<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-34225
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 22, 1998)
$341,121,101 (APPROXIMATE)
BA MORTGAGE SECURITIES, INC.
DEPOSITOR
BANK OF AMERICA, FSB
MASTER SERVICER
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1998-1
The Series 1998-1 Mortgage Pass-Through Certificates (the "Certificates")
will evidence the entire beneficial ownership interest in a trust fund (the
"Trust Fund") consisting primarily of a pool of conventional, fixed-rate, one-
to four-family first mortgage loans (the "Mortgage Loans") to be deposited by BA
Mortgage Securities, Inc. (the "Depositor") into the Trust Fund for the benefit
of the Certificateholders. Only the Classes identified in the table below (the
"Offered Certificates") are offered hereby.
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
INITIAL CERTIFICATE PASS-THROUGH INITIAL CERTIFICATE PASS-THROUGH
PRINCIPAL BALANCE RATE(1) PRINCIPAL BALANCE RATE(1)
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Class IA-1........... $ 96,101,504 6.750% Class IIA-6......... $ 2,127,000 6.500%(2)
Class IA-2........... 5,000,000 6.750% Class I-X........... (3) 6.750%
Class IA-3........... 9,500,000 6.750% Class II-X.......... (4) 6.500%
Class IA-4........... 14,250,000 6.750% Class I-PO.......... 21,501 (5)
Class IA-5........... 4,887,000 6.750% Class II-PO......... 350,133 (5)
Class IA-6........... 9,939,000 6.750% Class M............. 3,776,882 Variable Rate(6)
Class IIA-1.......... 121,111,453 6.500% Class B-1........... 2,231,794 Variable Rate(6)
Class IIA-2.......... 1,000,000 6.500% Class B-2........... 1,201,735 Variable Rate(6)
Class IIA-3.......... 8,262,000 6.500% Class R-I........... 50 6.750%
Class IIA-4.......... 14,913,749 6.500% Class R-II.......... 50 6.750%
Class IIA-5.......... 46,447,250 6.500%
- ---------------------
</TABLE>
(1) Interest distributed to the Offered Certificates on each Distribution Date
will have accrued during the preceding calendar month.
(2) On each Distribution Date on or before the Class IIA-6 Accretion Termination
Date (as defined herein), an amount equal to the Class IIA-6 Accrual Amount
(as defined herein) will be added to the Class IIA-6 Principal Balance, and
such amount will be distributed as principal to the Class IIA-5 and Class
IIA-6 Certificates as described herein.
(3) The Class I-X Certificates will not receive distributions of principal and
will accrue interest on the Class I-X Notional Amount. The "Class I-X
Notional Amount" with respect to any Distribution Date will equal the
product of (x) the aggregate scheduled principal balance, as of the second
preceding Due Date (as defined herein) after giving effect to payments
scheduled to be received as of such Due Date, whether or not received, or
with respect to the initial Distribution Date, as of the Cut-off Date, of
the Group I Loans (as defined herein) having Net Mortgage Rates equal to or
greater than 6.750% per annum (the "Group I Premium Rate Mortgage Loans")
and (y) a fraction, the numerator of which is the weighted average of the
Stripped Interest Rates (as defined herein) for the Group I Premium Rate
Mortgage Loans as of such Due Date and the denominator of which is 6.750%.
The Class I-X Notional Amount as of the Closing Date will be approximately
$11,983,709.
(4) The Class II-X Certificates will not receive distributions of principal and
will accrue interest on the Class II-X Notional Amount. The "Class II-X
Notional Amount" with respect to any Distribution Due will equal the product
of (x) the aggregate scheduled principal balance, as of the second preceding
Due Date after giving effect to payments scheduled to be received as of such
Due Date, whether or not received, or with respect to the initial
Distribution Date, as of the Cut-off Date, of the Group II Loans (as defined
herein) having Net Mortgage Rates equal to or greater than 6.500% per annum
(the "Group II Premium Rate Mortgage Loans") and (y) a fraction, the
numerator of which is the weighted average of the Stripped Interest Rates
for the Group II Premium Rate Mortgage Loans as of such Due Date and the
denominator of which is 6.500%. The Class II-X Notional Amount as of the
Closing Date will be approximately $7,513,508.
(5) The Class I-PO and Class II-PO Certificates are Principal Only Certificates
and will not bear interest.
(6) The Pass-Through Rate on the Class M, Class B-1 and Class B-2 Certificates
will vary from 6.500% to 6.750% per annum. For a more detailed description
of the Pass-Through Rate on the Subordinate Certificates, see "DESCRIPTION
OF THE CERTIFICATES -- Interest Distributions" herein. The initial
Pass-Through Rate for each Class of Subordinate Certificates will be
approximately 6.605% per annum.
SEE "RISK FACTORS" ON PAGE S-23 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. 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, FSB 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 THE FDIC OR ANY OTHER 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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(cover continued on next page)
DONALDSON, LUFKIN & JENRETTE ABN AMRO INCORPORATED
SECURITIES CORPORATION
The date of this Prospectus Supplement is April 22, 1998
<PAGE> 2
The Offered Certificates will be offered by Donaldson, Lufkin & Jenrette
Securities Corporation and ABN AMRO Incorporated (the "Underwriters") 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 approximately 100.093% of the
initial aggregate principal balance of the Offered Certificates, plus accrued
interest thereon from April 1, 1998 (the "Cut-off Date"), net of any expenses
payable by the Depositor. The Offered Certificates are offered by the
Underwriters subject to prior sale, when, as and if delivered to and accepted by
the Underwriters and subject to certain other conditions. The Underwriters
reserve 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 Offered
Certificates (other than the Class R-I and Class R-II Certificates) will be made
only in book-entry form through the Same Day Funds Settlement System of The
Depository Trust Company ("DTC") as discussed herein, and that delivery of the
Class R-I and Class R-II Certificates will be made at the offices of Donaldson,
Lufkin & Jenrette Securities Corporation, New York, New York on or about April
24, 1998, against payment therefor in immediately available funds.
The Mortgage Loans were originated or acquired by Bank of America National
Trust and Savings Association and Bank of America, FSB (each, in such capacity,
a "Seller"). The Depositor will acquire the Mortgage Loans from the Sellers on
the Closing Date. The Mortgage Loans will be serviced by Bank of America, FSB
(in such capacity, the "Master Servicer"). The Senior Certificates in the
aggregate and the Class M, Class B-1 and Class B-2 Certificates will evidence
initial undivided interests of approximately 97.25%, 1.10%, 0.65% and 0.35%,
respectively, in the Trust Fund. Certain characteristics of the Mortgage Loans
are described herein under "DESCRIPTION OF THE MORTGAGE POOL."
The Mortgage Pool (as described herein) consists of two groups of Mortgage
Loans ("Loan Group I" and "Loan Group II," and each, a "Loan Group"). The
Mortgage Loans in Loan Group I are sometimes referred to as the "Group I Loans"
and the Mortgage Loans in Loan Group II are sometimes referred to as the "Group
II Loans." The Group I Certificates will correspond to the Group I Loans, which
consist of fixed-rate Mortgage Loans with terms to maturity of greater than 15
years but not more than 30 years. The Group II Certificates will correspond to
the Group II Loans, which consist of fixed-rate Mortgage Loans with terms to
maturity of not more than 15 years. Distributions of interest and principal on
the Group I Certificates and the Group II Certificates will be based on interest
and principal received or advanced with respect to the Group I Loans and Group
II Loans, respectively, except under the limited circumstances described in
"DESCRIPTION OF THE CERTIFICATES -- Cross-Collateralization" herein. The rights
of the holders of the Subordinate Certificates to receive distributions with
respect to the Mortgage Loans will be based on interest and principal received
or advanced with respect to both Loan Groups, and will be subordinate to the
rights of the holders of the Senior Certificates to the extent described herein
and in the Prospectus.
Distributions on the Certificates will be made on the 25th day of each
month or, if such day is not a Business Day (as defined herein), then on the
next succeeding Business Day commencing in May 1998 (each, a "Distribution
Date"). 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 Notional Amount
Certificates) and the then applicable Pass-Through Rate set forth or described
on the cover hereof, which will be variable for the Senior Subordinate
Certificates (as defined below) 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 Certificates entitled to principal as
described herein under "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions."
The rights of the holders of the Class M, Class B-1 and Class B-2
Certificates (the "Senior Subordinate Certificates") to receive distributions of
interest and principal are subordinated to the rights of the holders of the
Senior Certificates to receive distributions of interest and principal. In
addition, the rights of the holders of the Class B-1 Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Class M Certificates to receive distributions of interest and
principal, and such rights of the holders of the Class B-2 Certificates are
similarly subordinated to the rights of the holders of the Class M and Class B-1
Certificates. Following the reduction of the aggregate Certificate Principal
Balance of the Junior
S-2
<PAGE> 3
Subordinate Certificates to zero, the yield to maturity on each Class of the
Senior Subordinate Certificates will be extremely sensitive to certain Realized
Losses on the Mortgage Loans because a disproportionate amount of such losses
(rather than a pro rata portion thereof) generally will be allocable to such
Certificates, in this order: first Class B-2, then Class B-1 and then Class M.
Similarly, following the reduction of the aggregate of the Certificate Principal
Balances of the Subordinate Certificates to zero, the yield to maturity on the
Senior Certificates will be sensitive to all Realized Losses on the Mortgage
Loans. See "DESCRIPTION OF THE CERTIFICATES -- Allocation of Losses;
Subordination" herein.
The Class IIA-6 Certificates will be especially sensitive to the rate of
payment of principal (including prepayments, defaults and liquidations) on the
Group II Loans because (i) prior to the Class IIA-6 Accretion Termination Date
(as defined herein) accrued certificate interest on the Class IIA-6 Certificates
will be added to the Certificate Principal Balance thereof rather than
distributed in respect of such Certificates and (ii) the Class IIA-6
Certificates will receive distributions of the Class IIA-6 Accrual Amount (as
defined herein) as principal on any Distribution Date prior to the Class IIA-6
Accretion Termination Date only to the extent of the Class IIA-6 Accrual Amount
remaining, if any, after the Class IIA-5 Certificate Principal Balance has been
reduced to its Targeted Principal Balance (as described herein) for such
Distribution Date. See "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions -- Group II Certificate Principal Distributions" and "CERTAIN
YIELD AND PREPAYMENT CONSIDERATIONS" herein.
Although the Lockout Certificates are Senior Certificates, the Group I
Lockout Certificates will generally not be entitled to receive any distributions
of Principal Payments or Principal Prepayments and the Group II Lockout
Certificates will generally not be entitled to receive any distributions of
Principal Prepayments until the Distribution Date occurring in May 2003.
Therefore, the Lockout Certificates will not be entitled to receive the
disproportionate allocation of principal Prepayments on the Mortgage Loans in
the related Loan Group that the other Senior Certificates are entitled to
receive. See "DESCRIPTION OF THE CERTIFICATES -- Principal Distributions" and
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" herein.
The Master Servicer's only obligations with respect to the Certificates (in
its capacity as Master Servicer) are its contractual obligations under the terms
of the Pooling Agreement (as defined herein).
The yield to maturity on each Class of Offered Certificates will be
sensitive in varying degrees to, among other things, the rate of payment of
principal (including prepayments, defaults and liquidations) on the Mortgage
Loans in the related Loan Group or Loan Groups. The Mortgage Loans may be
prepaid in full or in part at any time without penalty. The yield to investors
on the Offered Certificates, and particularly the Class M, Class B-1 and B-2
Certificates, will be adversely affected by any shortfalls in interest collected
on the Mortgage Loans due to prepayments, liquidations or otherwise. Because
they receive only distributions of interest, the yield to investors on the Class
I-X and Class II-X Certificates will be extremely sensitive to the rate of
principal payments (including prepayments and defaults) on the Premium Rate
Mortgage Loans in the related Loan Group, which rates may fluctuate
significantly over time. A rapid rate of principal payments (including
prepayments) on the Mortgage Loans in the related Loan Group could result in the
failure of such investors to fully recover their initial investments. Because
the principal payable with respect to the Class I-PO Certificates (which are
entitled to receive distributions of principal only) is derived from Group I
Loans with Net Mortgage Rates that are lower than 6.750% per annum, the yield to
maturity on the Class I-PO Certificates will be adversely affected by slower
than expected principal payments (including prepayments) on such Mortgage Loans.
Similarly, because the principal payable with respect to the Class II-PO
Certificates (which are entitled to distributions of principal only) is derived
from Group II Loans with Net Mortgage Rates that are lower than 6.500% per
annum, the yield to maturity on the Class II-PO Certificates will be adversely
affected by slower than expected principal payments (including prepayments) on
such Mortgage Loans. See "CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS" herein
and "YIELD CONSIDERATIONS" in the Prospectus.
The Class IA-2 and Class IA-5 Certificates will each have the benefit of a
certificate guaranty insurance policy (the "Class IA-2 Certificate Insurance
Policy" and "Class IA-5 Certificate Insurance Policy," together, the
"Certificate Insurance Policies") issued by MBIA Insurance Corporation (the
"Certificate
S-3
<PAGE> 4
Insurer") which will unconditionally and irrevocably guarantee the payment of
the Deficiency Amount (as defined herein) with respect to the related Class of
Insured Certificates on each Distribution Date to the extent described in the
applicable Certificate Insurance Policy. See "CREDIT ENHANCEMENTS -- The
Certificate Insurance Policies and the Certificate Insurer" herein.
THERE IS CURRENTLY NO SECONDARY MARKET FOR THE OFFERED CERTIFICATES. THE
UNDERWRITERS INTEND TO MAKE A SECONDARY MARKET IN THE OFFERED CERTIFICATES BUT
ARE NOT OBLIGATED TO DO SO. THERE CAN BE NO ASSURANCE THAT A SECONDARY MARKET
FOR THE OFFERED CERTIFICATES WILL DEVELOP OR, IF IT DOES DEVELOP, THAT IT WILL
CONTINUE OR PROVIDE INVESTORS WITH SUFFICIENT LIQUIDITY OF INVESTMENT. THE
OFFERED CERTIFICATES WILL NOT BE LISTED ON ANY SECURITIES EXCHANGE.
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class I-X, Class II-X,
Class I-PO and Class II-PO Certificates, which will be rated "AAAr") by Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and "AAA" by
Duff & Phelps Credit Rating Co. ("DCR") and that the Class M, Class B-1 and
Class B-2 Certificates be rated not less than "AA," "A" and "BBB," respectively,
by DCR. See "RATING" herein.
Two separate REMIC elections will be made in connection with the Trust Fund
for federal income tax purposes. All of the certificates issued by the Trust
Fund, other than the Class R-I and Class R-II Certificates, will represent
ownership of REMIC "regular interests" in the related REMIC and the Class R-I
and Class R-II Certificates will represent ownership of REMIC "residual
interests" in the related REMIC. See "FEDERAL INCOME TAX CONSEQUENCES" herein
and in the Prospectus.
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 APRIL 22, 1998, 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> 5
SUMMARY INFORMATION
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus.
Title of Securities........... Mortgage Pass-Through Certificates, Series
1998-1.
Depositor..................... BA Mortgage Securities, Inc. (the "Depositor"),
a wholly-owned subsidiary of Bank of America,
FSB. See "THE DEPOSITOR" in the Prospectus.
Master Servicer............... Bank of America, FSB (the "Master Servicer"), 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....................... Bankers Trust Company of California, N.A., a
national banking association (the "Trustee").
Cut-off Date.................. April 1, 1998.
Closing Date.................. On or about April 24, 1998.
Offered Certificates.......... Class IA-1, Class IA-2, Class IA-3, Class IA-4,
Class IA-5, Class IA-6, Class IIA-1, Class
IIA-2, Class IIA-3, Class IIA-4, Class IIA-5,
Class IIA-6, Class I-X, Class II-X, Class I-PO,
Class II-PO, Class M, Class B-1, Class B-2,
Class R-I and Class R-II Certificates. Only the
Offered Certificates are offered hereby. The
initial Certificate Principal Balances (subject
to a permitted variance in the aggregate of
plus or minus 5%) and Pass-Through Rates of the
Offered Certificates are set forth or described
on the cover page hereof.
The Class A Certificates represent fractional
undivided interests in one of the two pools of
assets each constituting a separate pool of
assets within the Trust Fund and have the
rights described in the Pooling and Servicing
Agreement, to be dated as of the Cut-off Date
among the Depositor, the Master Servicer and
the Trustee (the "Pooling Agreement"). The
Subordinate Certificates and Residual
Certificates represent an undivided ownership
interest in the Trust Fund which will consist
primarily of the Mortgage Pool. The
Certificates will be issued pursuant to the
Pooling Agreement.
The Senior Certificates will comprise
approximately 97.25% of the initial aggregate
Certificate Principal Balance of the
Certificates. The Class M, Class B-1 and Class
B-2 Certificates will comprise approximately
1.10%, 0.65% and 0.35%, respectively, of the
initial aggregate Certificate Principal Balance
of the Certificates.
Certificates Other Than the
Offered Certificates.......... In addition to the Offered Certificates, the
following Classes of Certificates will be
issued in the indicated approximate initial
S-5
<PAGE> 6
Certificate Principal Balances and will bear
interest at the indicated Pass-Through Rates,
but are not offered hereby:
<TABLE>
<CAPTION>
APPROXIMATE
INITIAL CERTIFICATE PASS-THROUGH
PRINCIPAL BALANCE RATE
------------------- ------------
<S> <C> <C>
Class B-3.................. $1,030,060 Variable(1)
Class B-4.................. 515,029 Variable(1)
Class B-5.................. 686,706 Variable(1)
</TABLE>
-------------------------------------------------
(1) The Pass-Through Rate on the Class B-3,
Class B-4 and Class B-5 Certificates will
vary from 6.500% to 6.750% per annum. For
a more detailed description of the
Pass-Through Rate on the Subordinate
Certificates, see "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions"
herein. The initial Pass-Through Rate for
each Class of Subordinate Certificates
will be approximately 6.605% per annum.
Designations
Regular Certificates........ All Classes of Certificates other than the
Residual Certificates.
Residual Certificates....... Class R-I and Class R-II Certificates.
Class A Certificates........ Class IA-1, Class IA-2, Class IA-3, Class IA-4,
Class IA-5, Class IA-6, Class IIA-1, Class
IIA-2, Class IIA-3, Class IIA-4, Class IIA-5
and Class IIA-6 Certificates.
Senior Certificates......... Class A, Class I-X, Class II-X, Class I-PO,
Class II-PO and Residual Certificates.
Class B Certificates........ Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5 Certificates.
Subordinate Certificates.... Class M and Class B Certificates.
Senior Subordinate
Certificates.................. Class M, Class B-1 and Class B-2 Certificates.
Junior Subordinate
Certificates.................. Class B-3, Class B-4 and Class B-5
Certificates.
Group I Certificates........ Class IA-1, Class IA-2, Class IA-3, Class IA-4,
Class IA-5, Class IA-6, Class I-X and Class
I-PO Certificates.
Group II Certificates....... Class IIA-1, Class IIA-2, Class IIA-3, Class
IIA-4, Class IIA-5, Class IIA-6, Class II-X and
Class II-PO Certificates.
Group I Lockout
Certificates.................. Class IA-4 Certificates.
Group II Lockout
Certificates.................. Class IIA-4 Certificates.
Insured Certificates........ Class IA-2 and Class IA-5 Certificates.
Lockout Certificates........ Group I Lockout Certificates and Group II
Lockout Certificates.
Principal Only
Certificates.................. Class I-PO and Class II-PO Certificates.
Interest Only
Certificates.................. Class I-X and Class II-X Certificates.
Notional Amount
Certificates.................. Class I-X and Class II-X Certificates.
Book-Entry Certificates..... Offered Certificates (other than the Residual
Certificates).
S-6
<PAGE> 7
The Mortgage Pool........... The Mortgage Pool will consist of fixed-rate,
fully-amortizing, level monthly payment
mortgage loans (the "Mortgage Loans"). The
Mortgage Loans were originated or acquired by
Bank of America National Trust and Savings
Association and Bank of America, FSB (each, in
such capacity, a "Seller"). The Depositor will
acquire the Mortgage Loans from the Sellers on
the Closing Date. The Mortgage Loans are
secured by first liens on one- to four-family
residential real properties (each, a "Mortgaged
Property"). The Mortgage Pool consists of two
groups of Mortgage Loans ("Loan Group I" and
"Loan Group II", and each, a "Loan Group").
Group I Loans. The Group I Loans consist of
approximately 445 Mortgage Loans with an
aggregate principal balance as of the Cut-off
Date (after deducting payments of principal due
on such date) of approximately $143,649,466.
The Group I Loans have terms to maturity from
the date of origination of greater than 15
years but not more than 30 years, with a
weighted average remaining term to maturity of
approximately 351 months as of the Cut-off
Date. The Group I Loans will bear interest at
Mortgage Rates of at least 6.750% per annum but
not more than 8.500% per annum, with a weighted
average Mortgage Rate of approximately 7.562%
per annum as of the Cut-off Date.
Group II Loans. The Group II Loans consist of
approximately 567 Mortgage Loans with an
aggregate principal balance as of the Cut-off
Date (after deducting payments of principal due
on such date) of approximately $199,703,430.
The Group II Loans have terms to maturity from
the date of origination of not more than 15
years, with a weighted average remaining term
to maturity of approximately 177 months as of
the Cut-off Date. The Group II Loans will bear
interest at Mortgage Rates of at least 6.500%
per annum but not more than 7.750% per annum,
with a weighted average Mortgage Rate of
approximately 7.136% per annum as of the
Cut-off Date.
For a further description of the Mortgage
Loans, see "DESCRIPTION OF THE MORTGAGE POOL"
herein.
Book-Entry Registration....... The Book-Entry Certificates are issuable in
book-entry form 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 Book-Entry
Certificates, as such term is used herein. A
person acquiring an interest in Book-Entry
Certificates (a "Beneficial Owner") will not be
entitled to receive a certificate representing
such Beneficial Owner's interest in the
Book-Entry Certificates except in the event
that Definitive Certificates (as defined
herein) 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
S-7
<PAGE> 8
Registration" herein and "DESCRIPTION OF THE
CERTIFICATES -- Form of Certificates" in the
Prospectus.
Denominations................. The Offered Certificates, other than the Class
IA-2, Class IA-3, Class IA-5, Class IA-6 and
Class IIA-3 Certificates, are offered in
minimum denominations equivalent to not less
than $100,000 initial Certificate Principal
Balance (or initial Notional Amount in the case
of the Notional Amount Certificates) each and
multiples of, $1 in excess thereof. The Class
IA-2, Class IA-3, Class IA-5, Class IA-6 and
Class IIA-3 Certificates are offered in minimum
denominations equivalent to not less than
$1,000 initial Certificate Principal Balance
and multiples of $1 in excess thereof. The
Class R-I and Class R-II Certificates will each
be offered in registered, certificated form in
a single denomination of 99.99% Percentage
Interest. The remaining 0.01% Percentage
Interest of each of the Class R-I and Class
R-II Certificates will be retained by the
Master Servicer, as set forth herein under
"FEDERAL INCOME TAX CONSEQUENCES."
Priority of Distributions..... Commencing in May 1998, on the 25th day of each
month, or if such 25th day is not a Business
Day (as defined herein), on the immediately
succeeding Business Day (each, a "Distribution
Date"), prior to the Credit Support Depletion
Date (as defined below), distributions will in
general be made in the order and priority as
follows:
(a) with respect to the Group I Certificates
and the Residual Certificates: (1) first,
the Class I-PO Certificates receive a
certain portion of the principal received
in respect of each Group I Loan with a Net
Mortgage Rate of less than 6.750% per annum
(a "Class I-PO Mortgage Loan"), as
described in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group I Certificate
Principal Distributions -- Class I-PO
Distribution Amount"; (2) second, the Group
I Certificates entitled to interest and the
Residual Certificates receive Accrued
Certificate Interest and Unpaid Accrued
Certificate Interest, as described in
"DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions";
(3) third, the Group I Certificates
entitled to principal (other than the Class
I-PO Certificates) and the Residual
Certificates receive principal as described
in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group I Certificate
Principal Distributions -- Group I
Principal Distribution Amount"; and (4)
fourth, the Class I-PO Certificates receive
principal in the amount necessary to make
up for certain losses on the Class I-PO
Mortgage Loans, as described in
"DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group I Certificate
Principal Distributions -- Class I-PO
Distribution Amount";
(b) with respect to the Group II Certificates:
(1) first, the Class II-PO Certificates
receive a certain portion of the principal
received in respect of each Group II Loan
with a Net Mortgage Rate of less than
6.500% per annum (a "Class II-PO Mortgage
Loan"), as described in "DESCRIP-
S-8
<PAGE> 9
TION OF THE CERTIFICATES -- Principal
Distributions -- Group II Certificate
Principal Distributions -- Class II-PO
Distribution Amount"; (2) second, the Group
II Certificates entitled to interest
receive Accrued Certificate Interest and
Unpaid Accrued Certificate Interest, as
described in "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions";
(3) third, the Group II Certificates
entitled to principal (other than the Class
II-PO Certificates) receive principal as
described in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group II Certificate
Principal Distributions -- Group II
Principal Distribution Amount"; and (4)
fourth, the Class II-PO Certificates
receive principal in the amount necessary
to make up for certain losses on the Class
II-PO Mortgage Loans, as described in
"DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group II Certificate
Principal Distributions -- Class II-PO
Distribution Amount"; and
(c) with respect to the Subordinate
Certificates, the Residual Certificates and
the Certificate Insurer, following payments
to the Group I and Group II Certificates:
(1) first, the Subordinate Certificates
receive interest and then principal in the
following order of seniority, with both
interest and principal being paid to one
Class before any payments are made to the
next Class: Class M, Class B-1, Class B-2,
Class B-3, Class B-4 and Class B-5, as
described in "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions" and
"-- Principal Distributions -- Subordinate
Certificate Principal Distributions"; (2)
second, each Class of Subordinate
Certificates receives, in order of
seniority, the remaining portion, if any,
of the sum of the Available Distribution
Amounts (as defined in "DESCRIPTION OF THE
CERTIFICATES -- Available Distribution
Amount" herein) for both Loan Groups, up to
the amount of unreimbursed Realized Losses
previously allocated to such Class; (3)
third, the Certificate Insurer receives
reimbursement for any amounts paid out
under any Certificate Insurance Policy; and
(4) fourth, the Residual Certificates
receive the remaining portion (which is
expected to be zero) of the sum of the
Available Distribution Amounts for both
Loan Groups for such Distribution Date as
described in the Pooling Agreement.
The "Credit Support Depletion Date" is the
first Distribution Date on which the aggregate
of the Certificate Principal Balances of the
Subordinate Certificates has been or will be
reduced to zero.
On each Distribution Date on or after the
Credit Support Depletion Date, distributions
will in general be made in the order and
priority as follows:
(a) with respect to the Group I Certificates
and the Residual Certificates: (1) first,
the Class I-PO Certificates receive a
certain portion of the principal received
in respect of each Class I-PO Mortgage
Loan, as described in "DESCRIP-
S-9
<PAGE> 10
TION OF THE CERTIFICATES -- Principal
Distributions -- Group I Certificate
Principal Distributions -- Class I -PO
Distribution Amount"; (2) second, the Group
I Certificates entitled to interest and the
Residual Certificates receive Accrued
Certificate Interest and Unpaid Accrued
Certificate Interest, as described in
"DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions";
(3) third, the Group I Certificates
entitled to principal (other than the Class
I-PO Certificates) and the Residual
Certificates receive principal pro rata
according to their respective Certificate
Principal Balances; (4) fourth, the
Certificate Insurer receives reimbursement
for any amounts paid out under any
Certificate Insurance Policy; and (5)
fifth, the Residual Certificates receive
the remaining portion (which is expected to
be zero) of the Available Distribution
Amount for Loan Group I for such
Distribution Date as described in the
Pooling Agreement; and
(b) with respect to the Group II Certificates
and the Residual Certificates: (1) first,
the Class II-PO Certificates receive a
certain portion of the principal received
in respect of each Class II-PO Mortgage
Loan, as described in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group II Certificate
Principal Distributions -- Class II-PO
Distribution Amount"; (2) second, the Group
II Certificates entitled to interest
receive Accrued Certificate Interest and
Unpaid Accrued Certificate Interest, as
described in "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions";
(3) third, the Group II Certificates
entitled to principal (other than the Class
II-PO Certificates) receive principal pro
rata according to their respective
Certificate Principal Balances; (4) fourth,
the Certificate Insurer receives
reimbursement for any amounts paid out
under any Certificate Insurance Policy; and
(5) fifth, the Residual Certificates
receive the remaining portion (which is
expected to be zero) of the Available
Distribution Amount for Loan Group II for
such Distribution Date as described in the
Pooling Agreement.
Except for the limited circumstances described
in "DESCRIPTION OF THE
CERTIFICATES -- Cross-Collateralization" herein
and with respect to the Insured Certificates,
which may also receive payments under their
respective Certificate Insurance Policies as
described herein, distributions of interest and
principal to the Group I Certificates and Group
II Certificates will be based solely on
payments received with respect to Group I Loans
and Group II Loans, respectively.
For a precise description of the order and
priority of distributions, see "DESCRIPTION OF
THE CERTIFICATES -- Priority of Distributions"
herein.
Interest Distributions........ Holders of each Class of Offered Certificates
(other than the Principal Only Certificates)
will be entitled to receive distributions in an
amount equal to the Accrued Certificate
Interest (as defined
S-10
<PAGE> 11
below) on such Class on each Distribution Date,
to the extent of the Available Distribution
Amount for the related Loan Group (as defined
herein under "DESCRIPTION OF THE
CERTIFICATES -- Available Distribution Amount")
for such Distribution Date, except that
interest accrued on the Class IIA-6
Certificates on or before the Class IIA-6
Accretion Termination Date will be added to the
Class IIA-6 Certificate Principal Balance.
With respect to any Distribution Date, Accrued
Certificate Interest will be equal to one
month's interest accrued during the preceding
calendar month on the Certificate Principal
Balance (or Notional Amount, in the case of the
Notional Amount Certificates) of the
Certificates of such Class, at the Pass-Through
Rate (as set forth or described on the cover
hereof) on such Class; 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
herein and allocated as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Interest
Distributions") for such Distribution Date. For
a description of how the Class I-X and Class
II-X Notional Amounts are determined, see
"DESCRIPTION OF THE CERTIFICATES -- Interest
Distributions' herein.
Compensating Interest......... With respect to prepayments in full or in part,
the Master Servicer is obligated to reduce its
aggregate Servicing Fee to the extent necessary
to fund any Prepayment Interest Shortfall
(adjusted to the related Net Mortgage Rate) on
each Distribution Date. The amount so passed
through will hereinafter be referred to as
"Compensating Interest." See "DESCRIPTION OF
THE CERTIFICATES -- Interest Distributions" and
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
herein.
