difference between the amount realized on the sale of a Grantor
Trust Certificate and its adjusted basis. The adjusted basis of a Grantor Trust
Certificate generally will equal its cost, increased by any income (including
original issue discount and market discount income) recognized by the seller and
reduced (but not below zero) by any previously reported losses, amortized
premium and distributions with respect to such Grantor Trust Certificate. The
Code currently provides for a top marginal tax rate applicable to ordinary
income of individuals of 39.6% while maintaining a maximum marginal rate for the
long-term capital gains of individuals of 28%. No such rate differential exists
for corporations. In addition, the distinction between a capital gain or loss
and ordinary income or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in
Certificates or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value of
the taxpayer's net investment in such transaction. The amount of gain realized
in a conversion transaction that is recharacterized as ordinary income generally
will not exceed the amount of interest that would have accrued on the taxpayer's
net investment at 120% of the appropriate "applicable Federal rate" (which rate
is computed and published monthly by the IRS) at the time the taxpayer enters
into the conversion transaction, subject to appropriate reduction for prior
inclusion of interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary income
rates rather than capital gains rates in order to include such net capital gain
in total net investment income for that taxable year, for purposes of the
limitation on the deduction of interest on indebtedness incurred to purchase or
carry property held for investment to a taxpayer's net investment income.
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Grantor Trust Reporting
The Trustee will furnish to each holder of a Grantor Trust Certificate with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the Master
Servicer, the Trustee will furnish to each Certificateholder during such year
such customary factual information as the Trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders who bought their Certificates at the
representative initial offering price used in preparing such reports.
Backup Withholding
In general, the rules described in "-- REMICs -- Backup Withholding with
Respect to REMIC Certificates" will also apply to Grantor Trust Certificates.
Foreign Investors
In general, the discussion with respect to REMIC Regular Certificates in
"-- REMICs -- Foreign Investors in REMIC Certificates -- REMIC Regular
Certificates" applies to Grantor Trust Certificates.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
REMICS
Classification of REMICs
With respect to each Series of REMIC Certificates, Orrick, Herrington &
Sutcliffe, counsel to the Depositor ("Special Tax Counsel"), is of the opinion
that, assuming compliance with all provisions of the related Pooling Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions. The following general discussion of the
anticipated federal income tax consequences of the purchase, ownership and
disposition of the REMIC Certificates together with the discussion, if any,
under the heading "FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus Supplement
represents the opinion of Special Tax Counsel, subject to any qualifications set
forth herein and therein. Special Tax Counsel have prepared or reviewed the
statements in this prospectus under the heading "FEDERAL INCOME TAX
CONSEQUENCES," and are of the opinion that such statements are correct in all
material respects. Such statements are intended as an explanatory discussion of
the possible effects of the classification of the Trust Fund as a REMIC for
federal income tax purposes on investors generally and of related tax matters
affecting investors generally, but do not purport to furnish information in the
level of detail or with attention to an investor's specific tax circumstances
that would be provided by an investor's own tax advisor. Accordingly, each
investor is advised to consult its own tax advisors with regard to the tax
consequences to it of investing in the REMIC Certificates.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a separate
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status
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or given the tax treatment described below. Although the Code authorizes the
Treasury Department to issue regulations providing relief in the event of an
inadvertent termination of REMIC status, no such regulations have been issued.
Any such relief, moreover, may be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the Trust Fund's income for
the period in which the requirements for such status are not satisfied. The
Pooling Agreement with respect to each REMIC will include provisions designed to
maintain the Trust Fund's status as a REMIC under the REMIC Provisions. It is
not anticipated that the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the Class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3)(C) of the Code if
transferred to another REMIC on its startup day in exchange for regular or
residual interests therein. The determination as to the percentage of the
REMIC's assets that constitute assets described in the foregoing sections of the
Code will be made with respect to each calendar quarter based on the average
adjusted basis of each category of the assets held by the REMIC during such
calendar quarter. The Master Servicer will report those determinations to
Certificateholders in the manner and at the times required by applicable
Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale and amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all of the foregoing sections. In
addition, in some instances Mortgage Loans may not be treated entirely as assets
described in the foregoing sections. If so, the related Prospectus Supplement
will describe the Mortgage Loans that may not be so treated. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Sections
593(d) and 856(c)(5)(A) of the Code.
Tiered REMIC Structures
For certain Series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Certificates, Orrick, Herrington & Sutcliffe, counsel to the
Depositor, will deliver their opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling Agreement, the Tiered
REMICs will each qualify as a REMIC and the REMIC Certificates issued by the
Tiered REMICs, respectively, will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates in the related REMIC within
the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption used by the Master Servicer in reporting
original issue discount for each Series of REMIC Regular Certificates (the
"Prepayment Assumption") will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Depositor
nor the Master Servicer will make any representation that the Mortgage Loans
will in fact prepay at a rate conforming to the Prepayment Assumption or at any
other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular Class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that Class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular Class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such Class will be treated as the fair
market value of such Class on the Closing Date. Under the OID Regulations, the
stated redemption price of a REMIC Regular Certificate is equal to the total of
all payments to be made on such Certificate other than "qualified stated
interest." "Qualified stated interest" includes interest that is unconditionally
payable at least annually at a single fixed rate, or in the case of a variable
rate debt instrument, at a "qualified floating rate," an "objective rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" that generally does not operate in a manner that accelerates or defers
interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied by the Master Servicer with respect to those
Certificates in preparing information returns to the Certificateholders and the
IRS.
Certain Classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is
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longer than the subsequent monthly intervals between interest payments. Assuming
the "accrual period" (as defined below) for original issue discount is each
monthly period that ends on a Distribution Date, in some cases, as a consequence
of this "long first accrual period," some or all interest payments may be
required to be included in the stated redemption price of the REMIC Regular
Certificate and accounted for as original issue discount. Because interest on
REMIC Regular Certificates must in any event be accounted for under an accrual
method, applying this analysis would result in only a slight difference in the
timing of the inclusion in income of the yield on the REMIC Regular
Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average maturity. For this
purpose, the weighted average maturity of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates -- Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period.
