<PAGE>
As filed with the Securities and Exchange Commission on December 8, 1999
Registration No. 333-80941
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
BANK OF AMERICA MORTGAGE SECURITIES, INC.
(Exact name of registrant as specified in governing instruments)
Delaware 94-324470
(State of Incorporation) (I.R.S. Employer Identification No.)
201 North Tryon Street
Charlotte, North Carolina 28255
(704) 388-4503
(Address of principal executive offices)
NICHOLAS KRSNICH
Senior Vice President
Bank of America Mortgage Securities, Inc.
201 North Tryon Street
Charlotte, North Carolina 28255
(704) 388-4503
(Name and address of agent for service)
--------------
Copies to:
JORDAN M. SCHWARTZ, Esq. PATRICK A. BRADLEY IVES, Esq.
T. QUINN, Esq. Kennedy Covington Lobdell & Hickman, L.L.P.
Cadwalader, Wickersham & Taft 100 North Tryon Street, 42nd Floor
100 Maiden Lane Charlotte, North Carolina 28202
New York, New York 10038 (704) 331-7400
(212) 504-6000
--------------
Approximate date of commencement of proposed sale to the public: From time
to time after this Registration Statement becomes effective.
--------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount Offering Price Aggregate Registration
being Registered being Registered Per Unit (1) Offering Price Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage Pass-Through Certificates (2).... $5,000,000,000 100% $5,000,000,000 $1,320,014(3)
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) This Registration Statement also registers an indeterminate amount of
Securities which may be sold by Banc of America Securities LLC in market
making transactions, to the extent required.
(3) $278 previously paid.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the Registration Statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
Pursuant to Rule 429 of the Securities and Exchange Commission's Rules and
Regulations under the Securities Act, the Prospectus and Prospectus Supplement
contained in this Registration Statement also relate to the Registrant's
Registration Statement on Form S-3 (Registration No. 333-67267).
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. The Depositor may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This prospectus supplement is not an offer to sell these securities and is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS SUPPLEMENT, SUBJECT TO COMPLETION, DATED DECEMBER 8, 1999
PROSPECTUS SUPPLEMENT
(To Prospectus Dated ,199 )
Bank of America Mortgage Trust 199 -
Issuer
Bank of America Mortgage Securities, Inc.
Depositor
$ (Approximate)
Mortgage Pass-Through Certificates, Series 199
Principal and interest payable monthly, commencing in 199
- ------------------ The Trust will Issue--
You should
carefully . Twenty-three classes of senior Class A Certificates.
consider the
risk factors . Six classes of Class B Certificates, all of which are
beginning on subordinated to, and provide credit enhancement for, the
page S-14 of Class A Certificates. Each class of Class B Certificates
this prospectus is also subordinated to each class of Class B
supplement. Certificates, if any, with a lower number.
Neither the The classes of offered certificates are listed under the
offered heading "Offered Certificates" in the table on page S-4.
certificates
nor the The yield to maturity of interest only and principal only
underlying certificates will be particularly sensitive to the rate of
mortgage loans principal payments on the mortgage loans in the trust. If
are insured or you are purchasing interest only certificates you should
guaranteed consider the risk that a faster than anticipated rate of
by any principal payments on the mortgage loans will result in
governmental an actual yield that is lower than your expected yield
agency or and could result in the loss of all or part of your
instrumentality. initial investment.
The offered The Assets of the Trust will Include--
certificates
will represent . A pool of fully amortizing, one- to four-family,
interests in residential first mortgage loans, substantially all of
the trust only which have original terms to stated maturity of
and will not approximately years.
represent
interests in
or obligations
of the
Depositor or
any affiliate
of the
Depositor.
This prospectus
supplement may
be used to
offer and sell
the offered
certificates
only if
accompanied
by the
prospectus.
- -----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates offered by this prospectus supplement
or determined that this prospectus supplement or the prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
[UNDERWRITERS]
, 199
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
Information is provided to you about the Offered Certificates in two
separate documents that progressively provide more detail: (a) the
accompanying Prospectus, which provides general information, some of which may
not apply to your Certificates and (b) this Prospectus Supplement, which
describes the specific terms of your Certificates.
If the description of the terms of your Certificates varies between this
Prospectus Supplement and the accompanying Prospectus, you should rely on the
information in this Prospectus Supplement.
Cross-references are included in this Prospectus Supplement and the
accompanying Prospectus to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying Prospectus provide the pages on which
these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus Supplement and the accompanying Prospectus are defined under the
caption "Index of Prospectus Supplement Definitions" beginning on page S-[ ]
in this document and under the caption "Index of Significant Definitions"
beginning on page [ ] in the accompanying Prospectus. Any capitalized terms
used but not defined in this Prospectus Supplement have the meanings assigned
in the Prospectus.
----------------
This Prospectus Supplement and the accompanying Prospectus contain forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended. Such forward-looking statements, together with related
qualifying language and assumptions, are found in the material, including each
of the tables, set forth under "Risk Factors" and "Prepayment and Yield
Considerations." Forward-looking statements are also found elsewhere in this
Prospectus Supplement and the Prospectus, and may be identified by, among
other things, accompanying language including the words "expects," "intends,"
"anticipates," "estimates" or analogous expressions, or by qualifying language
or assumptions. Such statements involve known and unknown risks, uncertainties
and other important factors that could cause the actual results or performance
to differ materially from such forward-looking statements. Such risks,
uncertainties and other factors include, among others, general economic and
business conditions, competition, changes in political, social and economic
conditions, regulatory initiatives and compliance with government regulations,
customer preference and various other matters, many of which are beyond the
Depositor's control. These forward-looking statements speak only as of the
date of this Prospectus Supplement. The Depositor expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to such
forward-looking statements to reflect any change in the Depositor's
expectations with regard thereto or any change in events, conditions or
circumstances on which any forward-looking statement is based.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<S> <C>
THE SERIES 199 CERTIFICATES.............................................. S-4
SUMMARY INFORMATION....................................................... S-5
RISK FACTORS.............................................................. S-14
Prepayments May Adversely Affect Yield.................................. S-14
Refinancing Incentives and Programs May Adversely Affect Yield.......... S-15
Subordinated Certificates Bear Risk of Loss Before More Senior
Certificates........................................................... S-15
Excess Losses May Be Allocated to More Senior Classes of Certificates
While More Junior Classes are Outstanding.............................. S-15
Rights of Beneficial Owners May Be Limited By Book-Entry System for
Certain Classes of Class A Certificates................................ S-15
Restrictions on Transfer May Decrease Liquidity......................... S-16
Lowering of Rating on Certificates May Decrease Value and Liquidity..... S-16
Geographic Concentration May Increase Risk of Loss Because of Adverse
Economic Conditions or Natural Disasters............................... S-16
Certificates May Not Be Appropriate For Individual Investors............ S-17
Class A-R and Class A-LR Certificates May Have Adverse Tax Attributes... S-17
DESCRIPTION OF THE CERTIFICATES........................................... S-18
Denominations; Form of Certificates..................................... S-18
Distributions........................................................... S-18
Interest................................................................ S-20