Principal Distributions....... General. On each Distribution Date,
Certificateholders will be entitled to receive
principal distributions from the related
Available Distribution Amount to the extent and
priority described herein. See "DESCRIPTION OF
THE CERTIFICATES -- Priority of Distributions"
and "-- Principal Distributions" herein. The
Group I Certificates will only receive
principal collected from Group I Loans and the
Group II Certificates will only receive
principal collected from Group II Loans, except
(i) with respect to the Group I and Group II
Certificates under the limited circumstances
described in "DESCRIPTION OF THE
CERTIFICATES -- Cross-Collateralization" herein
and (ii) with respect to the Insured
Certificates, which may also receive payments
under their respective Certificate Insurance
Policies as described herein. The Subordinate
Certificates will receive principal collected
from Mortgage Loans in both Loan Groups.
The Class I-X and Class II-X Certificates will
not receive any distributions of principal.
Distributions to the Group I Certificates
(other than the Class I-PO Certificates). On
each Distribution Date, prior to the Credit
Support Depletion Date, an amount, up to the
amount of the
S-11
<PAGE> 12
Group I Principal Distribution Amount (as
defined in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group I Certificate Principal
Distributions -- Group I Principal Distribution
Amount" herein) for such Distribution Date,
will be distributed as principal to the Group I
Certificates entitled to principal (other than
Class I-PO Certificates) in the order of
priority described herein under "DESCRIPTION OF
THE CERTIFICATES -- Principal Distributions --
Group I Certificate Principal
Distributions -- Group I Principal Distribution
Amount."
On each Distribution Date on or after the
Credit Support Depletion Date, an amount, up to
the amount of the Group I Principal
Distribution Amount for such Distribution Date
will be distributed as principal to the Group I
Certificates entitled to principal (other than
the Class I-PO Certificates), pro rata
according to their respective Certificate
Principal Balances.
Distributions to the Group II Certificates
(other than the Class II-PO Certificates). On
each Distribution Date, prior to the Credit
Support Depletion Date, an amount, up to the
amount of the Group II Principal Distribution
Amount (as defined in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group II Certificate Principal
Distributions -- Group II Principal
Distribution Amount" herein) for such
Distribution Date, will be distributed as
principal to the Group II Certificates entitled
to principal (other than the Class II-PO
Certificates) in the order of priority
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group II Certificate Principal
Distributions -- Group II Principal
Distribution Amount."
On each Distribution Date on or after the
Credit Support Depletion Date, an amount, up to
the amount of the Group II Principal
Distribution Amount for such Distribution Date
will be distributed as principal to the Group
II Certificates entitled to principal (other
than the Class II-PO Certificates), pro rata
according to their respective Certificate
Principal Balances.
Distributions to the Class I-PO and Class II-PO
Certificates. The Class I-PO and Class II-PO
Certificates will receive a portion of the
principal received on or in respect of any
Class I-PO Mortgage Loan or Class II-PO
Mortgage Loan, respectively. In addition, for
so long as any Class of Subordinate
Certificates remains outstanding, the Class
I-PO and Class II-PO Certificates will receive
distributions of principal equal to a portion
of certain losses on Class I-PO Mortgage Loans
or Class II-PO Mortgage Loans, respectively, as
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Group I Certificate Principal
Distributions -- Class I-PO Distribution
Amount" and "-- Group II Certificate Principal
Distributions -- Class II-PO Distribution
Amount."
Distributions to the Subordinate
Certificates. On each Distribution Date, an
amount, up to the Subordinate Principal
Distribution
S-12
<PAGE> 13
Amount (as defined in "DESCRIPTION OF THE
CERTIFICATES -- Principal
Distributions -- Subordinate Certificate
Principal Distributions" herein) for such
Distribution Date, will be distributed as
principal to the Subordinate Certificates. On
each Distribution Date, except Distribution
Dates on which the Subordination Level (as
defined in "DESCRIPTION OF THE
CERTIFICATES -- Priority of Distributions'
herein) for any Class of Subordinate
Certificates is less than such Subordination
Level as of the Cut-off Date, each Class of
Subordinate Certificates will be entitled to
receive its pro rata (by Certificate Principal
Balance) share of the Subordinate Principal
Distribution Amount, to the extent of the
Available Distribution Amount for both Loan
Groups remaining after distributions of
interest and principal to the Senior
Certificates, distributions of interest and
principal to all Classes of Subordinate
Certificates senior to such Class and
distributions of interest to such Class. See
"DESCRIPTION OF THE CERTIFICATES -- Priority of
Distributions" herein. The relative seniority,
from highest to lowest, of the Subordinate
Certificates shall be as follows: Class M,
Class B-1, Class B-2, Class B-3, Class B-4 and
Class B-5.
The rights of the holders of the Subordinate
Certificates to receive distributions of
principal are subordinated to the rights of the
holders of the Senior Certificates to receive
distributions of principal. See "DESCRIPTION OF
THE CERTIFICATES -- Allocation of Losses;
Subordination" herein.
For a more detailed description of how
distributions of principal will be allocated
among the various Classes of Certificates, see
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions" herein.
Cross-Collateralization....... In certain limited circumstances prior to the
Credit Support Depletion Date but on or after
the date on which the Certificate Principal
Balances of the Group I Certificates or Group
II Certificates have been reduced to zero, all
principal (in excess of that needed to reduce
such Certificate Principal Balances to zero) on
the Mortgage Loans in the Loan Group relating
to the Class A Certificates that have been paid
in full will be paid as principal, after
distributions of principal to the Class I-PO
Certificates or Class II-PO Certificates, as
applicable, to the remaining Class A
Certificates in accordance with the order set
forth under "-- Group I Certificate Principal
Distributions -- Group I Principal Distribution
Amount" or "-- Group II Certificate Principal
Distributions -- Group II Principal
Distribution Amount", as applicable, beginning
with clause (ii) thereof as described in
"DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions" herein. Consequently, in such
event, the Subordinate Certificates will not
receive such principal amount. In addition,
generally if on any Distribution Date the
aggregate of the Certificate Principal Balances
of the Group I Certificates or Group II
Certificates is greater than the aggregate of
the Stated Principal Balances of the Mortgage
Loans in the related Loan Group (the
"Undercollateralized Group"), (i) a portion of
the Available
S-13
<PAGE> 14
Distribution Amount in respect of principal on
the Mortgage Loans in the other Loan Group (the
"Overcollateralized Group") (after
distributions of principal to the Class I-PO
Certificates or Class II-PO Certificates, as
applicable, and Class A Certificates of the
Overcollateralized Group) will be distributed
to the Class A Certificates of the
Undercollateralized Group as described under
"-- Cross-Collateralization" and in accordance
with the order set forth the under "-- Group I
Certificate Principal Distributions -- Group I
Principal Distribution Amount" or "-- Group II
Certificate Principal Distributions -- Group II
Principal Distribution Amount", as applicable,
and (ii) the Available Distribution Amount of
the Overcollateralized Group will be further
reduced (after distributions to the
Overcollateralized Group pursuant to subclauses
(a)(i) and (ii) or (b)(i) and (ii), as
applicable, under "DESCRIPTION OF THE
CERTIFICATES -- Priority of Distributions"
herein) in an amount equal to one month's
interest on the amount by which the
Undercollateralized Group is
undercollateralized at 6.750% per annum if the
Undercollateralized Loan Group is Loan Group I
or 6.500% per annum if the Undercollateralized
Loan Group is Loan Group II plus any Unpaid
Accrued Certificate Interest on the Class A
Certificates of the Undercollateralized Group
from prior Distribution Dates, including
interest on such Unpaid Accrued Certificate
Interest at the rate described above (any
amount covering interest shortfalls and
interest accrued thereon, will be distributed
to the applicable Class or Classes of
Certificates in the priority of interest
payable on such Class of Certificates on such
Distribution Date) and such amount will be
added to the Available Distribution Amount of
the Undercollateralized Group.
Allocation of Losses;
Subordination................. Neither the Certificates nor the underlying
Mortgage Loans or other assets of the Trust
Fund are insured or guaranteed by the FDIC or
any other governmental agency or
instrumentality or by the Depositor, the Master
Servicer, BankAmerica or any of their
affiliates.
Subject to the limitations set forth below,
Realized Losses on the Mortgage Loans will be
allocated as follows: first, to the Class B-5
Certificates; second, to the Class B-4
Certificates; third, to the Class B-3
Certificates; fourth, to the Class B-2
Certificates; fifth, to the Class B-1
Certificates; sixth to the Class M
Certificates, in each case until the
Certificate Principal Balance of such class of
Certificates has been reduced to zero; and
seventh, (x) in the case of losses on a Group I
Loan, to the Group I Certificates, pro rata
according to their Certificate Principal
Balances in reduction thereof, and (y) in the
case of losses on a Group II Loan, to the Group
II Certificates, pro rata according to their
Certificate Principal Balances in reduction
thereof; provided, however, that in each case
if any such Realized Losses are on a Class I-PO
Mortgage Loan or Class II-PO Mortgage Loan, the
Class I-PO Fraction or II-PO Fraction of such
Realized Losses will first be allocated to the
Class I-PO Certificates or Class II-PO
Certificates, as applicable, and the remainder
of such Realized Losses will be allocated as
described above in this paragraph.
S-14
<PAGE> 15
The subordination provided to the Senior
Certificates by the Subordinate Certificates,
provided to the Class M Certificates by the
Class B Certificates and provided to each Class
of Class B Certificates (except the Class B-5
Certificates) by those Classes of Class B
Certificates having a higher numerical
designation 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 solely to the
Subordinate Certificates to cover Special
Hazard Losses, Fraud Losses and Bankruptcy
Losses are initially limited to $4,502,375,
$3,433,529 and $100,000, 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
Subordinate Certificate with the lowest
priority then outstanding is reduced to zero,
all additional losses will be borne by the
Subordinate Certificate with the next lowest
priority. The priority of the Subordinate
Certificates from highest to lowest is as
follows: Class M, Class B-1, Class B-2, Class
B-3, Class B-4 and Class B-5.
In addition, any Special Hazard Losses, Fraud
Losses and Bankruptcy Losses in excess of the
respective amounts of coverage therefor and all
Extraordinary Losses will be borne by the
holders of Senior Certificates (other than the
Principal Only Certificates) and Subordinate
Certificates on a pro rata basis. For purposes
of the foregoing, each Class of Subordinate
Certificates will be deemed to have an
aggregate Certificate Principal Balance (and to
accrue interest thereon) equal to the actual
aggregate Certificate Principal Balance thereof
times a fraction, the numerator of which is the
Group I Subordinate Amount (for a loss on a
Group I Loan) or the Group II Subordinate
Amount (for a loss on a Group II Loan), and the
denominator of which is the aggregate of the
Group I Subordinate Amount and the Group II
Subordinate Amount. 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.
The Certificate Insurance
Policies...................... In addition to the credit enhancement provided
by the subordination of the Subordinate
Certificates, each Class of Insured
Certificates will have the benefit of a
Certificate Insurance Policy pursuant to which
the Certificate Insurer will unconditionally
and irrevocably guarantee the payment of the
Deficiency Amount (as defined herein) on the
Insured Certificates. The Certificate Insurance
Policies will not cover (i) any shortfalls in
interest collections allocable to the Insured
Certificates resulting from the application of
the Soldiers' and Sailors' Civil Relief Act of
1940, as amended, nor (ii) prepayment interest
shortfalls allocable to the Insured
Certificates. See "CREDIT ENHANCEMENTS -- The
Certifi
S-15
<PAGE> 16
cate Insurance Policies and the Certificate
Insurer" herein. The Certificate Insurance
Policies do not provide credit enhancement for
any Class of Certificates other than the
Insured Certificates.
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.
Residual Certificates......... The Residual Certificates will each have an
initial Certificate Principal Balance of $50
and a Pass-Through Rate of 6.750% per annum. In
addition, the Class R-I 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 all of the Senior Certificates
and the Subordinate Certificates.
Last Scheduled Distribution
Date.......................... The Last Scheduled Distribution Date for all
Group I Certificates and the Subordinate
Certificates is the Distribution Date in May
2028, which is the Distribution Date occurring
in the month after the scheduled maturity date
for the latest maturing Group I Loan.
The Last Scheduled Distribution Date for all
Group II Certificates is the Distribution Date
in May 2013, which is the Distribution Date
occurring in the month after the scheduled
maturity date for the latest maturing Group II
Loan.
The actual last Distribution Date on the
Certificates will depend on the rate of
payments of principal (including Principal
Prepayments) on the Mortgage Loans in the
related Loan Group or Loan Groups, which in
turn, may be influenced by a variety of
economic, geographic and social factors, as
well as the level of prevailing interest rates.
No assurance can be given as to the actual
payment experience on the Mortgage Loans. See
"DESCRIPTION OF THE CERTIFICATES -- Last
Scheduled Distribution Date" and "CERTAIN YIELD
AND PREPAYMENT CONSIDERATIONS" herein.
Optional Termination.......... At its option, on any Distribution Date when
the aggregate principal balance of the Mortgage
Loans is less than 10% of the aggregate
principal balance of the Mortgage Loans as of
the Cut-off Date, the Master Servicer may
purchase from the Trust Fund all remaining
Mortgage Loans and other assets thereof at a
price equal to the sum of (a) 100% of the
unpaid principal balance of each Mortgage Loan
(other than any Mortgage Loan as to which title
to the related Mortgaged Property has been
acquired), or with respect to Mortgaged
Properties acquired in connection with
defaulted Mortgage Loans, the fair market value
of each Mortgaged Property if such fair market
value is less than such unpaid principal
balance (net of any unreimbursed Advances
attributable to princi-
S-16
<PAGE> 17
pal), in each case less any Realized Losses
that have not previously been allocated to the
Certificates on the day of repurchase plus (b)
accrued interest thereon at the weighted
average Net Mortgage Rate to, but not
including, the first day of the month of
repurchase. See "POOLING
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 in the
related Loan Group. As is the case with
mortgage-backed securities generally, the
Offered Certificates are subject to substantial
inherent cash-flow uncertainties because the
Mortgage Loans in the related Loan Group may be
prepaid at any time without penalty. 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 Group I Certificates and Group II
Certificates (other than the Class I-PO and
Class II-PO Certificates) are subject to
various priorities for payment of principal as
described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions."
Distributions on Classes of Group I
Certificates and Group II Certificates having
an earlier priority of payment will be
immediately affected by the prepayment speed of
the Mortgage Loans in the related Loan Group
early in the life of the Mortgage Pool.
Distributions 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.
As described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions,"
during certain periods all or a
disproportionately large percentage of
principal payments and principal prepayments on
the Group I Loans will be allocated among the
Group I Certificates (other than the Group I
Lockout Certificates and Class I-PO
Certificates), and during certain periods none
or a disproportionately small percentage of
such principal payments and principal
prepayments will be distributed to the Group I
Lockout Certificates. As a result, the weighted
average lives of the Group I Lockout
Certificates will be significantly longer than
would otherwise be the case.
As described herein under "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions,"
during certain periods all or a
disproportionately large percentage of
principal prepayments on the
S-17
<PAGE> 18
Group II Loans will be allocated among the
Group II Certificates (other than the Group II
Lockout Certificates and Class II-PO
Certificates), and during certain periods none
or a disproportionately small percentage of
such prepayments will be distributed to the
Group II Lockout Certificates. As a result, the
weighted average lives of the Group II Lockout
Certificates will be longer than would
otherwise be the case.
To the extent that no principal prepayments or
a disproportionately small percentage of
principal prepayments on the Mortgage Loans are
distributed to the Subordinate Certificates, in
the absence of offsetting Realized Losses
allocated thereto, the weighted average lives
of the Subordinate Certificates will be
extended and, as a relative matter, the
subordination afforded the Senior Certificates
by the Subordinate Certificates will be
increased.
See "DESCRIPTION OF THE
CERTIFICATES -- Principal Distributions" and
"CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS"
herein, and "MATURITY AND PREPAYMENT
CONSIDERATIONS" in the Prospectus.
Special Yield
Considerations................ The yield to maturity on each respective Class
of Certificates will depend on the rate and
timing of principal payments (including
prepayments, defaults and liquidations) on the
Mortgage Loans in the related Loan Group or
Loan Groups and the allocation thereof (and of
any losses on the Mortgage Loans in the related
Loan Group or Loan Groups) 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. Except as described herein
under "DESCRIPTION OF THE
CERTIFICATES -- Cross-Collateralization" and
with respect to the Insured Certificates, which
may also receive payments under their
respective Certificate Insurance Policies as
described herein, principal distributions to
the Group I Certificates and Group II
Certificates relate to principal payments on
the Group I Loans and Group II Loans,
respectively. The yield to investors on any
Class of Certificates will be adversely
affected by any allocation thereto of Net
Prepayment Interest Shortfalls on the Mortgage
Loans.
In general, if a Class of 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 assumed at the time of purchase.
Conversely, if a Class of Certificates is
purchased at a discount and principal
distributions thereon occur at a rate slower
than anticipated at the time of purchase, the
investor's actual yield to maturity will be
lower than assumed at the time of purchase.
The Certificates were structured based on a
number of assumptions, including a Standard
Prepayment Assumption ("SPA") of 250% and
weighted average lives corresponding thereto as
set forth herein under "CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS." The yield
assumptions for the respective
S-18
<PAGE> 19
Classes that are to be offered hereunder will
vary as determined at the time of sale.
The yields to maturity on the Interest Only
Certificates will be extremely sensitive to the
overall rate of receipt of principal
prepayments on the Premium Rate Mortgage Loans
in the related Loan Group. The interest payable
to the Class I-X Certificates is based on the
weighted average of the Stripped Interest Rates
of the Group I Premium Rate Mortgage Loans. The
interest payable to the Class II-X Certificates
is based on the weighted average of the
Stripped Interest Rates of the Group II Premium
Rate Mortgage Loans. The Group I Premium Rate
Mortgage Loans and Group II Premium Rate
Mortgage Loans are collectively referred to
herein as the "Premium Rate Mortgage Loans."
Therefore the yield to maturity on any Class of
the Interest Only Certificates will generally
decrease as a result of faster than expected
principal prepayments on the related Premium
Rate Mortgage Loans. Prospective investors
should fully consider the risks associated with
an investment in any Class of Interest Only
Certificates, including the possibility that if
the rate of principal prepayments on the
related Premium Rate Mortgage Loans is rapid,
such investors may not fully recoup their
initial investments.
Because the principal payable with respect to
the Class I-PO Certificates (which are entitled
to receive distributions of principal only) is
derived from Group I Loans with Net Mortgage
Rates that are lower than 6.750% per annum, the
yield to maturity on the Class I-PO
Certificates will be adversely affected by
slower than expected Principal Prepayments on
such Mortgage Loans. Because the principal
payable with respect to the Class II-PO
Certificates (which are entitled to receive
distributions of principal only) is derived
from Group II Loans with Net Mortgage Rates
that are lower than 6.500% per annum, the yield
to maturity on the Class II-PO Certificates
will be adversely affected by slower than
expected Principal Prepayments on such Mortgage
Loans. Because the interest payable on the
Class I-X and Class II-X Certificates and the
principal distributable to the Class I-PO and
Class II-PO Certificates are derived from
different groups of Mortgage Loans within the
related Loan Group, it is possible that faster
than expected prepayments with respect to the
Interest Only Certificates may occur at the
same time as slower than expected prepayments
with respect to the Principal Only
Certificates.
Principal distributions on the Class IIA-5
Certificates are generally payable based on the
Targeted Principal Balances set forth in
Appendix A. The Targeted Principal Balances of
the Class IIA-5 Certificates were determined
assuming that the prepayment rate of the Group
I Loans occur each month at a constant level of
250% of SPA. However, as discussed herein,
actual principal distributions may deviate from
the described amounts, because the actual
prepayment rate of the Group II Loans each
month may not occur or remain constant at such
percentage of SPA. If the Certificate Principal
Balance of the Class IIA-6 Certificates is
reduced to zero before the Certificate
Principal Balance of the Class IIA-5 Certifi
S-19
<PAGE> 20
cates is reduced to zero, the weighted average
life of the Class IIA-5 Certificates will
become significantly more sensitive to changes
in the prepayment rate of the Group II Loans.
Principal prepayments on the Group II Loans and
other unscheduled payments of principal may
result in principal available for distribution
on a Distribution Date to the Class IIA-5
Certificates in an amount greater than the
amount necessary to reduce the Certificate
Principal Balance of the Class IIA-5
Certificates to its Targeted Principal Balance
for such Distribution Date. Such excess
principal will be distributed to the Class
IIA-6 Certificates until the Class IIA-6
Certificate Principal Balance has been reduced
to zero. Accordingly, the rate of payments on
the Group II Loans is expected to have a
greater effect on the weighted average life of
the Class IIA-6 Certificates than on the
weighted average life of the Class IIA-5
Certificates. If the rate of Principal
Prepayments and other unscheduled payments of
principal causes the principal available for
distribution on the Class IIA-5 Certificates on
any Distribution Date to be less than the
amount necessary to reduce the IIA-5
Certificate Principal Balance to its respective
Targeted Principal Balance for such
Distribution Date, the Class IIA-6 Certificates
will not receive any distributions of
principal. See "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.
The yields to maturity on the Subordinate
Certificates, and in particular on the classes
of Subordinate Certificates with lower payment
priorities, 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 classes of
Subordinate Certificates lower in priority,
because the entire amount of such losses
(rather than a pro rata portion thereof) will
be allocable to the Subordinate Certificates,
as described herein. The payment priority of
the Subordinate Certificates from highest to
lowest is as follows: Class M, Class B-1, Class
B-2, Class B-3, Class B-4 and Class B-5.
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.
See "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS," especially "-- Yield
Considerations with Respect to the Interest
Only and Principal Only Certificates," and
"-- Yield Considerations Relating to the Class
M, Class B-1 and Class B-2 Certificates" and
"FEDERAL INCOME TAX CONSEQUENCES" herein, and
"YIELD CONSIDERATIONS" in the Prospectus.
Federal Income Tax
Consequences.................. Two separate REMIC elections ("REMIC I" and
"REMIC II") will be made with respect to the
Trust Fund (other than the
S-20
<PAGE> 21
Certificate Insurance Policies) for federal
income tax purposes. Upon the issuance of the
Certificates, Orrick, Herrington & Sutcliffe
LLP, counsel to the Depositor, will deliver its
opinion generally to the effect that, assuming
compliance with all provisions of the Pooling
Agreement, REMIC I and REMIC II will qualify as
REMICs under Sections 860A through 860G of the
Internal Revenue Code of 1986 (the "Code").
For federal income tax purposes, (a) the Class
R-I Certificates will be the sole class of
"residual interests" in REMIC I, (b) the
Offered Certificates (other than the Residual
Certificates) will represent "regular
interests" in REMIC II and will generally be
treated as representing ownership of debt
instruments of REMIC II and (c) the Class R-II
Certificates will constitute the sole class of
"residual interests" in REMIC II.
For federal income tax reporting purposes, the
Class IA-1, Class IA-4, Class IIA-1, Class
IIA-2, Class IIA-4 and Class IIA-5 Certificates
will not be treated as having been issued with
original issue discount for federal income tax
reporting purposes. The Class M and Class B-1
Certificates may be treated as having been
issued with original issue discount for federal
income tax reporting purposes. The Class IA-2,
Class IA-3, Class IA-5, Class IA-6, Class
IIA-3, Class IIA-6, Interest Only, Principal
Only and Class B-2 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
market discount and premium, if any, for
federal income tax purposes is 250% SPA.
No representation is made that the Mortgage
Loans will prepay at any given percentage of
the SPA.
If actual prepayments differ sufficiently from
the prepayment assumption, the calculation of
OID for certain Classes of Offered Certificates
might produce a negative number for certain
accrual periods. In such event,
Certificateholders will not be entitled to a
deduction for such amount, but will be required
to carry such amount forward as an offset to
OID, if any, accruing in future accrual
periods.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "FEDERAL INCOME TAX
CONSEQUENCES" herein and in the Prospectus.
ERISA Considerations.......... Subject to the considerations described herein
and in the Prospectus, the Senior Certificates
other than the Residual Certificates may be
acquired by or on behalf of Plans and Plan
Investors (each, as defined herein). See "ERISA
CONSIDERATIONS" herein and in the Prospectus.
Rating........................ It is a condition to the issuance of the
Offered Certificates that the Senior
Certificates each be rated "AAA" (except for
the Class I-X, Class II-X, Class I-PO and Class
II-PO Certificates, which will be rated "AAAr")
by Standard & Poor's, a division of
S-21
<PAGE> 22
The McGraw-Hill Companies, Inc. ("S&P"), and
"AAA" by Duff & Phelps Credit Rating Co.
("DCR") and that the Class M, Class B-1, Class
B-2 Certificates be rated not less than "AA,"
"A" and "BBB," respectively, by DCR. 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 Notional
Amount Certificates does not address the
possibility that the holders of such
Certificates may fail to fully recover their
initial investment. See "CERTAIN YIELD AND
PREPAYMENT CONSIDERATIONS" and "RATING" herein
and "YIELD CONSIDERATIONS" in the Prospectus.
Legal Investment.............. The Offered Certificates, other than the Class
B-1 and Class B-2 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 Class B-1 and Class B-2
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-22
<PAGE> 23
RISK FACTORS
UNCERTAIN TIMING OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS
The rate of principal payments, the amount of each interest payment and the
yield to maturity on each Class of the Certificates are directly related to the
rate of payments of principal on the Mortgage Loans in the related Loan Group,
which may be in the form of scheduled amortization, Principal Prepayments,
defaults or liquidations. In general, when the level of prevailing mortgage
interest rates declines significantly below the interest rates on the Mortgage
Loans, the rate of Principal Prepayments is likely to increase, although the
prepayment rate is influenced by a number of other factors, including general
economic conditions and homeowner mobility. The rate of payment of principal
will also be affected by any repurchase by a Seller or the Master Servicer of
the Mortgage Loans in the related Loan Group. See "POOLING AGREEMENT --
Termination; Retirement of Certificates" and "MATURITY AND PREPAYMENT
CONSIDERATIONS" in the Prospectus and "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" and "POOLING AGREEMENT -- Termination" herein. In such event,
the repurchase price paid by a Seller or the Master Servicer would be passed
through to Certificateholders in the related Certificate Group on the
Distribution Date following the month of repurchase. All of the Mortgage Loans
contained "due-on-sale" clauses. Consequently, acceleration of maturity as a
result of transfers of Mortgaged Properties will affect the level of prepayments
on the Mortgage Loans.
If any Certificate is purchased at a discount from its original Certificate
Principal Balance, and if a purchaser of such Certificate calculates the yield
to maturity based on an assumed rate of principal payments (including Principal
Prepayments, defaults and liquidations) faster than that actually received on
the Mortgage Loans in the related Loan Group, the actual yield to maturity will
be lower than that so calculated. If any Certificate is purchased at a premium
from its original Certificate Principal Balance, and if a purchaser of such
Certificate calculates the yield to maturity based on an assumed rate of
principal payments (including Principal Prepayments, defaults and liquidations)
slower than that actually received on the Mortgage Loans in the related Loan
Group, the actual yield to maturity will be lower than that so calculated.
SENSITIVITY OF CLASS IIA-6 CERTIFICATE YIELDS TO PREPAYMENTS
The Class IIA-6 Certificates will be especially sensitive to the rate of
payment of principal (including prepayments, defaults and liquidations) on the
Group II Loans because (i) prior to the Class IIA-6 Accretion Termination Date
(as defined herein) accrued certificate interest on the Class IIA-6 Certificates
will be added to the Certificate Principal Balance thereof rather than
distributed in respect of such Certificates and (ii) the Class IIA-6
Certificates will receive distributions of the Class IIA-6 Accrual Amount (as
defined herein) as principal on any Distribution Date prior to the Class IIA-6
Accretion Termination Date only to the extent of the Class IIA-6 Accrual Amount
remaining, if any, after the Certificate Principal Balance of the Class IIA-5
Certificates has been reduced to its Targeted Principal Balance (as described
herein) for such Distribution Date.
SENSITIVITY OF INTEREST ONLY AND PRINCIPAL ONLY CERTIFICATE YIELDS TO
PREPAYMENTS
The yields to maturity on the Interest Only and Principal Only Certificates
will be extremely sensitive to the level of principal prepayments (including
Principal Prepayments, defaults and liquidations) on the Premium Rate Mortgage
Loans in the related Loan Group. The interest payable to the Interest Only
Certificates is based on the weighted average of the Stripped Interest Rates of
the Premium Rate Mortgage Loans in the related Loan Group and therefore the
yield to maturity on such Certificates will decrease as a result of faster than
expected Principal Prepayments on the Premium Rate Mortgage Loans in the related
Loan Group. Prospective investors should fully consider the risks associated
with an investment in any Class of Interest Only Certificates, including the
possibility that if the rate of Principal Prepayments on the Premium Rate
Mortgage Loans in the related Loan Group is rapid, such investors may not fully
recoup their initial investments. SEE "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.
S-23
<PAGE> 24
Because the principal payable with respect to the Class I-PO Certificates
(which are entitled to receive distributions of principal only) is derived from
Group I Loans with Net Mortgage Rates that are lower than 6.750% per annum, the
yield to maturity on the Class I-PO Certificates will be adversely affected by
slower than expected Principal Prepayments on such Mortgage Loans. Because the
principal payable with respect to the Class II-PO Certificates (which are
entitled to receive distributions of principal only) is derived from Group II
Loans with Net Mortgage Rates that are lower than 6.500% per annum, the yield to
maturity on the Class II-PO Certificates will be adversely affected by slower
than expected Principal Prepayments on such Mortgage Loans. Because the interest
payable on the Class I-X and Class II-X Certificates and the principal
distributable to the Class I-PO and Class II-PO Certificates are derived from
different groups of Mortgage Loans within the related Loan Group, it is possible
that faster than expected prepayments with respect to the Interest Only
Certificates may occur at the same time as slower than expected prepayments with
respect to the Principal Only Certificates.
PRINCIPAL PAYMENT AND PRINCIPAL PREPAYMENT LIMITATIONS ON THE GROUP I LOCKOUT
CERTIFICATES
The Group I Lockout Certificates will generally not be entitled to receive
any distributions in respect of principal payments and principal prepayments
until the Distribution Date occurring in May 2003. Thereafter, the Group I
Lockout Certificates will not be entitled to receive the disproportionate
allocation of principal prepayments that the other Group I Certificates are
entitled to receive. See "DESCRIPTION OF THE CERTIFICATES -- Principal
Distributions -- Group I Certificate Principal Distributions" and "CERTAIN YIELD
AND PREPAYMENT CONSIDERATIONS" herein.
PRINCIPAL PREPAYMENT LIMITATIONS ON THE GROUP II LOCKOUT CERTIFICATES
The Group II Lockout Certificates will generally not be entitled to receive
any distributions in respect of principal prepayments until the Distribution
Date occurring in May 2003. Thereafter, the Group II Lockout Certificates will
not be entitled to receive the disproportionate allocation of principal
prepayments that the other Group II Certificates are entitled to receive. See
"DESCRIPTION OF THE CERTIFICATES -- Principal Distributions -- Group II
Certificate Principal Distributions" and "CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS" herein.
CROSS-COLLATERALIZATION
Investors in the Senior Certificates should be aware that the applicable
coverages for Special Hazard Losses, Fraud Losses and Bankruptcy Losses cover
Mortgage Loans in both Loan Groups. Therefore, in the event Mortgage Loans in a
Loan Group suffer a high level of such losses, it will reduce the available
coverage for the Senior Certificates in both Loan Groups and therefore may cause
Senior Certificates relating to the other Loan Group to suffer losses in the
event Mortgage Loans in either Loan Group suffer such losses after the available
coverage has been exhausted. See "DESCRIPTION OF THE CERTIFICATES -- Cross-
Collateralization" herein.