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The present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC Regular
Certificate will be received in future periods based on the Mortgage Loans being
prepaid at a rate equal to the Prepayment Assumption and (ii) using a discount
rate equal to the original yield to maturity of the Certificate. For these
purposes, the original yield to maturity of the Certificate will be calculated
based on its issue price and assuming that distributions on the Certificate will
be made in all accrual periods based on the Mortgage Loans being prepaid at a
rate equal to the Prepayment Assumption. The adjusted issue price of a REMIC
Regular Certificate at the beginning of any accrual period will equal the issue
price of such Certificate, increased by the aggregate amount of original issue
discount that accrued with respect to such Certificate in prior accrual periods,
and reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in its stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a price (excluding any portion of such price attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price," in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize income upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include market
discount in income currently with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates -- Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue
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discount on obligations payable in installments, the OID Regulations refer to
the weighted average maturity of obligations, and it is likely that the same
rule will be applied with respect to market discount, presumably taking into
account the Prepayment Assumption. If market discount is treated as de minimis
under this rule, it appears that the actual discount would be treated in a
manner similar to original issue discount of a de minimis amount. See "Taxation
of Owners of REMIC Regular Certificates -- Original Issue Discount." Such
treatment would result in discount being included in income at a slower rate
than discount would be required to be included in income using the method
described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in evaluating the
accrual of original issue discount is to be used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related REMIC Regular Certificate, rather than as a separate interest
deduction. The OID Regulations also permit Certificateholders to elect to
include all interest, discount and premium in income based on a constant yield
method, further treating the Certificateholder as having made the election to
amortize premium generally. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount." The Committee Report states that the same
rules that apply to accrual of market discount (which rules will require use of
a Prepayment
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Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it can
be established that any such reduction ultimately will not be recoverable. As a
result, the amount of taxable income reported in any period by the holder of a
REMIC Regular Certificate could exceed the amount of economic income actually
realized by the holder in such period. Although the holder of a REMIC Regular
Certificate eventually will recognize a loss or reduction in income attributable
to previously accrued and included income that, as the result of a realized
loss, ultimately will not be realized, the law is unclear with respect to the
timing and character of such loss or reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
General
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts will then be allocated among the REMIC
Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this allocation will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC" and
will be taxable to the REMIC Residual Certificateholders without regard to the
timing or amount of cash distributions by the REMIC until the REMIC terminates.
Ordinary income derived from REMIC Residual Certificates will be "portfolio
income" for purposes of the taxation of taxpayers subject to limitations under
Section 469 of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily portion of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. These daily portions generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise, to reduce (or increase) the income or loss of a holder
of a REMIC Residual Certificateholder that purchased such REMIC Residual
Certificate from a prior holder of such Certificate at a price greater than (or
less than) the adjusted basis (as defined below) such REMIC
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Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by the amortization of any premium received on issuance) on the
REMIC Regular Certificates (and any other Class of REMIC Certificates
constituting "regular interests" in the REMIC not offered hereby), amortization
of any premium on the Mortgage Loans, bad debt deductions with respect to the
Mortgage Loans and, except as described below, for servicing, administrative and
other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to their fair market value
immediately after their transfer to the REMIC. For this purpose, the Master
Servicer intends to treat the fair market value of the Mortgage Loans as being
equal to the aggregate issue prices of the REMIC Regular Certificates and REMIC
Residual Certificates. Such aggregate basis will be allocated among the Mortgage
Loans collectively and the other assets of the REMIC in proportion to their
respective fair market values. The issue price of any REMIC Certificates offered
hereby will be determined in the manner described above under "-- Taxation of
Owners of REMIC Regular Certificates -- Original Issue Discount." Accordingly,
if one or more Classes of REMIC Certificates are retained initially rather than
sold, the Master Servicer may be required to estimate the fair market value of
such interests in order to determine the basis of the REMIC in the Mortgage
Loans and other property held by the REMIC.
Subject to the possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method of accruing original issue discount income for REMIC Regular
Certificateholders (that is, under the constant yield method taking into account
the Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such discount in income currently, as it accrues, on a
constant interest basis. See "-- Taxation of Owners of REMIC Regular
Certificates" above, which describes a method of accruing discount income that
is analogous to that required to be used by a REMIC as to Mortgage Loans with
market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount will be includible in the income of the REMIC as it
accrues, in advance of receipt of the cash attributable to such income, under a
method similar to the method described
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above for accruing original issue discount on the REMIC Regular Certificates. It
is anticipated that each REMIC will elect under Section 171 of the Code to
amortize any premium on the Mortgage Loans. Premium on any Mortgage Loan to
which such election applies may be amortized under a constant yield method,
presumably taking into account a Prepayment Assumption.
The REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other Class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other Class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "-- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount," except that the de minimis rule and
the adjustments for subsequent holders of REMIC Regular Certificates (including
any other Class of Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a Class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such Class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such Class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "-- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount."
As a general rule, the taxable income of the REMIC is required to be
determined in the same manner as if the REMIC were an individual having the
calendar year as its taxable year and using the accrual method of accounting.
However, no item of income, gain, loss or deduction allocable to a prohibited
transaction will be taken into account. See "-- Prohibited Transactions and
Other Possible REMIC Taxes" below. Further, the limitation on miscellaneous
itemized deductions imposed on individuals by Section 67 of the Code (which
allows such deductions only to the extent they exceed in the aggregate two
percent of the taxpayer's adjusted gross income) will not be applied at the
REMIC level so that the REMIC will be allowed deductions for servicing,
administrative and other non-interest expenses in determining its taxable
income. All such expenses will be allocated as a separate item to the holders of
REMIC Certificates, subject to the limitation of Section 67 of the Code. See
"-- Possible Pass-Through of Miscellaneous Itemized Deductions." If the
deductions allowed to the REMIC exceed its gross income for a calendar quarter,
such excess will be the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to
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distributions early in the term of the related REMIC under circumstances in
which their bases in such REMIC Residual Certificates will not be sufficiently
large that such distributions will be treated as nontaxable returns of capital.