Principal (Including Prepayments)....................................... S-24
Calculation of Amount to be Distributed on the Certificates............ S-24
Allocation of Amount to be Distributed on the Class A Certificates..... S-29
Principal Payment Characteristics of the PAC Certificates and the
Companion Certificates................................................. S-31
Additional Rights of the Class A-R and Class A-LR Certificateholders.... S-32
Periodic Advances....................................................... S-32
Restrictions on Transfer of the Class A-R, Class A-LR and Class B
Certificates........................................................... S-32
Subordination of Class B Certificates................................... S-34
Allocation of Losses................................................... S-34
DESCRIPTION OF THE MORTGAGE LOANS......................................... S-38
General................................................................. S-38
Mortgage Loan Underwriting.............................................. S-39
Mortgage Loan Data...................................................... S-40
Mandatory Repurchase or Substitution of Mortgage Loans.................. S-44
DELINQUENCY AND FORECLOSURE EXPERIENCE.................................... S-45
PREPAYMENT AND YIELD CONSIDERATIONS....................................... S-47
Sensitivity of the Class A-3, Class A-12 and Class A-18 Certificates.... S-55
Yield Considerations with Respect to the Class B-2 and Class B-3
Certificates........................................................... S-57
POOLING AND SERVICING AGREEMENT........................................... S-59
General................................................................. S-59
Distributions........................................................... S-59
Voting.................................................................. S-59
Trustee................................................................. S-59
Special Servicing Agreements............................................ S-60
Optional Termination.................................................... S-60
Servicer Custodial Account.............................................. S-60
Servicing Compensation and Payment of Expenses.......................... S-61
Servicer Defaults....................................................... S-61
FEDERAL INCOME TAX CONSIDERATIONS......................................... S-63
Regular Certificates.................................................... S-63
Residual Certificates................................................... S-64
ERISA CONSIDERATIONS...................................................... S-66
LEGAL INVESTMENT.......................................................... S-67
SECONDARY MARKET.......................................................... S-67
UNDERWRITING.............................................................. S-68
LEGAL MATTERS............................................................. S-68
USE OF PROCEEDS........................................................... S-68
RATINGS................................................................... S-68
INDEX OF SIGNIFICANT PROSPECTUS SUPPLEMENT DEFINITIONS.................... S-70
</TABLE>
S-3
<PAGE>
THE SERIES 199 CERTIFICATES
<TABLE>
<CAPTION>
Initial Rating
Initial Pass-Through of Offered
Class Principal Balance(1) Rate Principal Types(2) Interest Types(2) Certificates(3)
- ----- -------------------- ------------ ---------------------------- ----------------- ---------------
Offered Certificates
<S> <C> <C> <C> <C> <C> <C>
Class A-1............... $ % Senior, Planned Amortization Fixed Rate
Class A-2............... $ % Senior, Planned Amortization Fixed Rate
Class A-3............... (4) % Senior, Notional Amount Fixed Rate,
Interest Only
Class A-4............... $ % Senior, Accretion Directed Fixed Rate
Class A-5............... $ % Senior, Accretion Directed Fixed Rate
Class A-6............... $ % Senior, Accretion Directed, Accrual,
Companion Fixed Rate
Class A-7............... $ % Senior, Companion Accrual,
Fixed Rate
Class A-8............... $ % Senior, Accretion Directed Fixed Rate
Class A-9............... $ % Senior, Accretion Directed, Accrual,
Companion Fixed Rate
Class A-10.............. $ % Senior, Accretion Directed, Accrual,
Companion Fixed Rate
Class A-11.............. $ % Senior, Companion Accrual,
Fixed Rate
Class A-12.............. $ (5) Senior, Companion Principal Only
Class A-13.............. $ % Senior, Accretion Directed Fixed Rate
Class A-14.............. $ % Senior, Accretion Directed Fixed Rate
Class A-15.............. $ % Senior, Accretion Directed Fixed Rate
Class A-16.............. $ % Senior, Companion Accrual,
Fixed Rate
Class A-17.............. $ % Senior Fixed Rate
Class A-18.............. (6) % Senior, Notional Amount Fixed Rate,
Interest Only
Class A-19.............. $ % Senior Fixed Rate
Class A-20.............. $ % Senior Fixed Rate
Class A-R............... $ % Senior Fixed Rate
Class A-LR.............. $ % Senior Fixed Rate
Class B-1............... $ % Subordinated Fixed Rate
Class B-2............... $ % Subordinated Fixed Rate
Class B-3............... $ % Subordinated Fixed Rate
Non-Offered Certificates
Class A-PO.............. $ (7) Senior Principal Only
Class B-4............... $ % Subordinated Fixed Rate
Class B-5............... $ % Subordinated Fixed Rate
Class B-6............... $ % Subordinated Fixed Rate
</TABLE>
- --------------------
(1) Approximate. The initial Principal Balances are subject to adjustment as
described herein.
(2) See "Description of the Certificates -- Categories of Classes of Certifi-
cates" in the Prospectus for a description of the principal and interest
categories listed.
(3) A description of the ratings of the Offered Certificates is set forth under
the heading "Rating of Certificates" on page S-5 of the Summary Information
and under "Ratings" in the main text of this Prospectus Supplement.
(4) The Class A-3 Certificates are interest-only certificates, have no Princi-
pal Balance and will bear interest on the Class A-3 Notional Amount (ini-
tially approximately $ ) as described herein under "Description of the
Certificates -- Interest."
(5) The Class A-12 Certificates are principal-only certificates and will not be
entitled to distributions in respect of interest.
(6) The Class A-18 Certificates are interest-only certificates, have no Princi-
pal Balance and will bear interest on the Class A-18 Notional Amount (ini-
tially approximately $ ) as described herein under "Description of Cer-
tificates -- Interest."
(7) The Class A-PO Certificates are principal-only certificates and will not be
entitled to distributions in respect of interest.
S-4
<PAGE>
SUMMARY INFORMATION
. This summary highlights selected information from this document, but does not
contain all of the information that you should consider in making your
investment decision. Please read this entire Prospectus Supplement and the
accompanying prospectus (the "Prospectus") carefully for additional detailed
information about the Offered Certificates.
RELEVANT PARTIES
Issuer
The Bank of America Mortgage Trust 199 - (the "Trust") will own the Mortgage
Loans and issue the Certificates.
Depositor
Bank of America Mortgage Securities, Inc. (the "Depositor") will acquire the
Mortgage Loans from [ ] (" " or the "Seller"), an affiliate of the
Depositor, and will transfer the Mortgage Loans into the Trust.
Servicer
[ ] (in its capacity as servicer, the "Servicer") will provide custom-
ary servicing functions with respect to the Mortgage Loans assigned to the
Trust.
Trustee
[ ] (the "Trustee") will act as the trustee for the Trust.
RATING OF CERTIFICATES
The Trust will not issue the Offered Certificates unless they have received at
least the ratings set forth on page S-4 from [ ] (" ") and, if applicable,
[ ] (" " and, together with , the "Rating Agencies").
. The ratings assigned by the Rating Agencies are not recommendations to buy,
sell or hold the Certificates rated. A rating may be subject to revision or
withdrawal at any time by the assigning Rating Agency.
. The ratings do not address the possibility that, as a result of principal
prepayments, the yield on your Certificate may be lower than anticipated.
See "-- Effects of Prepayments on Investment Expectations" below and "Ratings"
in this Prospectus Supplement.
DESCRIPTION OF CERTIFICATES
The Mortgage Pass-Through Certificates, Series 199 (the "Certificates") will
be issued on or about , 199 (the "Closing Date").
The Certificates consist of:
. The twenty-three Classes of senior certificates designated as "Senior" Cer-
tificates in the table on page S-4 of this Prospectus Supplement (collective-
ly, the "Class A Certificates"); and
. The six Classes of junior certificates designated as "Subordinated" Certifi-
cates in the table on page S-4 of this Prospectus Supplement (collectively,
the "Subordinated Certificates" or the "Class B Certificates").