Investors in the Senior Certificates should also be aware that because the
Subordinate Certificates represent interests in both Loan Groups, the
Certificate Principal Balance of the Subordinate Certificates could be reduced
to zero as a result of a disproportionate amount of Realized Losses on the
Mortgage Loans in one Loan Group. Therefore, notwithstanding that Realized
Losses on the Mortgage Loans in one Loan Group may only be allocated to the
related Senior Certificates (except for Special Hazard Losses, Fraud Losses and
Bankruptcy Losses in excess of the applicable coverage amounts), the allocation
to the Senior Certificates of Realized Losses on the Mortgage Loans in either
Loan Group will reduce the subordination provided by the Subordinate
Certificates to the Senior Certificates of the other Loan Group and increase the
likelihood that Realized Losses may be allocated to the Senior Certificates of
such other Loan Group. See "DESCRIPTION OF THE CERTIFICATES -- Cross
Collateralization" herein.
S-24
<PAGE> 25
SUBORDINATION; ALLOCATION OF REALIZED LOSSES
The yield to maturity on each Class of Senior Subordinate Certificates will
be extremely sensitive to Realized Losses on the Mortgage Loans (other than
Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and
Extraordinary Losses, each as defined herein) because a disproportionately large
amount of such losses (rather than a pro rata portion thereof) generally will be
allocable to such Classes of Certificates following the reduction of the
aggregate of the Certificate Principal Balances of the Junior Subordinate
Certificates to zero, as described under "DESCRIPTION OF THE CERTIFICATES --
Allocation of Losses; Subordination" herein.
The yield to maturity on each Class of Senior Certificates will be
sensitive to Realized Losses on the Mortgage Loans because all such losses will
be allocable to such Classes of Certificates following the reduction of the
aggregate of the Certificate Principal Balances of the Subordinate Certificates
to zero, as described under "DESCRIPTION OF THE CERTIFICATES -- Allocation of
Losses; Subordination" herein.
BOOK-ENTRY SYSTEM
Since transactions in the Book-Entry Certificates generally can be effected
only through The Depository Trust Company ("DTC"), participating organizations,
indirect participants and certain banks, the ability of a Certificateholder to
pledge a Book-Entry Certificate to persons or entities that do not participate
in the DTC system, or otherwise to take actions with respect to such
Certificates, may be limited due to a lack of a physical certificate
representing the Book-Entry Certificates. In addition, the Certificateholders
may experience some delay in their receipt of distributions of interest and
principal on the Book-Entry Certificates, since such distributions will be
forwarded by the Trustee (or its duly appointed paying agent, if any) to DTC,
and DTC will credit such distributions to the accounts of DTC Participants (as
defined herein) which will thereafter credit them to the accounts of
Certificateholders either directly or indirectly through indirect participants.
Also, issuance of the Book-Entry Certificates in book-entry form may reduce the
liquidity thereof in any secondary trading market that may develop therefor
because investors may be unwilling to purchase securities for which they cannot
obtain delivery of physical certificates. See "DESCRIPTION OF THE
CERTIFICATES -- Book-Entry Registration" herein.
RECENT DEVELOPMENTS
BankAmerica and NationsBank Corporation, a North Carolina corporation
("NationsBank"), entered into an Agreement and Plan of Reorganization on April
10, 1998 (the "Merger Agreement"). Pursuant to the Merger Agreement, (i)
NationsBank will form a new Delaware subsidiary ("NationsBank (DE)") and will
merge (the "Reincorporation Merger") with and into NationsBank (DE), with
NationsBank (DE) as the surviving corporation in the Reincorporation Merger, and
(ii) BankAmerica will thereafter merge (the "Merger," and together with the
Reincorporation Merger, the "Reorganization") with and into NationsBank (DE),
with NationsBank (DE) as the surviving corporation in the Merger. The Board of
Directors of BankAmerica and the Board of Directors of NationsBank approved the
Reorganization and the transactions related thereto at their meetings held April
9, 1998 and April 10, 1998, respectively. Consummation of the Reorganization is
subject to various conditions, including (i) approval of the Merger Agreement
and the Reorganization by the stockholders of each of the parties thereto, and
(ii) receipt of requisite approvals from the Board of Governors of the Federal
Reserve System and other federal and state regulatory authorities as necessary.
S-25
<PAGE> 26
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 $343,352,897. The Group I Loans
and Group II Loans will have an aggregate principal balance outstanding as of
the Cut-off Date, after deducting payments of principal due on such date, of
approximately $143,649,466 and $199,703,430, respectively.
The Mortgage Pool will consist of conventional, fully-amortizing, level
monthly payment first Mortgage Loans with fixed interest rates. The Group I
Loans have terms to maturity from the date of origination of greater than 15
years but not more than 30 years and the Group II Loans have terms to maturity
from the date of origination of not more than 15 years. All of the Mortgage
Loans were originated or acquired by the Sellers, as more fully described herein
and in the Prospectus.
Pursuant to the terms of the Pooling Agreement, the Depositor shall assign
the representations and warranties relating to the Mortgage Loans made by the
Sellers to the Trustee for the benefit of the Certificateholders as of the
Closing Date. To the extent that the applicable 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, none of the Depositor, the Master Servicer
nor any of their 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 Subordinate Certificates as described herein under
"DESCRIPTION OF THE CERTIFICATES -- Allocation of Losses; Subordination."
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 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 specially stated or required by
the context. References herein to percentages of Group I Loans or Group II Loans
refer in each case to the approximate percentage of the aggregate principal
balance of all Group I Loans or Group II Loans, respectively, based on the
outstanding principal balances of the Group I Loans or Group II Loans after
giving effect to scheduled principal payments due on or prior to the Cut-off
Date, whether or not received. Unless otherwise stated, references to weighted
averages refer, in each case, to weighted averages by principal balance as of
the Cut-off Date of the related Group I Loans or Group II Loans (determined as
described in the preceding sentence), as applicable. In the following tables,
individual balances and percentages may not sum to the total due to rounding.
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 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 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-26
<PAGE> 27
LOAN GROUP I
The Group I Loans will have the following characteristics as of the Cut-off
Date (except as otherwise indicated). Percentages of the Group I Loans are
percentages of the aggregate unpaid scheduled principal balance of the Group I
Loans having such characteristics relative to the aggregate unpaid principal
balance of all Group I Loans:
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
-------------- -------------- ----------------- -------------
<S> <C> <C> <C>
6.501 to 7.000%................ 12 $ 4,692,750.53 3.27%
7.001 to 7.500 ................ 211 69,398,379.69 48.31
7.501 to 8.000 ................ 218 68,488,677.36 47.68
8.001 to 8.500 ................ 4 1,069,658.77 0.74
--- --------------- ------
Total................ 445 $143,649,466.35 100.00%
=== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group I
Loans will be approximately 7.562% per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
ORIGINAL MORTGAGE LOAN NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$200,000.01 to 300,000.00...... 220 $ 58,010,840.13 40.38%
300,000.01 to 400,000.00...... 166 56,541,663.15 39.36
400,000.01 to 500,000.00...... 36 15,921,043.32 11.08
500,000.01 to 600,000.00...... 19 10,394,540.79 7.24
600,000.01 to 700,000.00...... 3 1,893,038.73 1.32
800,000.01 to 900,000.00...... 1 888,340.23 0.62
--- --------------- ------
Total................ 445 $143,649,466.35 100.00%
=== =============== ======
</TABLE>
As of the Cut-off Date, the average unpaid principal balance of the Group I
Loans will be approximately $322,807.79.
ORIGINAL LOAN-TO-VALUE RATIO
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
LOAN-TO-VALUE RATIO(%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
0.01 to 60.00%.............. 66 $ 21,390,473.04 14.89%
60.01 to 65.00 .............. 26 9,007,886.79 6.27
65.01 to 70.00 .............. 53 17,372,585.16 12.09
70.01 to 75.00 .............. 92 28,962,046.19 20.16
75.01 to 80.00 .............. 158 51,828,163.91 36.08
80.01 to 85.00 .............. 11 3,056,424.58 2.13
85.01 to 90.00 .............. 34 10,742,541.61 7.48
90.01 to 95.00 .............. 5 1,289,345.07 0.90
--- --------------- ------
Total................ 445 $143,649,466.35 100.00%
=== =============== ======
</TABLE>
S-27
<PAGE> 28
The weighted average Loan-to-Value Ratio at origination of the Group I
Loans will be approximately 71.87%.
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
----- -------------- ----------------- -------------
<S> <C> <C> <C>
Arizona........................ 16 $ 5,413,094.33 3.77%
California..................... 230 74,325,745.23 51.74
Connecticut.................... 9 3,231,397.35 2.25
Massachusetts.................. 53 16,069,823.99 11.19
Minnesota...................... 8 2,303,958.13 1.60
New York....................... 11 3,794,101.50 2.64
Oregon......................... 16 5,338,404.48 3.72
Texas.......................... 7 2,348,971.62 1.64
Washington..................... 28 9,504,812.63 6.62
Virginia....................... 7 2,387,370.24 1.66
Other(1)....................... 60 18,931,786.85 13.18
--- --------------- ------
Total................ 445 $143,649,466.35 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Other includes states and the District of Columbia with under 1.59%
concentrations individually.
No more than 2.73% of the Group I Loans secured by Mortgaged Properties
located in California are located in any one zip code area and approximately
2.27% of the Group I Loans secured by Mortgaged Properties located outside of
California will be secured by Mortgaged Properties located in any one zip code
area.
MORTGAGED PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP I LOANS
------------- -------------- ----------------- -------------
<S> <C> <C> <C>
Single-family detached......... 350 $111,887,556.49 77.89%
Planned Unit Developments...... 73 25,236,958.97 17.57
Two- to four-family units...... 1 280,302.02 0.20
Condo.......................... 21 6,244,648.87 4.35
--- --------------- ------
Total................ 445 $143,649,466.35 100.00%
=== =============== ======
</TABLE>
No Group I Loan will have a stated remaining term to maturity as of the
Cut-off Date of less than 239 months. The weighted average remaining term to
stated maturity of the Group I Loans as of the Cut-off Date will be
approximately 351 months.
As of the Cut-off Date, no Group I Loan will be one month or more
delinquent in payment of principal and interest.
None of the Group I Loans will be Buydown Mortgage Loans.
Approximately 17.86% of the Group I 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
66.21%. Approximately 57.94% of the Group I 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 70.60%.
S-28
<PAGE> 29
Approximately 52.99% of the Group I 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 Group I Loans which were underwritten under the Rapid
Processing Program loan documentation program will be approximately 72.63%.
Approximately 42.82% of the Group I Loans underwritten under the Rapid
Processing Program will be secured by Mortgaged Properties located in
California. See "POOLING AGREEMENT -- The Master Servicer" herein.
Approximately 11.61% of the Group I Loans are Convertible Mortgage Loans
for which the related Mortgagors have previously elected to convert the
adjustable rates thereon to fixed rates. See "THE MORTGAGE POOLS -- The Mortgage
Loans" in the Prospectus.
Approximately 1.90% of the Group I Loans will be secured by vacation or
second homes. Approximately 0.19% of the Group I Loans will be secured by
non-owner-occupied residences.
LOAN GROUP II
The Group II Loans will have the following characteristics as of the
Cut-off Date (except as otherwise indicated). Percentages of the Group II Loans
are percentages of the aggregate unpaid scheduled principal balance of the Group
II Loans having such characteristics relative to the aggregate unpaid principal
balance of all Group II Loans:
MORTGAGE RATES
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SCHEDULED UNPAID GROUP II
MORTGAGE RATES MORTGAGE LOANS PRINCIPAL BALANCE LOANS
-------------- -------------- ----------------- -------------
<S> <C> <C> <C>
6.001 to 6.500%................ 16 $ 6,062,991.35 3.04%
6.501 to 7.000 ................ 204 72,434,847.91 36.27
7.001 to 7.500 ................ 315 110,858,772.43 55.51
7.501 to 8.000 ................ 32 10,346,818.59 5.18
--- --------------- ------
Total................ 567 $199,703,430.28 100.00%
=== =============== ======
</TABLE>
As of the Cut-off Date, the weighted average Mortgage Rate of the Group II
Loans will be approximately 7.136% per annum.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
ORIGINAL MORTGAGE LOAN NUMBER OF SCHEDULED UNPAID GROUP II
PRINCIPAL BALANCE MORTGAGE LOANS PRINCIPAL BALANCE LOANS
---------------------- -------------- ----------------- -------------
<S> <C> <C> <C>
$100,000.01 to 200,000.00..... 10 $ 1,591,261.97 0.80%
200,000.01 to 300,000.00..... 240 64,623,696.90 32.35
300,000.01 to 400,000.00..... 179 61,645,347.73 30.87
400,000.01 to 500,000.00..... 78 35,493,616.71 17.77
500,000.01 to 600,000.00..... 31 17,294,153.03 8.66
600,000.01 to 700,000.00..... 26 16,528,724.79 8.28
700,000.01 to 800,000.00..... 1 770,175.98 0.39
800,000.01 to 900,000.00..... 1 832,338.51 0.42
900,000.01 to 1,000,000.00.... 1 924,114.66 0.46
--- --------------- ------
Total................ 567 $199,703,430.28 100.00%
=== =============== ======
</TABLE>
S-29
<PAGE> 30
As of the Cut-off Date, the average unpaid principal balance of the Group
II Loans will be approximately $352,210.64.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
LOAN-TO-VALUE RATIO(%) MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
---------------------- -------------- ----------------- --------------
<S> <C> <C> <C>
0.01 to 60.00%................... 168 $ 60,712,494.24 30.40%
60.01 to 65.00 ................... 54 20,675,668.65 10.35
65.01 to 70.00 ................... 60 19,496,409.26 9.76
70.01 to 75.00 ................... 135 47,697,710.45 23.88
75.01 to 80.00 ................... 136 46,965,019.09 23.52
80.01 to 85.00 ................... 3 878,018.42 0.44
85.01 to 90.00 ................... 11 3,278,110.17 1.64
--- --------------- ------
Total................... 567 $199,703,430.28 100.00%
=== =============== ======
</TABLE>
The weighted average Loan-to-Value Ratio at origination of the Group II
Loans will be approximately 65.40%.
GEOGRAPHIC DISTRIBUTIONS OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
STATE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
----- -------------- ----------------- --------------
<S> <C> <C> <C>
Arizona........................... 18 $ 6,554,358.74 3.28%
California........................ 385 137,511,984.18 68.86
Massachusetts..................... 10 3,304,514.58 1.65
Michigan.......................... 11 3,527,802.24 1.77
Nevada............................ 9 3,285,513.17 1.65
New York.......................... 10 3,370,349.69 1.69
Oregon............................ 12 3,937,433.71 1.97
Texas............................. 13 4,269,937.98 2.14
Utah.............................. 8 3,009,802.92 1.50
Washington........................ 29 9,069,830.96 4.54
Other (1)......................... 62 21,861,902.11 10.95
--- --------------- ------
Total................... 567 $199,703,430.28 100.00%
=== =============== ======
</TABLE>
- ---------------
(1) Other includes states and the District of Columbia with under 1.50%
concentrations individually.
No more than 2.61% of the Group II Loans secured by Mortgaged Properties
located in California are located in any one zip code area and approximately
3.26% of the Group II Loans secured by Mortgaged Properties located outside of
California will be secured by Mortgaged Properties located in any one zip code
area.
MORTGAGE PROPERTY TYPES
<TABLE>
<CAPTION>
NUMBER OF SCHEDULED UNPAID PERCENTAGE OF
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE GROUP II LOANS
------------- -------------- ----------------- --------------
<S> <C> <C> <C>
Single-family detached............ 427 $149,167,191.65 74.69%
Planned Unit Developments......... 115 42,184,845.89 21.12
Two- to four-family units......... 3 1,037,545.20 0.52
Condo............................. 22 7,313,847.54 3.66
--- --------------- ------
Total................... 567 $199,703,430.28 100.00%
=== =============== ======
</TABLE>
S-30
<PAGE> 31
No Group II Loan will have a stated remaining term to maturity as of the
Cut-off Date of less than 104 months. The weighted average remaining term to
stated maturity of the Group II Loans as of the Cut-off Date will be
approximately 177 months.
As of the Cut-off Date, no Group II Loan will be one month or more
delinquent in payment of principal and interest.
None of the Group II Loans will be Buydown Mortgage Loans.
Approximately 13.37% of the Group II 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
65.94%. Approximately 74.04% of the Group II 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 63.80%.
Approximately 51.16% of the Group II 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 Group II Loans which were underwritten under the
Rapid Processing Program loan documentation program will be approximately
64.74%. Approximately 69.10% of the Group II Loans underwritten under the Rapid
Processing Program will be secured by Mortgaged Properties located in
California. See "POOLING AGREEMENT -- The Master Servicer" herein.
Approximately 1.60% of the Group II Loans are Convertible Mortgage Loans
for which the related Mortgagors have previously elected to convert the
adjustable rates thereon to fixed rates. See "THE MORTGAGE POOLS -- The Mortgage
Loans" in the Prospectus.
Approximately 3.01% of the Group II Loans will be secured by vacation or
second homes. None of the Group II Loans will be secured by non-owner-occupied
residences.
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"),
except as set forth in the following sentences. As of the Cut-off Date,
approximately 5.60% of the Mortgage Loans, by aggregate principal balance, were
required to be covered by Primary Insurance Policies. To the best of the
Depositor's knowledge, as of the Cut-off Date, all such Mortgage Loans were so
covered. Substantially all of such Primary Insurance Policies were issued by
General Electric Mortgage Insurance Corporation, Mortgage Guaranty Insurance
Corporation, PMI Mortgage Insurance Company, United Guaranty Insurance Company,
Amerin Guaranty Corporation, Republic Mortgage Insurance Company, Triad Guaranty
Insurance Corporation and Commonwealth Mortgage Assurance Company (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 subsequent to the Closing Date 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 Certificates; however,
there is no
S-31
<PAGE> 32
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 last paragraph under
"DESCRIPTION OF THE MORTGAGE POOL -- General" herein, such removal or addition
will be noted in the Current Report on Form 8-K.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Series 1998-1 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following twenty-four Classes: (i) the Class IA-1, Class
IA-2, Class IA-3, Class IA-4, Class IA-5 and Class IA-6 Certificates (the "Group
IA Certificates"), (ii) the Class IIA-1, Class IIA-2, Class IIA-3, Class IIA-4,
Class IIA-5 and Class IIA-6 Certificates (the "Group IIA Certificates" and the
Group IIA Certificates together with the Group IA Certificates, the "Class A
Certificates"), (iii) the Class I-X and Class II-X Certificates (the "Interest
Only Certificates" or "Notional Amount Certificates"), (iv) the Class I-PO and
Class II-PO Certificates (the "Principal Only Certificates"), (v) the Class R-I
and Class R-II Certificates (the "Residual Certificates," and together with the
Class A Certificates, Interest Only Certificates and Principal Only
Certificates, the "Senior Certificates"), (vi) the Class M Certificates, (vii)
the Class B-1 and Class B-2 Certificates (together with the Class M
Certificates, the "Senior Subordinate Certificates") and (viii) the Class B-3,
Class B-4 and Class B-5 Certificates (the "Junior Subordinate Certificates" and,
together with the Senior Subordinate Certificates, the "Subordinate
Certificates"). The Group IA Certificates, Class I-X Certificates and Class I-PO
Certificates are sometimes referred to as the "Group I Certificates" and the
Group IIA Certificates, Class II-X Certificates and Class II-PO Certificates are
sometimes referred to as the "Group II Certificates." The Group I Certificates
and Group II Certificates are each a "Certificate Group." The Class IA-4
Certificates are sometimes referred to as the "Group I Lockout Certificates."
The Class IIA-4 Certificates are sometimes referred to as the "Group II Lockout
Certificates" and, together with Group I Lockout Certificates, the "Lockout
Certificates." The Class IA-2 and Class IA-5 Certificates are sometimes referred
to as the "Insured Certificates." Only the Senior Certificates and the Senior
Subordinate Certificates (collectively, the "Offered Certificates") are offered
hereby.
The Class A Certificates represent fractional undivided interests in one of
two pools of assets each constituting a separate pool of assets within the Trust
Fund and have the rights described in the Pooling and Servicing Agreement, to be
dated as of the Cut-off Date, among the Depositor, the Master Servicer and the
Trustee (the "Pooling Agreement"). The Subordinate Certificates and Residual
Certificates represent an undivided ownership interest in the Trust Fund which
will consist of (i) the Mortgage Loans; (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; (iv) any applicable Primary Insurance Policies and Primary Hazard
Insurance Policies and all proceeds thereof; and (v) with respect to the Class
IA-2 and Class IA-5 Certificates only, the Class IA-2 Certificate Insurance
Policy and Class IA-5 Certificate Insurance Policy (each, as defined herein)
issued by MBIA Insurance Corporation (the "Certificate Insurer").
The Offered Certificates, other than the Residual Certificates (the
"Book-Entry Certificates"), will be issued, maintained and transferred on the
book-entry records of DTC and its Participants. The Book-Entry Certificates,
other than the Class IA-2, Class IA-3, Class IA-5, Class IA-6 and Class IIA-3
Certificates, are offered in minimum denominations equivalent to not less than
$100,000 initial Certificate Principal Balance (or initial Notional Amount in
the case of the Notional Amount Certificates) each and multiples of $1 in excess
thereof. The Class IA-2, Class IA-3, Class IA-5, Class IA-6 and Class IIA-3
Certificates are offered in
S-32
<PAGE> 33
minimum denominations equivalent to not less than $1,000 initial Certificate
Principal Balance and multiples of $1 in excess thereof. The Class R-I and Class
R-II Certificates are "Physical Certificates" and will each be offered in
registered, certificated form in a single denomination of 99.99% Percentage
Interest. The remaining 0.01% Percentage Interest of each of the Class R-I and
Class R-II Certificates will be retained by the Master Servicer, as set forth
herein under "FEDERAL INCOME TAX CONSEQUENCES."
The Book-Entry 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 Book-Entry Certificates under the
limited circumstances described herein, all references to actions by
Certificateholders with respect to the Book-Entry 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 Book-Entry Certificates shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of the
Book-Entry Certificates, for distribution to Beneficial Owners by DTC in
accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
General. Beneficial Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the related Book-Entry Certificates may do so only through
Participants and Indirect Participants. In addition, Beneficial Owners will
receive all distributions of principal of and interest on the related Book-Entry
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 Book-Entry
Certificates, it is anticipated that the only registered Certificateholder of
such Book-Entry 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 Indirect Participants.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants and to receive and transmit
distributions of principal of, and interest on, such Book-Entry Certificates.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to such Book-Entry 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 Book-Entry
Certificates, the Rules provide a mechanism by which Beneficial Owners, through
their Participants and Indirect Participants, will receive distributions and
will be able to transfer their interests in the Book-Entry Certificates.
None of the Depositor, the Master Servicer, the Trustee or the Paying Agent
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 Book-Entry
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 eleventh
paragraph under "DESCRIPTION OF THE CERTIFICATES -- Form of Certificates," the
Trustee is required to notify, through DTC, Participants who have ownership of
Book-Entry Certificates as indicated on the records of DTC of the availability
of Definitive Certificates for their Book-Entry Certificates. Upon surrender by
DTC of the
S-33
<PAGE> 34
definitive certificates representing the Book-Entry Certificates and upon
receipt of instructions from DTC for re-registration, the Trustee will reissue
the Book-Entry 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 Book-Entry 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, (iii) all Advances
made for such Distribution Date, in each case net of amounts reimbursable
therefrom to the Master Servicer and any Subservicer, (iv) any amounts payable
as Compensating Interest on such Distribution Date and (v) solely with respect
to each Class of Insured Certificates, any payments received by the Trustee for
claims under the applicable Certificate Insurance Policy. 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 15th day of the
month in which such Distribution Date occurs or, if such day is not a day other
than (a) a Saturday or a Sunday or (b) a day on which the Certificate Insurer is
closed (with respect to matters affecting the Certificate Insurer) or banking
institutions in the State of California or State of New York (and such other
state or states in which the Custodial Account or the Certificate Account are at
the time located) are required or authorized by law or executive order to be
closed (a "Business Day"), the immediately preceding Business Day.
With respect to any Distribution Date for which a Deficiency Amount will
exist, the Trustee, on behalf of the holders of the Insured Certificates, may
make a claim on the applicable Certificate Insurance Policy which guarantees for
the Insured Certificates the applicable Deficiency Amount (as defined in "CREDIT
ENHANCEMENTS -- The Certificate Insurance Policies and the Certificate Insurer"
herein).
PRIORITY OF DISTRIBUTIONS
Commencing in May 1998, on the 25th day of each month, or if such 25th day
is not a Business Day, on the immediately succeeding Business Day (each, a
"Distribution Date"), prior to the Credit Support Depletion Date (as defined
herein), distributions will be made in the order and priority as follows,
subject, in each case, to the extent of the related Available Distribution
Amount on such Distribution Date:
(a) with respect to the Group I Certificates and the Residual
Certificates, to the extent of the Available Distribution Amount for Loan
Group I on such Distribution Date:
(i) first, to the Class I-PO Certificates, the Class I-PO Fraction
(as defined herein) of all principal received on or in respect of each
Class I-PO Mortgage Loan (as defined herein);
(ii) second, to the Group I Certificates entitled to interest and
the Residual Certificates, Accrued Certificate Interest (as defined
below) and any portion of the Accrued Certificate Interest remaining
unpaid from prior Distribution Dates ("Unpaid Accrued Certificate
Interest");
(iii) third, to the Group I Certificates entitled to principal,
other than the Class I-PO Certificates, and the Residual Certificates,
the Group I Principal Distribution Amount in the order described in
"-- Principal Distributions -- Group I Certificate Principal
Distributions -- Group I Principal Distribution Amount" herein;
S-34
<PAGE> 35
(iv) fourth, to the Class I-PO Certificates, the sum of (a)
principal in an amount equal to the Class I-PO Fraction of certain
principal losses on the Class I-PO Mortgage Loans, as described in
"-- Principal Distributions -- Group I Certificate Principal
Distributions -- Class I-PO Distribution Amount" herein to the extent of
amounts otherwise available to pay the Subordinate Principal
Distribution Amount (as defined herein)(without regard to clause (B) of
such definition) on such Distribution Date and (b) the sum of amounts,
if any, by which the amount described in clause (a) above on each prior
Distribution Date exceeded the amount actually distributed in respect
thereof on such prior Distribution Dates and not subsequently
distributed to the extent of the Subordinate Principal Distribution
Amount on such Distribution Date (any amounts distributed in respect of
losses pursuant to this paragraph shall not cause a further reduction in
the Class I-PO Certificate Principal Balance); provided, that if the
amounts otherwise available to pay the Subordinate Principal
Distribution Amount for any such Distribution Date are insufficient to
cover such outstanding principal losses for the Class I-PO Certificates
as provided above and Class II-PO Certificates as provided in clause
(iv) of paragraph (b) below, then the amounts otherwise available to pay
the Subordinate Principal Distribution Amount will be allocated pro rata
to the Class I-PO and Class II-PO Certificates based on the amount such
Certificates are entitled to receive pursuant to this clause, in the
case of the Class I-PO Certificates, and clause (iv) of paragraph (b)
below, in the case of the Class II-PO Certificates;
(b) with respect to the Group II Certificates, to the extent of the
Available Distribution Amount for Loan Group II on such Distribution Date:
(i) first, to the Class II-PO Certificates, the Class II-PO
Fraction (as defined herein) of all principal received on or in respect
of each Class II-PO Mortgage Loan (as defined herein);
(ii) second, to the Group II Certificates entitled to interest,
Accrued Certificate Interest and any Unpaid Accrued Certificate
Interest;
(iii) third, to the Group II Certificates entitled to principal,
other than the Class II-PO Certificates, the Group II Principal
Distribution Amount in the order described in "-- Principal
Distributions -- Group II Certificate Principal Distributions -- Group
II Principal Distribution Amount" herein;
(iv) fourth, to the Class II-PO Certificates, the sum of (a)
principal in an amount equal to the Class II-PO Fraction of certain
principal losses on the Class II-PO Mortgage Loans, as described in
"-- Principal Distributions -- Group II Certificate Principal
Distributions -- Class II-PO Distribution Amount" herein to the extent
of amounts otherwise available to pay the Subordinate Principal
Distribution Amount (without regard to clause (B) of such definition) on
such Distribution Date and (b) the sum of amounts, if any, by which the
amount described in clause (a) above on each prior Distribution Date
exceeded the amount actually distributed in respect thereof on such
prior Distribution Dates and not subsequently distributed to the extent
of the Subordinate Principal Distribution Amount on such Distribution
Date (any amounts distributed in respect of losses pursuant to this
paragraph shall not cause a further reduction in the Class II-PO
Certificate Principal Balance); provided, that if the amounts otherwise
available to pay the Subordinate Principal Distribution Amount for any
such Distribution Date are insufficient to cover such outstanding
principal losses for the Class II-PO Certificates as provided above and
Class I-PO Certificates as provided in clause (iv) of paragraph (a)
above, then the amounts otherwise available to pay the Subordinate
Principal Distribution Amount will be allocated pro rata to the Class
I-PO and Class II-PO Certificates based on the amount such Certificates
are entitled to receive pursuant to this clause, in the case of the
Class II-PO Certificates, and clause (iv) of paragraph (a) above, in the
case of the Class I-PO Certificates; and
S-35
<PAGE> 36
(c) with respect to the Subordinate Certificates, the Residual
Certificates and the Certificate Insurer, subject to the payment of the
Senior Certificates as described above and the payments described below
under "-- Cross-Collaterialization" and to the extent of the Available
Distribution Amount from both Loan Groups remaining, if any, following
prior distributions on such Distribution Date:
(i) first, to the Class M Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(ii) second, to the Class M Certificates, their pro rata share of
the Subordinate Principal Distribution Amount;
(iii) third, to the Class B-1 Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(iv) fourth, to the Class B-1 Certificates, their pro rata share of
the Subordinate Principal Distribution Amount;
(v) fifth, to the Class B-2 Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(vi) sixth, to the Class B-2 Certificates, their pro rata share of
the Subordinate Principal Distribution Amount;
(vii) seventh, to the Class B-3 Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(viii) eighth, to the Class B-3 Certificates, their pro rata share
of the Subordinate Principal Distribution Amount;
(ix) ninth, to the Class B-4 Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(x) tenth, to the Class B-4 Certificates, their pro rata share of
the Subordinate Principal Distribution Amount;
(xi) eleventh, to the Class B-5 Certificates, Accrued Certificate
Interest and Unpaid Accrued Certificate Interest;
(xii) twelfth, to the Class B-5 Certificates, their pro rata share
of the Subordinate Principal Distribution Amount;
(xiii) thirteenth, to each Class of Subordinate Certificates, in
order of seniority, the remaining portion, if any, of the sum of the
Available Distribution Amounts for both Loan Groups, up to the amount of
unreimbursed Realized Losses previously allocated to such Class;
(xiv) fourteenth, to the Certificate Insurer, an amount (the
"Reimbursement Amount") equal to the sum, of (a) all amounts previously
paid by the Certificate Insurer under the Certificate Insurance Policies
which have not been previously reimbursed and (b) interest on the
foregoing at the Late Payment Rate (as defined in the Pooling
Agreement); and
(xv) fifteenth, to the Residual Certificates the remaining portion,
if any, of the Available Distribution Amount for such Distribution Date,
as their respective interests are described in the Pooling Agreement;
provided, however, that there is not expected to be any such remaining
portion available for distribution to the Residual Certificates pursuant
to this clause fifteenth.