Their bases in such REMIC Residual Certificates will initially equal the amount
paid for such REMIC Residual Certificates and will be increased by their
allocable shares of taxable income of the Trust Fund. However, such basis
increases may not occur until the end of the calendar quarter, or perhaps the
end of the calendar year, with respect to which such REMIC taxable income is
allocated to the REMIC Residual Certificateholders. To the extent such REMIC
Residual Certificateholders' initial bases are less than the distributions to
such REMIC Residual Certificateholders, and increases in such initial bases
either occur after such distributions or (together with their initial bases) are
less than the amount of such distributions, gain will be recognized to such
REMIC Residual Certificateholders on such distributions and will be treated as
gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of its share of any net
losses of the REMIC or upon the sale of its REMIC Residual Certificate. See
"-- Sales of REMIC Certificates." For a discussion of possible modifications of
these rules that may require adjustments to income of a holder of a REMIC
Residual Certificate other than an original holder in order to reflect any
difference between the cost of such REMIC Residual Certificate to such holder
and the adjusted basis such REMIC Residual Certificate would have had in the
hands of the original holder, see "-- Taxation of Owners of REMIC Residual
Certificates -- General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the sum
of the daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-- Foreign
Investors in REMIC Certificates," below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
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addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value." The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above-described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return) or by certain wholly-owned direct subsidiaries of such institutions
formed or operated exclusively in connection with the organization and operation
of one or more REMICs.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain), will be allocated among the shareholders
of such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Treasury regulations yet to be issued could apply a similar rule to
regulated investment companies, common trust funds and certain cooperatives; the
REMIC Regulations currently do not address this subject.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling Agreement
that are intended to reduce the possibility of any such transfer being
disregarded. Such restrictions will require each party to a transfer to provide
an affidavit that no purpose of such transfer is to impede the assessment or
collection of tax, including certain representations as to the financial
condition of the prospective transferee, as to which the transferor also is
required to make a reasonable investigation to determine such transferee's
historic payment of its debts and ability to continue to pay its debts as they
come due in the future. Prior to purchasing a REMIC Residual Certificate,
prospective purchasers should consider the possibility that a purported transfer
of such REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described rules
which would result in the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any
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disclosure that a REMIC Residual Certificate will not be considered
"noneconomic" will be based upon certain assumptions, and the Depositor will
make no representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules. See "-- Foreign
Investors in REMIC Certificates -- REMIC Residual Certificates" below for
additional restrictions applicable to transfers of certain REMIC Residual
Certificates to foreign persons.
Mark-to-Market Rules
On December 28, 1993, the IRS released temporary regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market. Prospective purchasers of a REMIC Residual Certificate should consult
their tax advisors regarding the possible application of the mark-to-market
requirement to REMIC Residual Certificates.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single Class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should consult
carefully with their tax advisors prior to making an investment in such
Certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The
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adjusted basis of a REMIC Regular Certificate generally will equal the cost of
such REMIC Regular Certificate to such Certificateholder, increased by income
reported by such Certificateholder with respect to such REMIC Regular
Certificate (including original issue discount and market discount income) and
reduced (but not below zero) by distributions on such REMIC Regular Certificate
received by such Certificateholder and by any amortized premium. The adjusted
basis of a REMIC Residual Certificate will be determined as described under
"-- Taxation of Owners of REMIC Residual Certificates -- Basis Rules, Net Losses
and Distributions." Except as described below, any such gain or loss generally
will be capital gain or loss. The Code as of the date of this Prospectus
provides for a top marginal tax rate of 39.6% for individuals and a maximum
marginal rate for long-term capital gains of individuals of 28%. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate had income
accrued thereon at a rate equal to 110% of the "applicable Federal rate"
(generally, a rate based on an average of current yields on Treasury securities
having a maturity comparable to that of the Certificate, which rate is computed
and published monthly by the IRS), determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such REMIC Regular Certificate at a market discount will be taxable as ordinary
income to the extent of any accrued and previously unrecognized market discount
that accrued during the period the Certificate was held. See "-- Taxation of
Owners of REMIC Regular Certificates -- Market Discount."
REMIC Certificates will be "evidences of indebtedness" within the meaning
of Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in Certificates or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the limitation on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires the Certificate, any other
residual interest in a REMIC or any similar interest in a "taxable mortgage
pool" (as defined in Section 7701(i) of the Code) within six months of the date
of such sale, the sale will be subject to the "wash sale" rules of Section 1091
of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other
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than a Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling Agreement will include provisions designed to
prevent the acceptance of any contributions that would be subject to such tax.
REMICs also are subject to federal income tax at the highest corporate rate
on "net income from foreclosure property," determined by reference to the rules
applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling Agreement and in respect of compliance with
applicable laws and regulations. Any such tax not borne by the Master Servicer
or the Trustee will be payable out of the related Trust Fund resulting in a
reduction in amounts payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the Certificate, which rate is computed and published
monthly by the IRS) of the total anticipated excess inclusions with respect to
such REMIC Residual Certificate for periods after the transfer and (ii) the
highest marginal federal income tax rate applicable to corporations. The
anticipated excess inclusions must be determined as of the date that the REMIC
Residual Certificate is transferred and must be based on events that have
occurred up to the time of such transfer, the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in the
REMIC's organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer is
through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not a
disqualified organization and, as of the time of the transfer, the transferor
does not have actual knowledge that such affidavit is false. Moreover, an entity
will not qualify as a REMIC unless there are reasonable arrangements designed to
ensure that (i) residual interests in such entity are not held by disqualified
organizations and (ii) information necessary for the application of the tax
described herein will be made available. Restrictions on the transfer of REMIC
Residual Certificates and certain other provisions that are intended to meet
this requirement will be included in the Pooling Agreement, including provisions
(i) requiring any transferee of a REMIC Residual Certificate to provide an
affidavit representing that it is not a "disqualified organization" and is not
acquiring the REMIC Residual Certificate on behalf of a "disqualified
organization," undertaking to maintain such status and
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agreeing to obtain a similar affidavit from any person to whom it shall transfer
the REMIC Residual Certificate, (ii) providing that any transfer of a REMIC
Residual Certificate to a "disqualified person" shall be null and void and (iii)
granting to the Master Servicer the right, without notice to the holder or any
prior holder, to sell to a purchaser of its choice any REMIC Residual
Certificate that shall become owned by a "disqualified organization" despite (i)
and (ii) above.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalties of perjury that such social security number is that of the
record holder or (ii) a statement under penalties of perjury that such record
holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
Termination
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should be treated as
realizing a loss equal to the amount of such difference, and such loss may be
treated as a capital loss.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and Residual Certificateholders will be treated
as partners. Unless otherwise stated in the related Prospectus Supplement, the
Master Servicer will file REMIC federal income tax returns on behalf of the
related REMIC, will be designated as and will act as the "tax matters person"
with respect to the REMIC in all respects, and generally will hold at least a
nominal amount of REMIC Residual Certificates.
As the tax matters person, the Master Servicer will, subject to certain
notice requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
Classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Master Servicer, as tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could
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result in an audit of a REMIC Residual Certificateholder's return. No REMIC will
be registered as a tax shelter pursuant to Section 6111 of the Code because it
is not anticipated that any REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish to the
related REMIC, in a manner to be provided in Treasury regulations, the name and
address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face certain information including the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method requires information relating to the holder's purchase
price that the Master Servicer will not have, such regulations only require that
information pertaining to the appropriate proportionate method of accruing
market discount be provided. See "Taxation of Owners of REMIC Regular
Certificates -- Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Master Servicer. The Prospectus Supplement related to any Series of
Certificates will specify the manner in which Certificateholders may request any
information with respect to the returns described in Section 1.6049-7(e)(2) of
the Treasury regulations.
Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of such payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not be subject to United States federal
income or withholding tax in respect of a distribution on a REMIC Regular
Certificate, provided that the holder complies to the extent necessary with
certain identification requirements (including delivery of a statement, signed
by the Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in, or under the laws of, the United States or
any political subdivision thereof, or an estate or trust whose income from
sources without the United States is includible in gross income for United
States
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federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "FEDERAL
INCOME TAX CONSEQUENCES", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax 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 own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain fiduciary and prohibited transaction restrictions on employee
pension and welfare benefit plans subject to ERISA ("ERISA Plans"). Section 4975
of the Code imposes similar prohibited transaction restrictions on tax-qualified
retirement plans described in Section 401(a) of the Code ("Qualified Retirement
Plans") and on Individual Retirement Accounts ("IRAs") described in Section 408
of the Code (collectively, "Tax-Favored Plans"). In accordance with the general
fiduciary standards of ERISA, an ERISA Plan fiduciary should consider whether an
investment in the Certificates is permitted by the documents and instruments
governing the Plan, consistent with the Plan's overall investment policy and
appropriate in view of the composition of its investment portfolio.
Certain employee benefit plans, such as governmental plans (as defined in
Section 3(32) of ERISA) and certain church plans (as defined in Section 3(33) of
ERISA), are not subject to the ERISA requirements discussed herein. Accordingly,
assets of such plans may be invested in Certificates without regard to the ERISA
considerations described below, subject to the provisions of applicable federal
and state law. Any such plan that is a Qualified Retirement Plan 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.
Section 406 of ERISA and Section 4975 of the Code prohibit a broad range of
transactions involving "plan assets" of ERISA Plans and Tax-Favored Plans
(collectively, "Plans") and persons ("Parties in Interest" under ERISA or
"Disqualified Persons" under the Code) who have certain specified relationships
to the Plans, unless a statutory or administrative exemption is available.
Certain Parties in Interest or Disqualified Persons who participate in a
prohibited transaction may be subject to a penalty or an excise tax imposed
pursuant to Section 502(i) of ERISA or Section 4975 of the Code, unless a
statutory or administrative exemption is available.
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PLAN ASSET REGULATIONS
An investment of Plan Assets (as defined below) in Certificates may cause
the underlying Mortgage Loans included in a Trust Fund to be deemed "plan
assets" of such Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations (the "DOL Regulations") concerning whether or not the assets of a
Plan would be deemed to include an interest in the underlying assets of an
entity (such as a Trust Fund), for purposes of applying the general fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code, when a Plan acquires an "equity interest"
(such as a Certificate) in such entity. Because of the factual nature of certain
of the rules set forth in the DOL Regulations, Plan Assets either may be deemed
to include an interest in the assets of a Trust Fund or may be deemed merely to
include its interest in the Certificates. Therefore, neither Plans nor such
entities should acquire or hold Certificates in reliance upon the availability
of any exception under the DOL Regulations. For purposes of this Section "ERISA
CONSIDERATIONS," the term "Plan Assets" or "assets of a Plan" has the meaning
specified in the DOL Regulations and includes an undivided interest in the
underlying assets of certain entities in which a Plan invests.
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 Subservicer, the Trustee, the obligor under any credit enhancement
mechanism or certain affiliates thereof, to be considered or become Parties in
Interest or Disqualified Persons with respect to an investing Plan or a Plan
holding an interest in an entity whose assets include Plan Assets (a "Plan Asset
Investor"). If so, the acquisition or holding of Certificates by, on behalf of
or with Plan Assets of any Plan could also give rise to a prohibited transaction
under ERISA and/or Section 4975 of the Code, unless some statutory or
administrative exemption is available. Certificates acquired by a Plan would
constitute assets of that Plan. Under the DOL Regulations, the Trust Fund,
including the Mortgage Loans and the other assets held in the Trust Fund, may
also be deemed to be assets of each Plan that acquires Certificates. Special
caution should be exercised before Plan Assets are used to acquire a Certificate
in such circumstances, especially if, with respect to such assets, the
Depositor, the Master Servicer, any Subservicer, the Trustee, the obligor under
any credit enhancement mechanism or an affiliate thereof either (i) has
investment discretion with respect to the investment of such Plan Assets or (ii)
has authority or responsibility to give (or regularly gives) investment advice
with respect to such 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 (in the manner described above), is
a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan
Assets, then any party exercising management or discretionary control regarding
those assets may be deemed to be a Plan "fiduciary," and thus subject to the
fiduciary requirements of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code with respect to any investing Plan. In
addition, if the Mortgage Loans were to constitute Plan Assets, then the
acquisition or holding of Certificates by, on behalf of or with Plan Assets, as
well as the operation of the Trust Fund, may constitute or result in a
prohibited transaction under ERISA and/or Section 4975 of the Code.
PROHIBITED TRANSACTION CLASS EXEMPTION 83-1
Prohibited Transaction Class Exemption ("PTCE") 83-1 (Class Exemption for
Certain Transactions Involving Mortgage Pool Investment Trusts) permits, subject
to certain conditions, certain transactions involving the creation, maintenance
and termination of certain residential mortgage pools and the acquisition and
holding of certain residential mortgage pool pass-through certificates by Plan
Asset Investors, regardless of whether (a) the mortgage pool is exempt from
"plan asset" treatment under the DOL Regulations or (b) the transactions would
otherwise be prohibited under ERISA or Section 4975 of the Code. If the general
conditions (described below) of PTCE 83-1 are satisfied, an investment by a Plan
in Certificates (1) will be exempt from the prohibitions of Section 406(a) of
ERISA (relating generally to Plan Asset transactions involving Parties in
Interest or Disqualified Persons who are not fiduciaries) if the Certificates
are purchased at no more than fair market value, and (2) will be exempt from the
prohibitions of Sections 406(b)(1) and
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(2) of ERISA (relating generally to Plan Asset transactions with fiduciaries)
if, in addition, the purchase is approved by an independent fiduciary, the Plan
Asset Investor pays no more for the Certificates than would be paid in an arm's
length transaction with an unrelated party, no sales commission is paid to the
Depositor as Mortgage Pool sponsor, the Plan Asset Investor does not purchase
more than 25% of the Certificates of the applicable Series, and at least 50% of
the Certificates of that Series is purchased by persons independent of the
Depositor, the Trustee and the obligor under any credit enhancement mechanism,
as applicable.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (1) the existence of a pool
trustee who is not an affiliate of the pool sponsor; (2) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments; and (3) a limitation on the amount of the payment retained by the pool
sponsor, together with other funds inuring to its benefit, to not more than
adequate consideration for selling the mortgage loans plus reasonable
compensation for services provided by the pool sponsor to the mortgage pool.