Only the Class A Certificates (other than the Class A-PO Certificates) and the
Class B-1, Class B-2 and Class B-3 Certificates (collectively, the "Offered
Certificates") are being offered by this Prospectus Supplement and the accompa-
nying Prospectus. The Class A-PO, Class B-4, Class B-5 and Class B-6 Certifi-
cates are not being offered pursuant to this Prospectus Supplement and the ac-
companying Prospectus, and the Depositor may retain or sell such Classes.
See page S-4 of this Prospectus Supplement for more information with respect to
each Class of Certificates.
Principal Balance and Interests Evidenced by the Certificates
The Certificates will have an approximate aggregate initial Principal Balance
of $ . Any difference between the aggregate Principal Balance of the
Certificates as of the date of issuance of the Certificates and the approximate
aggregate initial Principal Balance of the Certificates as of the date of this
Pro-
S-5
<PAGE>
spectus Supplement will not exceed 5% of the aggregate initial Principal Bal-
ance of the Certificates. Any such difference will be allocated among the vari-
ous Classes of Certificates so as to materially retain the characteristics of
the Offered Certificates described in this Prospectus Supplement.
The following table sets forth the approximate undivided interest in the prin-
cipal balance of the Mortgage Loans that the Depositor expects each Class or
group of Classes indicated to evidence as of the Closing Date.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Approximate Initial
Class Undivided Interest
- ------------------------------- ---------------------
<S> <C> <C>
Class A (other than Class A-PO) %
Class A-PO* %
---------
Class A (all Classes) %
Class B-1 %
Class B-2 %
Class B-3 %
Classes B-4, B-5 and B-6 %
----------
Total 100.00%
==========
</TABLE>
- --------
* The Class A-PO Certificates in the aggregate represent an approximate %
initial interest in the principal balance of the Discount Mortgage Loans.
- --------------------------------------------------------------------------------
The following table sets forth for the Class A and Class B Certificates the ap-
proximate undivided interest in the Pool Balance (Non-PO Portion) that the
Seller expects such Class or group of Classes indicated to evidence, in the ag-
gregate, as of the Closing Date.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Approximate Initial
Undivided Interest
-----------------------
Class Percentage In dollars
- ------------------------------- ---------- ------------
<S> <C> <C>
Class A (other than Class A-PO) % $
Class B % $
------ ------------
Totals 100.00% $
====== ============
- --------------------------------------------------------
</TABLE>
The relative interests in the initial Pool Balance (Non-PO Portion) represented
by the Class A Certificates in the aggregate (other than the Class A-PO Certif-
icates) and the Class B Certificates in the aggregate are subject to change
over time because:
. Certain unscheduled principal payments will be disproportionally allocated to
the Class A Certificates (other than the Class A-PO Certificates) for a spec-
ified period; and
. Certain losses and certain shortfalls will be allocated first to the Classes
of Class B Certificates in reverse numerical order prior to the allocation of
such losses and shortfalls to the Class A Certificates, as discussed in "De-
scription of the Certificates -- Distributions" and "-- Subordination
of Class B Certificates" in this Prospectus Supplement.
Forms of Certificates; Denominations
Your Certificates will be issued either in book-entry form or in fully regis-
tered, certificated form. The table under "Description of the Certificates --
Denominations; Form of Certificates" in this Prospectus Supplement sets forth
the original certificate form, the minimum denomination and the incremental de-
nomination of the Offered Certificates. The Offered Certificates are not in-
tended to be directly or indirectly held or beneficially owned by anyone in
amounts lower than such minimum denominations.
MORTGAGE POOL
The Mortgage Loans, which are the source of distributions to holders of the
Certificates, will consist of conventional, fixed interest rate, monthly pay,
fully amortizing, one- to four-family, residential first mortgage loans, sub-
stantially all of which have original terms to stated maturity of approximately
years. Some of the Mortgage Loans may be loans secured by shares issued by
cooperative housing corporations.
The Depositor expects the Mortgage Loans to have the further specifications set
forth in the table below and under the heading "Description of the Mortgage
Loans" in this Prospectus Supplement.
S-6
<PAGE>
- -------------------------------------------------------------------------------
SELECTED MORTGAGE LOAN DATA(/1/)
(as of 1, 19 (the "Cut-Off Date"))
<TABLE>
<S> <C> <C>
Number of Mortgage Loans:
Aggregate Unpaid Principal Balance(/2/): $
Range of Unpaid Principal Balances(/2/): $ to $
Average Unpaid Principal Balance(/2/): $
Range of Mortgage Interest Rates: % to %
Weighted Average Mortgage Interest Rate(/2/): %
Range of Remaining Terms to Stated Maturity: months to months
Weighted Average Remaining Term to Stated
Maturity(/2/): months
Range of Original Loan-to-Value Ratios(/2/): % to %
Weighted Average Original Loan-to-Value Ratio(/2/): %
Geographic Concentration of Mortgaged Properties
Securing Mortgage Loans in Excess of 5% of the
Aggregate Unpaid Principal Balance(/2/): [STATES] %
%
Maximum Five-Digit Zip Code Concentration(/2/): %
</TABLE>
- -------
(1) Information concerning the Discount Mortgage Loans and Premium Mortgage
Loans is set forth under "Description of the Mortgage Loans -- General."
(2) Approximate.
- -------------------------------------------------------------------------------
Changes to Mortgage Pool
The Depositor may remove Mortgage Loans from the pool, or may make substitu-
tions for certain Mortgage Loans, in advance of the Closing Date.
After the issuance of the Certificates, the Depositor may remove certain Mort-
gage Loans from the pool through repurchase or, under certain circumstances,
may make substitutions for certain Mortgage Loans.
See "Description of the Mortgage Loans" in this Prospectus Supplement.
Optional Termination of the Trust
The Servicer may, subject to certain conditions including the then-remaining
size of the pool, purchase all outstanding Mortgage Loans in the pool and
thereby effect early retirement of the Certificates. See "Pooling and Servic-
ing Agreement -- Optional Termination" in this Prospectus Supplement.
Underwriting Standards
The Mortgage Loans were generally originated in conformity with the underwrit-
ing standards described in the Prospectus under the heading "The Mortgage Loan
Programs -- Mortgage Loan Underwriting" (the "Underwriting Standards"). In
certain instances, the Seller may have granted exceptions to the Underwriting
Standards.
See "Description of the Mortgage Loans" in this Prospectus Supplement and "The
Mortgage Loan Programs -- Mortgage Loan Underwriting" in the Prospectus.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST TO CERTIFICATEHOLDERS
On each Distribution Date the Pool Distribution Amount, which consists of
those payments, recoveries, advances and other receipts in respect of the
Mortgage Loans which are available for distribution on such date, will be dis-
tributed generally in the following order of priority:
. First, pro rata, to the holders of the Class A Certificates in respect of
interest which they are entitled to receive on such Distribution Date;
S-7
<PAGE>
. Second, to the holders of the Class A Certificates in respect of principal
which they are entitled to receive on such Distribution Date; and
. Third, to the holders of the Class B Certificates in numerical order (i.e.,
first to the Class B-1 Certificates, then the Class B-2 Certificates, etc.)
in respect of interest and principal which they are entitled to receive on
such Distribution Date.
However, if you are purchasing Accrual Certificates you will not receive inter-
est distributions with respect to your Certificates until the applicable Accre-
tion Termination Date. Prior to the applicable Accretion Termination Date,
interest which would otherwise be distributed on a Class of Accrual Certifi-
cates will be added to the Principal Balance of such Class of Accrual Certifi-
cates and will be distributed instead as principal to the holders of the Class
or Classes of Class A Certificates specified under "Description of the Certifi-
cates -- Principal (Including Prepayments)" in this Prospectus Supplement.