With respect to the Subordinate Certificates, notwithstanding the
foregoing, on any Distribution Date on which the Subordination Level for any
Class of Subordinate Certificates is less than such percentage as of the Cut-off
Date, the pro rata share of the Subordinate Principal Prepayment Distribution
Amount (as defined below under "-- Principal Distributions -- Subordinate
Certificate Principal Distributions") of the Subordinate Principal Distribution
Amount otherwise allocable to the Class or Classes junior to such Class will be
allocated to the most senior Classes of Subordinate Certificates for which the
Subordination Level is less than such percentage as of the Cut-Off Date and to
the Class or Classes of Subordinate Certificates senior thereto, pro rata
according to the Certificate Principal Balances of such Classes. The
"Subordination Level" on any specified date with respect to any Class of
Subordinate Certificates is the percentage obtained by dividing the sum of the
aggregate Certificate Principal Balance of all Classes of Certificates which are
S-36
<PAGE> 37
subordinate in right of payment to such Class by the sum of the aggregate
Certificate Principal Balances of all Classes of Certificates as of such date
prior to giving effect to distributions or allocations of Realized Losses on the
Mortgage Loans on such date.
On each Distribution Date on or after the Credit Support Depletion Date,
distributions will be made in the order and priority as follows:
(a) with respect to the Group I Certificates and the Residual
Certificates, to the extent of the Available Distribution Amount for Loan
Group I remaining following prior distributions, if any, on such
Distribution Date:
(i) first, to the Class I-PO Certificates, the Class I-PO Fraction
of all principal received on or in respect of each Class I-PO Mortgage
Loan;
(ii) second, to the Group I Certificates entitled to interest and
the Residual Certificates, Accrued Certificate Interest and Unpaid
Accrued Certificate Interest;
(iii) third, to the Group I Certificates entitled to principal
(other than the Class I-PO Certificates) and the Residual Certificates,
the Group I Principal Distribution Amount, pro rata, according to their
respective Certificate Principal Balances; and
(iv) fourth, to the Certificate Insurer, the Reimbursement Amount;
and
(v) fifth, to the Residual Certificates, the remaining portion of
the Available Distribution Amount for Loan Group I for such Distribution
Date, as their respective interests are described in the Pooling
Agreement; provided, however, that there is not expected to be any such
remaining portion available for distribution to the Residual
Certificates pursuant to this clause (v); and
(b) with respect to the Group II Certificates and the Residual
Certificates, to the extent of the Available Distribution Amount for Loan
Group II remaining following prior distributions, if any, on such
Distribution Date:
(i) first, to the Class II-PO Certificates, the Class II-PO
Fraction of all principal received on or in respect of each Class II-PO
Mortgage Loan;
(ii) second, to the Group II Certificates entitled to interest,
Accrued Certificate Interest and Unpaid Accrued Certificate Interest;
(iii) third, to the Group II Certificates entitled to principal
(other than the Class II-PO Certificates), the Group II Principal
Distribution Amount, pro rata, according to their respective Certificate
Principal Balances;
(iv) fourth, to the Certificate Insurer, the Reimbursement Amount;
and
(v) fifth, to the Residual Certificates, the remaining portion of
the Available Distribution Amount for Loan Group II for such
Distribution Date, as their respective interests are described in the
Pooling Agreement; provided, however, that there is not expected to be
any such portion available for distribution to the Residual Certificates
pursuant to this clause (v).
The "Credit Support Depletion Date" is the first Distribution Date on which
the aggregate of the Certificate Principal Balances of the Subordinate
Certificates has been or will be reduced to zero.
Except for the limited circumstances described in
"-- Cross-Collateralization" herein and with respect to the Insured
Certificates, which may also receive payments under their respective Certificate
Insurance Policies as described herein, distributions of interest and principal
to the Group I Certificates and the Group II Certificates will be based solely
on payments received with respect to Group I Loans and Group II Loans,
respectively.
S-37
<PAGE> 38
INTEREST DISTRIBUTIONS
The Pass-Through Rate for each Class of Offered Certificate for each
Distribution Date (the "Pass-Through Rate") is as set forth or described on the
cover hereof. Accrued Certificate Interest distributed to the Offered
Certificates on each Distribution Date will have accrued during the preceding
calendar month.
Holders of each Class of Certificates (other than the Class I-PO and Class
II-PO Certificates which receive no distributions of interest) will be entitled
to receive distributions in an amount equal to the Accrued Certificate Interest
on such Class for such Distribution Date, except that (a) interest accrued on
the Class IIA-6 Certificates on or before the Class IIA-6 Accretion Termination
Date (as defined herein) will be added to the Class IIA-6 Certificate Principal
Balance. With respect to any Distribution Date, Accrued Certificate Interest
will be equal to one month's interest accrued on the Certificate Principal
Balance (or Notional Amount (as described below) in the case of the Notional
Amount Certificates) of the Certificates of such Class at the Pass-Through Rate
on such Class; 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"), losses not covered by the errors and omissions and fidelity
policy required to be maintained by the Master Servicer, and losses occasioned
by war, civil insurrection, certain governmental actions, nuclear reaction and
certain other risks ("Extraordinary Losses")) not covered by the Subordination;
(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. Accrued
Certificate Interest is calculated on the basis of a 360-day year consisting of
twelve 30-day months.
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 "Class IIA-6 Accretion Termination Date" is the earlier to occur of (i)
the Distribution Date on which the Certificate Principal Balance of the Class
IIA-5 Certificates has been reduced to zero and (ii) the Credit Support
Depletion Date. On each Distribution Date on or before the Class IIA-6 Accretion
Termination Date, an amount (the "Class IIA-6 Accrual Amount") equal to the
lesser of (i) the accrued interest that would otherwise be distributable in
respect of the Class IIA-6 Certificates on such Distribution Date and (ii) the
Certificate Principal Balance of the Class IIA-5 Certificates will be added to
the Class IIA-6 Certificate Principal Balance, and such amount will be
distributed, as principal, to the following Certificates:
(1) first, to the Class IIA-5 Certificates, to the extent necessary to
reduce the Class IIA-5 Certificate Principal Balance to its Targeted
Principal Balance for such Distribution Date; and
(2) second, to the Class IIA-6 Certificates.
The amount so added to the Class IIA-6 Certificate Principal Balance will
thereafter accrue interest at the Class IIA-6 Pass-Through Rate.
The "Class I-X Notional Amount" with respect to any Distribution Date will
equal the product of (x) the aggregate scheduled principal balance, as of the
second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, or with respect to the
initial Distribution Date, as of the Cut-off Date, of the Group I Loans having
Net Mortgage Rates equal to or greater than 6.750% per annum (the "Group I
Premium Rate Mortgage Loans") and (y) a fraction, the numerator of which is the
weighted average of the Stripped Interest Rates (as defined herein) for the
Group I Premium
S-38
<PAGE> 39
Rate Mortgage Loans as of such Due Date and the denominator of which is 6.750%
per annum. The Class I-X Notional Amount as of the Closing Date will be
approximately $11,983,709.
The "Class II-X Notional Amount" with respect to any Distribution Date will
equal the product of (x) the aggregate scheduled principal balance, as of the
second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, or with respect to the
initial Distribution Date, as of the Cut-off Date, of the Group II Loans having
Net Mortgage Rates equal to or greater than 6.500% per annum (the "Group II
Premium Rate Mortgage Loans") and (y) a fraction, the numerator of which is the
weighted average of the Stripped Interest Rates for the Group II Premium Rate
Mortgage Loans as of such Due Date and the denominator of which is 6.500% per
annum. The Class II-X Notional Amount as of the Closing Date will be
approximately $7,513,508.
The "Stripped Interest Rate" means (i) for each Group I Loan, the excess,
if any, of the Net Mortgage Rate for such Mortgage Loan over 6.750% per annum,
and (ii) for each Group II Loan, the excess, if any, of the Net Mortgage Rate
for such Mortgage Loan over 6.500% per annum. The "Net Mortgage Rate" for any
Mortgage Loan is the Mortgage Rate thereof less the Administration Fee for such
Mortgage Loan.
The Pass-Through Rate on each Class of Subordinate Certificates will equal,
on any Distribution Date, the quotient expressed as a percentage of (a) the sum
of (i) the product of (x) 6.750% and (y) the excess, if any, of the aggregate of
the Stated Principal Balances of the Group I Loans, as of the second preceding
Due Date after giving effect to payments scheduled to be received as of such Due
Date, whether or not received, and after giving effect to any Principal
Prepayments distributed on the prior Distribution Date, over the then
outstanding aggregate Certificate Principal Balance of the Group I Certificates
and Residual Certificates (such excess being referred to as the "Group I
Subordinate Amount") and (ii) the product of (x) 6.500% and (y) the excess, if
any, of the aggregate of the Stated Principal Balances of the Group II Loans, as
of the second preceding Due Date after giving effect to payments scheduled to be
received as of such Due Date, whether or not received, and after giving effect
to any Principal Prepayments distributed on the prior Distribution Date, over
the then outstanding aggregate Certificate Principal Balance of the Group II
Certificates (such excess being referred to as the "Group II Subordinate
Amount") over (b) the sum of the Group I Subordinate Amount and the Group II
Subordinate Amount. The initial Pass-Through Rate for each Class of Subordinate
Certificates will be approximately 6.605% per annum.
If the amount available for distributions of interest on any Classes of
Certificates in the priority described herein is less than the related Accrued
Certificate Interest, the shortfall will be allocated among all Classes of equal
priority pro rata on the basis of the respective amounts of Accrued Certificate
Interest. Any such shortfall ("Unpaid Accrued Certificate Interest") will be
distributable to holders of the Certificates of such Classes, on subsequent
Distribution Dates, to the extent of available funds. Shortfalls could occur,
for example, if losses 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 "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 Subordination,
interest shortfalls relating to the Relief Act (as defined herein) or similar
legislation and other interest shortfalls not covered by the Subordination on
any Distribution Date will be allocated among the holders of all Classes of
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, before taking into account any such
reduction.
PRINCIPAL DISTRIBUTIONS
General. On each Distribution Date, Certificateholders will be entitled to
receive principal distributions from the Available Distribution Amount to the
extent described herein. See "-- Priority of Distributions" herein. Except for
limited circumstances described under "-- Cross-Collateralization" herein and,
with respect to the Insured Certificates which may also receive payments under
their respective Certificate
S-39
<PAGE> 40
Insurance Policies, as described herein, the Group I Certificates entitled to
receive distributions of principal will receive principal from the Group I Loans
and the Group II Certificates entitled to receive distributions of principal
will receive principal from the Group II Loans.
The Class I-X and Class II-X Certificates will not receive any
distributions of principal.
GROUP I CERTIFICATE PRINCIPAL DISTRIBUTIONS
Group I Principal Distribution Amount. On each Distribution Date prior to
the Credit Support Depletion Date, an amount, up to the amount of the Group I
Principal Distribution Amount (as defined below) for such Distribution Date,
will be distributed as principal to the following Classes of Group I
Certificates and Residual Certificates in the following order of priority:
(i) first, to the Class IA-4 Certificates, an amount, up to the amount
of the Class IA-4 Priority Amount (as defined below) for such Distribution
Date, until the Certificate Principal Balance thereof has been reduced to
zero;
(ii) second, to each Class of the Residual Certificates, pro rata,
according to their respective Certificate Principal Balances, until the
Certificate Principal Balances of the Residual Certificates have been
reduced to zero;
(iii) third, to the Class IA-1 Certificates until the Certificate
Principal Balance thereof has been reduced to zero;
(iv) fourth, concurrently, 20.2216290544% to the Class IA-2
Certificates, until the Certificate Principal Balance thereof has been
reduced to zero, and 79.7783709456% sequentially as follows:
(A) concurrently, 67.0376365844% to the Class IA-6 Certificates,
and 32.9623634156% to the Class IA-5 Certificates, in each case until
the Certificate Principal Balance thereof has been reduced to zero;
(B) to the Class IA-3 Certificates;
(v) fifth, to the Class IA-3 Certificates until the Certificate
Principal Balance thereof has been reduced to zero; and
(vi) sixth, to the Class IA-4 Certificates, until the Certificate
Principal Balance thereof has been reduced to zero.
On each Distribution Date on and after the Credit Support Depletion Date,
an amount up to the Group I Principal Distribution Amount for such Distribution
Date will be distributed as principal to the Group I Certificates entitled to
distributions of principal (other than the Class I-PO Certificates), pro rata
according to their respective Certificate Principal Balances.
The "Group I Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Group I Percentage (as defined herein) of the Principal
Payment Amount (as defined below) for Loan Group I (exclusive of the portion
thereof attributable to the Class I-PO Principal Distribution Amount (as defined
below)), (ii) the Group I Prepayment Percentage (as defined below) of the
Principal Prepayment Amount (as defined below) for Loan Group I (exclusive of
the portion thereof attributable to the Class I-PO Principal Distribution
Amount) and (iii) the Group I Liquidation Amount (as defined below).
The "Group I Liquidation Amount" is the aggregate, for each Group I Loan
which became a Liquidated Mortgage Loan (as defined herein) during the calendar
month preceding the month of the Distribution Date, of the lesser of (i) the
Group I Percentage of the principal balance of such Mortgage Loan (exclusive of
the Class I-PO Fraction thereof, if applicable) and (ii) the Group I Prepayment
Percentage of the Liquidation Principal with respect to such Mortgage Loan.
"Liquidation Principal" is the principal portion of Liquidation Proceeds
received with respect to each Mortgage Loan which became a Liquidated Mortgage
Loan (but not in excess of the principal balance thereof) during the calendar
month preceding the month of the Distribution Date, exclusive of the portion
S-40
<PAGE> 41
thereof attributable to the Class I-PO Principal Distribution Amount or the
Class II-PO Principal Distribution Amount. A "Liquidated Mortgage Loan" is a
Mortgage Loan as to which the Master Servicer or a Subservicer has determined
that all amounts which it expects to recover from or on account of such Mortgage
Loan, whether from Insurance Proceeds, Liquidation Proceeds or otherwise have
been recovered.
The "Group I Percentage" for any Distribution Date will equal the lesser of
(a) 100% and (b) the sum of the Certificate Principal Balances of the Group I
Certificates (other than the Class I-PO Certificates) and the Residual
Certificates divided by the aggregate principal balance of the Group I Loans
(less the Certificate Principal Balance of the Class I-PO Certificates), in each
case immediately prior to the Distribution Date.
The "Class IA-4 Priority Amount" for any Distribution Date will equal the
sum of (i) the Adjusted Class IA-4 Percentage (as defined below) of the
Principal Payment Amount for Loan Group I (exclusive of the portion thereof
attributable to the Class I-PO Principal Distribution Amount), (ii) the Class
IA-4 Prepayment Percentage (as defined herein) of the Principal Prepayment
Amount for Loan Group I (exclusive of the portion thereof attributable to the
Class I-PO Principal Distribution Amount) and (iii) the Class IA-4 Liquidation
Amount (as defined below).
The "Class IA-4 Percentage" for any Distribution Date will equal the lesser
of (a) 100% and (b) the Class IA-4 Certificate Principal Balance divided by the
aggregate Stated Principal Balances of the Group I Loans (less the Class I-PO
Certificate Principal Balance), in each case immediately prior to the
Distribution Date.
The "Adjusted Class IA-4 Percentage" will equal (i) for any Distribution
Date prior to the Distribution Date in May 2003, 0% and (ii) for any
Distribution Date on or after the Distribution Date in May 2003, the Class IA-4
Percentage.
The "Class IA-4 Liquidation Amount" is the aggregate of, for each Group I
Loan which became a Liquidated Mortgage Loan (as defined herein) during the
calendar month preceding the month of the Distribution Date, the lesser of (i)
the Class IA-4 Percentage of the principal balance of such Mortgage Loan
(exclusive of the Class I-PO Fraction thereof, if applicable) and (ii) the Class
IA-4 Percentage on any Distribution Date occurring prior to the fifth
anniversary of the first Distribution Date, and the Class IA-4 Prepayment
Percentage on any Distribution Date thereafter, in each case, of the Liquidation
Principal with respect to such Mortgage Loan.
The "Class IA-4 Prepayment Percentage" for any Distribution Date will equal
the product of (a) the Class IA-4 Percentage for such Distribution Date and (b)
the applicable Step Down Percentage.
The "Step Down Percentage" for any Distribution Date will be the percentage
indicated below:
<TABLE>
<CAPTION>
STEP DOWN
DISTRIBUTION DATE OCCURRING IN PERCENTAGE
------------------------------ ----------
<S> <C>
May 1998 through April 2003................................. 0%
May 2003 through April 2004................................. 30%
May 2004 through April 2005................................. 40%
May 2005 through April 2006................................. 60%
May 2006 through April 2007................................. 80%
May 2007 and thereafter..................................... 100%
</TABLE>
Class I-PO Distribution Amount. On each Distribution Date, the Class I-PO
Certificates will receive a portion of the Available Distribution Amount for
Loan Group I attributable to principal received on or in respect of any Group I
Loan with a Net Mortgage Rate of less than 6.750% per annum (a "Class I-PO
Mortgage Loan"), equal to the amount of such principal so attributable
multiplied by a fraction, the numerator of which is 6.750% minus the Net
Mortgage Rate on such Class I-PO Mortgage Loan and the denominator of which is
6.750% (the "Class I-PO Fraction"). In addition, on each Distribution Date for
so long as any Class of Subordinate Certificates remains outstanding, the Class
I-PO Certificates will also be allocated principal, to the extent of amounts
available to pay the Subordinate Principal Distribution Amount (without regard
to clause (B) of such definition) on such Distribution Date, in an amount
generally equal to
S-41
<PAGE> 42
the Class I-PO Fraction of any loss on a Class I-PO Mortgage Loan other than an
Excess Special Hazard Loss, an Excess Fraud Loss or an Excess Bankruptcy Loss
(each, as defined herein); provided, that such payments in respect of losses
shall not cause a further reduction of the outstanding Certificate Principal
Balance of the Class I-PO Certificates; and provided, further, that if the
amounts otherwise available to pay the Subordinate Principal Distribution Amount
for any such Distribution Date are insufficient to cover such outstanding
principal losses for the Class I-PO Certificates as provided above and the Class
II-PO Certificates as provided below, then the amounts otherwise available to
pay the Subordinate Principal Distribution Amount will be allocated pro rata to
the Class I-PO and Class II-PO Certificates based on the amount such
Certificates are entitled to receive pursuant to this sentence, in the case of
the I-PO Certificates, and the second sentence under "-- Group II Certificate
Principal Distributions -- Class II-PO Distribution Amount" below, in the case
of the Class II-PO Certificates. The aggregate of the amounts payable to the
Class I-PO Certificates described in this paragraph are referred to herein as
the "Class I-PO Principal Distribution Amount."
GROUP II CERTIFICATE PRINCIPAL DISTRIBUTIONS
Group II Principal Distribution Amount. On each Distribution Date prior to
the Credit Support Depletion Date, an amount, up to the amount of the Group II
Principal Distribution Amount (as defined below) for such Distribution Date,
will be distributed as principal concurrently, 62.4732001904% to the Class IIA-1
Certificates, until the Certificate Balance thereof has been reduced to zero,
and 37.5267998096% sequentially as follows:
(i) to the Class IIA-4 Certificates, an amount, up to the amount of
the Class IIA-4 Priority Amount (as defined below) for such Distribution
Date, until the Certificate Principal Balance thereof has been reduced to
zero;
(ii) concurrently, 2.0171762558% to the Class IIA-2 Certificates until
the Certificate Principal Balance thereof has been reduced to zero, and
97.9828237442% as follows:
(A) first, to the Class IIA-5 Certificates, to the extent necessary
to reduce the Class IIA-5 Certificate Principal Balance to its Targeted
Principal Balance for such Distribution Date;
(B) second, to the Class IIA-6 Certificates until the Certificate
Principal Balance thereof has been reduced to zero;
(C) third, to the Class IIA-5 Certificates until the Certificate
Principal Balance thereof has been reduced to zero;
(iii) to the Class IIA-3 Certificates until the Certificate Principal
Balance thereof has been reduced to zero; and
(iv) to the Class IIA-4 Certificates, until the Certificate Principal
Balance thereof has been reduced to zero.
On each Distribution Date on and after the Credit Support Depletion Date,
an amount up to the Group II Principal Distribution Amount for such Distribution
Date will be distributed as principal to the Group II Certificates entitled to
distributions of principal (other than the Class II-PO Certificates), pro rata
according to their respective Certificate Principal Balances.
The "Group II Principal Distribution Amount" for any Distribution Date will
equal the sum of (i) the Group II Percentage (as defined herein) of the
Principal Payment Amount (as defined below) for Loan Group II (exclusive of the
portion thereof attributable to the Class II-PO Principal Distribution Amount
(as defined below)), (ii) the Group II Prepayment Percentage (as defined below)
of the Principal Prepayment Amount (as defined below) for Loan Group II
(exclusive of the portion thereof attributable to the Class II-PO Principal
Distribution Amount) and (iii) the Group II Liquidation Amount (as defined
below).
The "Group II Liquidation Amount" is the aggregate, for each Group II Loan
which became a Liquidated Mortgage Loan (as defined herein) during the calendar
month preceding the month of the
S-42
<PAGE> 43
Distribution Date, of the lesser of (i) the Group II Percentage of the principal
balance of such Mortgage Loan (exclusive of the Class II-PO Fraction thereof, if
applicable) and (ii) the Group II Prepayment Percentage of the Liquidation
Principal (as defined above under "-- Group I Certificate Principal
Distributions -- Group I Principal Distribution Amount") with respect to such
Mortgage Loan.
The "Group II Percentage" for any Distribution Date will equal the lesser
of (a) 100% and (b) the sum of the Certificate Principal Balances of the Group
II Certificates (other than the Class II-PO Certificates) divided by the
aggregate principal balance of the Group II Loans (less the Certificate
Principal Balance of the Class II-PO Certificates), in each case immediately
prior to the Distribution Date.
The "Class IIA-4 Priority Amount" for any Distribution Date will equal the
sum of (i) the Class IIA-4 Percentage (as defined below) of the Principal
Payment Amount for Loan Group II (exclusive of the portion thereof attributable
to the Class II-PO Principal Distribution Amount), (ii) the Class IIA-4
Prepayment Percentage (as defined herein) of the Principal Prepayment Amount for
Loan Group II (exclusive of the portion thereof attributable to the Class II-PO
Principal Distribution Amount) and (iii) the Class IIA-4 Liquidation Amount (as
defined below).
The "Class IIA-4 Percentage" for any Distribution Date will equal the
lesser of (a) 100% and (b) the Class IIA-4 Certificate Principal Balance divided
by the aggregate Stated Principal Balances of the Group II Loans (less the Class
II-PO Certificate Principal Balance), in each case immediately prior to the
Distribution Date.
The "Class IIA-4 Liquidation Amount" is the aggregate of, for each Group II
Loan which became a Liquidated Mortgage Loan (as defined herein) during the
calendar month preceding the month of the Distribution Date, the lesser of (i)
the Class IIA-4 Percentage of the principal balance of such Mortgage Loan
(exclusive of the Class II-PO Fraction thereof, if applicable) and (ii) the
Class IIA-4 Percentage on any Distribution Date occurring prior to the fifth
anniversary of the first Distribution Date, and the Class IIA-4 Prepayment
Percentage on any Distribution Date thereafter, in each case, of the Liquidation
Principal (as defined above under "-- Group I Certificate Principal
Distributions -- Group I Principal Distribution Amount") with respect to such
Mortgage Loan.
The "Class IIA-4 Prepayment Percentage" for any Distribution Date will
equal the product of (a) the Class IIA-4 Percentage for such Distribution Date
and (b) the applicable Step Down Percentage (as defined above under "-- Group I
Certificate Principal Distributions -- Group I Principal Distribution Amount").
Class II-PO Distribution Amount. On each Distribution Date, the Class II-PO
Certificates will receive a portion of the Available Distribution Amount for
Loan Group II attributable to principal received on or in respect of any Group
II Loan with a Net Mortgage Rate of less than 6.500% per annum (a "Class II-PO
Mortgage Loan"), equal to the amount of such principal so attributable
multiplied by a fraction, the numerator of which is 6.500% minus the Net
Mortgage Rate on such Class II-PO Mortgage Loan and the denominator of which is
6.500% (the "Class II-PO Fraction"). In addition, on each Distribution Date for
so long as any Class of Subordinate Certificates remains outstanding, the Class
II-PO Certificates will also be allocated principal, to the extent of amounts
available to pay the Subordinate Principal Distribution Amount (without regard
to clause (B) of such definition) on such Distribution Date, in an amount
generally equal to the Class II-PO Fraction of any loss on a Class II-PO
Mortgage Loan other than an Excess Special Hazard Loss, an Excess Fraud Loss or
an Excess Bankruptcy Loss (each, as defined herein); provided, that such
payments in respect of losses shall not cause a further reduction of the
outstanding Certificate Principal Balance of the Class II-PO Certificates; and
provided, further, that if the amounts otherwise available to pay the
Subordinate Principal Distribution Amount for any such Distribution Date are
insufficient to cover such outstanding principal losses for the Class II-PO
Certificates as provided above and the Class I-PO as provided above, then the
amounts otherwise available to pay the Subordinate Principal Distribution Amount
will be allocated pro rata to the Class I-PO and Class II-PO Certificates based
on the amount such Certificates are entitled to receive pursuant to this
sentence, in the case of the Class II-PO Certificates, and the second sentence
under "-- Group I Certificate Principal Distributions -- I-PO Distribution
Amount" above, in the case of the Class I-PO Certificates. The aggregate of the
amounts payable to the Class II-PO Certificates described in this paragraph are
referred to herein as the "Class II-PO Principal Distribution Amount."
S-43
<PAGE> 44
SUBORDINATE CERTIFICATE PRINCIPAL DISTRIBUTIONS
Subordinate Principal Distribution Amount. On each Distribution Date, an
amount, up to the Subordinate Principal Distribution Amount (as defined below)
for such Distribution Date, will be distributed as principal to the Subordinate
Certificates. On each Distribution Date, except Distribution Dates on which the
Subordination Level for any Class of Subordinate Certificates is less than such
Subordination Level as of the Cut-off Date, each Class of Subordinate
Certificates will be entitled to receive its pro rata (by Certificate Principal
Balance) share of the Subordinate Principal Distribution Amount, to the extent
of the Available Distribution Amount remaining after distributions of interest
and principal to the Senior Certificates, distributions of interest and
principal to all Classes of Subordinate Certificates senior to such Class and
distributions of interest to such Class. See "-- Priority of Distributions"
herein. The relative seniority, from highest to lowest, of the Subordinate
Certificates shall be as follows: Class M, Class B-1, Class B-2, Class B-3,
Class B-4 and Class B-5.
The "Subordinate Principal Distribution Amount" for any Distribution Date
will be equal to (A) the sum of (i) the Subordinate Percentage (as defined
herein) for Loan Group I of the Principal Payment Amount for Loan Group I
(exclusive of the portion thereof attributable to the Class I-PO Principal
Distribution Amount), (ii) the Subordinate Percentage for Loan Group II of the
Principal Payment Amount for Loan Group II (exclusive of the portion thereof
attributable to the Class II-PO Principal Distribution Amount), (iii) the
Subordinate Prepayment Percentage (as defined herein) for Loan Group I of the
Principal Prepayment Amount for Loan Group I (exclusive of the portion thereof
attributable to the Class I-PO Principal Distribution Amount), (iv) the
Subordinate Prepayment Percentage for Loan Group II of the Principal Prepayment
Amount for Loan Group II (exclusive of the portion thereof attributable to the
Class II-PO Principal Distribution Amount) and (v) the Subordinate Liquidation
Amount (as defined below) minus (B) the sum of (x) the amounts required to be
distributed to the Class I-PO and Class II-PO Certificates pursuant to clause
(iv) of paragraphs (a) and (b) under "-- Priority of Distributions" herein on
such Distribution Date and (y) the amounts in respect of principal paid from the
Available Distribution Amount of an Overcollateralized Group (as defined herein)
to an Undercollateralized Group (as defined herein) as described in
"-- Cross-Collateralization." Any reduction of the Subordinate Principal
Distribution Amount for Loan Group I or Loan Group II pursuant to clauses (x)
and (y) above shall, in the case of Loan Group I each first offset the amount
calculated pursuant to clause (i), second clause (v) and then clause (iii), and
in the case of Loan Group II each first offset the amount calculated pursuant to
clause (ii), second clause (v) and then clause (iv), in each case of the
definition thereof. The portion of the Subordinate Principal Distribution Amount
described in clauses (iii) and (iv) of the definition thereof, as reduced in
accordance with the preceding sentence if applicable, is referred to herein as
the "Subordinate Principal Prepayment Distribution Amount."
The "Subordinate Percentage" for any Distribution Date will equal (i) for
Loan Group I, the excess of 100% over the Group I Percentage and (ii) for Loan
Group II, the excess of 100% over the Group II Percentage.
The "Subordinate Prepayment Percentage" for any Distribution Date will
equal (i) for Loan Group I, the excess of 100% over the Group I Prepayment
Percentage and (ii) for Loan Group II, the excess of 100% over the Group II
Prepayment Percentage; provided, however, that if the Certificate Principal
Balance of the Senior Certificates (other than the Class I-PO and Class II-PO
Certificates) has been reduced to zero, then the Subordinate Prepayment
Percentage will equal 100%.
The "Subordinate Liquidation Amount" will equal the excess, if any, of the
aggregate Liquidation Principal for all Mortgage Loans which became Liquidated
Mortgage Loans during the calendar month preceding the month of the Distribution
Date, over the sum of the Group I Liquidation Amount and Group II Liquidation
Amount for such Distribution Date.
The rights of the holders of Subordinate Certificates to receive
distributions of interest and principal are subordinated to the rights of the
holders of the Senior Certificates to receive distributions of interest and
principal. The rights of the holders of any Class of Subordinate Certificates to
receive distributions of interest and principal are also subordinated to the
rights of the holders of all Classes of Subordinate Certificates with a
S-44
<PAGE> 45
higher priority to receive distributions of interest and principal. The priority
of the Subordinate Certificates from highest to lowest is as follows: Class M,
Class B-1, Class B-2, Class B-3, Class B-4 and Class B-5. See "-- Allocation of
Losses; Subordination" herein.