Unless otherwise specified in the applicable Prospectus Supplement, the
Trustee for each Series will be unaffiliated with the Depositor, and the first
general condition of PTCE 83-1 will be satisfied for each such Series. With
respect to the second general condition of PTCE 83-1, the Depositor intends to
use its best efforts to establish for each Series of Certificates an insurance,
indemnification, subordination or other method of credit support which will
adequately protect the Mortgage Pools and indemnify Certificateholders of the
applicable Series against pass-through payment reductions resulting from
property damage or defaults in loan payments. See "DESCRIPTION OF CREDIT
ENHANCEMENTS." The amount, method and description of the credit support method
applicable to a Series of Certificates will be set forth in the related
Prospectus Supplement. With respect to the third general condition of PTCE 83-1,
the Depositor intends to use its best efforts to establish for each Series a
compensation method which will produce for the Depositor total compensation
which will not exceed adequate consideration for forming the Mortgage Pool,
selling the Certificates and fulfilling any duties owed the Mortgage Pool by the
Depositor under the applicable Pooling Agreement. However, the Depositor does
not guarantee that its credit support and compensation methods will be
sufficient to meet the second and third general conditions (described above)
with respect to any Series.
As indicated in the two preceding paragraphs, the continued maintenance of
a system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments, is one of the three general conditions that must be satisfied for any
transaction involving a Mortgage Pool to remain eligible for exemption by PTCE
83-1 from the prohibited transaction rules of ERISA and Section 4975 of the
Code. If the credit support method established for any Series is cancelled or
terminated, or if the credit support is reduced to such an extent that its
coverage amount is less than the greater of (a) 1% of the aggregate unpaid
principal balance of the Mortgage Loans or (b) the unpaid principal balance of
the largest single Mortgage Loan (see "DESCRIPTION OF CREDIT ENHANCEMENTS"),
then the Mortgage Pool relating to that Series may no longer satisfy the general
conditions of PTCE 83-1. In such event, the exemption from the prohibited
transaction rules afforded by PTCE 83-1 may no longer be available.
One or more Series of Certificates may be offered to Plan Asset Investors
through a forward delivery commitment contract, which is a contract for the
purchase of Certificates to be delivered at an agreed future settlement date.
PTCE 83-1 permits the sale of Certificates to a Plan Asset Investor pursuant to
such a contract, provided that the forward delivery commitment is expressly
approved by a fiduciary who is independent of the Depositor, the Trustee, the
obligor under any credit enhancement mechanism, as applicable, and their
respective affiliates, and who has the authority to manage and control the Plan
Assets being committed for investment in the Certificates.
If a Series of Certificates is subdivided into two or more Classes which
are entitled to disproportionate allocations of the principal and interest
payments on the Mortgage Loans, the availability of the exemption afforded by
PTCE 83-1 may be adversely affected, as described in the applicable Prospectus
Supplement. Moreover, if any Class of Certificates is entitled to pass-through
payments of principal (but no or only nominal
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interest) or interest (but no or only nominal principal), PTCE 83-1 will not
exempt holders of the Class of Certificates from the prohibited transaction
rules of ERISA and Section 4975 of the Code.
OTHER EXEMPTIONS
If for any reason PTCE 83-1 does not provide an exemption for a particular
Certificateholder who is a Plan or a Plan Asset Investor, one of four other
prohibited transaction class exemptions issued by the DOL might apply, i.e.,
PTCE 95-60 (Class Exemption for Certain Transactions Involving Insurance Company
General Accounts), PTCE 91-38 (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds), PTCE 90-1 (Class Exemption for
Certain Transactions Involving Insurance Company Pooled Separate Accounts) or
PTCE 84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers). There can be no assurance
that any of these class exemptions will apply with respect to any particular
Plan or Plan Asset Investor or, even if it were to apply, that the exemption
would apply to all transactions involving the Mortgage Pool. In addition, the
underwriter with respect to a particular Series may be the recipient of a final
prohibited transaction exemption which, if so specified in the applicable
Prospectus Supplement, may accord a Plan or a Plan Asset Investor protection
from violations of the prohibited transaction rules of ERISA and Section 4975 of
the Code if the Plan or Plan Asset Investor satisfies the conditions described
in the applicable Prospectus Supplement.
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 "FEDERAL INCOME TAX CONSEQUENCES -- Taxation of Owners of REMIC
Residual Certificates -- Excess Inclusions."
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan Asset Investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions of
ERISA and Section 4975 of the Code to the proposed investment and the
availability of PTCE 83-1 or any other prohibited transaction exemption.
LEGAL INVESTMENT MATTERS
Each Class of Certificates offered by means of this Prospectus and the
related Prospectus Supplement will be rated at the date of issuance in one of
the four highest rating categories by at least one Rating Agency. Unless
otherwise specified in the related Prospectus Supplement each such Class that is
rated in one of the two highest rating categories by at least one Rating Agency
will constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal
investments for persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or of any State whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities.
Under SMMEA, if a State enacted legislation on or prior to October 3, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," such securities will constitute legal
investments for entities subject to such legislation only to the extent provided
therein. Certain States have enacted legislation which overrides the preemption
provisions of SMMEA. SMMEA provides, however, that in no event will the
enactment of any such legislation affect the validity of any contractual
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commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities, so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe.
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 with an effective date of
February 10, 1992. 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 30-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 will be treated as high-risk
under the Policy Statement.
The predecessor to 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 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 Certificates. Similar
policy statements have been issued by regulators having jurisdiction over other
types of depository institutions.
Certain Classes of Certificates offered hereby, including any Class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of SMMEA.
Any such Class of Certificates will be identified in the related Prospectus
Supplement. Prospective investors in such Classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors either
to purchase certain Classes of Certificates or to purchase any Class of
Certificates representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any Class of Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any Class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any Class of 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 own legal advisors in determining whether
and to what extent the 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.
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USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Depositor to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
underlying the Certificates or will be used by the Depositor for general
corporate purposes. The Depositor expects that it will make additional sales of
securities similar to the Certificates from time to time, but the timing and
amount of any such additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans purchased by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
METHODS 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 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 a particular
Series of Certificates 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 re-offering by underwriters;
2. By placements by the Depositor with institutional investors through
dealers; and
3. By direct placements by the Depositor with institutional investors.
If underwriters are used in a sale of any 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. Such underwriters may be
broker-dealers affiliated with the Depositor whose identities and relationships
to the Depositor will be as set forth in the related Prospectus Supplement. The
managing underwriter or underwriters with respect to the offer and sale of a
particular Series of Certificates 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 the Certificates, underwriters may receive
compensation from the Depositor or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the 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
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
any Series of Certificates will provide that the obligations of the underwriters
will be subject to certain conditions precedent, that the underwriters will be
obligated to purchase all such Certificates if any are purchased (other than in
connection with an underwriting on a best efforts basis) and that, in limited
circumstances, the Depositor will indemnify the several underwriters and the
underwriters will indemnify the Depositor against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended, or will
contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any Series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Depositor and purchasers of
Certificates of such Series.