In addition, the portion, if any, of principal to which the Class A-PO Certifi-
cates are entitled on a Distribution Date which consists of the Class A-PO De-
ferred Amount will only be paid out of amounts otherwise distributable as prin-
cipal to the Class B Certificates on such Distribution Date.
Interest Distributions
The amount of interest which will accrue on your Certificates (unless you own
Class A-12 Certificates) each month is equal to:
. 1/12th of the Pass-Through Rate for your Class of Certificates multiplied by
the outstanding Principal Balance (or notional amount, in the case of the
Class A-3 and Class A-18 Certificates) of such Class on the related Distribu-
tion Date minus
. the amount of certain interest shortfalls arising from the timing of prepay-
ments on the Mortgage Loans and interest losses allocated to your Class of
Certificates, as described under "Description of the Certificates --
Interest" in this Prospectus Supplement.
Because the Class A-12 Certificates are principal-only certificates, if you own
Class A-12 Certificates, you will not be entitled to distributions of interest.
The allocation of interest distributions among the Class A Certificates will be
made as described under "Description of the Certificates -- Distributions" and
"Interest" in this Prospectus Supplement.
Principal Distributions
The calculation of the amount of principal which each Class of Offered Certifi-
cates is entitled to receive on each Distribution Date and the priority of
principal distributions among the Class A Certificates are described under "De-
scription of the Certificates -- Distributions" and "-- Principal (Including
Prepayments)" in this Prospectus Supplement.
Credit Enhancement
The rights of the holders of each Class of Class B Certificates to receive dis-
tributions will be subordinated to the rights of the holders of the Class A
Certificates and the holders of the Classes of Class B Certificates, if any,
with lower numerical designations to receive distributions.
In general, the protection afforded the holders of more senior Classes of Cer-
tificates by means of this subordination will be effected in two ways:
. By the preferential right of the holders of such Classes to receive, prior to
any distribution being made on any Distribution Date to the holders of the
more junior Classes of Certificates, the amounts of interest and principal
due on the more senior Classes of Certificates (other than the Class A-PO De-
ferred Amount) and, if necessary, by the right of such more senior holders to
receive future distributions on the Mortgage Loans that would otherwise have
been allocated to the holders of the more junior Classes of Certificates; and
. By the allocation to the more junior Classes of Certificates (in reverse or-
der of seniority), until their respective Principal Balances have been
reduced to zero, of losses resulting from the liquidation of defaulted Mort-
gage Loans or the bankruptcy of mortgagors prior to the allocation of such
losses to the more senior Classes of Certificates (other than certain excess
losses arising from special hazards, mortgagor fraud or mortgagor bankrupt-
cy).
S-8
<PAGE>
See "Description of the Certificates -- Distributions" and "-- Subordination
of Class B Certificates" in this Prospectus Supplement.
In addition, to increase the period during which the Principal Balances of the
Class B Certificates remain available as credit enhancement to the Class A
Certificates, a disproportionate amount of prepayments and certain unscheduled
recoveries with respect to the Mortgage Loans will be allocated to the Class A
Certificates in the aggregate (other than the Class A-PO Certificates). This
allocation will accelerate the amortization of the Class A Certificates (other
than the Class A-PO Certificates) while, in the absence of losses due to the
liquidation of defaulted Mortgage Loans or losses resulting from the bank-
ruptcy of mortgagors, increasing the percentage interest in the principal bal-
ance of the Mortgage Loans evidenced by the Class B Certificates. See "De-
scription of the Certificates" and "Prepayment and Yield Considerations" in
this Prospectus Supplement.
After the Principal Balances of the Class B Certificates have been reduced to
zero, the principal portion of all losses (other than the portion attributable
to the Discount Mortgage Loans) will be allocated to the Class A Certificates
(other than the Class A-PO Certificates). To the extent such losses arise with
respect to Discount Mortgage Loans, principal losses will be shared among the
Class A Certificates according to their respective interests in such Mortgage
Loans. The principal portion of any losses borne by the Class A Certificates
(other than losses borne by the Class A-PO Certificates) will be shared pro
rata by the Classes of Class A Certificates (other than the Class A-PO Certif-
icates) based on their then-outstanding Principal Balances (or, in the case of
the Accrual Certificates, their initial Principal Balances, if lower) and the
interest portion of such losses will be shared pro rata by such Classes based
on interest accrued. See "Description of the Certificates -- Interest" and "--
Subordination of Class B Certificates -- Allocation of Losses" in this Pro-
spectus Supplement.
If you are purchasing Class B Certificates, you should consider that the yield
to maturity on each Class of Class B Certificates will be more sensitive to
losses due to liquidations of the Mortgage Loans (and the timing thereof) than
that on the more senior Classes of Certificates if the aggregate Principal
Balance of the Classes of Certificates that are junior to it has been reduced
to zero.
The sensitivity of the yield to maturity of the Class B-2 and Class B-3 Cer-
tificates to losses is illustrated in the tables under the heading "Prepayment
and Yield Considerations -- Yield Considerations with Respect to the Class B-2
and Class B-3 Certificates" in this Prospectus Supplement. These illustrations
are based on default, loss and other assumptions which are unlikely to match
actual experience on the Mortgage Loans. Therefore, your results will vary.
See "Description of the Certificates -- Subordination of Class B Certificates"
in this Prospectus Supplement.
EFFECTS OF PREPAYMENTS ON YOUR INVESTMENT EXPECTATIONS
The Offered Certificates were structured assuming, among other things, that
prepayments on the Mortgage Loans occur at a constant rate of % SPA. Howev-
er, no one can predict the actual rate of prepayment of principal on the Mort-
gage Loans.
In deciding whether to purchase any Offered Certificates, you should make an
independent decision as to the appropriate prepayment assumptions to use. If
prepayments on the Mortgage Loans are higher or lower than you anticipate, the
investment performance of the Offered Certificates may vary materially and ad-
versely from your investment expectations.
In addition, if you are purchasing Class A Certificates you should consider
that the Class A Certificates (other than the Class A-PO Certificates) in the
aggregate will be more sensitive to prepayments on the Mortgage Loans than the
Class B Certificates because such prepayments will be disproportionately allo-
cated to the Class A Certificates then entitled to principal distributions
during the nine years beginning on the first Distribution Date. See "Descrip-
tion of the Certificates -- Principal (Including Prepayments)" and "Prepayment
and Yield Considerations" in this Prospectus Supplement.
The actual yield on your Certificates may not be equal to the yield you antic-
ipated at the time of purchase or, even if the actual yield is
equal to the yield you anticipated at that time, the
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total return on investment you expected or the expected weighted average life
of your Certificates may not be realized. These effects are summarized below.
Yield
The actual yield on your Certificates in relation to the related Pass-Through
Rate will vary depending upon the price you pay for your Certificates.
. If you purchase an Offered Certificate (other than a Class A-12 Certificate)
at an amount equal to its unpaid Principal Balance (that is, at "par"), your
effective yield (assuming that there are no interest shortfalls and assuming
the full return of your invested principal) will approximate the Pass-Through
Rate on that Certificate.
. If you pay less or more than the unpaid Principal Balance of an Offered Cer-
tificate (that is, buy the Certificate at a "discount" or "premium," respec-
tively), then, your effective yield (assuming that there are no interest
shortfalls and assuming the full return of your invested principal) will be
higher or lower, respectively, than the Pass-Through Rate on the Certificate,
because such discount or premium will be amortized over the life of the Cer-
tificate.