PRINCIPAL PAYMENT AMOUNT AND PRINCIPAL PREPAYMENT
For any Distribution Date and any Loan Group, the "Principal Payment
Amount" is the sum, with respect to the Mortgage Loans in such Loan Group, of
(i) scheduled principal payments on the Mortgage Loans due on the related Due
Date, (ii) the principal portion of repurchase proceeds received with respect to
any Mortgage Loan which was repurchased as permitted or required by the Pooling
Agreement during the calendar month preceding the month of the Distribution Date
and (iii) any other unscheduled payments of principal which were received during
the preceding calendar month, other than full and partial Principal Prepayments
or Liquidation Principal. For any Distribution Date and any Loan Group, the
"Principal Prepayment Amount" is the sum, with respect to the Mortgage Loans in
such Loan Group, of all full and partial Principal Prepayments which were
received during the preceding calendar month. Except as described under
"-- Cross-Collateralization" herein, principal distributions to the Group I
Certificates will be based on the Principal Payment Amount, Principal Prepayment
Amount and Liquidation Principal for the Group I Loans and principal
distributions to the Group II Certificates will be based on the Principal
Payment Amount, Principal Prepayment Amount and Liquidation Principal for the
Group II Loans. Principal distributions to Subordinate Certificates will be
based on the Principal Payment Amount, Principal Prepayment Amount and
Liquidation Principal for both Loan Groups.
The "Group I Prepayment Percentage" and "Group II Prepayment Percentage"
for any Distribution Date occurring during the five years beginning on the first
Distribution Date will equal 100%. The "Group I Prepayment Percentage" and
"Group II Prepayment Percentage" on the Distribution Date in each of the months
of the fifth through ninth anniversaries of the first Distribution Date will be
as follows: for any Distribution Date in or after the month of the fifth
anniversary of the month of the first Distribution Date but before the sixth
anniversary of the month of the first Distribution Date, the Group I Percentage
or Group II Percentage, as applicable, for such Distribution Date plus 70% of
the Subordinate Percentage for the related Loan Group for such Distribution
Date; for any Distribution Date in or after the month of the sixth anniversary
of the month of the first Distribution Date but before the seventh anniversary
of the month of the first Distribution Date, the Group I Percentage or Group II
Percentage, as applicable, for such Distribution Date plus 60% of the
Subordinate Percentage for the related Loan Group for such Distribution Date;
for any Distribution Date in or after the month of the seventh anniversary of
the month of the first Distribution Date but before the eighth anniversary of
the month of the first Distribution Date, the Group I Percentage or Group II
Percentage, as applicable, for such Distribution Date plus 40% of the
Subordinate Percentage for the related Loan Group for such Distribution Date;
for any Distribution Date in or after the month of the eighth anniversary of the
month of the first Distribution Date but before the ninth anniversary of the
month of the first Distribution Date, the Group I Percentage or Group II
Percentage, as applicable, for such Distribution Date plus 20% of the
Subordinate Percentage for the related Loan Group for such Distribution Date.
For any Distribution Date in or after the ninth anniversary of the month of the
first Distribution Date, the Group I Prepayment Percentage or Group II
Prepayment Percentage, as applicable, will be the Group I Percentage or Group II
Percentage, respectively, for such Distribution Date.
Notwithstanding the foregoing, if on any Distribution Date the Group I
Percentage or Group II Percentage for such Distribution Date exceeds the initial
Group I Percentage or Group II Percentage, respectively, as of the Cut-off Date,
then both the Group I Prepayment Percentage and Group II Prepayment Percentage
for such Distribution Date will equal 100%. The scheduled reductions in the
Group I Prepayment Percentage and Group II Prepayment Percentage for
Distribution Dates occurring on or after the fifth anniversary of the month of
the first Distribution Date will be subject to the conditions set forth in the
immediately following paragraph. If on any Distribution Date the allocation to
the Group I Certificates (other than the Class I-PO Certificates) or the
allocation to the Group II Certificates (other than the Class II-PO
Certificates) in the percentage required would reduce the sum of the Certificate
Principal Balances of such
S-45
<PAGE> 46
Certificates below zero, the Group I Prepayment Percentage or Group II
Prepayment Percentage, as applicable, for such Distribution Date will be limited
to the percentage necessary to reduce such sum to zero.
No decrease in the Group I Prepayment Percentage or Group II Prepayment
Percentage will occur unless both of the following conditions (the "Step Down
Conditions") are satisfied with respect to the Mortgage Pool as a whole: (i) the
outstanding principal balance of all Mortgage Loans delinquent 60 days or more
(averaged over the preceding six month period), as a percentage of the aggregate
principal balance of the Subordinate Certificates on such Distribution Date,
does not equal or exceed 50%, and (ii) cumulative Realized Losses with respect
to the Mortgage Loans do not exceed (a) with respect to the Distribution Date on
the fifth anniversary of the first Distribution Date, 30% of the aggregate of
the principal balances of the Subordinate Certificates as of the Cut-off Date
(the "Original Subordinate Principal Balance"), (b) with respect to the
Distribution Date on the sixth anniversary of the first Distribution Date, 35%
of the Original Subordinate Principal Balance, (c) with respect to the
Distribution Date on the seventh anniversary of the first Distribution Date, 40%
of the Original Subordinate Principal Balance, (d) with respect to the
Distribution Date on the eighth anniversary of the first Distribution Date, 45%
of the Original Subordinate Principal Balance, and (e) with respect to the
Distribution Date on the ninth anniversary of the first Distribution Date, 50%
of the Original Subordinate Principal Balance.
CROSS-COLLATERALIZATION
On each Distribution Date prior to the occurrence of the Credit Support
Depletion Date, but on or after the date on which the Certificate Principal
Balances of the Group I Certificates (other than the Class I-PO Certificate
Principal Balance) or the Certificate Principal Balances of the Group II
Certificates (other than the Class II-PO Certificate Principal Balance) have
been reduced to zero, all principal (in excess of that needed to reduce such
Certificate Principal Balances to zero) on the Mortgage Loans in the Loan Group
relating to the Class A Certificates that have been paid in full will be paid as
principal, after distributions of principal to the Class I-PO Certificates or
Class II-PO Certificates, as applicable, to the remaining Class A Certificates
in accordance with the order set forth under "-- Group I Principal Distribution
Amount" beginning with clause (ii) thereof or, as set forth under "-- Group II
Principal Distribution Amount" (other than clause (i) thereof) as described in
"-- Distributions of Principal" herein, and in reduction of the Certificate
Principal Balances of such remaining Class A Certificates, provided that on such
Distribution Date (a) the Aggregate Subordinate Percentage (as defined herein)
for such Distribution Date is less than 200% of the Aggregate Subordinate
Percentage as of the Cut-Off Date or (b) the average outstanding principal
balance of the Mortgage Loans in either Loan Group delinquent 60 days or more
over the last six months, as a percentage of the related Subordinate Loan Group
Component Balance (as defined herein), is greater than or equal to 50%.
In addition, if on any Distribution Date the aggregate of the Certificate
Principal Balances of the Group I Certificates or Group II Certificates is
greater than the aggregate of the Stated Principal Balances of the Mortgage
Loans in the related Loan Group (the "Undercollateralized Group"), (i) the
portion of the Available Distribution Amount in respect of principal on the
Mortgage Loans in the other Loan Group (the "Overcollateralized Group") (after
distributions of principal to the Class I-PO or Class II-PO Certificates, as
applicable, and the Class A Certificates of the Overcollateralized Group) will
be distributed to the Class A Certificates of the Undercollateralized Group in
accordance with the order set forth under "-- Group I Principal Distribution
Amount" beginning with clause (ii) thereof or, as set forth under "-- Group II
Principal Distribution Amount" (other than clause (i) thereof) as described in
"-- Principal Distributions" herein, until the aggregate of the Certificate
Principal Balances of the Class A Certificates of the Undercollateralized Group
equals the aggregate of the Stated Principal Balances of the Mortgage Loans in
the related Loan Group less the Class I-PO Fraction or Class II-PO Fraction of
any Class I-PO Mortgage Loans or Class II-PO Mortgage Loans, as applicable, in
such Loan Group and (ii) the Available Distribution Amount of the
Overcollateralized Group will be further reduced (after distributions to the
Overcollateralized Group pursuant to subclauses (a)(i) and (ii) or (b)(i) and
(b)(ii), as applicable, under "-- Priority of Distributions" herein) in an
amount equal to one month's interest on the amount by which the
Undercollateralized Group is undercollateralized at 6.750% per annum if the
Undercollateralized Group is Loan Group I or 6.500% per annum if the
Undercollateralized Loan Group is Loan Group II plus any shortfall of interest
on
S-46
<PAGE> 47
the Class A Certificates of the Undercollateralized Group from prior
Distribution Dates, including Unpaid Accrued Certificate Interest on such
shortfall at the rate described above (any amount covering interest shortfalls
and interest accrued thereon, will be distributed to the applicable Class or
Classes of Certificates in the priority of interest payable on such Class of
Certificates on such Distribution Date) and such amount will be added to the
Available Distribution Amount of the Undercollateralized Group; provided,
however, that in no case will the Available Distribution Amount for an
Overcollateralized Group be so reduced by more than the sum of (a) its Senior
Overcollateralized Amount and (b) interest on such amount at the Pass-Through
Rate for such Overcollateralized Group. In the event the Group I Certificates
are the Undercollateralized Group, the reduction in the Available Distribution
Amount of the Overcollateralized Group to pay interest to the
Undercollateralized Group as described above may cause a shortfall in the amount
of principal and interest otherwise distributable to the Subordinate
Certificates and further to the amount of principal otherwise currently
distributable to the Group II Certificates because the Group II Certificates
have Pass-Through Rates less than the Group I Certificates.
The "Aggregate Subordinate Percentage" at any time will equal the sum of
the Certificate Principal Balances of the Subordinate Certificates divided by
the then outstanding aggregate Stated Principal Balance of the Mortgage Loans.
For each Loan Group on each Distribution Date, the "Senior
Overcollateralized Amount" will equal the excess, if any, of the aggregate
Stated Principal Balance of the Mortgage Loans in such Loan Group (less the
applicable Class I-PO or Class II-PO Fraction, as applicable, of any Class I-PO
or Class II-PO Mortgage Loan in such Loan Group) over the aggregate Certificate
Principal Balance of the Class A Certificates of the related Certificate Group
plus, in the case of Loan Group I, the aggregate Certificate Principal Balance
of the Residual Certificates. The "Senior Overcollateralized Amount" with
respect to each Loan Group is also referred to herein as the "Subordinate Loan
Group Component Balance" for such Loan Group.
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
as follows: first, to the Class B-5 Certificates until the Class B-5 Certificate
Principal Balance has been reduced to zero; second, to the Class B-4
Certificates until the Class B-4 Certificate Principal Balance has been reduced
to zero; third, to the Class B-3 Certificates until the Class B-3 Certificate
Principal Balance has been reduced to zero; fourth, to the Class B-2
Certificates until the Class B-2 Certificate Principal Balance has been reduced
to zero; fifth, to the Class B-1 Certificates until the Class B-1 Certificate
Principal Balance has been reduced to zero; sixth, to the Class M Certificates
until the Class M Certificate Principal Balance has been reduced to zero;
seventh, (x) in the case of losses on a Group I Loan, to the Group I
Certificates (other than the Class I-X Certificates) and the Residual
Certificates, pro rata according to their Certificate Principal Balances in
reduction thereof, and (y) in the case of losses on a Group II Loan, to the
Group II Certificates (other than the Class II-X Certificates), pro rata
according to their Certificate Principal Balances in reduction thereof;
provided, however, that in each case if any such Realized Losses is on a Class
I-PO Mortgage Loan or Class II-PO Mortgage Loan, the Class I-PO Fraction or
Class II-PO Fraction of such loss will first be allocated to the Class I-PO
Certificate or Class II-PO Certificate, as applicable, and the remainder of such
Realized Losses will be allocated as described above in this paragraph. Any
allocation of a Realized Loss (other than a Debt Service Reduction) to a
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 Debt Service Reductions (as defined below) 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. Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination will be allocated on a pro rata basis among the Senior
Certificates (other than the Class I-PO and Class II-PO Certificates) and the
Subordinate Certificates (any such Realized Losses so allocated to the
S-47
<PAGE> 48
Senior Certificates and the Subordinate Certificates will be allocated without
priority among the various Classes of Certificates (other than the Class I-PO
and Class II-PO Certificates). For purposes of the foregoing, each Class of
Subordinate Certificates will be deemed to have an aggregate Certificate
Principal Balance (and to accrue interest thereon) equal to the actual aggregate
Certificate Principal Balance thereof times a fraction, the numerator of which
is the Group I Subordinate Amount (for a loss on a Group I Loan) or the Group II
Subordinate Amount (for a loss on a Group II Loan), and the denominator of which
is the aggregate of the Group I Subordinate Amount and the Group II Subordinate
Amount. The principal portion of such losses on Class I-PO Mortgage Loans and
Class II-PO Mortgage Loans will be allocated to the Class I-PO and the Class
II-PO Certificates, respectively, in an amount equal to the related Class I-PO
Fraction or Class II-PO Fraction thereof, and the remainder of such losses on
Class I-PO Mortgage Loans or Class II-PO Mortgage Loans will be allocated among
the remaining Certificates in the related Certificate Group on a pro rata basis.
Investors in the Senior Certificates should be aware that because the
Subordinate Certificates represent interests in both Loan Groups, the
Certificate Principal Balances of the Subordinate Certificates could be reduced
to zero as a result of a disproportionate amount of losses on the Mortgage Loans
in one Loan Group. Therefore, notwithstanding that losses on the Mortgage Loans
in one Loan Group may only be allocated to the related Senior Certificates
(except for Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses and Extraordinary Losses), the allocation to the Subordinate Certificates
of losses on the Mortgage Loans in the other Loan Group will increase the
likelihood that losses may be allocated to such 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 (as defined below) 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, Bankruptcy Losses and Extraordinary 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.
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
any Realized Loss thereon has been allocated to one or more Classes of
Certificates on or before the date of determination.
In order to maximize the likelihood of distribution in full of the Group I
Principal Distribution Amount or the Group II Principal Distribution Amount, as
applicable, and Accrued Certificate Interest thereon, holders of Group I
Certificates and Group II Certificates will have a prior right, on each
Distribution Date, to the Available Distribution Amount for the related Loan
Group, to the extent necessary to satisfy the Accrued Certificate Interest
thereon and the Group I Principal Distribution Amount or Group II Principal
Distribution Amount, as applicable. The Group I Principal Distribution Amount
and Group II Principal Distribution Amount are subject to adjustment on each
Distribution Date to reflect the then applicable Group I Percentage or Group II
Percentage, as applicable, and the Group I Prepayment Percentage or Group II
Prepayment Percentage, as applicable, 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 Group I Prepayment Percentage when it exceeds the Group I Percentage to
determine the Group I Principal Distribution Amount will accelerate the
amortization of the Group I Certificates (except the Class I-PO Certificates and
the Group I Lockout Certificates) relative to the actual amortization of the
Group I Loans. Similarly, the application of the Group II Prepayment Percentage
when it exceeds the Group II Percentage to determine the Group II Principal
Distribution Amount will accelerate the amortiza-
S-48
<PAGE> 49
tion of the Group II Certificates (except the Class II-PO Certificates and the
Group II Lockout Certificates) relative to the actual amortization of the Group
II Loans. To the extent that the Senior Certificates are amortized faster than
the Mortgage Loans, the percentage interest evidenced by such 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.
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 $4,502,375 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 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 solely to the
Subordinate Certificates in connection with Fraud Losses (the "Fraud Loss
Amount") from Subordination will initially be equal to $3,433,529. As of any
date of determination after the Cut-off Date the Fraud Loss Amount will equal
(X) prior to the first anniversary of the Cut-off Date an amount equal to 2% 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) 1% 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 will be zero and no allocation solely to the Subordinate Certificates
through Subordination will 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 $100,000 less the sum of any amounts
allocated solely to the Subordinate Certificates through Subordination for such
losses up to such date of determination.
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 it 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.
Investors in the Senior Certificates should be aware that the applicable
coverage for such losses cover Mortgage Loans in both Loan Groups. Therefore, in
the event Mortgage Loans in a Loan Group suffer a high level of Special Hazard
Losses, Fraud Losses or Bankruptcy Losses, it will reduce the available coverage
for the Senior Certificates in both Loan Groups and may cause Senior
Certificates relating to the other Loan
S-49
<PAGE> 50
Group to suffer losses in the event Mortgage Loans in either Loan Group suffer
such losses after the available coverage has been exhausted.
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) 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, Insurance
Proceeds or Liquidation Proceeds.
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 to the 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 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 late collections, Insurance Proceeds 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.
LAST SCHEDULED DISTRIBUTION DATE
The Last Scheduled Distribution Date for the Group I Certificates and the
Subordinate Certificates is the Distribution Date in May 2028, which is the
Distribution Date occurring in the month after the scheduled maturity date for
the latest maturing Group I Loan.
The Last Scheduled Distribution Date for the Group II Certificates is the
Distribution Date in May 2013, which is the Distribution Date occurring in the
month after the scheduled maturity date for the latest maturing Group II Loan.
The actual last Distribution Date on the Certificates will depend on the
rate of payments of principal (including Principal Prepayments) on the Mortgage
Loans in the related Loan Group or Loan Groups, which in turn may be influenced
by a variety of economic, geographic and social factors, as well as the level of
prevailing interest rates. No assurance can be given as to the actual payment
experience on the Mortgage Loans.
S-50
<PAGE> 51
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 Pass-Through Rate and
purchase price because monthly distributions will not be made to such holders
until the 25th 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 in the related Loan Group. Such yield may be
adversely affected by a higher or lower than anticipated rate of payment of
principal on the Mortgage Loans in the related Loan Group. Except in limited
circumstances, as described in "DESCRIPTION OF THE
CERTIFICATES -- Cross-Collateralization" herein and, with respect to the Insured
Certificates, which may also receive payments under their respective Certificate
Insurance Policies as described herein, principal distributions to the Group I
Certificates and Group II Certificates relate to principal payments on the Group
I Loans and Group II Loans, respectively, and principal distributions to the
Subordinate Certificates relate to principal payments on both Group I Loans and
Group II Loans. The rate of payment of principal on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, 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. 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 Principal Prepayments on
the Mortgage Loans will generally be distributed to the Senior Certificates
entitled to principal (other than the Principal Only Certificates and Lockout
Certificates) during at least the first five years after the Closing 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 the Mortgage Loans during any period or over the life of the Certificates.
The Class IIA-6 Certificates will be especially sensitive to the rate of
payment of principal (including prepayments, defaults and liquidations) on the
Group II Loans because (i) prior to the Class IIA-6 Accretion Termination Date
accrued certificate interest on the Class IIA-6 Certificates will be added to
the Certificate Principal Balance thereof rather than distributed in respect of
such Certificates and (ii) the Class IIA-6 Certificates will receive
distributions of the Class IIA-6 Accrual Amount as principal on any Distribution
Date prior to the Class IIA-6 Accretion Termination Date only to the extent of
the Class IIA-6 Accrual Amount remaining, if any, after the Class IIA-5
Certificate Principal Balance has been reduced to its Targeted Principal Balance
for such Distribution Date.
Investors in the Group I Lockout Certificates should be aware that because
the Group I Lockout Certificates generally do not receive any distributions of
principal payments or principal prepayments prior to the Distribution Date
occurring in May 2003, the weighted average life of the Group I Lockout
Certificates will be significantly longer than would otherwise be the case, and
the effect on the market value of the Group I Lockout Certificates arising out
of changes in market interest rates or market yields for similar securities will
be greater than for other Classes of Class A Certificates entitled to such
distributions.
S-51
<PAGE> 52
Investors in the Group II Lockout Certificates should be aware that because
the Group II Lockout Certificates generally do not receive any distributions of
principal prepayments prior to the Distribution Date occurring in May 2003, the
weighted average lives of the Group II Lockout Certificates will be longer than
would otherwise be the case, and the effect on the market value of the Group II
Lockout Certificates arising out of changes in market interest rates or market
yields for similar securities will be greater than for other Classes of Class A
Certificates entitled to such distributions.
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. There can be no
assurance that the Mortgage Loans will prepay at any particular rate or that the
cash flows on the Certificates will conform to the cash flows described herein.
Because the Mortgage Rates on the Mortgage Loans and the Pass-Through Rates
on the Offered Certificates are fixed, such rates will 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 such Offered Certificates may decline.
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 that are equity refinance mortgage loans may
be higher than for other types of mortgage loans. Prepayments, liquidations and
purchases of the Mortgage Loans in a Loan Group will result in distributions to
Certificateholders in the related Certificate Group of principal amounts which
would otherwise be distributed over the remaining terms of the Mortgage Loans in
such Loan Group. 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 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 among the holders of all Classes of 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.
See "YIELD CONSIDERATIONS" in the Prospectus and "DESCRIPTION OF THE
CERTIFICATES -- Interest Distributions" herein 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 in the related Certificate Group entitled to principal
(other than the Principal Only Certificates and Lockout Certificates) during at
least the first five years after the Closing Date, the rate of principal
prepayments on the Mortgage Loans in the related Loan Group during this period
may significantly affect the yield to maturity of the Offered Certificates.
S-52
<PAGE> 53
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. For additional considerations relating to the
yield on the Certificates, see "YIELD CONSIDERATIONS" and "MATURITY AND
PREPAYMENT CONSIDERATIONS" in the Prospectus.
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 in the related Loan Group or Loan Groups 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 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, "200% SPA" assumes prepayment rates
equal to 200% of SPA. Correspondingly, "250% SPA" assumes prepayment rates equal
to 250% 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.
Unless otherwise specified, the information in the tables in this
Prospectus Supplement has been prepared on the basis of the following assumed
characteristics of the Mortgage Loans and the following additional assumptions
(collectively, the "Structuring Assumptions"): (i) the Mortgage Loans have the
characteristics set forth under "DESCRIPTION OF THE MORTGAGE POOL" herein, (ii)
the Mortgage Loans prepay at the specified level of SPA, (iii) no defaults in
the payment by Mortgagors of principal of and interest on the Mortgage Loans are
experienced, (iv) scheduled payments on the Mortgage Loans are received on the
first day of each month commencing in the calendar month following the Cut-off
Date and are computed prior to giving effect to prepayments received on the last
day of the prior month, (v) prepayments are allocated as described herein
without giving effect to loss and delinquency tests, (vi) there are no Net
Prepayment Interest Shortfalls and prepayments represent prepayments in full of
individual Mortgage Loans and are received on the last day of each month,
commencing in April 1998, (vii) the initial Certificate Principal Balance or
Notional Amount, as applicable, of each Class of Certificates is as set forth on
the cover page hereof, (viii) interest accrues on each interest-bearing Class of
Certificates at the applicable Pass-Through rate set forth or described on the
cover hereof or described herein, (ix) distributions in respect of the
Certificates are received in cash on the 25th day of each month commencing in
May 1998, (x) optional repurchase of either Loan Group does not occur and (xii)
the Offered Certificates are purchased for cash on April 30, 1998. 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 Structuring Assumptions and the actual
characteristics of the Mortgage Loans and the Certificates underscore the
hypothetical nature of the following tables, which are 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
S-53
<PAGE> 54
Mortgage Loans may result in percentages of the initial Certificate Principal
Balance outstanding and weighted average lives of the Offered Certificates
different from those shown.
Based upon the foregoing assumptions, the following table sets forth the
percentages of the initial Certificate Principal Balance (or Notional Amount) of
each such Class of Offered Certificates that would be outstanding after each of
the dates shown at various percentages of SPA and the corresponding weighted
average lives.
S-54
<PAGE> 55
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS IA-1 CLASS IA-2
------------------------------------- -------------------------------------
100% 200% 250% 350% 500% 100% 200% 250% 350% 500%
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100 100 100 100 100 100
April 25, 1999.................................. 96 94 93 91 87 100 100 100 100 100
April 25, 2000.................................. 89 82 78 70 59 100 100 100 100 100
April 25, 2001.................................. 80 65 58 45 27 100 100 100 100 100
April 25, 2002.................................. 70 50 41 24 3 100 100 100 100 100
April 25, 2003.................................. 62 37 26 8 0 100 100 100 100 50
April 25, 2004.................................. 54 26 15 0 0 100 100 100 88 14
April 25, 2005.................................. 47 18 6 0 0 100 100 100 56 0
April 25, 2006.................................. 41 10 0 0 0 100 100 97 35 0
April 25, 2007.................................. 35 4 0 0 0 100 100 76 21 0
April 25, 2008.................................. 30 0 0 0 0 100 98 60 12 0
April 25, 2009.................................. 25 0 0 0 0 100 81 47 5 0
April 25, 2010.................................. 20 0 0 0 0 100 67 35 0 0
April 25, 2011.................................. 15 0 0 0 0 100 54 26 0 0
April 25, 2012.................................. 11 0 0 0 0 100 44 18 0 0
April 25, 2013.................................. 7 0 0 0 0 100 34 11 0 0
April 25, 2014.................................. 4 0 0 0 0 100 26 6 0 0
April 25, 2015.................................. * 0 0 0 0 100 19 1 0 0
April 25, 2016.................................. 0 0 0 0 0 87 13 0 0 0
April 25, 2017.................................. 0 0 0 0 0 75 7 0 0 0
April 25, 2018.................................. 0 0 0 0 0 63 2 0 0 0
April 25, 2019.................................. 0 0 0 0 0 52 0 0 0 0
April 25, 2020.................................. 0 0 0 0 0 42 0 0 0 0
April 25, 2021.................................. 0 0 0 0 0 32 0 0 0 0
April 25, 2022.................................. 0 0 0 0 0 23 0 0 0 0
April 25, 2023.................................. 0 0 0 0 0 14 0 0 0 0
April 25, 2024.................................. 0 0 0 0 0 6 0 0 0 0
April 25, 2025.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2026.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2027.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2028.................................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)................ 7.4 4.4 3.7 2.9 2.3 21.5 14.0 11.3 7.7 5.2
<CAPTION>
CLASS IA-3
-------------------------------------
100% 200% 250% 350% 500%
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100
April 25, 1999.................................. 100 100 100 100 100
April 25, 2000.................................. 100 100 100 100 100
April 25, 2001.................................. 100 100 100 100 100
April 25, 2002.................................. 100 100 100 100 100
April 25, 2003.................................. 100 100 100 100 100
April 25, 2004.................................. 100 100 100 100 78
April 25, 2005.................................. 100 100 100 100 31
April 25, 2006.................................. 100 100 100 100 6
April 25, 2007.................................. 100 100 100 91 0
April 25, 2008.................................. 100 100 100 73 0
April 25, 2009.................................. 100 100 100 58 0
April 25, 2010.................................. 100 100 100 47 0
April 25, 2011.................................. 100 100 100 36 0
April 25, 2012.................................. 100 100 86 27 0
April 25, 2013.................................. 100 100 72 21 0
April 25, 2014.................................. 100 100 60 16 0
April 25, 2015.................................. 100 87 51 12 0
April 25, 2016.................................. 100 74 41 9 0
April 25, 2017.................................. 100 63 33 7 0
April 25, 2018.................................. 100 54 26 5 0
April 25, 2019.................................. 100 45 21 4 0
April 25, 2020.................................. 100 36 16 3 0
April 25, 2021.................................. 100 28 12 2 0
April 25, 2022.................................. 95 21 9 1 0
April 25, 2023.................................. 77 16 6 1 0
April 25, 2024.................................. 62 11 4 1 0
April 25, 2025.................................. 47 8 3 * 0
April 25, 2026.................................. 30 5 2 * 0
April 25, 2027.................................. 14 2 1 * 0
April 25, 2028.................................. 0 0 0 0 0
Weighted Average Life (Years)(1)................ 26.8 21.0 17.9 12.7 6.7
</TABLE>
- ---------------
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed reduction in Certificate Principal
Balance or Notional Amount, as applicable, on such Class of Certificates by
the number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the total amount of such reductions on such Class of Certificates.
* Indicates an amount above zero and less than 0.5% of the initial Certificate
Principal Balance or initial Notional Amount outstanding.
S-55
<PAGE> 56
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS IA-4 CLASS IA-5 AND CLASS IIA-6
------------------------------------- -------------------------------------
DISTRIBUTION DATE 100% 200% 250% 350% 500% 100% 200% 250% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100 100 100 100 100 100
April 25, 1999.................................. 100 100 100 100 100 100 100 100 100 100
April 25, 2000.................................. 100 100 100 100 100 100 100 100 100 100
April 25, 2001.................................. 100 100 100 100 100 100 100 100 100 100
April 25, 2002.................................. 100 100 100 100 100 100 100 100 100 100
April 25, 2003.................................. 100 100 100 100 100 100 100 100 100 33
April 25, 2004.................................. 97 95 94 92 89 100 100 100 84 0
April 25, 2005.................................. 93 89 86 82 76 100 100 100 41 0
April 25, 2006.................................. 88 81 77 70 60 100 100 96 13 0
April 25, 2007.................................. 82 71 66 57 43 100 100 68 0 0
April 25, 2008.................................. 75 61 55 44 30 100 97 47 0 0
April 25, 2009.................................. 69 53 46 34 20 100 75 29 0 0
April 25, 2010.................................. 63 45 38 26 14 100 56 14 0 0
April 25, 2011.................................. 58 39 31 20 9 100 39 1 0 0
April 25, 2012.................................. 52 33 26 15 6 100 25 0 0 0
April 25, 2013.................................. 47 28 21 12 4 100 12 0 0 0
April 25, 2014.................................. 43 23 17 9 3 100 1 0 0 0
April 25, 2015.................................. 38 20 14 7 2 100 0 0 0 0
April 25, 2016.................................. 34 16 11 5 1 83 0 0 0 0
April 25, 2017.................................. 30 14 9 4 1 67 0 0 0 0
April 25, 2018.................................. 26 11 7 3 1 51 0 0 0 0
April 25, 2019.................................. 23 9 6 2 * 37 0 0 0 0
April 25, 2020.................................. 19 7 4 1 * 23 0 0 0 0
April 25, 2021.................................. 16 6 3 1 * 9 0 0 0 0
April 25, 2022.................................. 13 4 2 1 * 0 0 0 0 0
April 25, 2023.................................. 10 3 2 * * 0 0 0 0 0
April 25, 2024.................................. 8 2 1 * * 0 0 0 0 0
April 25, 2025.................................. 6 2 1 * * 0 0 0 0 0
April 25, 2026.................................. 4 1 * * * 0 0 0 0 0
April 25, 2027.................................. 2 * * * * 0 0 0 0 0
April 25, 2028.................................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)................ 15.5 12.6 11.7 10.4 9.1 20.2 12.6 10.1 6.9 4.8
<CAPTION>
CLASS II A-1
-------------------------------------
DISTRIBUTION DATE 100% 200% 250% 350% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100
April 25, 1999.................................. 94 93 92 90 88
April 25, 2000.................................. 86 81 79 74 66
April 25, 2001.................................. 77 68 63 55 44
April 25, 2002.................................. 68 56 50 40 28
April 25, 2003.................................. 60 46 40 29 18
April 25, 2004.................................. 52 37 31 21 11
April 25, 2005.................................. 45 30 24 15 7
April 25, 2006.................................. 38 23 18 11 4
April 25, 2007.................................. 31 18 14 7 3
April 25, 2008.................................. 25 14 10 5 1
April 25, 2009.................................. 19 10 7 3 1
April 25, 2010.................................. 14 7 4 2 *
April 25, 2011.................................. 9 4 3 1 *
April 25, 2012.................................. 4 2 1 * *
April 25, 2013.................................. 0 0 0 0 0
April 25, 2014.................................. 0 0 0 0 0
April 25, 2015.................................. 0 0 0 0 0
April 25, 2016.................................. 0 0 0 0 0
April 25, 2017.................................. 0 0 0 0 0
April 25, 2018.................................. 0 0 0 0 0
April 25, 2019.................................. 0 0 0 0 0
April 25, 2020.................................. 0 0 0 0 0
April 25, 2021.................................. 0 0 0 0 0
April 25, 2022.................................. 0 0 0 0 0
April 25, 2023.................................. 0 0 0 0 0
April 25, 2024.................................. 0 0 0 0 0
April 25, 2025.................................. 0 0 0 0 0
April 25, 2026.................................. 0 0 0 0 0
April 25, 2027.................................. 0 0 0 0 0
April 25, 2028.................................. 0 0 0 0 0
Weighted Average Life (Years)(1)................ 6.7 5.4 4.9 4.1 3.2
</TABLE>
- ---------------
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed reduction in Certificate Principal
Balance or Notional Amount, as applicable, on such Class of Certificates by
the number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the total amount of such reductions on such Class of Certificates.