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Purchasers of 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 Certificates. Holders of Certificates should consult with
their legal advisors in this regard prior to any such reoffer or sale.
RATING
It is a condition to the issuance of the Certificates of each Series
offered hereby and by the related Prospectus Supplement that they shall have
been rated in one of the four highest rating categories by one or more
nationally recognized statistical rating agencies (each, a "Rating Agency")
specified in the related Prospectus Supplement.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped pass-through certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Orrick,
Herrington & Sutcliffe, San Francisco, California.
FINANCIAL INFORMATION
The Depositor has determined that its financial statements are not material
to the offering made hereby.
ADDITIONAL INFORMATION
This Prospectus, together with the Prospectus Supplement for each Series of
Certificates, contains a summary of the material terms of the applicable
exhibits to the Registration Statement and the documents referred to herein and
therein. Copies of such exhibits are on file at the offices of the Securities
and Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and may be
inspected, without charge, at the Commission's offices. In addition, such
Registration Statement, the exhibits thereto and any reports or other
information filed with the Commission through its Electronic Data Gathering,
Analysis, and Retrieval System are publicly available through the Commission's
Web site (http://www.sec.gov).
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Accrual Certificates.................................................................. 6
Advance............................................................................... 33
Affiliated Seller..................................................................... 12
Appraised Value....................................................................... 13
ARM Loans............................................................................. 12
Balloon Amount........................................................................ 13
Balloon Loans......................................................................... 13
Bank of America FSB................................................................... 1
Bank of America NT&SA................................................................. 1
BankAmerica........................................................................... 10
Bankruptcy Amount..................................................................... 37
Bankruptcy Loss....................................................................... 39
Book-Entry Certificates............................................................... 24
Buydown Account....................................................................... 14
Buydown Agreement..................................................................... 30
Buydown Funds......................................................................... 14
Buydown Mortgage Loans................................................................ 14
Buydown Period........................................................................ 14
CEDEL................................................................................. 26
CEDEL Participants.................................................................... 26
Certificate Account................................................................... 29
Certificate Account Deposit Date...................................................... 29
Certificate Insurance Policy.......................................................... 41
Certificate Principal Balance......................................................... 5
Certificateholders.................................................................... 3
Certificates.......................................................................... 1
Citibank.............................................................................. 24
Class................................................................................. 1
Closing Date.......................................................................... 73
Code.................................................................................. 6
Commission............................................................................ 3
Committee Report...................................................................... 67
Contributions Tax..................................................................... 84
Convertible Mortgage Loan............................................................. 13
Cooperative........................................................................... 26
Credit Enhancer....................................................................... 39
Custodial Account..................................................................... 19
Cypress Center........................................................................ 20
Debt Service Reduction................................................................ 41
Defaulted Mortgage Loss............................................................... 39
Deficient Valuation................................................................... 41
Definitive Certificates............................................................... 25
Deleted Mortgage Loan................................................................. 19
Depositaries.......................................................................... 24
</TABLE>
94
<PAGE> 151
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Depositor............................................................................. 1
Determination Date.................................................................... 33
Disqualified Persons.................................................................. 87
Distribution Date..................................................................... 7
DOL................................................................................... 88
DOL Regulations....................................................................... 88
Due Date.............................................................................. 28
Eligible Account...................................................................... 29
ERISA................................................................................. 9
ERISA Plans........................................................................... 87
Euroclear............................................................................. 26
Euroclear Operator.................................................................... 26
Euroclear Participants................................................................ 26
Extraordinary Losses.................................................................. 39
FDIC.................................................................................. 16
FHA................................................................................... 16
FHLMC................................................................................. 16
FNMA.................................................................................. 16
Form of Pooling Agreement............................................................. 4
Fraud Loss............................................................................ 39
Fraud Loss Amount..................................................................... 37
Garn-St Germain Act................................................................... 59
GNMA.................................................................................. 16
Grantor Trust Certificates............................................................ 9
Grantor Trust Fractional Interest Certificate......................................... 62
Grantor Trust Fund.................................................................... 61
Grantor Trust Strip Certificate....................................................... 61
Guides................................................................................ 16
Holder................................................................................ 24
Indirect Participants................................................................. 25
Insurance Proceeds.................................................................... 29
IRAs.................................................................................. 87
IRS................................................................................... 63
Issue Premium......................................................................... 79
Letter of Credit...................................................................... 40
Letter of Credit Bank................................................................. 40
Liquidated Mortgage Loan.............................................................. 35
Liquidation Proceeds.................................................................. 29
Loan-to-Value Ratio................................................................... 13
Loss.................................................................................. 45
Mark-to-Market Regulations............................................................ 82
Master Commitments.................................................................... 18
Master Servicer....................................................................... 1
Morgan................................................................................ 24
Mortgage File......................................................................... 28
Mortgage Loans........................................................................ 1
</TABLE>
95
<PAGE> 152
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Mortgage Notes........................................................................ 12
Mortgage Pool......................................................................... 1
Mortgage Pool Insurance Policy........................................................ 40
Mortgage Rate......................................................................... 12
Mortgaged Properties.................................................................. 6
Mortgages............................................................................. 12
Mortgagor............................................................................. 11
Net 5 Loans........................................................................... 13
Net Mortgage Rate..................................................................... 53
Note Margin........................................................................... 12
OID Regulations....................................................................... 61
OTS................................................................................... 20
Owners................................................................................ 25
Parties in Interest................................................................... 87
Pass-Through Rate..................................................................... 5
Paying Agent.......................................................................... 31