The yield on your Certificates will also be affected by the rate and timing of
prepayments on the Mortgage Loans. Any deviation in the actual rate of prepay-
ments on the Mortgage Loans from the rate you assumed will affect the period of
time over which, or the rate at which, the discount or premium will be amor-
tized and, consequently, will cause your actual yield to differ from that which
you anticipated.
If you purchase Class A-3 or Class A-18 Certificates, which do not have Princi-
pal Balances, your yield will be sensitive to both the timing of receipt of
prepayments and the overall rate of prepayment on the Mortgage Loans.
If you purchase Class A-12 Certificates, which do not bear interest, your yield
will primarily be a function of the price you paid for your Class A-12 Certifi-
cates, the rate and timing of principal payments on the Mortgage Loans and
losses incurred on and after the Cross-Over Date.
The particular sensitivities of the Class A-3, Class A-12 and Class A-18 Cer-
tificates are separately displayed in the tables appearing under the heading
"Prepayment and Yield Considerations" in this Prospectus Supplement.
If you are purchasing Offered Certificates at a discount, particularly the
Class A-12 Certificates, you should consider the risk that a slower than antic-
ipated rate of principal payments on the Mortgage Loans will result in an ac-
tual yield that is lower than your expected yield.
If you are purchasing Offered Certificates at a premium, or if you are purchas-
ing Class A-3 or Class A-18 Certificates, which do not have Principal Balances,
you should consider the risk that a faster than anticipated rate of principal
payments on the Mortgage Loans will result in an actual yield that is lower
than your expected yield. You should also consider the risk that a rapid rate
of principal payments on the Mortgage Loans could result in the loss of all or
part of your initial investment.
Reinvestment Risk
As stated above, if you purchase an Offered Certificate at par, fluctuations in
the rate of distributions of principal will generally not affect your yield to
maturity. However, the total return on your investment, even if you purchase
your Certificates at par, will be reduced if principal distributions received
on your Certificates cannot be reinvested at a rate as high as the stated Pass-
Through Rate.
You should consider the risk that rapid rates of prepayments on the Mortgage
Loans may coincide with periods of low prevailing market interest rates. During
periods of low prevailing market interest rates, mortgagors may be expected to
prepay or refinance Mortgage Loans that carry interest rates significantly
higher than then-current interest rates for mortgage loans. Consequently, the
amount of principal distributions available to you for reinvestment at such low
prevailing interest rates may be relatively large.
Conversely, slow rates of prepayments on the Mortgage Loans may coincide with
periods of high prevailing market interest rates. During such periods, it is
less likely that mortgagors will elect to prepay or refinance Mortgage Loans
and, therefore, the amount
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<PAGE>
of principal distributions available to you for reinvestment at such high pre-
vailing interest rates may be relatively small.
Weighted Average Life Volatility
One indication of the impact of varying prepayment speeds on a security is the
change in its weighted average life.
. The "weighted average life" of an Offered Certificate (other than a Class A-
3 or Class A-18 Certificate) is the average amount of time that will elapse
between the date of issuance of the Certificate and the date on which each
dollar in reduction of the principal balance of the Certificate is distrib-
uted to the investor.
. The weighted average life of a Class A-3 Certificate is the average amount
of time that will elapse between the date of issuance of the Certificates
and the date on which each dollar in reduction of the Principal Balance of
the Class A-1 Certificates (a portion of the Principal Balance of which cor-
responds to the notional amount of the Class A-3 Certificates) is distrib-
uted to the investors in the Class A-1 Certificates.
. The weighted average life of a Class A-18 Certificate is the average amount
of time that will elapse between the date of issuance of the Certificates
and the date on which each dollar in reduction of the Principal Balance of
the Class A-17 Certificates (the Principal Balance of which corresponds to
the notional amount of the Class A-18 Certificates) is distributed to the
investors in the Class A-17 Certificates.
Low rates of prepayment may result in the extension of the weighted average
life of a Certificate. High rates of prepayment may result in the shortening
of the weighted average life of a Certificate.
In general, if you purchase your Certificates at par and the weighted average
life of your Certificates is extended beyond your anticipated time period, the
market value of your Certificates may be adversely affected even though the
yield to maturity on your Certificates is unaffected.
If you are purchasing Companion Certificates, you should consider that their
weighted average lives will be highly sensitive to the rate of prepayments on
the Mortgage Loans.
See "Risk Factors -- Prepayments May Adversely Affect Yield," "Prepayment and
Yield Considerations" and "Description of the Certificates -- Principal (In-
cluding Prepayments) -- Principal Payment Characteristics of the PAC Certifi-
cates and the Companion Certificates" in this Prospectus Supplement.
Weighted Average Lives (in years)*
<TABLE>
<CAPTION>
SPA
-------------------
Class 0% % % % %
- ----- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
A-1...............
A-2...............
A-3...............
A-4...............
A-5...............
A-6...............
A-7...............
A-8...............
A-9...............
A-10..............
A-11..............
A-12..............
A-13..............
A-14..............
A-15..............
A-16..............
A-17..............
A-18..............
A-19..............
A-20..............
A-R...............
A-LR..............
B-1...............
B-2...............
B-3...............
</TABLE>
- -------
* Determined as described under "Prepayment and Yield Considerations" in this
Prospectus Supplement. Prepayments will not occur at any assumed rate shown
or any other constant rate, and the actual weighted average lives of any or
all of the Classes of Offered Certificates are likely to differ from those
shown, perhaps significantly.
FEDERAL INCOME TAX STATUS
For federal income tax purposes, the Trust Estate will consist of two real es-
tate mortgage investment con-
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<PAGE>
duits (the "Upper-Tier REMIC" and the "Lower-Tier REMIC," respectively, and
each a "REMIC"). The Offered Certificates (other then the Class A-R and Class
A-LR Certificates) and the Class A-PO, Class B-4, Class B-5 and Class B-6 Cer-
tificates (collectively, the "Regular Certificates") will constitute "regular
interests" in the Upper-Tier REMIC. The Class A-R Certificate will be the "re-
sidual interest" in the Upper-Tier REMIC and the Class A-LR Certificate will
be the "residual interest" in the Lower-Tier REMIC.
The Regular Certificates will be treated as newly-originated debt instruments
for most federal income tax purposes. You must report income received on your
Regular Certificates as it accrues from Distribution Date to Distribution
Date, which will be before such income is distributed in cash to you. Addi-
tionally, as described under "Federal Income Tax Consequences" in this Pro-
spectus Supplement, certain Classes of Regular Certificates may be issued with
"original issue discount" ("OID"). If your class of Regular Certificates is
issued with OID, you must report OID income over the life of the Regular Cer-
tificate, often well before such income is distributed in cash to you.
The Class A-R and Class A-LR Certificates will not be treated as debt instru-
ments for federal income tax purposes. Instead, if you are the holder of the
Class A-R or Class A-LR Certificate, you must include the taxable income or
loss of the Upper-Tier REMIC or the Lower-Tier REMIC, respectively, in deter-
mining your federal taxable income. All or most of the taxable income of the
Upper-Tier REMIC and the Lower-Tier REMIC includible by the Class A-R and
Class A-LR Certificateholders will be treated as "excess inclusion" income
which is subject to special limitations for federal tax purposes. As a result
of this tax treatment, your after-tax return on the Class A-R or Class A-LR
Certificate may be significantly lower than would be the case if the Class A-R
and Class A-LR Certificates were taxed as debt instruments, or may be negative
(i.e., you may have to use funds other than distributions on your certificate
to meet the tax liabilities resulting from the ownership of a Class A-R or
Class A-LR Certificate).