* Indicates an amount above zero and less than 0.5% of the initial Certificate
Principal Balance or initial Notional Amount outstanding.
S-56
<PAGE> 57
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS II A-2 CLASS II A-3
------------------------------------- -------------------------------------
DISTRIBUTION DATE 100% 200% 250% 350% 500% 100% 200% 250% 350% 500%
----------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100 100 100 100 100 100
April 25, 1999.................................. 93 91 89 87 83 100 100 100 100 100
April 25, 2000.................................. 82 75 71 64 53 100 100 100 100 100
April 25, 2001.................................. 70 57 50 38 21 100 100 100 100 100
April 25, 2002.................................. 59 41 33 18 0 100 100 100 100 100
April 25, 2003.................................. 48 27 19 3 0 100 100 100 100 18
April 25, 2004.................................. 39 17 9 0 0 100 100 100 68 0
April 25, 2005.................................. 30 9 1 0 0 100 100 100 34 0
April 25, 2006.................................. 22 3 0 0 0 100 100 75 16 0
April 25, 2007.................................. 15 0 0 0 0 100 88 54 8 0
April 25, 2008.................................. 9 0 0 0 0 100 66 39 5 0
April 25, 2009.................................. 3 0 0 0 0 100 48 27 4 0
April 25, 2010.................................. 0 0 0 0 0 85 32 18 2 0
April 25, 2011.................................. 0 0 0 0 0 53 19 10 1 0
April 25, 2012.................................. 0 0 0 0 0 24 8 4 * 0
April 25, 2013.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2014.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2015.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2016.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2017.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2018.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2019.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2020.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2021.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2022.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2023.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2024.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2025.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2026.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2027.................................. 0 0 0 0 0 0 0 0 0 0
April 25, 2028.................................. 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(1)................ 5.2 3.7 3.2 2.6 2.1 13.2 11.2 9.8 6.9 4.6
<CAPTION>
CLASS IIA-4
-------------------------------------
DISTRIBUTION DATE 100% 200% 250% 350% 500%
----------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Initial Percentage.............................. 100 100 100 100 100
April 25, 1999.................................. 96 96 96 96 96
April 25, 2000.................................. 92 92 92 92 92
April 25, 2001.................................. 87 87 87 87 87
April 25, 2002.................................. 82 82 82 82 82
April 25, 2003.................................. 77 77 77 77 77
April 25, 2004.................................. 70 68 68 66 54
April 25, 2005.................................. 62 59 58 55 33
April 25, 2006.................................. 54 49 47 43 20
April 25, 2007.................................. 45 39 36 31 12
April 25, 2008.................................. 36 29 26 21 7
April 25, 2009.................................. 28 21 18 14 4
April 25, 2010.................................. 20 14 12 8 2
April 25, 2011.................................. 13 8 7 4 1
April 25, 2012.................................. 6 3 3 2 *
April 25, 2013.................................. 0 0 0 0 0
April 25, 2014.................................. 0 0 0 0 0
April 25, 2015.................................. 0 0 0 0 0
April 25, 2016.................................. 0 0 0 0 0
April 25, 2017.................................. 0 0 0 0 0
April 25, 2018.................................. 0 0 0 0 0
April 25, 2019.................................. 0 0 0 0 0
April 25, 2020.................................. 0 0 0 0 0
April 25, 2021.................................. 0 0 0 0 0
April 25, 2022.................................. 0 0 0 0 0
April 25, 2023.................................. 0 0 0 0 0
April 25, 2024.................................. 0 0 0 0 0
April 25, 2025.................................. 0 0 0 0 0
April 25, 2026.................................. 0 0 0 0 0
April 25, 2027.................................. 0 0 0 0 0
April 25, 2028.................................. 0 0 0 0 0
Weighted Average Life (Years)(1)................ 8.2 7.8 7.6 7.3 6.2
</TABLE>
- ---------------
(1) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed reduction in Certificate Principal
Balance or Notional Amount, as applicable, on such Class of Certificates by
the number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the total amount of such reductions on such Class of Certificates.
* Indicates an amount above zero and less than 0.5% of the initial Certificate
Principal Balance or initial Notional Amount outstanding.
S-57
<PAGE> 58
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS IIA-5 CLASS IIA-6 CLASS I-X(1)
-------------------------------- -------------------------------- -----------
100% 200% 250% 350% 500% 100% 200% 250% 350% 500% 100% 200%
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................. 100 100 100 100 100 100 100 100 100 100 100 100
April 25, 1999..................... 92 90 89 89 87 107 106 89 34 0 98 96
April 25, 2000..................... 81 73 71 67 55 114 113 71 0 0 93 88
April 25, 2001..................... 68 54 50 40 22 121 121 50 0 0 86 76
April 25, 2002..................... 55 37 33 19 0 130 129 33 0 0 80 66
April 25, 2003..................... 44 22 19 4 0 138 138 19 0 0 74 58
April 25, 2004..................... 34 11 9 0 0 148 147 9 0 0 69 50
April 25, 2005..................... 24 2 1 0 0 157 157 1 0 0 63 43
April 25, 2006..................... 16 0 0 0 0 168 64 0 0 0 59 37
April 25, 2007..................... 8 0 0 0 0 179 0 0 0 0 54 32
April 25, 2008..................... 1 0 0 0 0 191 0 0 0 0 50 28
April 25, 2009..................... 0 0 0 0 0 69 0 0 0 0 45 24
April 25, 2010..................... 0 0 0 0 0 0 0 0 0 0 41 20
April 25, 2011..................... 0 0 0 0 0 0 0 0 0 0 38 17
April 25, 2012..................... 0 0 0 0 0 0 0 0 0 0 34 15
April 25, 2013..................... 0 0 0 0 0 0 0 0 0 0 31 12
April 25, 2014..................... 0 0 0 0 0 0 0 0 0 0 28 10
April 25, 2015..................... 0 0 0 0 0 0 0 0 0 0 25 9
April 25, 2016..................... 0 0 0 0 0 0 0 0 0 0 22 7
April 25, 2017..................... 0 0 0 0 0 0 0 0 0 0 20 6
April 25, 2018..................... 0 0 0 0 0 0 0 0 0 0 17 5
April 25, 2019..................... 0 0 0 0 0 0 0 0 0 0 15 4
April 25, 2020..................... 0 0 0 0 0 0 0 0 0 0 13 3
April 25, 2021..................... 0 0 0 0 0 0 0 0 0 0 10 2
April 25, 2022..................... 0 0 0 0 0 0 0 0 0 0 8 2
April 25, 2023..................... 0 0 0 0 0 0 0 0 0 0 6 1
April 25, 2024..................... 0 0 0 0 0 0 0 0 0 0 5 1
April 25, 2025..................... 0 0 0 0 0 0 0 0 0 0 4 1
April 25, 2026..................... 0 0 0 0 0 0 0 0 0 0 2 *
April 25, 2027..................... 0 0 0 0 0 0 0 0 0 0 1 *
April 25, 2028..................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life (Years)(2)... 4.7 3.4 3.2 2.7 2.2 10.8 7.9 3.2 0.8 0.5 11.4 7.7
<CAPTION>
CLASS I-X(1)
------------------
250% 350% 500%
---- ---- ----
<S> <C> <C> <C>
Initial Percentage................. 100 100 100
April 25, 1999..................... 95 94 91
April 25, 2000..................... 85 80 73
April 25, 2001..................... 72 63 51
April 25, 2002..................... 60 49 35
April 25, 2003..................... 50 38 24
April 25, 2004..................... 42 30 17
April 25, 2005..................... 35 23 12
April 25, 2006..................... 29 18 8
April 25, 2007..................... 24 14 5
April 25, 2008..................... 20 11 4
April 25, 2009..................... 17 8 3
April 25, 2010..................... 14 6 2
April 25, 2011..................... 11 5 1
April 25, 2012..................... 9 4 1
April 25, 2013..................... 8 3 1
April 25, 2014..................... 6 2 *
April 25, 2015..................... 5 2 *
April 25, 2016..................... 4 1 *
April 25, 2017..................... 3 1 *
April 25, 2018..................... 3 1 *
April 25, 2019..................... 2 * *
April 25, 2020..................... 2 * *
April 25, 2021..................... 1 * *
April 25, 2022..................... 1 * *
April 25, 2023..................... 1 * *
April 25, 2024..................... * * *
April 25, 2025..................... * * *
April 25, 2026..................... * * *
April 25, 2027..................... * * *
April 25, 2028..................... 0 0 0
Weighted Average Life (Years)(2)... 6.5 5.1 3.8
</TABLE>
- ---------------
(1) In the case of the Class I-X Certificates, this table indicates the
percentage of the original Class I-X Notional Amount outstanding.
(2) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed reduction in Certificate Principal
Balance or Notional Amount, as applicable, on such Class of Certificates by
the number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the total amount of such reductions on such Class of Certificates.
* Indicates an amount above zero and less than 0.5% of the initial Certificate
Principal Balance or initial Notional Amount outstanding.
S-58
<PAGE> 59
PERCENT OF INITIAL CERTIFICATE PRINCIPAL BALANCE OR NOTIONAL AMOUNT
OUTSTANDING AT THE FOLLOWING PERCENTAGES OF SPA
<TABLE>
<CAPTION>
CLASS II-X(1) CLASS I-PO CLASS II-PO
-------------------------------- -------------------------------- -----------
DISTRIBUTION DATE 100% 200% 250% 350% 500% 100% 200% 250% 350% 500% 100% 200%
----------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100 100 100 100 100 100 100 100
April 25, 1999................... 94 93 92 90 88 97 96 95 94 91 94 93
April 25, 2000................... 86 81 79 74 67 93 87 85 80 73 86 82
April 25, 2001................... 77 68 64 56 45 86 76 72 63 51 77 68
April 25, 2002................... 68 56 51 41 29 80 66 60 49 35 68 57
April 25, 2003................... 60 46 41 31 19 74 57 50 38 24 60 47
April 25, 2004................... 52 38 32 22 12 68 50 42 30 17 52 38
April 25, 2005................... 45 30 25 16 8 63 43 35 23 11 45 31
April 25, 2006................... 38 24 19 11 5 58 37 29 18 8 38 24
April 25, 2007................... 31 18 14 8 3 54 32 24 14 5 32 19
April 25, 2008................... 25 14 10 5 2 49 28 20 11 4 25 14
April 25, 2009................... 19 10 7 3 1 45 24 17 8 3 20 10
April 25, 2010................... 14 7 5 2 1 41 20 14 6 2 14 7
April 25, 2011................... 9 4 3 1 * 38 17 11 5 1 9 4
April 25, 2012................... 4 2 1 * * 34 15 9 4 1 4 2
April 25, 2013................... 0 0 0 0 0 31 12 8 3 1 0 0
April 25, 2014................... 0 0 0 0 0 28 11 6 2 * 0 0
April 25, 2015................... 0 0 0 0 0 25 9 5 2 * 0 0
April 25, 2016................... 0 0 0 0 0 22 7 4 1 * 0 0
April 25, 2017................... 0 0 0 0 0 20 6 3 1 * 0 0
April 25, 2018................... 0 0 0 0 0 18 5 3 1 * 0 0
April 25, 2019................... 0 0 0 0 0 15 4 2 * * 0 0
April 25, 2020................... 0 0 0 0 0 13 3 2 * * 0 0
April 25, 2021................... 0 0 0 0 0 11 3 1 * * 0 0
April 25, 2022................... 0 0 0 0 0 9 2 1 * * 0 0
April 25, 2023................... 0 0 0 0 0 7 2 1 * * 0 0
April 25, 2024................... 0 0 0 0 0 6 1 * * * 0 0
April 25, 2025................... 0 0 0 0 0 4 1 * * * 0 0
April 25, 2026................... 0 0 0 0 0 3 * * * * 0 0
April 25, 2027................... 0 0 0 0 0 1 * * * * 0 0
April 25, 2028................... 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(2)..................... 6.7 5.4 4.9 4.1 3.3 11.5 7.7 6.5 5.1 3.8 6.8 5.5
<CAPTION>
CLASS II-PO
------------------ --------------------------------
DISTRIBUTION DATE 250% 350% 500% 100% 200% 250% 350% 500%
----------------- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100 100 100 100
April 25, 1999................... 92 91 88 97 97 97 97 97
April 25, 2000................... 79 74 68 94 94 94 94 94
April 25, 2001................... 64 56 45 91 91 91 91 91
April 25, 2002................... 51 42 30 88 88 88 88 88
April 25, 2003................... 41 31 20 84 84 84 84 84
April 25, 2004................... 32 23 13 79 77 76 75 72
April 25, 2005................... 25 16 8 73 69 68 64 59
April 25, 2006................... 19 12 5 66 60 58 53 45
April 25, 2007................... 14 8 3 58 51 47 41 32
April 25, 2008................... 10 5 2 51 41 37 30 20
April 25, 2009................... 7 4 1 43 33 29 21 13
April 25, 2010................... 5 2 1 36 26 22 15 8
April 25, 2011................... 3 1 * 30 20 16 10 5
April 25, 2012................... 1 * * 24 15 12 7 3
April 25, 2013................... 0 0 0 19 11 8 5 2
April 25, 2014................... 0 0 0 17 9 7 3 1
April 25, 2015................... 0 0 0 15 8 5 3 1
April 25, 2016................... 0 0 0 13 6 4 2 1
April 25, 2017................... 0 0 0 12 5 4 1 *
April 25, 2018................... 0 0 0 10 4 3 1 *
April 25, 2019................... 0 0 0 9 4 2 1 *
April 25, 2020................... 0 0 0 8 3 2 1 *
April 25, 2021................... 0 0 0 6 2 1 * *
April 25, 2022................... 0 0 0 5 2 1 * *
April 25, 2023................... 0 0 0 4 1 1 * *
April 25, 2024................... 0 0 0 3 1 * * *
April 25, 2025................... 0 0 0 2 1 * * *
April 25, 2026................... 0 0 0 1 * * * *
April 25, 2027................... 0 0 0 1 * * * *
April 25, 2028................... 0 0 0 0 0 0 0 0
Weighted Average Life
(Years)(2)..................... 5.0 4.2 3.4 10.9 9.6 9.1 8.4 7.7
</TABLE>
- ---------------
(1) In the case of the Class II-X Certificates, this table indicates the
percentage of the original Class II-X Notional Amount outstanding.
(2) The weighted average life of any Class of Certificates is determined by (i)
multiplying the amount of each assumed reduction in Certificate Principal
Balance or Notional Amount, as applicable, on such Class of Certificates by
the number of years from the date of issuance of the Certificates to the
related Distribution Date, (ii) summing the results, and (iii) dividing the
sum by the total amount of such reductions on such Class of Certificates.
* Indicates an amount above zero and less than 0.5% of the initial Certificate
Principal Balance or initial Notional Amount outstanding.
S-59
<PAGE> 60
YIELD CONSIDERATIONS WITH RESPECT TO THE INTEREST ONLY AND PRINCIPAL ONLY
CERTIFICATES
The yields to maturity on the Interest Only and Principal Only Certificates
will be extremely sensitive to the level of both the timing of and overall rate
of receipt of principal prepayments on the Mortgage Loans in the related Loan
Group. The interest payable to the Interest Only Certificates is based on the
weighted average of the Stripped Interest Rates of the Premium Rate Mortgage
Loans in the related Loan Group and therefore the yield to maturity on such
Certificates will decrease as a result of faster than expected principal
prepayments on the Premium Rate Mortgage Loans in the related Loan Group.
Prospective investors should fully consider the risks associated with an
investment in the Interest Only Certificates, including the possibility that if
the rate of principal prepayments on the Mortgage Loans in the related Loan
Group is rapid, such investors may not fully recoup their initial investments.
Because the principal payable with respect to the Class I-PO and Class
II-PO Certificates is derived from Class I-PO Mortgage Loans and Class II-PO
Mortgage Loans, respectively, the yield to maturity on such Principal Only
Certificates will be adversely affected by slower than expected Principal
Prepayments on such Mortgage Loans. In general, mortgage loans with higher
mortgage rates tend to prepay at higher rates than mortgage loans with
relatively lower mortgage rates in response to a given reduction in market
interest rates. As a result, the Class I-PO Mortgage Loans and Class II-PO
Mortgage Loans may prepay at lower rates, thereby reducing the rate of payment
of principal and the resulting yield of the related Principal Only Certificates.
To illustrate the significance of different rates of prepayment on the
distributions on the Interest Only and Principal Only Certificates, the
following tables indicate the approximate pre-tax yields to maturity (on a
corporate bond equivalent basis) under the different percentages of the SPA
indicated. Any differences between such assumptions and the actual
characteristics and performance of the Mortgage Loans in the related Loan Group
and of the Certificates may result in yields to maturity being different from
those shown in such tables. Discrepancies between assumed and actual
characteristics and performances underscore the hypothetical nature of the
tables, which are provided only to give a general sense of the sensitivity of
yields to maturity in varying prepayment scenarios. In addition, it is highly
unlikely that the Mortgage Loans in either Loan Group will prepay at a constant
level of the SPA until maturity or that all of such Mortgage Loans in either
Loan Group will prepay at the same rate. The timing of changes to the rate of
prepayments on the Mortgage Loans in the related Loan Group may significantly
affect the actual yield to maturity to an investor, even if the average rate of
Principal Prepayments on the Mortgage Loans in the related Loan Group is
consistent with an investors expectation. In general, the earlier a payment of
principal of the Mortgage Loans in the related Loan Group, the greater the
effect on an investor's yield to maturity. As a result, the effect on an
investor's yield to maturity of Principal Prepayments on the Mortgage Loans in
the related Loan Group occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates occurring at a rate higher or lower than the rate
anticipated by the investor during the period immediately following the issuance
of the Certificates will not be equally offset by a subsequent like reduction
(or increase) in the rate of Principal Prepayments on the Mortgage Loans in the
related Loan Group.
In addition, the yield to maturity on the Interest Only Certificates may be
adversely affected if an optional termination of the Trust Fund occurs.
The tables set forth below are based on the Structuring Assumptions and
assume further that the Certificates are purchased at prices (which include
accrued interest in the case of the Interest Only Certificates) equal to those
set forth in the tables. There can be no assurance that the Mortgage Loans will
have the assumed characteristics, will prepay at any of the rates shown herein,
that the purchase prices of the Certificates will be as assumed or that the
pre-tax yields to maturity will correspond to any of the pre-tax yields shown
herein. The actual prices to be paid on the Interest Only and Principal Only
Certificates have not been determined and will be dependent on the
characteristics of the Mortgage Pool as ultimately constituted. In addition to
any other factors an investor may deem material, each investor must make its own
decision as to
S-60
<PAGE> 61
the appropriate prepayment assumptions to be used in deciding whether or not to
purchase a Class of Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS I-X CERTIFICATES TO PREPAYMENTS AT A
SPECIFIED ASSUMED PRICE
<TABLE>
<CAPTION>
PERCENTAGE OF THE SPA
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED PRICE 100% 200% 250% 350% 500%
------- ------- ------- ------- -------
$2,911,292..................... 22.96% 17.86% 15.27% 10.04% 2.03%
</TABLE>
On the basis of a constant prepayment rate of approximately 537% of SPA,
the assumed purchase price set forth above, and the assumptions described above,
the pre-tax yield to maturity of the Class I-X Certificates would be
approximately 0%. If the actual prepayment rate were to exceed the rate assumed
above, even for one month, while equaling such rate for all other months, an
investor in the Class I-X Certificates would not fully recoup the initial
purchase price of such Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS II-X CERTIFICATES TO PREPAYMENTS AT A
SPECIFIED ASSUMED PRICE
<TABLE>
<CAPTION>
PERCENTAGE OF THE SPA
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED PRICE 100% 200% 250% 350% 500%
------- ------- ------- ------- -------
$1,391,773..................... 26.44% 21.65% 19.22% 14.30% 6.76%
</TABLE>
On the basis of a constant prepayment rate of approximately 631% of SPA,
the assumed purchase price set forth above, and the assumptions described above,
the pre-tax yield to maturity of the Class II-X Certificates would be
approximately 0%. If the actual prepayment rate were to exceed the rate assumed
above, even for one month, while equaling such rate for all other months, an
investor in the Class II-X Certificates would not fully recoup the initial
purchase price of such Certificates.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS I-PO CERTIFICATES TO PREPAYMENTS AT A
SPECIFIED ASSUMED PRICE
<TABLE>
<CAPTION>
PERCENTAGE OF THE SPA
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED PRICE 100% 200% 250% 350% 500%
------- ------- ------- ------- -------
$12,928........................ 5.12% 7.93% 9.35% 12.07% 15.88%
</TABLE>
SENSITIVITY OF PRE-TAX YIELD TO MATURITY
OF THE CLASS II-PO CERTIFICATES TO PREPAYMENTS AT A
SPECIFIED ASSUMED PRICE
<TABLE>
<CAPTION>
PERCENTAGE OF THE SPA
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSUMED PRICE 100% 200% 250% 350% 500%
------- ------- ------- ------- -------
$245,531....................... 5.69% 7.18% 7.96% 9.54% 11.88%
</TABLE>
It is highly unlikely that all of the Mortgage Loans will have the
characteristics assumed or that the Class I-PO Mortgage Loans or Class II-PO
Mortgage Loans will prepay at the same rate until maturity or that all of the
Class I-PO Mortgage Loans or Class II-PO Mortgage Loans will prepay at the same
rate or time. As a result of these factors, the pre-tax yields on the Principal
Only Certificates are likely to differ from
S-61
<PAGE> 62
those shown in the table above, even if all of the Class I-PO Mortgage Loans and
Class II-PO Mortgage Loans prepay at the indicated percentages of SPA. No
representation is made as to the actual rate of principal payments on the
Mortgage Loans for any period or over the life of the Principal Only
Certificates or as to the yield on the Principal Only Certificates. Investors
must make their own decisions as to the appropriate prepayment assumption to be
used in deciding whether or not to purchase any of the Certificates.
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rates (whether positive or
negative) which, when applied to the assumed streams of cash flows to be paid on
the Interest Only and Principal Only Certificates, would cause the discounted
present values of such assumed streams of cash flows to equal the assumed
purchase price, including accrued interest, where applicable. These monthly
discount rates were converted to corporate bond equivalent rates, which are
higher than the monthly discount rates because they are based on semiannual
compounding. These yields to maturity 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 Interest Only or Principal Only Certificates and thus do
not reflect the return on any investment in the Interest Only or Principal Only
Certificates when any reinvestment rates other than the discount rates are
considered.
YIELD CONSIDERATIONS RELATING TO THE CLASS M, CLASS B-1 AND CLASS B-2
CERTIFICATES
Defaults on mortgage loans may be measured relative to a default standard
or model. The model used in this Prospectus Supplement, the standard default
assumption ("SDA"), represents an assumed rate of default each month relative to
the then outstanding performing principal balance of a pool of new mortgage
loans. A default assumption of 100% SDA assumes constant default rates of 0.02%
per annum of the then outstanding principal balance of such mortgage loans in
the first month of the life of the mortgage loans and an additional 0.02% per
annum in each month thereafter until the 30th month. Beginning in the 30th month
and in each month thereafter through the 60th month of the life of the mortgage
loans, 100% SDA assumes a constant default rate of 0.60% per annum each month.
Beginning in the 61st month and in each month thereafter through the 120th month
of the life of the mortgage loans, 100% SDA assumes that the constant default
rate declines each month by 0.0095% per annum, and that the constant default
rate remains at 0.03% per annum in each month after the 120th month. For the
purposes of the tables below, it is assumed that there is no delay between the
default and liquidation of the mortgage loans.
SDA does not purport to be a historical description of default experience
or a prediction of the anticipated rate of default of any pool of mortgage
loans, including the Mortgage Loans. Investors should note that SDA produces
less aggregate losses as the assumed rate of prepayment is increased because the
amount of losses is expressed as a percentage of a smaller pool balance
(reflecting the increasing amount of prepayments). Investors should 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. No representation is
made regarding the appropriateness of SDA or the underlying assumptions, the
rate, timing or severity of Realized Losses, the relationship, if any, to the
rate and timing of prepayments or as to the resulting yield to maturity of any
Class of Offered Certificates.
The following tables indicate the sensitivity of the yields to maturity on
the Class M, Class B-1 and Class B-2 Certificates to various rates of prepayment
and varying levels of aggregate Realized Losses by projecting the monthly
aggregate cash flows on the Class M, Class B-1 and Class B-2 Certificates and
computing the corresponding pre-tax yields to maturity on a corporate bond
equivalent basis. The tables are based on the Structuring Assumptions excluding
assumptions (iii) and (v), including the assumptions regarding the
characteristics and performance of the Mortgage Loans, which differ from the
actual characteristics and performance thereof, and assume 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
S-62
<PAGE> 63
results in a Realized Loss allocable to principal equal to the percentage
indicated (the "Loss Severity Percentage") multiplied by the principal balances
of the Mortgage Loans assumed to be liquidated, (iii) there are no delinquencies
on the Mortgage Loans, and principal 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, Class B-1 and Class B-2 Certificates will be $3,716,718, $2,190,663 and
$1,161,561, respectively, which include accrued interest.
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS M CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE OF --------------------
SDA LOSS SEVERITY PERCENTAGE 100% 250% 500%
- ------------- ------------------------ ---- ---- ----
<C> <S> <C> <C> <C>
0% N/A......................................... 6.97% 6.99% 7.01%
50 20%......................................... 6.97 6.99 7.01
50 40.......................................... 6.97 6.99 7.01
100 20.......................................... 6.97 6.99 7.01
100 40.......................................... 6.96 6.99 7.01
150 20.......................................... 6.98 6.99 7.01
150 40.......................................... 5.71 6.97 7.01
</TABLE>
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS B-1 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE OF ------------------------
SDA LOSS SEVERITY PERCENTAGE 100% 250% 500%
- ------------- ------------------------ ------ ----- -----
<C> <S> <C> <C> <C>
0% N/A..................................... 7.00% 7.03% 7.06%
50 20%..................................... 7.00 7.03 7.06
50 40...................................... 7.00 7.03 7.06
100 20...................................... 7.00 7.03 7.06
100 40...................................... 4.09 7.03 7.06
150 20...................................... 6.99 7.03 7.06
150 40...................................... (19.98) 0.65 7.06
</TABLE>
SENSITIVITY OF PRE-TAX YIELD TO MATURITY OF THE
CLASS B-2 CERTIFICATES TO PREPAYMENTS AND REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE OF -------------------------
SDA LOSS SEVERITY PERCENTAGE 100% 250% 500%
- ------------- ------------------------ ------ ------ -----
<C> <S> <C> <C> <C>
0% N/A.................................... 7.23% 7.27% 7.33%
50 20%.................................... 7.23 7.28 7.33
50 40..................................... 7.17 7.28 7.33
100 20..................................... 7.18 7.28 7.33
100 40..................................... (23.55) (3.27) 7.34
150 20..................................... (2.49) 6.22 7.33
150 40..................................... (43.90) (36.78) (4.28)
</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, Class B-1 and Class B-2
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
S-63
<PAGE> 64
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, Class B-1 and Class B-2 Certificates, and thus do
not reflect the return on any investment in the Class M, Class B-1 and Class B-2
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:
AGGREGATE REALIZED LOSSES
<TABLE>
<CAPTION>
PERCENTAGE OF SPA
PERCENTAGE OF --------------------
SDA LOSS SEVERITY PERCENTAGE 100% 250% 500%
- ------------- ------------------------ ---- ---- ----
<C> <S> <C> <C> <C>
50 20%......................................... 0.28 0.21 0.14
50 40.......................................... 0.55 0.42 0.28
100 20.......................................... 0.55 0.42 0.28
100 40.......................................... 1.10 0.83 0.55
150 20.......................................... 0.82 0.62 0.41
150 40.......................................... 1.64 1.24 0.83
</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, Class B-1 and Class B-2 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, Class B-1 and Class B-2
Certificates will conform to the yields described herein. Moreover, the various
remaining terms to maturity and interest rates 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
remaining terms to maturity and interest rates of the Mortgage Loans are as
assumed.
CREDIT ENHANCEMENTS
THE CERTIFICATE INSURANCE POLICIES AND THE CERTIFICATE INSURER
The following information has been supplied by MBIA Insurance Corporation
(the "Certificate Insurer") for inclusion in this Prospectus Supplement. The
following constitutes a summary of the provisions of the Certificate Insurance
Policies and it does not purport to be complete and is qualified in its entirety
by reference to the Certificate Insurance Policies, copies of which may be
obtained from the Trustee upon request. The term "Owner," as more specifically
defined below, generally refers to the beneficial owner from time to time of a
Class IA-2 or Class IA-5 Certificate (collectively, the "Insured Certificates").
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of (a) the certificate guaranty insurance policy with
respect to the Class IA-2 Certificates and (b) the certificate guaranty
insurance policy with respect to the Class IA-5 Certificates, (each, a
"Certificate Insurance Policy" and, collectively, the "Certificate Insurance
Policies"), thereby unconditionally and irrevocably guarantees to any Owner that
an amount equal to each full and complete Insured Payment will be received from
the Certificate Insurer by the Trustee, or its successor, as trustee for the
Owners on behalf of the Owners, for distribution by the Trustee to each Owner of
each Owner's proportionate share of the Insured Payment. The Certificate
Insurer's obligations under a Certificate Insurance Policy with respect to a
particular Insured
S-64
<PAGE> 65
Payment shall be discharged to the extent funds equal to the applicable Insured
Payment are received by the Trustee, whether or not such funds are properly
applied by the Trustee. Insured Payments shall be made only at the time set
forth in the applicable Certificate Insurance Policy and no accelerated Insured
Payments shall be made regardless of any acceleration of the Insured
Certificates, unless such acceleration is at the sole option of the Certificate
Insurer.