Percentage Interest................................................................... 32
Permitted Investments................................................................. 29
Plan.................................................................................. 9
Plan Asset Investor................................................................... 88
Plan Assets........................................................................... 88
Plans................................................................................. 87
Policy Statement...................................................................... 91
Pool Insurer.......................................................................... 30
Pooling Agreement..................................................................... 4
Prepayment Assumption................................................................. 65
Prepayment Interest Shortfall......................................................... 7
Primary Mortgage Insurance Policy..................................................... 45
Primary Mortgage Insurer.............................................................. 45
Principal Prepayments................................................................. 28
Prohibited Transactions Tax........................................................... 83
PTCE.................................................................................. 88
Qualified Retirement Plans............................................................ 87
Qualified Substitute Mortgage Loan.................................................... 19
Rating Agency......................................................................... 9
Realized Loss......................................................................... 37
Record Date........................................................................... 31
Relief Act............................................................................ 60
REMIC................................................................................. 1
REMIC Certificates.................................................................... 61
REMIC Provisions...................................................................... 61
REMIC Regular Certificates............................................................ 71
REMIC Regulations..................................................................... 61
REMIC Residual Certificates........................................................... 71
REO Mortgage Loan..................................................................... 35
Reserve Fund.......................................................................... 41
Retained Yield........................................................................ 11
Richmond Center....................................................................... 20
</TABLE>
96
<PAGE> 153
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Rules................................................................................. 25
Sellers............................................................................... 1
Senior Certificates................................................................... 6
Senior Percentage..................................................................... 38
Senior/Subordinate Series............................................................. 23
Series................................................................................ 1
Servicing Advances.................................................................... 31
Single Certificate.................................................................... 34
SMMEA................................................................................. 9
Special Hazard Amount................................................................. 37
Special Hazard Instrument............................................................. 39
Special Hazard Insurance Policy....................................................... 40
Special Hazard Loss................................................................... 39
Stated Principal Balance.............................................................. 38
Strip Certificates.................................................................... 6
Subordinate Amount.................................................................... 38
Subordinate Certificates.............................................................. 6
Subservicers.......................................................................... 14
Tax Exempt Investor................................................................... 90
Tax-Favored Plans..................................................................... 87
Terms and Conditions.................................................................. 26
Tiered REMICs......................................................................... 72
Title V............................................................................... 60
Title VIII............................................................................ 60
Trust Fund............................................................................ 1
Trustee............................................................................... 4
UBTI.................................................................................. 90
Unaffiliated Sellers.................................................................. 12
Unrecovered Senior Portion............................................................ 38
VA.................................................................................... 16
</TABLE>
97
<PAGE> 154
- ------------------------------------------------------
- ------------------------------------------------------
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-5
[RISK FACTORS.................................... S-19]
DESCRIPTION OF THE MORTGAGE POOL................. S-20
DESCRIPTION OF THE CERTIFICATES.................. S-27
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS...... S-37
POOLING AGREEMENT................................ S-46
[DESCRIPTION OF CREDIT ENHANCEMENT............... S-47
FEDERAL INCOME TAX CONSEQUENCES.................. S-47
METHOD OF DISTRIBUTION........................... S-51
LEGAL OPINIONS................................... S-52
RATING........................................... S-52
LEGAL INVESTMENT................................. S-52
ERISA CONSIDERATIONS............................. S-53
PROSPECTUS
PROSPECTUS SUPPLEMENT............................ 3
AVAILABLE INFORMATION............................ 3
REPORTS TO CERTIFICATEHOLDERS.................... 3
INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE...................................... 3
SUMMARY OF PROSPECTUS............................ 5
RISK FACTORS..................................... 10
THE MORTGAGE POOLS............................... 11
THE DEPOSITOR.................................... 15
MORTGAGE LOAN PROGRAM............................ 15
DESCRIPTION OF THE CERTIFICATES.................. 23
SUBORDINATION.................................... 36
DESCRIPTION OF CREDIT ENHANCEMENTS............... 39
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER.............................. 45
THE POOLING AGREEMENT............................ 48
YIELD CONSIDERATIONS............................. 52
MATURITY AND PREPAYMENT CONSIDERATIONS........... 54
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND
RELATED MATTERS................................ 56
FEDERAL INCOME TAX CONSEQUENCES.................. 61
STATE AND OTHER TAX CONSEQUENCES................. 87
ERISA CONSIDERATIONS............................. 87
LEGAL INVESTMENT MATTERS......................... 90
USE OF PROCEEDS.................................. 92
METHODS OF DISTRIBUTION.......................... 92
RATING........................................... 93
LEGAL MATTERS.................................... 93
FINANCIAL INFORMATION............................ 93
ADDITIONAL INFORMATION........................... 93
INDEX OF PRINCIPAL DEFINITIONS................... 94
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
BANKAMERICA MORTGAGE
SECURITIES, INC.
$ (APPROXIMATE)
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 19 -
------------------------
PROSPECTUS SUPPLEMENT
------------------------
[NAME OF UNDERWRITER(S)]
, 19
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 155
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses expected to be
incurred in connection with the issuance and distribution of the Certificates
being registered, other than underwriting discounts and commissions. All such
expenses, except for the filing fee, are estimated.
<TABLE>
<S> <C>
Registration Fee . . . . . . . . . . . . . . . . . . . . . . $ 344,828
Trustee's Fees and Expenses . . . . . . . . . . . . . . . . 30,000
Accounting Fees and Expenses . . . . . . . . . . . . . . . . 125,000
Printing and Engraving Expenses . . . . . . . . . . . . . . 75,000
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . 250,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . 325,000
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . 150,000
Total . . . . . . . . . . . . . . . . . . . . . . . $1,299,828
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expense
(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
II-1
<PAGE> 156
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.
There is directors' and officers' liability insurance presently
outstanding which insures directors and officers of BankAmerica Corporation and
certain of its subsidiaries, including the Registrant. The policies cover loss
for which BankAmerica Corporation or any of such subsidiaries shall be required
or permitted by law to indemnify directors and officers and which result from
claims made against such directors or officers based upon the commission of
wrongful acts in the performance of their duties. The policies also cover losses
which the directors or officers must pay as the result of claims brought against
them based upon the commission of wrongful acts in the performance of their
duties and for which they are not indemnified by BankAmerica Corporation or any
of such subsidiaries. The losses covered by the policies are subject to certain
exclusions and do not include fines or penalties imposed by law or other matters
uninsurable under the law. The policies contain certain provisions regarding
deductibles.
The Pooling and Servicing 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 and Servicing
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 and Servicing Agreements and related
Certificates other than such expenses related to particular Mortgage Loans.
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 from certain information furnished to the Registrant by or on behalf of
such indemnifying party.
II-2
<PAGE> 157
ITEM 16. EXHIBITS.
Exhibit
Number Description of Exhibit
1.1 Form of Underwriting Agreement.*
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Orrick, Herrington & Sutcliffe as to the legality
of the Certificates.
8.1 Opinion of Orrick, Herrington & Sutcliffe as to certain tax
matters.
23.1 Consents of Orrick, Herrington & Sutcliffe (included in
Exhibits 5.1 and 8.1 hereto).