Additionally, the Class A-R and Class A-LR Certifi cates will be considered
"non-economic residual interests" for tax purposes. As a result, certain
transfers of the Class A-R or Class A-LR Certificates may be disregarded for
federal tax purposes, with the transferor continuing to have tax liabilities
for the transferred Certificates. See "Description of the Certificates -- Re-
strictions on Transfer of the Class A-R, Class A-LR and Class B Certificates"
and "Federal Income Tax Considerations" in this Prospectus Supplement and
"Federal Income Tax Consequences -- Federal Income Tax Consequences for REMIC
Certificates" in the Prospectus.
ERISA CONSIDERATIONS
If you are a fiduciary of an employee benefit plan or other retirement plan or
arrangement subject to Title I of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of
1986, as amended (the "Code"), or a governmental plan, as defined in Sec-
tion 3(32) of ERISA, subject to any federal, state or local law ("Similar
Law") which is, to a material extent, similar to the foregoing provisions of
ERISA or the Code (collectively, a "Plan"), you should carefully review with
your legal advisors whether the purchase or holding of Offered Certificates
could give rise to a transaction prohibited or not otherwise permissible under
ERISA, the Code or Similar Law.
Because the Class B-1, Class B-2 and Class B-3 Certificates are subordinated
to the Class A Certificates with respect to certain losses, the Class B-1,
Class B-2 and Class B-3 Certificates may not be transferred unless the trans-
feree has delivered to the Trustee and the Seller:
. a representation letter stating either (a) that the transferee is not a Plan
and is not acting on behalf of a Plan or using the assets of a Plan to ef-
fect such purchase or (b) subject to certain conditions described herein,
that the source of funds used to purchase such Certificates is an "insurance
company general account"; or
. an opinion of counsel and such other documentation as described under "De-
scription of the Certificates -- Restrictions on Transfer of the Class A-R,
Class A-LR and Class B Certificates" in this Prospectus Supplement.
The Class A-R and Class A-LR Certificates may not be purchased by or trans-
ferred to a Plan or a
S-12
<PAGE>
person acting on behalf of or investing the assets of a Plan. See "Description
of the Certificates -- Restrictions on Transfer of the Class A-R, Class A-LR
and Class B Certificates" and "ERISA Considerations" in this Prospectus
Supplement.
LEGAL INVESTMENT
. The Class A and Class B-1 Certificates will constitute "mortgage related se-
curities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") so long as they are rated in one of the two high-
est rating categories by at least one nationally recognized statistical rat-
ing organization.
. The Class B-2 and Class B-3 Certificates will not constitute "mortgage re-
lated securities" under SMMEA.
If your investment activities are subject to legal investment laws and regula-
tions, regulatory capital requirements or review by regulatory authorities you
may be subject to restrictions on investment in the Offered Certificates and
should consult your own legal, tax and accounting advisors in determining the
suitability of and consequences to you of the purchase, ownership and disposi-
tion of the Offered Certificates.
See "Legal Investment" in the Prospectus.
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<PAGE>
RISK FACTORS
You should consider, among other things, the following description of the
material risks associated with the purchase of Certificates.
Prepayments May Adversely Affect Yield
The rate of distributions of principal and the yield to maturity on your
Certificates will be directly related to the rate of payments of principal on
the Mortgage Loans and the amount and timing of mortgagor defaults resulting
in Realized Losses. Mortgagors are permitted to prepay the Mortgage Loans, in
whole or in part, at any time without penalty. The rate of principal payments
on the Mortgage Loans will be affected by, among other things:
. the amortization schedules of the Mortgage Loans;
. the rate of principal prepayments (including partial prepayments and
those resulting from refinancing) thereon by mortgagors;
. liquidations of defaulted Mortgage Loans;
. repurchases of Mortgage Loans by the Depositor as a result of defective
documentation or breaches of representations and warranties; and
. the optional purchase by the Servicer of all of the Mortgage Loans in
connection with the termination of the Trust Estate.
See "Prepayment and Yield Considerations" and "Pooling and Servicing
Agreement -- Optional Termination" herein and "The Pooling and Servicing
Agreement -- Assignment of Mortgage Loans to the Trustee," "-- Optional
Purchases" and "-- Termination; Optional Purchase of Mortgage Loans" in the
Prospectus.
The rate of payments (including prepayments) on pools of mortgage loans is
influenced by a variety of economic, geographic, social and other factors.
. If prevailing rates for similar mortgage loans fall below the Mortgage
Interest Rates on the Mortgage Loans, the rate of prepayment would gen-
erally be expected to increase.
. Conversely, if interest rates on similar mortgage loans rise above the
Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment
would generally be expected to decrease.
If you are purchasing Offered Certificates at a discount, or are purchasing
the Class A-12 Certificates, you should consider the risk that if principal
payments on the Mortgage Loans occur at a rate slower than you expected, your
yield may be lower than you expected.
If you are purchasing Offered Certificates at a premium, or are purchasing
the Class A-3 or Class A-18 Certificates, you should consider the risk that if
principal payments on the Mortgage Loans occur at a rate faster than you
expected, your yield may be lower than you expected. If you are purchasing
Class A-3 or Class A-18 Certificates, you should consider the risk that a
rapid rate of principal payments on the Mortgage Loans could result in your
failure to recover your initial investment.
The particular sensitivities of the Class A-3, Class A-12 and Class A-18
Certificates are separately displayed in the tables appearing under the
heading "Prepayment and Yield Considerations" in this Prospectus Supplement.
See "Summary Information -- Effects of Prepayments on Investment
Expectations" and "Prepayment and Yield Considerations" herein.
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<PAGE>
Refinancing Incentives and Programs May Adversely Affect Yield
Incentives or programs offered by mortgage originators to encourage
refinancing may increase prepayments on the Mortgage Loans and affect the
yield to maturity on the Classes of Certificates. In particular, an increase
in prepayments may adversely affect any Offered Certificates purchased at a
premium. See "--Prepayments May Adversely Affect Yield" above. The Servicer
may, in its discretion, offer incentives to borrowers to refinance. Such
incentives may be offered through general advertising or by targeted
solicitations directed at borrowers with particular types of loans, borrowers
in specified geographic areas or other classes of borrowers. Incentives may
include refinancings at partially or greatly reduced borrower cost and/or the
waiver of certain underwriting standards ordinarily applicable to refinancing
such as, for example, the requirement of a new appraisal.
Subordinated Certificates Bear Risk of Loss Before More Senior Certificates
The rights of the holders of each Class of Class B Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates and the
lowered-numbered Classes of Class B Certificates, if any. In addition,
Realized Losses, other than Excess Losses, will be allocated to the Class B
Certificates in the reverse order in which they are entitled to distributions
of principal before being allocated to the Class A Certificates. Accordingly,
if you are purchasing Class B Certificates you will be more likely to
experience losses as a result of the occurrence of losses or interest
shortfalls on the Mortgage Loans. See "Description of the Certificates--
Subordination of Class B Certificates".
The allocation of all or a disproportionate portion of prepayments on the
Mortgage Loans to the Class A Certificates (other than the Class A-PO
Certificates) for a specified period will, in the absence of losses, result in
a decrease in the interest in the Pool Balance (Non-PO Portion) represented by
the Class A Certificates, and an increase in the interest in the Pool Balance
(Non-PO Portion) represented by the Class B Certificates. As a result of such
change in the relative interests of the Class A and Class B Certificates, the
yield to maturity of your Class B Certificates will grow more sensitive to the
rate of prepayments on the Mortgage Loans as the percentage of prepayments on
the Mortgage Loans allocated to the Class A Certificates (other than the Class
A-PO Certificates) decreases.