Notwithstanding the foregoing paragraph, the Certificate Insurance Policies
do not cover shortfalls, if any, attributable to the liability of the Trust
Fund, any REMIC or the Trustee for withholding taxes, if any (including interest
and penalties in respect of any such liability). The Certificate Insurance
Policies do not cover, and Insured Payments shall not include, any shortfalls
allocable to the Insured Certificates resulting from the application of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended, nor any Prepayment
Interest Shortfalls or Net Prepayment Interest Shortfalls allocable to the
Insured Certificates. The Certificate Insurance Policies do not provide credit
enhancement for any Class of Certificates other than the Insured Certificates.
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Business Day following receipt on a Business Day by the Fiscal
Agent (as defined below) of (i) a certified copy of the order requiring the
return of a preference payment, (ii) an opinion of counsel satisfactory to the
Certificate Insurer that such order is final and not subject to appeal, (iii) an
assignment in such form as is reasonably required by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of the
Owner relating to or arising under the Insured Certificates against the debtor
which made such preference payment or otherwise with respect to such preference
payment and (iv) appropriate instruments to effect the appointment of the
Certificate Insurer as agent for such Owner in any legal proceeding related to
such preference payment, such instruments being in a form satisfactory to the
Certificate Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments shall be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on the Insured Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Certificate Insurer will pay any other amount payable under each
Certificate Insurance Policy no later than 12:00 noon New York City time on the
later of the Distribution Date on which the related Deficiency Amount is due or
the third Business Day following receipt in New York, New York on a Business Day
by State Street Bank and Trust Company, N.A., as Fiscal Agent for the
Certificate Insurer or any successor fiscal agent appointed by the Certificate
Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if
such Notice is received after 12:00 noon New York City time on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim under a Certificate Insurance
Policy it shall be deemed not to have been received by the Fiscal Agent for
purposes of this paragraph, and the Certificate Insurer or the Fiscal Agent, as
the case may be, shall promptly so advise the Trustee and the Trustee may submit
an amended Notice.
Insured Payments due under a Certificate Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Trustee on behalf of
the related Owners by wire transfer of immediately available funds in the amount
of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Trustee for the payment of such
Insured Payment and legally available therefor.
The Fiscal Agent is the agent of the Certificate Insurer only and the
Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal
Agent or any failure of the Certificate Insurer to deposit or cause to be
deposited, sufficient funds to make payments due under the Certificate Insurance
Policies.
Upon and to the extent of any disbursement under a Certificate Insurance
Policy, the Certificate Insurer shall become the owner or holder of such Insured
Certificates or right to payment and shall be subrogated to the rights of the
Owner, including the right to payment of the Insured Certificates to the extent
paid by the Certificate Insurer.
S-65
<PAGE> 66
As used in the Certificate Insurance Policies, the following terms shall
have the following meanings:
"Agreement" means the Pooling and Servicing Agreement dated as of April 1,
1998 among the Depositor, the Master Servicer and the Trustee, without regard to
any amendment or supplement thereto unless such amendment or supplement has been
approved in writing by the Certificate Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday, (b) a
day on which the Certificate Insurer is closed or (c) a day on which banking
institutions in the State of California or the State of New York (or such other
state or states in which the Custodial Account or the Certificate Account is at
the time located) or in the city in which the corporate trust office of the
Trustee under the Agreement is located are authorized or obligated by law or
executive order to close.
"Deficiency Amount" means, with respect to any Distribution Date, the
amount of any shortfall in amounts available in the Certificate Account to pay
the Required Payments.
"Insured Payment" means (i) as of any Distribution Date, any Deficiency
Amount and (ii) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached to each
Certificate Insurance Policy, the original of which is subsequently delivered by
registered or certified mail, from the Trustee specifying the Insured Payment
which shall be due and owing on the applicable Distribution Date.
"Owner" means each Holder (as defined in the Agreement) of an Insured
Certificate who, on the applicable Distribution Date, is entitled under the
terms of the applicable Insured Certificates to payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the Insured Certificates that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
"Required Payments" means, with respect to any Distribution Date, the sum,
without duplication, of (i) any interest shortfall (except for shortfalls
relating to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (or
similar legislation or regulations as in effect from time to time) and except
for any Prepayment Interest Shortfalls or any Net Prepayment Interest
Shortfalls) allocated to the Insured Certificates on such Distribution Date and
(ii) the principal portion of any Realized Losses allocated to the Insured
Certificates on such Distribution Date.
Capitalized terms used in each Certificate Insurance Policy and not
otherwise defined in such Certificate Insurance Policy shall have the respective
meanings set forth in the Agreement as of the date of execution of such
Certificate Insurance Policy, without giving effect to any subsequent amendment
or modification of the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
Any notice under the Certificate Insurance Policies or service of process
on the Fiscal Agent may be made at the address listed below for the Fiscal Agent
or such other address as the Certificate Insurer shall specify in writing to the
Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Trustee in writing.
EACH CERTIFICATE INSURANCE POLICY IS BEING ISSUED UNDER AND PURSUANT TO,
AND SHALL BE CONSTRUED UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING
EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
The insurance provided by each Certificate Insurance Policy is not covered
by the Property/Casualty Insurance Security Fund specified in Article 76 of the
New York Insurance Law.
S-66
<PAGE> 67
The Certificate Insurance Policies are not cancelable for any reason. The
premiums on the Certificate Insurance Policies are not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Insured Certificates.
The Certificate Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company (the "Company"). The Company is not
obligated to pay the debts of or claims against the Certificate Insurer. The
Certificate Insurer is domiciled in the State of New York and licensed to do
business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the
Northern Mariana Islands, the Virgin Islands of the United States and the
Territory of Guam. The Certificate Insurer has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Certificate Insurer, changes in control
and transactions among affiliates. Additionally, the Certificate Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
Effective February 17, 1998, the Company acquired all of the outstanding
stock of Capital Markets Assurance Corporation ("CMAC") through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Insurer. The Company is not obligated to pay the debts of or
claims against CMAC.
The consolidated financial statements of the Certificate Insurer, a wholly
owned subsidiary of the Company and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years ended December 31, 1997,
prepared in accordance with generally accepted accounting principles, included
in the Annual Report on Form 10-K of the Company for the year ended December 31,
1997, are hereby incorporated by reference into this Prospectus Supplement and
shall be deemed to be a part hereof. Any statement contained in a document
incorporated by reference herein shall be modified or superseded for purposes of
this Prospectus Supplement to the extent that a statement contained herein or in
any other subsequently filed document which also is incorporated by reference
herein modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
All financial statements of the Certificate Insurer and its subsidiaries
included in documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this Prospectus Supplement and prior to the termination of the offering
of the Offered Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The tables below present selected financial information of the Certificate
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(AUDITED) (AUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets............................ $4,476 $5,256
Liabilities................................ 3,009 3,496
Capital and Surplus........................ 1,467 1,760
</TABLE>
S-67
<PAGE> 68
<TABLE>
<CAPTION>
GAAP
----------------------------
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
(AUDITED) (AUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets..................................... $5,066 $5,988
Liabilities................................ 2,262 2,624
Shareholder's Equity....................... 2,804 3,364
</TABLE>
Copies of the financial statements of the Certificate Insurer incorporated
by reference herein and copies of the Certificate Insurer's 1997 year-end
audited financial statements prepared in accordance with statutory accounting
practices are available, without charge, from the Certificate Insurer. The
address of the Certificate Insurer is 113 King Street, Armonk, New York 10504.
The telephone number of the Certificate Insurer is (914) 273-4545.
The Certificate Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Certificate Insurance Policies and Certificate
Insurer set forth under the heading "CREDIT ENHANCEMENTS -- The Certificate
Insurance Policies and the Certificate Insurer." Additionally, the Certificate
Insurer makes no representation regarding the Insured Certificates or the
advisability of investing in the Insured Certificates.
Moody's Investors Service, Inc. rates the claims paying ability of the
Certificate Insurer "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Certificate Insurer
"AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the claims paying ability of the Certificate Insurer "AAA."
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Certificate Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Insured
Certificates, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the Insured
Certificates. The Certificate Insurer does not guaranty the market price of the
Insured Certificates nor does it guaranty that the ratings on the Insured
Certificates will not be revised or withdrawn.
S-68
<PAGE> 69
POOLING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling Agreement") dated as of April 1, 1998, 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 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 BA Mortgage
Securities, Inc., 345 Montgomery Street, Lower Level, Unit #8152, San Francisco,
California, 94104, Attention: David Grout.
THE MASTER SERVICER
Pursuant to the Pooling Agreement, Bank of America, FSB, the corporate
parent of the Depositor, will act as Master Servicer for the Mortgage Loans. For
a general description of Bank of America, FSB 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 or subserviced by them, see "MORTGAGE LOAN PROGRAM -- Bank
of America, FSB," "-- Residential Mortgage Loan Servicing Activities" and
"-- Delinquency, Foreclosure and Loss Experience" in the Prospectus.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The Administration Fee for each Mortgage Loan is payable out of the
interest payments on such Mortgage Loan. The Administration Fee in respect of
each Group I Loan will be 0.25% per annum of the outstanding principal balance
of each Group I Loan, and in respect of each Group II Loan will be at least
0.25% and not more than 0.46% per annum of the outstanding principal balance of
each Group II Loan. The Administration Fee consists of (a) servicing
compensation payable to the Master Servicer in respect of its master servicing
activities, (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), and (c)
compensation payable to the Trustee in respect of its obligations with respect
to the Trust Fund. 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. 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.
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 will have the option to purchase all remaining Mortgage
Loans and other assets in the Trust Fund, thereby effecting the termination of
the Trust Fund and the 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 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 (other than any Mortgage Loan as to which title to the related
Mortgaged Property has been acquired), or with respect to Mortgaged Properties
acquired in connection with defaulted Mortgage Loans the fair market value of
each Mortgaged Property if such fair market value is less than such unpaid
principal balance (net of any unreimbursed Advances attributable to principal),
in each case less any Realized Losses that have not previously been allocated to
the Certificates on the day of repurchase plus (b) accrued interest thereon at
the
S-69
<PAGE> 70
weighted average Net Mortgage Rate to, but not including, the first day of the
month of repurchase. Certificateholders may suffer a loss if the fair market
value of the REO Properties is less than the unpaid principal balance.
FEDERAL INCOME TAX CONSEQUENCES
With respect to the Offered Certificates, Orrick, Herrington & Sutcliffe
LLP, counsel to the Depositor ("Special Tax Counsel"), is of the opinion that,
assuming compliance with all provisions of the Pooling Agreement, for federal
income tax purposes, both REMIC I and REMIC II will qualify as REMICs 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 has 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 -- REMICs," and is 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 Offered Certificates.
For federal income tax purposes, (a) the Class R-I Certificates will
constitute the sole class of "residual interests" in REMIC I, (b) each Class of
Offered Certificates (other than the Residual Certificates) will represent
ownership of "regular interests" in REMIC II and will generally be treated as
representing ownership of debt instruments in REMIC II and (c) the Class R-II
Certificates will constitute the sole class of "residual interests" in REMIC II.
See "FEDERAL INCOME TAX CONSEQUENCES -- REMICs" in the Prospectus.
For federal income tax reporting purposes, the Class IA-1, Class IA-4,
Class IIA-1, Class IIA-2, Class IIA-4 and Class IIA-5 Certificates will not be
treated as having been issued with original issue discount for federal income
tax reporting purposes. The Class M and Class B-1 Certificates may be treated as
having been issued with original issue discount for federal income tax reporting
purposes. The Class IA-2, Class IA-3, Class IA-5, Class IA-6, Class IIA-3, Class
IIA-6, Interest Only, Principal Only and Class B-2 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 250% 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.
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 Interest Only 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, an Interest Only
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
S-70
<PAGE> 71
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 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 assets described in Section 7701(a)(19)(C)
of the Code and "real estate assets" under Section 856(c)(4)(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)(4)(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.
See "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 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. Excess
inclusions are expected to be 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.
S-71
<PAGE> 72
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 received by
such Class of 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 Fund's 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 REMIC 1 and REMIC II 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 "FEDERAL INCOME TAX
CONSEQUENCES -- REMICs -- Taxation of Owners of REMIC Residual Certificates" in
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
dated April 22, 1998, the Underwriters have agreed to purchase and the Depositor
has agreed to sell to the Underwriters each Class of Offered Certificates.
The Underwriting Agreement provides that the obligation of the Underwriters
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 Underwriters may be
effected from time to time in one or more negotiated transactions, or otherwise,
at varying prices to be determined at the time of sale. Proceeds to the
Depositor from the sale of the Offered Certificates, before deducting expenses
payable by the Depositor, will be 100.093% of the aggregate Certificate
Principal Balance of the Offered Certificates plus accrued interest thereon from
the Cut-off Date. Any Underwriter 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 Underwriters may be deemed to have received
compensation from the Depositor in the form of underwriting compensation. Any
Underwriter and any dealers that participate with any Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters, and
any profit on the resale of the Offered Certificates positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Depositor and Bank of America,
FSB will indemnify the Underwriters, and under limited circumstances the
Underwriters will indemnify the Depositor and Bank of America, FSB, against
certain civil liabilities under the Securities Act of 1933, or contribute to
payments required to be made in respect thereof.
S-72
<PAGE> 73
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or
provide sufficient liquidity of investment. 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 LLP, San Francisco, California
and for the Underwriters by Thacher Proffitt & Wood, New York, New York. The
enforceability of the Certificate Insurance Policies will be passed upon by
Kutak Rock, Omaha, Nebraska, special counsel to the Certificate Insurer.
RATING
It is a condition to the issuance of the Offered Certificates that the
Senior Certificates each be rated "AAA" (except for the Class I-X, Class II-X,
Class I-PO and Class II-PO Certificates, which will be rated "AAAr") by Standard
& Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") and "AAA" by
Duff & Phelps Credit Rating Co. ("DCR") and the Class M Certificates be rated
not less than "AA," the Class B-1 Certificates be rated not less than "A" and
the Class B-2 Certificates be rated not less than "BBB" by DCR.
The ratings of S&P and DCR 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. The ratings do not address the
possibility that Certificateholders might suffer a lower than anticipated yield.
In addition, in the case of the Interest Only Certificates, the ratings do not
address whether investors will recoup the purchase price of such Certificates.
Moreover, in the case of the Principal Only Certificates, the rating does not
assess the likelihood of return to investors except to the extent of the
Certificate Principal Balances thereof.
The Depositor has not requested a rating on the Offered Certificates by any
rating agency other than S&P and DCR. 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 S&P and DCR.
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. 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.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, incorporated by
S-73
<PAGE> 74
reference in this Prospectus Supplement have been audited by Coopers & Lybrand,
L.L.P., independent accountants, as set forth in their report thereon
incorporated by reference herein in reliance upon the authority of such firm as
experts in accounting and auditing.
LEGAL INVESTMENT
The Senior Certificates and the Class M 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
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 Class B 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 Certificates for legal investment or other purposes, or
as to the ability of particular investors to purchase any Class of the Offered
Certificates under applicable legal investment restrictions. These uncertainties
may affect the liquidity of any Class of Offered 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 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 Interest Only Certificates, which are not entitled to
principal, the Principal Only Certificates, which are not entitled to interest,
the Senior Subordinate 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. See
"ERISA CONSIDERATIONS -- Prohibited Transaction Class Exemption 83-1" in the
Prospectus.
S-74
<PAGE> 75
UNDERWRITER'S PTE
Donaldson, Lufkin & Jenrette Securities Corporation is the recipient of a
final prohibited transaction exemption (the "Underwriter's PTE") which may
afford protection from violations under Sections 406 and 407 of ERISA and
Section 4975 of the Code for Plans or Plan Asset Investors that acquire Offered
Certificates (other than the Senior Subordinate or Residual Certificates). Plans
or Plan Asset Investors that acquire Offered Certificates (other than the Senior
Subordinate or Residual Certificates) may be eligible for protection under the
Underwriter's PTE if:
(a) Such Certificates are 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"));
(c) At the time of such acquisition, such Certificates have 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
Credit Rating Co. or Fitch IBCA, Inc. (collectively, the "Exemption Rating
Agencies");
(d) The Trustee is not an affiliate of any member of the Restricted
Group (as defined in paragraph (3) below);
(e) Such Certificates evidence ownership in Trust Fund 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 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;
(g) The sum of all payments made to and retained by the Underwriters
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 their services under the Pooling
Agreement and reimbursement of its reasonable expenses in connection
therewith; and
(h) (1) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (2) certificates evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at
least one year prior to the acquisition of Certificates by or with Plan
Assets of a Plan; and (iii) certificates in such other investment pools
must have been purchased by investors (other than Plans) for at least one
year prior to any acquisition of Certificates by or with Plan Assets of a
Plan.
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 which may result from a Plan's investment in
such 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 investing 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;
S-75
<PAGE> 76
(3) The Plan is sponsored by the Depositor, either 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 in Certificates, 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 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 Senior Subordinate 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 Senior Subordinate 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 purchaser or other transferee will not be
registered unless the Trustee receives from the transferee (i) an opinion of
counsel, which opinion will not be at the expense of the Master Servicer, the
Depositor or the Trustee, 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, (ii) a
representation to the effect that the transferee is not, and is not acquiring
such Certificates on behalf of, a Plan or Plan Asset Investor, or (iii) with
respect to a Senior Subordinate Certificate, a representation that the
transferee is an insurance company, and the source of funds used to purchase
such Certificates is an "insurance company general account" (as such term is
defined in PTCE 95-60) and the conditions set forth in Sections I and III of
PTCE 95-60 have been satisfied. By a transferee's acceptance of a Senior
Subordinate Certificate, the transferee shall be deemed to have either (x)
warranted to the Master Servicer, the Depositor and the Trustee that it has
provided the opinion described in clause (i) above to the Trustee or (y) made
the representation described in clause (ii) above or, if the transferee is an
insurance company, clause (ii) or (iii) above.
S-76
<PAGE> 77
APPENDIX A
TARGETED PRINCIPAL BALANCES
<TABLE>
<CAPTION>
CLASS IIA-5
DISTRIBUTION DATE TARGETED PRINCIPAL BALANCE
----------------- --------------------------
<S> <C>
Initial Balance 46,447,250.00
May 25, 1998 46,191,365.45
June 25, 1998 45,905,650.91
July 25, 1998 45,590,383.83
August 25, 1998 45,245,881.71
September 25, 1998 44,872,501.75
October 25, 1998 44,470,640.46
November 25, 1998 44,040,733.12
December 25, 1998 43,583,253.23
January 25, 1999 43,098,711.81
February 25, 1999 42,587,656.67
March 25, 1999 42,050,671.50
April 25, 1999 41,488,375.01
May 25, 1999 40,901,419.87
June 25, 1999 40,290,491.61
July 25, 1999 39,656,307.48
August 25, 1999 38,999,646.55
September 25, 1999 38,321,284.13
October 25, 1999 37,622,023.28
November 25, 1999 36,902,693.38
December 25, 1999 36,164,148.55
January 25, 2000 35,407,266.13
February 25, 2000 34,632,945.03
March 25, 2000 33,842,104.06
April 25, 2000 33,035,680.17
May 25, 2000 32,214,844.32
June 25, 2000 31,380,850.97
July 25, 2000 30,534,964.14
August 25, 2000 29,682,942.75
September 25, 2000 28,832,339.75
October 25, 2000 27,994,666.78
November 25, 2000 27,171,076.31
December 25, 2000 26,361,373.62
January 25, 2001 25,565,366.69
February 25, 2001 24,782,866.26
March 25, 2001 24,013,685.74
April 25, 2001 23,257,641.16
May 25, 2001 22,514,551.19
June 25, 2001 21,784,237.07
July 25, 2001 21,066,522.56
August 25, 2001 20,361,233.94
September 25, 2001 19,668,199.95
October 25, 2001 18,987,251.77
November 25, 2001 18,318,222.98
</TABLE>
<TABLE>
<CAPTION>
CLASS IIA-5
DISTRIBUTION DATE TARGETED PRINCIPAL BALANCE
----------------- --------------------------
<S> <C>
December 25, 2001 17,660,949.53
January 25, 2002 17,015,269.72
February 25, 2002 16,381,024.13
March 25, 2002 15,758,055.64
April 25, 2002 15,146,209.36
May 25, 2002 14,545,332.62
June 25, 2002 13,955,274.91
July 25, 2002 13,375,887.92
August 25, 2002 12,807,025.42
September 25, 2002 12,248,543.29
October 25, 2002 11,700,299.47
November 25, 2002 11,162,153.97
December 25, 2002 10,633,968.76
January 25, 2003 10,115,607.83
February 25, 2003 9,606,937.11
March 25, 2003 9,107,824.47
April 25, 2003 8,618,139.67
May 25, 2003 8,186,719.51
June 25, 2003 7,763,679.60
July 25, 2003 7,348,894.37
August 25, 2003 6,942,240.00
September 25, 2003 6,543,594.46
October 25, 2003 6,152,837.44
November 25, 2003 5,769,850.34
December 25, 2003 5,394,516.22
January 25, 2004 5,026,719.84
February 25, 2004 4,666,347.57
March 25, 2004 4,313,287.41
April 25, 2004 3,967,428.93
May 25, 2004 3,643,037.80
June 25, 2004 3,325,294.49
July 25, 2004 3,014,095.25
August 25, 2004 2,709,337.83
September 25, 2004 2,410,921.45
October 25, 2004 2,118,746.78
November 25, 2004 1,832,715.92
December 25, 2004 1,552,732.38
January 25, 2005 1,278,701.08
February 25, 2005 1,010,528.29
March 25, 2005 748,121.64
April 25, 2005 491,390.10
May 25, 2005 264,827.27
June 25, 2005 43,024.17
July 25, 2005 0.00
</TABLE>
A-1
<PAGE> 78
PROSPECTUS
BA MORTGAGE SECURITIES, INC.
MORTGAGE PASS-THROUGH CERTIFICATES
BA 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 of a segregated pool (a
"Mortgage Pool") of conventional one- to four-family residential first mortgage
loans (the "Mortgage Loans") which Mortgage Loans, if so specified in the
related Prospectus Supplement, may include cooperative apartment loans
("Cooperative Loans"), or interests therein and related assets conveyed to such
Trust Fund by the Depositor. The Depositor will acquire the assets of any
Mortgage Pool from 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 will be Bank of America, FSB. 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, FSB 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.
BancAmerica Robertson Stephens, an affiliate of the Depositor and the Master
Servicer, may from time to time act as agents or underwriters in connection with
the sale of the Certificates. This Prospectus and the related Prospectus
Supplement may be used by BancAmerica Robertson Stephens in connection with
offers and sales related to secondary market transactions in any Series of
Certificates. BancAmerica Robertson Stephens may act as principal or agent in
such transactions. Such sales will be made at prices related to prevailing
market prices at the time of sale or otherwise.
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 APRIL 22, 1998.
<PAGE> 79
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.......................................... 12
THE DEPOSITOR............................................... 15
MORTGAGE LOAN PROGRAM....................................... 15
DESCRIPTION OF THE CERTIFICATES............................. 23
SUBORDINATION............................................... 37
DESCRIPTION OF CREDIT ENHANCEMENTS.......................... 39
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS
THEREUNDER................................................ 45
THE POOLING AGREEMENT....................................... 49
YIELD CONSIDERATIONS........................................ 53
MATURITY AND PREPAYMENT CONSIDERATIONS...................... 55
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED
MATTERS................................................... 57
FEDERAL INCOME TAX CONSEQUENCES............................. 64
STATE AND OTHER TAX CONSEQUENCES............................ 90
ERISA CONSIDERATIONS........................................ 90
LEGAL INVESTMENT MATTERS.................................... 93
USE OF PROCEEDS............................................. 95
METHODS OF DISTRIBUTION..................................... 95
RATING...................................................... 96
LEGAL MATTERS............................................... 96
FINANCIAL INFORMATION....................................... 96
ADDITIONAL INFORMATION...................................... 96
INDEX OF PRINCIPAL DEFINITIONS.............................. 97
</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> 80
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; and (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.
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: BA Mortgage Securities, Inc.,
3
<PAGE> 81
345 Montgomery Street, Lower Level #2, Unit #8152, San Francisco, California
94104, Attention: David M. Grout, telephone number (415) 622-3676.
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.
4
<PAGE> 82
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....................... BA Mortgage Securities, Inc., a wholly-owned
subsidiary of Bank of America, FSB. See "THE
DEPOSITOR."
Master Servicer................. Bank of America, FSB. See "MORTGAGE LOAN
PROGRAM -- Bank of America, FSB" 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") which Mortgage
Loans, if so specified in the related
Prospectus Supplement, may include
cooperative apartment loans ("Cooperative
Loans"), or interests therein and related
assets (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.
5
<PAGE> 83
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,
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, FSB
or any of their affiliates.
The Mortgage Pools.............. Each Trust Fund will consist of Mortgage
Loans or interests therein and related assets
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, 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
Series of Certificates. See "MORTGAGE LOAN
PROGRAM." For a description of the
6
<PAGE> 84
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
POOLS," "MATURITY AND PREPAYMENT CONSID-
7
<PAGE> 85
ERATIONS" 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........................ 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."
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
8
<PAGE> 86
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................ If so 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.
9
<PAGE> 87
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. Consequently, the ability of Certificateholders to sell
Certificates may be adversely affected.
Limited Obligations. The Certificates will not represent an interest in or
obligation of the Depositor, BankAmerica Corporation ("BankAmerica"), 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, 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, 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. In the
event losses exceed the amount of coverage provided by any form of 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).
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. 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, 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. 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). See "DESCRIPTION OF CREDIT ENHANCEMENTS -- Reduction of Credit
Enhancement."
10
<PAGE> 88
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.
Sensitivity of Mortgage Loan Collections to Changes in Interest
Rates. 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. In the
event losses exceed the amount of coverage provided by any form of 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).
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. Certificateholders of any Series as to which the related Mortgage
Loans are concentrated in adversely affected regions may experience losses or
shortfalls in payments that are greater than those that would be experienced
absent such concentrations.
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. In the event losses exceed
the amount of coverage provided by any form of 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).
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
11
<PAGE> 89
conditions and homeowner mobility. See "YIELD CONSIDERATIONS" and "MATURITY AND
PREPAYMENT CONSIDERATIONS" herein.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist 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 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. If
specified in the Prospectus Supplement relating to a Series of Certificates, a
Mortgage Pool may contain cooperative apartment loans ("Cooperative Loans")
evidenced by promissory notes ("Cooperative Notes") secured by securities
interests in shares issued by private cooperative housing corporations (each, a
"Cooperative") and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific dwelling units in the related
buildings. As used herein, unless the context indicates otherwise, "Mortgage
Loans" includes Cooperative Loans, "Mortgaged Properties" includes shares in the
related Cooperative and the related proprietary leases or occupancy agreements
securing Cooperative Notes, "Mortgage Notes" includes Cooperative Notes and
"Mortgage" includes a security agreement with respect to a Cooperative Note.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Mortgage Pool from among those originated by 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
12
<PAGE> 90
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 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
- ---------------
* 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.
13
<PAGE> 91
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 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 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 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
14
<PAGE> 92
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 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
CERTIFICATES -- 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
filed a Certificate of Amendment of Certificate of Incorporation changing its
name to "BA Mortgage Securities, Inc." on August 23, 1996. Bank of America, FSB
acquired, subject to regulatory approval, all of the outstanding stock of the
Depositor from its affiliate, Bank of America National Trust and Savings
Association ("Bank of America NT&SA"), on January 1, 1998. 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) 622-3676.
MORTGAGE LOAN PROGRAM
The Depositor will purchase the Mortgage Loans, either directly or
indirectly through its affiliates, from Sellers. The Mortgage Pools may consist
of Mortgage Loans purchased from Affiliated Sellers, Unaffiliated Sellers or
both Unaffiliated Sellers and Affiliated Sellers. A description of Bank of
America, FSB is given below under "-- Bank of America, FSB," 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."
15
<PAGE> 93
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.
BANK OF AMERICA, FSB
With more than $12 billion in assets as of December 31, 1997, 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 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 Federal Deposit
Insurance Corporation (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 Veterans Administration, the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage Corporation ("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 complete 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
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 generally
require a description of assets and liabilities and income and expenses and
obtain a credit report which summarizes the prospective borrower's credit
history with merchants and lenders and any public
16
<PAGE> 94
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 generally 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 will receive
scrutiny from a senior 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.
With respect to most mortgage loans originated by the Affiliated Sellers,
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 (or not consider) 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 generally do
not require prospective borrowers to have such liquid assets when they originate
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.
17
<PAGE> 95
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
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 substantially similar to
the Guides, 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 Federal Housing Administration 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.
18
<PAGE> 96
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 Trust Fund: (i) the
information set forth in the schedule of Mortgage Loans is true and correct in
all material respects; (ii) except in the case of Cooperative Loans, 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)
except in the case of Cooperative Loans, 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.
If the Mortgage Loans include Cooperative Loans, representations and
warranties with respect to title insurance or hazard insurance will not be
given. Generally, a Cooperative itself is responsible for the maintenance of
hazard insurance for property owned by such Cooperative, and the borrowers
(tenant-stockholders) of such Cooperative do not maintain hazard insurance on
their individual dwelling units. Title Insurance is not obtained for Cooperative
Loans because such loans are not secured by real property. See "CERTAIN LEGAL
ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS -- Cooperative Loans."
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
19
<PAGE> 97
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 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, FSB at either its servicing facility located in
Cypress, California (the "Cypress Center") or its servicing facility located in
Richmond, Virginia (the "Richmond Center"). Bank of America, FSB acquired the
Cypress Center from Bank of America NT&SA on January 1, 1998. On December 31,
1997, the Cypress Center was servicing approximately 439,600 mortgage loans with
an aggregate principal balance of $54,100,000,000 and the Richmond Center was
servicing approximately 404,100 mortgage loans with an aggregate principal
balance of $35,610,000,000.
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 Bank of
America, FSB's internal and external auditors and periodically by FNMA, FHLMC,
GNMA, the Office of Thrift Supervision ("OTS") and the Department of Housing and
Urban Development. Certain financial records of Bank of America, FSB relating to
its mortgage servicing activities are reviewed annually by its independent
public accountants.
20
<PAGE> 98
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
The delinquency, foreclosure and loss experience on the portfolios of one-
to four-family first mortgage loans owned by Bank of America, FSB and Bank of
America NT&SA and serviced or subserviced by Bank of America, FSB are set forth
in the following table.* The delinquency, foreclosure and loss experience
indicated excludes certain loans originated by private banking units of Bank of
America, FSB's affiliates. The portfolio of mortgage loans serviced or
subserviced by Bank of America, FSB includes 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 portfolio of one- to
four-family first mortgage loans owned by Bank of America, FSB and Bank of
America NT&SA and serviced or subserviced by Bank of America, FSB will be
similar to the results that may be experienced with respect to the Mortgage
Loans underlying any Series of Certificates.
- ---------------
* The delinquency, foreclosure and loss experience indicated includes the
delinquency, foreclosure and loss experience on mortgage loans owned by Bank
of America NT&SA and serviced by it prior to January 1, 1998. Bank of America,
FSB acquired the Cypress Center on January 1, 1998. In addition, the
delinquency, foreclosure and loss experience set forth for 1997 includes
certain mortgage loans, with an aggregate principal balance that does not
exceed 15% of the total portfolio by dollar amount for any period indicated,
that are owned by an affiliate of Bank of America, FSB (other than Bank of
America NT&SA) and serviced or subserviced by Bank of America, FSB.