24.1 Powers of Attorney.*
----------
*Previously filed.
ITEM 17. UNDERTAKINGS.
A. Undertakings Pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement: (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising 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 the Registration Statement or any
material change to such information in the Registration Statement; provided,
however, that the undertakings set forth in clauses (i) and (ii) above shall not
apply if the information required to be included in a post-effective amendment
by those clauses is contained in periodic reports filed 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.
II-3
<PAGE> 158
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 provisions referred to in Item 15
above, 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.
C. Undertaking pursuant to Item 512(b).
The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 159
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT, BANKAMERICA MORTGAGE SECURITIES, INC., A CORPORATION ORGANIZED AND
EXISTING UNDER THE LAWS OF DELAWARE, CERTIFIES THAT IT HAS REASONABLE GROUNDS TO
BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS
DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-3 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
AND COUNTY OF SAN FRANCISCO, STATE OF CALIFORNIA, ON THE 26TH DAY OF JULY, 1996.
BANKAMERICA MORTGAGE SECURITIES, INC.
By /s/ Arthur D. Ringwald
---------------------------------------------
Arthur D. Ringwald,
Chairman of the Board, Chief Executive Officer
and President (Principal Executive Officer)
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933,
THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT ON FORM S-3 HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE
/s/ Arthur D. Ringwald Chairman of the Board, Chief
- --------------------------------------- Executive Officer and President
Arthur D. Ringwald (Principal Executive Officer)
and Director
John D. Kelleghan* Chief Financial Officer
- --------------------------------------- (Principal Financial and
John D. Kelleghan Accounting Officer)
Directors:
Jacquelin Legorreta Erdman*
James G. Jones*
Claus H. Lund*
Shaun M. Maguire*
*By: /s/ Andrea B. Sudmann
- ---------------------------------------
Andrea B. Sudmann
Attorney-in-Fact
Dated: July 26, 1996
- -------------
*Note: Powers of Attorney appointing Andrea B. Sudmann and Daniel G. Weiss, or
either of them acting singly, to execute the Registration Statement and any
amendments thereto on behalf of the above-named individuals, were previously
filed in Exhibit 24.1 to the Registration Statement.
<PAGE> 160
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
1.1 Form of Underwriting Agreement.*
4.1 Form of Pooling and Servicing Agreement.*
5.1 Opinion of Orrick, Herrington & Sutcliffe as to the legality of the
Certificates.
8.1 Opinion of Orrick, Herrington & Sutcliffe as to certain tax matters.
23.1 Consents of Orrick, Herrington & Sutcliffe (included in Exhibits 5.1
and 8.1 hereto).
24.1 Powers of Attorney.*
- -----------------
*Previously filed.
<PAGE> 1
Exh. 5.1
[ORRICK, HERRINGTON & SUTCLIFFE LETTERHEAD]
July 29, 1996
BankAmerica Mortgage Securities, Inc.
345 Montgomery Street
Lower Level #2, Unit #8152
San Francisco, California 94104
Ladies and Gentlemen:
We have acted as counsel to BankAmerica Mortgage Securities, Inc., a
Delaware corporation (the "Registrant"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") of the
Registration Statement on Form S-3 filed by the Registrant with the Commission
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended (the "Act"), of its Mortgage Pass-Through
Certificates (the "Certificates"). The Certificates are issuable in series
(each, a "Series") under separate Pooling and Servicing Agreements (each, a
"Pooling Agreement") by and among the Registrant, one of the Master Servicers
named therein and the Trustee selected for each Series. The Certificates of each
Series are to be sold as described in the Registration Statement and the
prospectus and prospectus supplement relating to such Series.
We have examined such instruments, documents and records as we deemed
relevant and necessary as a basis for our opinion hereinafter expressed. In such
examination, we have assumed the following: (a) the authenticity of original
documents and the genuineness of all signatures; (b) the conformity to the
originals of all documents submitted to us as copies; and (c) the truth,
accuracy and completeness of the information, representations and warranties
contained in the records, documents, instruments and certificates we have
reviewed.
Based on such examination, we are of the opinion that when the issuance
of each Series of Certificates has been duly authorized by appropriate corporate
action and the Certificates of such Series have been duly executed,
authenticated and delivered in accordance with the terms of the Pooling
Agreement relating to such Series and sold in the manner described in the
Registration Statement and the prospectus and prospectus supplement relating
thereto, the Certificates of such Series will be legally issued, fully paid,
binding obligations of the trust
<PAGE> 2
BankAmerica Mortgage Securities, Inc.
July 29, 1996
Page 2
created by each Pooling Agreement, and the holders of the Certificates of such
Series will be entitled to the benefits of the Pooling Agreement, except as
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, fraudulent conveyance, moratorium, or other laws
relating to or affecting the rights of creditors generally and general
principles of equity, including concepts of materiality, reasonableness, good
faith and fair dealing, and the possible unavailability of specific performance
or injunctive relief, regardless of whether such enforceability is considered in
a proceeding in equity or at law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name wherever it appears in the
Registration Statement and the prospectus contained therein.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe
ORRICK, HERRINGTON & SUTCLIFFE
<PAGE> 1
Exh. 8.1
[ORRICK, HERRINGTON & SUTCLIFFE LETTERHEAD]
July 29, 1996
BankAmerica Mortgage Securities, Inc.
345 Montgomery Street
Lower Level #2, Unit #8152
San Francisco, California 94104
Ladies and Gentlemen:
We have acted as counsel for BankAmerica Mortgage Securities, Inc., a
Delaware corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-3, Registration No. 333-05201 (the
"Registration Statement"), which has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), for the
registration under the Act of series (each, a "Series") of Mortgage Pass-Through
Certificates (collectively, the "Certificates"), each such Series representing
an undivided interest in a specified trust fund (each, a "Trust Fund"). Each
Series of Certificates will be issued pursuant to a pooling and servicing
agreement (each, a "Pooling Agreement"), among the Company and a master servicer
and trustee to be named. The form of Pooling Agreement relating to the Trust
Funds to be formed by the Company has been filed as Exhibit 4.1 to the
Registration Statement.
We hereby confirm that the statements set forth under the headings
"Summary of Prospectus -- Federal Income Tax Consequences" and "Federal Income
Tax Consequences" in the Prospectus, and under the headings "Summary of
Prospectus -- Federal Income Tax Consequences" and "Federal Income Tax
Consequences" in the form of prospectus supplement, each forming a part of the
Registration Statement, which statements have been prepared by us, constitute
our opinion as to the material federal income tax consequences relating to the
Certificates and are correct in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Orrick, Herrington & Sutcliffe
ORRICK, HERRINGTON & SUTCLIFFE