If you are purchasing higher-numbered Class B Certificates, the yield to
maturity on your Class B Certificates will generally be more sensitive to
losses due to liquidations of defaulted Mortgage Loans, and the timing of such
losses, than the yield to maturity of lower-numbered Class B Certificates
because the entire amount of such losses (other than the portion of Excess
Losses allocable to the Class A Certificates and Classes of Class B
Certificates with lower numerical designations) will be allocable to the
Classes of Class B Certificates in reverse order in which they are entitled to
distributions of principal.
Excess Losses May be Allocated to More Senior Classes of Certificates While
More Junior Classes are Outstanding
Even though more junior Classes of Certificates are still outstanding,
Excess Losses will be allocated in part to more senior Classes, including the
Class A Certificates. The principal portion of such losses will be allocated
(i) to the outstanding Classes of the Class A Certificates (other than the
Class A-PO Certificates) and Classes of Class B Certificates pro rata based on
their outstanding Principal Balances in proportion to the Non-PO Fraction of
such losses and (ii) in respect of Discount Mortgage Loans, to the Class A-PO
Certificates in proportion to the PO Fraction of such losses. The interest
portion of such losses will be allocated to the Classes of Class A and Class B
Certificates based on interest accrued.
Rights of Beneficial Owners May Be Limited By Book-Entry System for Certain
Classes of Class A Certificates
Transactions in the Book-Entry Certificates generally can be effected only
through DTC, DTC Participants and Indirect DTC Participants. If you are a
Beneficial Owner of Book-Entry Certificates, your ability to pledge your
Certificates and the liquidity of your Certificates in general may be limited
due to the fact that you will not
S-15
<PAGE>
have a physical certificate. In addition, you may experience delays in
receiving payments on your Certificates. See "Risk Factors--Book-Entry System
for Certain Classes of Certificates" and "Description of the Certificates--
Book-Entry Form" in the Prospectus.
Restrictions on Transfer May Decrease Liquidity
The Class A-R, Class A-LR and Class B Certificates are subject to certain
restrictions on transfer which may decrease your ability to transfer such
Certificates.
You may not sell or transfer your Class A-R or Class A-LR Certificate to (i)
a Disqualified Organization, (ii) except under certain limited circumstances,
a person who is not a U.S. Person, (iii) a Plan or a person acting on behalf
of or investing the assets of a Plan or (iv) any person or entity the
transferor knows or has reason to know will be unwilling or unable to pay when
due federal, state or local taxes with respect thereto.
You may not transfer your Class B Certificates unless your transferee has
delivered (i) a representation letter to the Trustee stating either (a) that
the transferee is not a Plan and is not acting on behalf of a Plan or using
the assets of a Plan to effect such purchase or (b) subject to certain
conditions described herein, that the source of funds used to purchase the
Class B Certificates is an insurance company general account or (ii) an
opinion of counsel and such other documentation as provided in this Prospectus
Supplement.
See "Description of the Certificates--Restrictions on Transfer of the Class
A-R, Class A-LR and Class B Certificates" for an expanded discussion of these
restrictions and their application.
Lowering of Rating on Certificates May Decrease Value and Liquidity
The rating of any Class of Offered Certificates assigned by the applicable
Rating Agency may be lowered following the initial issuance of the
Certificates as a result of losses on the Mortgage Loans substantially in
excess of the levels contemplated by such Rating Agency at the time of its
initial rating analysis. If you have purchased a Class of Certificates where
the rating is lowered, the market value and the liquidity of your Certificates
may decrease. Neither the Depositor, the Servicer nor any of their affiliates
will have any obligation to maintain the ratings of any Class of Certificates.
Geographic Concentration May Increase Risk of Loss Because of Adverse Economic
Conditions or Natural Disasters
The yield to maturity on your Certificates may be affected by the geographic
concentration of the Mortgaged Properties securing the 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 on mortgage loans
generally. Any concentration of the Mortgage Loans in such a region may
present risk considerations in addition to those generally present for similar
mortgage-backed securities without such concentration. In particular,
approximately %, % and % of the Mortgage Loans, by aggregate principal
balance as of the Cut-Off Date, are secured by Mortgaged Properties located in
, and , respectively. In addition, California,
Florida and several other regions have experienced natural disasters,
including earthquakes, fires, floods and hurricanes, which may adversely
affect property values. Any deterioration in housing prices in the states in
which there is a significant concentration of Mortgaged Properties, as a
result of adverse economic conditions, natural disaster or otherwise, as well
as the other states in which the Mortgaged Properties are located, and any
deterioration of economic conditions in such states which adversely affects
the ability of borrowers to make payments on the Mortgage Loans, may increase
the liklihood of losses on the Mortgage Loans. Such losses, if they occur, may
have an adverse effect on the yield to maturity of your Certificates. The
states and geographic areas where there are large concentrations of Mortgaged
Properties are identified under "Description of the Mortgage Loans."
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<PAGE>
Certificates May Not Be Appropriate For Individual Investors
If you are an individual investor who does not have sufficient resources or
expertise to evaluate the particular characteristics of the applicable Class
of Offered Certificates, the Offered Certificates may not be an appropriate
investment for you. This may be the case because, among other things:
. If you purchase your Certificates at a price other than par, your yield
to maturity will be sensitive to the uncertain rate and timing of prin-
cipal prepayments on the Mortgage Loans;
. The rate of principal distributions on, and the weighted average life
of, the Offered Certificates will be sensitive to the uncertain rate and
timing of principal prepayments on the Mortgage Loans and the priority
of principal distributions among the Classes of Certificates, and as
such the Offered Certificates may be inappropriate investments for you
if you require a distribution of a particular amount of principal on a
specific date or an otherwise predictable stream of distributions;
. There can be no assurance that you will be able to reinvest amounts dis-
tributed in respect of principal on your Certificates (which, in gener-
al, are expected to be greater during periods of relatively low interest
rates) at a rate at least as high as the applicable Pass-Through Rate;
. There can be no assurance that a secondary market for the Offered Cer-
tificates will develop or provide you with liquidity of investment; and
. You must report interest as well as original issue discount, if any, on
the accrual method of accounting, even if you are otherwise using the
cash method of accounting.
If you are an individual investor considering the purchase of an Offered
Certificate, you should also carefully consider the further risks and other
special considerations discussed above and under the headings "Summary
Information -- Effects of Prepayments on Investment Expectations" and
"Prepayment and Yield Considerations" herein and "Risk Factors--Yield is
Sensitive to Rate of Principal Prepayment" in the Prospectus.
Class A-R and Class A-LR Certificates May Have Adverse Tax Attributes
If you own the Class A-R or Class A-LR Certificate you will be required to
include the taxable income or loss of the Upper-Tier REMIC and Lower-Tier
REMIC, respectively, in determining your federal taxable income. It is
anticipated that all or a substantial portion of the taxable income of the
Upper-Tier REMIC and Lower-Tier REMIC includible by you as the owner of the
Class A-R or Class A-LR Certificate will be treated as "excess inclusion"
income subject to special limitations for federal income tax purposes. As a
result, the effective after-tax return of your Class A-R or Class A-LR
Certificate may be significantly lower than would be the case if such
Certificate were taxed as a debt instrument, or may be negative. Further,
significant restrictions apply to your transfer of the Class A-R or Class A-LR
Certificate. The Class A-R and Class A-LR Certificates will be considered
"noneconomic residual interests," and certain transfers you make may be
disregarded for federal income tax purposes. See "Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates" in the Prospectus.