21
<PAGE> 99
DELINQUENCY, FORECLOSURE AND LOSS EXPERIENCE
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1994 1995 1996 1997
----------------------- ----------------------- ----------------------- -----------------------
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........... 176,254 $25,619.6 174,863 $26,335.1 149,178 $27,832.2 150,688 $28,721.2
Average Portfolio
Balance(1).............. 174,462 25,364.7 178,221 26,308.5 160,712 27,105.7 178,809 32,381.2
Period of Delinquency
31 to 59 days........... 2,318 299.2 2,728 367.5 2,613 366.2 3,180 415.8
60 to 89 days........... 653 98.4 779 118.3 662 96.7 817 113.7
90 days or more(2)...... 1,021 195.2 877 161.7 613 98.3 780 107.0
------- --------- ------- --------- ------- --------- ------- ---------
Total Delinquent Loans.... 3,992 $ 592.8 4,384 $ 647.5 3,888 $ 561.2 4,777 $ 635.9
Delinquency Ratio......... 2.26% 2.31% 2.51% 2.46% 2.61% 2.02% 3.17% 2.21%
Foreclosures Pending(3)... 693 $ 162.9 1,101 $ 216.0 904 $ 160.4 1,082 $ 178.0
Foreclosure Ratio......... 0.39% 0.64% 0.63% 0.82% 0.61% 0.58% 0.72% 0.62%
Losses(4)................. 975 $ 101.6 1,286 $ 112.6 1,832 $ 98.8 1,363 $ 50.8
Loss Ratio(5)............. 0.56% 0.40% 0.72% 0.43% 1.14% 0.36% 0.76% 0.16%
Excess Recovery(6)........ (7) (7) 13 $ 0.2 54 $ 0.5 67 $ 0.8
</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,
Bank of America 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, FSB's internal reinvestment rate or Bank of America NT&SA's
internal reinvestment rate, as applicable, 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.
22
<PAGE> 100
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.
23
<PAGE> 101
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> 102
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
25
<PAGE> 103
(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 "Euroclear
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 Euroclear Cooperative. The Euroclear
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> 104
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 or, in the case of a Cooperative Loan, on the
related financing statement (except for any Mortgage not returned from the
public recording office) an assignment in recordable form of the Mortgage (or,
with respect to a Cooperative Loan, an assignment of the related proprietary
lease or occupancy agreement) 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
27
<PAGE> 105
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 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. Except as
specified in the following paragraph, 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;
28
<PAGE> 106
(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
29
<PAGE> 107
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. The terms of Buydown Mortgage Loans will 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
30
<PAGE> 108
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
31
<PAGE> 109
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. 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) shortfalls (a "Prepayment Interest
Shortfall") in collections of interest on Mortgage Loans resulting from
Mortgagor prepayments during the month preceding the month of distribution to
the extent such Prepayment Interest Shortfall is not paid by the Master Servicer
as Compensating Interest (as defined in the related Prospectus Supplement), 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.
32
<PAGE> 110
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
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)
33
<PAGE> 111
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)
34
<PAGE> 112
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
35
<PAGE> 113
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 (as defined under "SUBORDINATION" herein) 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."
36
<PAGE> 114
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. 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 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.
37
<PAGE> 115
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
38
<PAGE> 116
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
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
39
<PAGE> 117
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. 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 in the applicable Prospectus Supplement, protect holders of
the related Series of Certificates from (i) losses
40
<PAGE> 118
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 otherwise payable on any related Subordinate
Certificates, from Retained Yield or otherwise. To the extent
41
<PAGE> 119
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. 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, 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." 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, 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
42
<PAGE> 120
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 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
43
<PAGE> 121
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
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 the Master Servicer
will be obligated to obtain replacement credit support in order to restore the
rating of the Certificates only to the extent specified in the related
Prospectus Supplement. 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
44
<PAGE> 122
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 (other than any Cooperative 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. Cooperative Loans
generally will not be covered by a hazard insurance policy insuring the
individual dwelling unit as the related Cooperative typically is responsible for
the maintenance of hazard insurance for property owned by such Cooperative. 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
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 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, 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.
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
45
<PAGE> 123
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 (other than Cooperative Loans and Mortgage
Loans secured by condominium apartments) 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 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
46
<PAGE> 124
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 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
47
<PAGE> 125
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)
Hazard insurance and flood insurance generally will not be maintained for
any Cooperative Loan or Mortgage Loan secured by a condominium apartment. With
respect to a Cooperative Loan, generally the Cooperative itself is responsible
for the maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of the Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Loan do not maintain adequate coverage
or any insurance proceeds are not applied to the restoration of the damaged
property, damage to such borrower's cooperative apartment or such Cooperative's
building could significantly reduce the value of the collateral securing such
Cooperative Note. With respect to a Mortgage Loan secured by a condominium
apartment, the condominium owner's association for the related building
generally is responsible for maintenance of hazard insurance for such building,
and the condominium owners do not maintain individual hazard insurance policies.
To the extent that a borrower who is the owner of a condominium apartment and
the related condominium owner's association do not maintain such insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to such borrower's condominium
apartment or the related building could significantly reduce the value of the
Mortgaged Property.
48
<PAGE> 126
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 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)
49
<PAGE> 127
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 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)
50
<PAGE> 128
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a Series of
Certificates 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. 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 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)
51
<PAGE> 129
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 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
52
<PAGE> 130
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, 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 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
53
<PAGE> 131
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 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
54
<PAGE> 132
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, 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 to the extent such
shortfalls in interest are not paid to the Certificateholders by the Master
Servicer as Compensating Interest (as defined in the related Prospectus
Supplement). 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 as Compensating Interest 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. 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 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.
55
<PAGE> 133
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, 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. The 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 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
56
<PAGE> 134
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. If the Mortgaged Properties relating to a Series of
Certificates are concentrated in a particular state or states, the related
Prospectus Supplement will contain a summary of relevant laws of such state or
states to the extent such laws are not addressed generally in the following
discussion. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans.
GENERAL
The Mortgage Loans (other than Cooperative 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. A Mortgage Pool may also contain Cooperative Loans which are
described below under "-- Cooperative Loans."
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may include Cooperative Loans. Each promissory
note (a "Cooperative Note") evidencing a Cooperative Loan will be secured by a
security interest in shares issued by the related private cooperative housing
corporation (a "Cooperative") that owns the related apartment building, which is
a corporation entitled to be treated as a housing cooperative under federal tax
law, and in the related proprietary lease or occupancy agreement granting
exclusive rights to occupy a specific dwelling unit in the Cooperative's
building. The security agreement will create a lien upon, or grant a security
interest in, the Cooperative shares and proprietary lease or occupancy
agreement, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement (or the
filing of the financing statements related thereto) in
57
<PAGE> 135
the appropriate recording office or the taking of possession of the Cooperative
shares, depending on the law of the state in which the Cooperative is located.
Such a lien or security interest is not, in general, prior to liens in favor of
the Cooperative for unpaid assessments or common charges.
Unless otherwise specified in the related Prospectus Supplement, all
Cooperative buildings relating to the Cooperative Loans are located in the
States of New York and New Jersey. Generally, each Cooperative owns in fee or
has a leasehold interest in all the real property and owns in fee or leases the
building and all separate dwelling units therein. The Cooperative is directly
responsible for property management and, in most cases, payment of real estate
taxes, other governmental impositions and hazard and liability insurance. If
there is an underlying mortgage (or mortgages) on the Cooperative's building or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the Cooperative, as mortgagor or lessee, as
the case may be, is also responsible for fulfilling such mortgage or rental
obligations. An underlying mortgage loan is ordinarily obtained by the
Cooperative in connection with either the construction or purchase of the
Cooperative's building or the obtaining of capital by the Cooperative. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord is generally subordinate to the interest
of the holder of an underlying mortgage and to the interest of the holder of a
land lease. If the Cooperative is unable to meet the payment obligations (i)
arising under an underlying mortgage, the mortgagee holding an underlying
mortgage could foreclose on that mortgage and terminate all subordinate
proprietary leases and occupancy agreements or (ii) arising under its land
lease, the holder of the landlord's interest under the land lease could
terminate it and all subordinate proprietary leases and occupancy agreements. In
addition, an underlying mortgage on a Cooperative may provide financing in the
form of a mortgage that does not fully amortize, with a significant portion of
principal being due in one final payment at maturity. The inability of the
Cooperative to refinance a mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee. Similarly, a land
lease has an expiration date and the inability of the Cooperative to extend its
term or, in the alternative, to purchase the land, could lead to termination of
the Cooperative's interest in the property and termination of all proprietary
leases and occupancy agreements. In either event, a foreclosure by the holder of
an underlying mortgage or the termination of the underlying lease could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of shares
of the Cooperative or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
Each Cooperative is owned by shareholders (referred to as
tenant-stockholders) who, through ownership of stock or shares in the
Cooperative, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific dwellings. Generally, a tenant-stockholder
of a Cooperative must make a monthly maintenance payment to the Cooperative
pursuant to the proprietary lease, which maintenance payment represents such
tenant-stockholder's pro rata share of the Cooperative's payments for its
underlying mortgage, real property taxes, maintenance expenses and other capital
or ordinary expenses. An ownership interest in a Cooperative and accompanying
occupancy rights may be financed through a Cooperative Loan evidenced by a
Cooperative Note and secured by an assignment of and a security interest in the
occupancy agreement or proprietary lease and a security interest in the related
shares of the related Cooperative. The lender generally takes possession of the
share certificate and a counterpart of the proprietary lease or occupancy
agreement and a financing statement covering the proprietary lease or occupancy
agreement and the Cooperative shares is filed in the appropriate state and local
offices to perfect the lender's interest in its collateral. Subject to the
limitations discussed below, upon default of the tenant-stockholder, the lender
may sue for judgment on the Cooperative Note, dispose of the collateral at a
public or private sale or otherwise proceed against the collateral or
tenant-stockholder as an individual as provided in the security agreement
covering the assignment of the proprietary lease or occupancy agreement and the
pledge of Cooperative shares. See "-- Foreclosure on Shares of Cooperatives"
below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his or her taxable year to the corporation
representing
58
<PAGE> 136
his or her proportionate share of certain interest expenses and certain real
estate taxes allowable as deductions to the corporation under Section 163 and
164 of the Code. In order for a corporation to qualify under Section 216(b)(1)
of the Code for the taxable year to which such interest and tax deductions
relate, such section requires, among other things, that at least 80% of the
gross income of the corporation be derived from its tenant-stockholders. By
virtue of this requirement, the status of a corporation for purposes of Section
216(b)(1) of the Code must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
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' 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."
59
<PAGE> 137
FORECLOSURE ON SHARES OF COOPERATIVES
The Cooperative shares owned by the tenant-stockholder, together with the
rights of the tenant-stockholder under the proprietary lease or occupancy
agreement, are pledged to the lender and are, in almost all cases, subject to
restrictions on transfer as set forth in the Cooperative's certificate of
incorporation and by-laws, as well as in the proprietary lease or occupancy
agreement. The proprietary lease or occupancy agreement, even while pledged, may
be cancelled by the Cooperative for failure by the tenant-stockholder to pay
maintenance or other obligations or charges owed by such tenant-stockholder,
including mechanics' liens against the Cooperative's building incurred by such
tenant-stockholder. Generally, maintenance and other obligations and charges
arising under a proprietary lease or occupancy agreement which are owed to the
Cooperative are made liens upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the Cooperative to terminate such lease or agreement
in the event the borrower defaults in the performance of covenants thereunder.
Typically, the lender and the Cooperative enter into a recognition agreement
which, together with any lender protection provisions contained in the
proprietary lease or occupancy agreement, establishes the rights and obligations
of both parties in the event of a default by the tenant-stockholder on its
obligations under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the shares and the
proprietary lease or occupancy agreement allocated to the dwelling, subject,
however, to the Cooperative's right to sums due under such proprietary lease or
occupancy agreement or which have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the amount realized upon a sale of
the collateral below the outstanding principal balance of the Cooperative Loan
and accrued and unpaid interest thereon.
Recognition agreements also generally provide that in the event the lender
succeeds to the tenant-stockholder's shares and proprietary lease or occupancy
agreements as the result of realizing upon its collateral for a Cooperative
Loan, the lender must obtain the approval or consent of the board of directors
of the Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. Such approval or consent
is usually based on the prospective purchaser's income and net worth, among
other factors, and may significantly reduce the number of potential purchasers,
which could limit the ability of the lender to sell and realize upon the value
of the collateral. Generally, the lender is not limited in any rights it may
have to dispossess the tenant-stockholder.
Because of the nature of Cooperative Loans, lenders do not require the
tenant-stockholder (i.e., the borrower) to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
affecting the Cooperative's building or real estate also may adversely affect
the marketability of the shares allocated to the dwelling unit in the event of
foreclosure.
A foreclosure on the Cooperative shares is accomplished by public sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code (the
"UCC") and the security agreement relating to those shares. Article 9 of the UCC
requires that a sale be conducted in a "commercially reasonable" manner. Whether
a sale has been conducted in a "commercially reasonable" manner will depend on
the facts in each case. In determining commercial reasonableness, a court will
look to the notice given the debtor and the method, manner, time, place and
terms of the sale and the sale price. Generally, a sale conducted according to
the usual practice of creditors selling similar collateral will be considered
reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The
60
<PAGE> 138
recognition agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the Cooperative corporation to receive
sums due under the proprietary lease or occupancy agreement. If there are
proceeds remaining, the lender must account to the tenant-stockholder for the
surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See
"-- Anti-Deficiency Legislation and Other Limitations on Lenders" below.
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 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.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted Article 9 to prohibit or limit a deficiency award in certain
circumstances, including circumstances where the disposition of the collateral
(which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was not
conducted in a commercially reasonable manner.
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
61
<PAGE> 139
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. Courts with
federal bankruptcy jurisdiction similarly may be able to modify the terms of a
Cooperative 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 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
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
62
<PAGE> 140
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.
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.
63
<PAGE> 141
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
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
64
<PAGE> 142
Code 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. Section 1221 of the Code defines "capital assets" generally as property
other than (i) property held for sale to customers or (ii) real, tangible
personal, property used in a trade or business. 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. Additional material income tax consequences
may be set forth in the related Prospectus Supplement.
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.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds
With respect to each Series of Grantor Trust Certificates, Orrick,
Herrington & Sutcliffe LLP, 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 in the Prospectus Supplement under the
heading "FEDERAL INCOME TAX CONSEQUENCES," if any, 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 prior to the Delivery Date with
65
<PAGE> 143
respect to any Series of Grantor Trust Certificates. 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, if so
specified in the related Prospectus Supplement and subject to the discussion
below with respect to Buydown Mortgage Loans, Grantor Trust Fractional Interest
Certificates will represent interests in (i) "loans . . . secured by an interest
in real property" within the meaning of Section 7701(a)(19)(C)(v) of the Code;
(ii) "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 (iii)
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code. In
addition, if so specified in the related Prospectus Supplement, 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. Special Tax
Counsel provides no assurances as to the treatment of Grantor Trust Fractional
Interest Certificates under the Code provisions described in this paragraph,
except to the extent specified in the related Prospectus Supplement.
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 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 "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)(4)(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
66
<PAGE> 144
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 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
67
<PAGE> 145
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 the Grantor Trust Fractional Interest
Certificates. It is uncertain whether the assumed prepayment rate should 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, how
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 will not 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 will
increase or decrease such yield, and thus accelerate or decelerate,
respectively, the reporting of income.
When a Mortgage Loan prepays in full, it appears that the holder of a
Grantor Trust Fractional Interest Certificate acquired at a discount or a
premium generally will not recognize a separate item of income or loss. 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 will 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
68
<PAGE> 146
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.
Recently enacted amendments to Section 1272(a)(6) of the Code require the
use of a prepayment assumption in determining the existence and accrual of
original issue discount associated with pools of debt instruments whose yield
may be affected by prepayments. No regulations have been issued interpreting the
application of this provision to securities such as the Grantor Trust Fractional
Interest Certificates nor do the committee reports prepared by those
Congressional committees that examined such provision in the course of its
enactment provide guidance as to its intended application to such securities. In
the absence of such guidance, various interpretations are possible. For example,
the provision could be interpreted as requiring the pool of mortgage loans
underlying the Grantor Trust Fractional Interest Certificates to be segregated
into two subpools consisting respectively of those mortgage loans that had
original issue discount upon their origination (the "OID Pool") and those
mortgage loans that did not have original issue discount upon their origination
(the "Non-OID Pool"). A holder of a Grantor Trust Fractional Interest
Certificate would be required to report its share of the interest income on the
Mortgage Loans in the Non-OID Pool in accordance with such holder's normal
method of accounting and, to the extent that the portion of its purchase price
for such Certificates properly allocable to its interest in the Non-OID Pool
were less than its share of the aggregate principal amount of the Mortgage Loans
in the Non-OID Pool, would be subject to the Market Discount rules described
below under "Market Discount" or "REMICS -- Taxation of Owners of REMIC Regular
Certificates -- Market Discount." Such holder would be required to treat the
portion of its Certificate representing an interest in the OID Pool as a single
debt instrument issued on the Closing Date with original issue discount equal to
its pro-rata share of the aggregate of the unaccrued original issue discount on
the Mortgage Loans in the OID Pool as of such date and subject to the rules for
reporting original issue discount described under "REMICS -- Taxation of Owners
of REMIC Regular Certificates -- Original Issue Discount." To the extent that
the portion of such holder's purchase price for its Certificate properly
allocable to the OID Pool represented a discount greater than such holder's
pro-rata share of the aggregate original issue discount on the Mortgage Loans in
the OID Pool, such holder would be subject to the Market Discount Rules
69
<PAGE> 147
described below under "REMICS -- Taxation of Owners of REMIC Regular
Certificates -- Market Discount."
Alternatively, a Grantor Trust Fractional Interest Certificate could be
treated as a single debt instrument issued on the Closing Date and subject to
the rules described under "REMICS -- Taxation of Owners of REMIC Regular
Certificates -- Original Issue Discount" and "-- Market Discount." Other
interpretations of the application of the original issue discount rules to
Grantor Trust Fractional Interest Certificates are possible. Investors are urged
to consult their tax advisors concerning the application and effect of such
rules on their investment in such Certificates.
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. The amendment to Section
1272(a)(6) of the Code described under "-- Stripped Bond Rules Do Not Apply,"
above, could be interpreted as requiring the use of a prepayment assumption in
connection with the determination, accrual and inclusion in income of market
discount. If such a requirement were applicable, a Grantor Trust Fractional
Interest Certificate would probably be treated as a single aggregate debt
instrument to which the rules described under "REMICS -- Taxation of Owners of
REMIC Regular Certificates -- Market Discount" would apply. Alternatively, if
the requirement of a prepayment assumption were not applicable, the rules
described in the succeeding paragraphs of this section would be applicable
either on a Mortgage-Loan-by-Mortgage-Loan basis or on such a basis with respect
to the Non-OID Pool and on an aggregate basis with respect to the OID Pool.
Other interpretations of the effect of the amendment to Section 1272(a)(6) on
the determination and accrual of market discount are possible. Investors are
advised to consult their tax advisors concerning the application of the market
discount rules to Grantor Trust Fractional Interest Certificates.
If a prepayment assumption generally is not required in the application of
the market discount rules to pools of debt instruments, a Grantor Trust
Fractional Interest Certificate may be subject to the market discount rules 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
70
<PAGE> 148
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.
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
"-- REMICS -- Taxation of Owners of REMIC Regular Certificates -- Original Issue
Discount."
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
71
<PAGE> 149
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 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.
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 the
Grantor Trust Strip Certificates, and that adjustments be made in the amount and
rate of accrual of such discount when prepayments do not conform to such
prepayment assumption. It is uncertain whether the assumed prepayment rate
should 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 using a prepayment assumption than if yield were 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
72
<PAGE> 150
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
sufficiently faster than the Prepayment Assumption to assure that the holder of
such Certificate will not recover its initial purchase price together with
previously accrued original issue discount. However, if a Grantor Trust Strip
Certificate is treated as an interest in discrete Mortgage Loans 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 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 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.
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
73
<PAGE> 151
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.
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 in the Prospectus
74
<PAGE> 152
Supplement under the heading "FEDERAL INCOME TAX CONSEQUENCES," if any, 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 prior to the Delivery Date with
respect to any Series of REMIC Certificates. 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 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 "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)(4)(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 Section
856(c)(4)(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
75
<PAGE> 153
purposes. Upon the issuance of any such Series of REMIC Certificates, Orrick,
Herrington & Sutcliffe LLP, 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
"real estate assets" within the meaning of Section 856(c)(4)(A) of the Code and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the 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
76
<PAGE> 154
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 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,
77
<PAGE> 155
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," which in general is the period corresponding
to the period between Distribution Dates or other interest compounding period, a
calculation will be made of the portion of the original issue discount that
accrued during such accrual period. The portion of original issue discount that
accrues in any accrual period will equal the excess, if any, of (i) the sum of
(A) the present value, as of the end of the accrual period, of all of the
distributions remaining to be made on the REMIC Regular Certificate, if any, in
future periods and (B) the distributions made on such REMIC Regular Certificate
during the accrual period of amounts included in the stated redemption price,
over (ii) the adjusted issue price of such REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence will be calculated (i)
assuming that distributions on the REMIC Regular Certificate will be received in
future periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption 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
78
<PAGE> 156
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 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.
79
<PAGE> 157
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 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. 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
80
<PAGE> 158
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 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.
81
<PAGE> 159
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 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.
82
<PAGE> 160
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 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
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.
83
<PAGE> 161
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. In addition, excess inclusions are not
permitted to be offset by the alternative tax net operating loss deduction and
alternative minimum taxable income may not be less than the taxpayer's excess
inclusions.
Although it has not done so, the Treasury 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 REMIC Regulations provide
that in order to be treated as having significant value, the REMIC Residual
Certificates must have an aggregate issue price at least equal to two percent of
the aggregate issue prices of all of the related REMIC's Regular and Residual
Certificates. In addition, based on the Prepayment Assumption, the anticipated
weighted average life of the REMIC Residual Certificates must equal or exceed 20
percent of the anticipated weighted average life of the REMIC, based on the
Prepayment Assumption and on any required or permitted clean up calls or
required qualified liquidation provided for in the REMIC's organizational
documents. If the Treasury issues regulations pursuant to its authority, 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.
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
84
<PAGE> 162
determine such transferee's historic payment of its debts and ability to
continue to pay its debts as they come due in the future. Prior to purchasing a
REMIC Residual Certificate, prospective purchasers should consider the
possibility that a purported transfer of such REMIC Residual Certificate by such
a purchaser to another purchaser at some future date may be disregarded in
accordance with the above-described rules which would result in the retention of
tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-- Foreign Investors in REMIC Certificates -- REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On December 24, 1996, the IRS released final 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 REMIC Residual Certificate acquired on or after January 4, 1995
is not treated as a security and thus 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. The related Prospectus
Supplement will so indicate if a related Trust Fund constitutes such a "single
class REMIC," in which case such fees and expenses will be allocated to 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.
85
<PAGE> 163
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described 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.
86
<PAGE> 164
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 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.
It is not anticipated that any REMIC will recognize "net income from foreclosure
property" subject to any material federal income tax.
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 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
87
<PAGE> 165
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. 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
88
<PAGE> 166
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
89
<PAGE> 167
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.
New Withholding Regulations
The Treasury Department has issued new regulations (the "New Regulations")
which make certain modifications to the withholding, backup withholding and
information reporting rules described above. The New Regulations attempt to
unify certification requirements and modify reliance standards. The New
Regulations will generally be effective for payments made after December 31,
1998, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
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 (collectively, "Parties in Interest")) who
90
<PAGE> 168
have certain specified relationships to the Plans, unless a statutory or
administrative exemption is available. Certain Parties in Interest 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.
PLAN ASSET REGULATIONS
Investments 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
investing Plans. 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 with respect to an investing Plan or a Plan holding an interest in an
investing 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
91
<PAGE> 169
(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 and Sections 4975(c)(1)(A)-(D) of the
Code (relating generally to Plan Asset transactions involving Parties in
Interest 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 (2) of ERISA and Sections 4975(c)(1)(E) and (F) of the Code
(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.
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 Senior
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
92
<PAGE> 170
applicable, and their respective affiliates, and who has the authority to manage
and control the Plan Assets being committed for investment in the Certificates.
PTCE 83-1 will not provide exemptive relief with respect to a Series of
Certificates evidencing interests in a Trust Fund that includes Cooperative
Loans. 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 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 five other
prohibited transaction class exemptions issued by the DOL might apply, i.e.,
PTCE 96-23 (Class Exemption for Plan Asset Transactions Determined by In-House
Asset Managers), 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. If so
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
93
<PAGE> 171
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
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
94
<PAGE> 172
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.
USE OF PROCEEDS
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. 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. BancAmerica Robertson Stephens, an
affiliate of the Depositor and the Master Servicer, may participate as an
underwriter in the offering of the Certificates.
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.
This Prospectus and the related Prospectus Supplement may be used by
BancAmerica Robertson Stephens in connection with offers and sales related to
secondary market transactions in any Series of Certificates. BancAmerica
Robertson Stephens may act as principal or agent in such transactions. Such
sales will be made at prices related to prevailing market prices at the time of
sale or otherwise.
95
<PAGE> 173
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.
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 LLP, 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).
96
<PAGE> 174
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
Baloon Loans................................................ 13
Bank of America NT&SA....................................... 15
BankAmerica................................................. 6
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
Certificateholder........................................... 24
Certificateholders.......................................... 3
Certificates................................................ 1
Citibank.................................................... 24
Class....................................................... 1
Closing Date................................................ 76
Code........................................................ 6
Commission.................................................. 3
Committee Report............................................ 71
Contributions Tax........................................... 87
Convertible Mortgage Loan................................... 14
Cooperative................................................. 12
Cooperative Loans........................................... 12
Cooperative Notes........................................... 12
Credit Enhancer............................................. 39
Custodial Account........................................... 20
Cypress Center.............................................. 20
Debt Service Reduction...................................... 41
Defaulted Mortgage Loss..................................... 39
Deficient Valuation......................................... 41
Definitive Certificates..................................... 25
Deleted Mortgage Loan....................................... 20
</TABLE>
97
<PAGE> 175
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Depositaries................................................ 24
Depositor................................................... 1
Determination Date.......................................... 33
Distribution Date........................................... 7
DOL......................................................... 91
DOL Regulations............................................. 91
Due Date.................................................... 29
Eligible Account............................................ 29
ERISA....................................................... 9
ERISA Plans................................................. 90
Euroclear................................................... 26
Euroclear Cooperative....................................... 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......................................... 63
GNMA........................................................ 16
Grantor Trust Certificates.................................. 9, 65
Grantor Trust Fractional Interest Certificate............... 66
Grantor Trust Fund.......................................... 65
Grantor Trust Strip Certificate............................. 66
Guides...................................................... 16
Holder...................................................... 25
Index....................................................... 13
Indirect Participants....................................... 25
Insurance Proceeds.......................................... 29
IRAs........................................................ 90
IRS......................................................... 67
Issue Premium............................................... 82
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.................................. 85
Master Commitments.......................................... 18
Master Servicer............................................. 1
Morgan...................................................... 24
Mortgage File............................................... 28
Mortgage Loans.............................................. 1
</TABLE>
98
<PAGE> 176
<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........................................... 54
Non-OID Pool................................................ 69
Nonrecoverable Advance...................................... 31
Note Margin................................................. 13
OID Pool.................................................... 69
OID Regulations............................................. 65
OTS......................................................... 20
Owners...................................................... 25
Participants................................................ 25
Parties in Interest......................................... 90
Pass-Through Rate........................................... 5
Paying Agent................................................ 31
Percentage Interest......................................... 32
Permitted Investments....................................... 29
Plan........................................................ 9
Plan Asset Investor......................................... 91
Plan Assets................................................. 91
Plans....................................................... 90
Policy Statement............................................ 94
Pool Insurer................................................ 30
Pooling Agreement........................................... 4
Prepayment Assumption....................................... 68
Prepayment Interest Shortfall............................... 7
Primary Mortgage Insurance Policy........................... 45
Primary Mortgage Insurer.................................... 45
Principal Prepayments....................................... 28
Prohibited Transactions Tax................................. 87
PTCE........................................................ 91
Qualified Retirement Plans.................................. 90
Qualified Substitute Mortgage Loan.......................... 20
Rating Agency............................................... 9
Realized Loss............................................... 37
Record Date................................................. 31
Relief Act.................................................. 64
REMIC....................................................... 65
REMIC Certificates.......................................... 65
REMIC Provisions............................................ 65
REMIC Regular Certificates.................................. 74
REMIC Regulations........................................... 65
REMIC Residual Certificates................................. 74
</TABLE>
99
<PAGE> 177
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
REO Mortgage Loan........................................... 35
Reserve Fund................................................ 41
Retained Yield.............................................. 12
Richmond Center............................................. 20
Rules....................................................... 25
Sellers..................................................... 1, 6
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................................................ 15
Tax Exempt Investor......................................... 93
Tax-Favored Plans........................................... 90
Terms and Conditions........................................ 26
Tiered REMICs............................................... 75
Title V..................................................... 63
Title VIII.................................................. 64
Trust Fund.................................................. 1
Trustee..................................................... 3
UBTI........................................................ 93
UCC......................................................... 60
Unaffiliated Sellers........................................ 12
Unrecovered Senior Portion.................................. 38
</TABLE>
100
<PAGE> 178
======================================================
NO DEALER, SALESPERSON 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 ANY 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 Information............................... S-5
Risk Factors...................................... S-23
Recent Developments............................... S-25
Description of the Mortgage Pool.................. S-26
Description of the Certificates................... S-32
Certain Yield and Prepayment Considerations....... S-51
Credit Enhancements............................... S-64
Pooling Agreement................................. S-69
Federal Income Tax Consequences................... S-70
Method of Distribution............................ S-72
Legal Opinions.................................... S-73
Rating............................................ S-73
Experts........................................... S-73
Legal Investment.................................. S-74
ERISA Considerations.............................. S-74
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................................ 12
The Depositor..................................... 15
Mortgage Loan Program............................. 15
Description of the Certificates................... 23
Subordination..................................... 37
Description of Credit Enhancements................ 39
Primary Mortgage Insurance, Hazard Insurance;
Claims Thereunder............................... 45
The Pooling Agreement............................. 49
Yield Considerations.............................. 53
Maturity and Prepayment Considerations............ 55
Certain Legal Aspects of Mortgage Loans and
Related Matters................................. 57
Federal Income Tax Consequences................... 64
State and Other Tax Consequences.................. 90
ERISA Considerations.............................. 90
Legal Investment Matters.......................... 93
Use of Proceeds................................... 95
Methods of Distribution........................... 95
Rating............................................ 96
Legal Matters..................................... 96
Financial Information............................. 96
Additional Information............................ 96
Index of Principal Definitions.................... 97
</TABLE>
======================================================
======================================================
$341,121,101 (APPROXIMATE)
BA MORTGAGE
SECURITIES, INC.
MORTGAGE PASS-THROUGH
CERTIFICATES
SERIES 1998-1
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ABN AMRO INCORPORATED
APRIL 22, 1998
======================================================