----------------
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Offered Certificates.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
Denominations; Form of Certificates
Offered Certificates issued in fully registered, certificated form are
referred to herein as "Definitive Certificates." Distributions of principal
of, and interest on, the Definitive Certificates will be made by the Trustee
or other paying agent directly to holders of Definitive Certificates in
accordance with the procedures set forth in the Pooling and Servicing
Agreement. The Definitive Certificates will be transferable and exchangeable
at the offices of the Trustee or other certificate registrar. No service
charge will be imposed for any registration of transfer or exchange, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge imposed in connection therewith.
Offered Certificates, other than those initially issued as Definitive
Certificates, will be issued in book-entry form and are referred to herein as
"Book-Entry Certificates." Each Class of the Book-Entry Certificates initially
will be represented by one physical certificate registered in the name of Cede
& Co. ("Cede"), as nominee of The Depository Trust Company ("DTC"), which will
be the "holder" or "Certificateholder" of such Certificates, as such terms are
used herein. No person acquiring an interest in the Book-Entry Certificates (a
"Beneficial Owner") will be entitled to receive a Definitive Certificate
representing such person's interest in the Book-Entry Certificates, except as
set forth under "Description of the Certificates--Book-Entry Form" in the
Prospectus. Unless and until Definitive Certificates are issued under the
limited circumstances described therein, all references to actions taken by
Certificateholders or holders shall, in the case of the Book-Entry
Certificates, refer to actions taken by DTC upon instructions from its DTC
Participants (as defined under "Description of the Certificates--Book-Entry
Form" in the Prospectus), and all references herein to distributions, notices,
reports and statements to Certificateholders or holders shall, in the case of
the Book-Entry Certificates, refer to distributions, notices, reports and
statements to DTC or Cede, as the registered holder of the Book-Entry
Certificates, as the case may be, for distribution to Beneficial Owners in
accordance with DTC procedures. See "Description of the Certificates--Book-
Entry Form" in the Prospectus.
The following table sets forth the original certificate form, the minimum
denomination and the incremental denomination of the Offered Certificates. The
Offered Certificates are not intended to be and should not be directly or
indirectly held or beneficially owned in amounts lower than such minimum
denominations.
FORM AND DENOMINATIONS OF OFFERED CERTIFICATES
<TABLE>
<CAPTION>
Original Minimum Incremental
Class Certificate Form Denomination Denomination
----- ---------------- ------------ ------------
<S> <C> <C> <C>
Classes A-1, A-2, A-4, A-5, A-6,
A-7, A-8, A-9, A-10, A-11, A-13,
A-14, A-15, A-16 and A-19 ...... $ $
Class A-3........................ $ $
Class A-12....................... $ $
Class A-17....................... $ $
Class A-18....................... $ $
Class A-20....................... $ $
Classes A-R and A-LR............. $ N/A
Classes B-1, B-2 and B-3......... $ $
</TABLE>
Distributions
Distributions of interest and in reduction of principal balance to holders
of each Class of Certificates will be made monthly, to the extent of each
Class's entitlement thereto, on the 25th day of each month (or, if such day is
not a business day, the business day following the 25th day) (each, a
"Distribution Date"), beginning in [ ] 199[ ]. The "Determination Date"
with respect to each Distribution Date will be the 17th day of each month (or,
if such day is not a business day, the preceding business day). Distributions
will be made on
S-18
<PAGE>
each Distribution Date by the Trustee, or a paying agent on its behalf, to
holders of record (which, in the case of the Book-Entry Certificates, will be
Cede, as nominee for DTC) at the close of business on the last business day of
the preceding month (each, a "Record Date").
The aggregate amount available for distribution to Certificateholders on
each Distribution Date will be the Pool Distribution Amount. The "Pool
Distribution Amount" for a Distribution Date will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds in respect of principal, if
any), and interest on or in respect of the Mortgage Loans received by the
Trustee on or prior to the Remittance Date in the month in which such
Distribution Date occurs, plus (i) all Periodic Advances made and (ii) all
other amounts (including any insurance proceeds and Compensating Interest)
placed in the Certificate Account by the Servicer pursuant to the Pooling and
Servicing Agreement, but excluding the following:
(a) amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds with respect to a Mortgage Loan that
represents any unreimbursed Periodic Advances;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent the applicable Servicing Fee;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all principal prepayments in full, all partial principal prepayments,
all proceeds of any Mortgage Loans or property acquired in respect thereof,
or liquidated pursuant to the Pooling and Servicing Agreement, including
net Partial Liquidation Proceeds but excluding any Net Foreclosure Profits
(as defined under "Description of the Certificates" in the Prospectus), and
other unscheduled receipts in respect of principal of the Mortgage Loans
other than proceeds of a repurchase of a Mortgage Loan by the Depositor or
amounts deposited by the Depositor in the Certificate Account in connection
with the substitution of a Mortgage Loan (collectively, "Unscheduled
Principal Receipts") that were received by the Servicer after the
Unscheduled Principal Receipt Period relating to such Distribution Date,
and all related payments of interest on such amounts;
(f) all repurchase proceeds with respect to Mortgage Loans repurchased by
the Depositor on or following the Due Date in the month in which such
Distribution Date occurs and the excess of the unpaid principal balance of
any defective Mortgage Loan for which a Mortgage Loan was substituted over
the unpaid principal balance of such substituted Mortgage Loan on or
following the Due Date in the month in which such Distribution Date occurs;
(g) to the extent permitted by the Pooling and Servicing Agreement, that
portion of Liquidation Proceeds or insurance proceeds with respect to a
Mortgage Loan or proceeds of any REO Property which represents any unpaid
Servicing Fee to which the Servicer is entitled, and the portion of net
Liquidation Proceeds used to reimburse any unreimbursed Periodic Advances;
(h) all amounts representing certain expenses reimbursable to the
Servicer and other amounts permitted to be retained by the Servicer or the
Trustee or withdrawn or the Trustee from the Certificate Account pursuant
to the Pooling and Servicing Agreement;
(i) reinvestment earnings on payments received in respect of the Mortgage
Loans or on other amounts on deposit in the Certificate Account;
(j) Net Foreclosure Profits; and
(k) generally, the amount of any recoveries in respect of principal which
had previously been allocated as a loss to one or more Classes of
Certificates.
The "Remittance Date" with respect to any Distribution Date will be the
[24th] day of each month (or, if any such day is not a business day, the
preceding business day).
S-19
<PAGE>
"Partial Liquidation Proceeds" are Liquidation Proceeds received by the
Servicer on a Mortgage Loan prior to such Mortgage Loan becoming a Liquidated
Loan.
On each Distribution Date, the Pool Distribution Amount will be allocated
among the Classes of Certificates and distributed to the holders thereof of
record as of the related Record Date as follows (the "Pool Distribution Amount
Allocation"):
first, to the Classes of Class A Certificates, pro rata based on their
respective Interest Accrual Amounts, in an aggregate amount up to the sum
of their Interest Accrual Amounts with respect to such Distribution Date;
provided that prior to the applicable Accretion Termination Date, an amount
equal to the amount that would otherwise be distributable in respect of
interest to each Class of Accrual Certificates pursuant to this provision
will be distributed in reduction of the Principal Balances of certain
Classes of Class A Certificates as set forth below under "--Principal
(Including Prepayments)--Allocation of Amount to be Distributed on the
Class A Certificates";
second, to the Classes of Class A Certificates, pro rata based on their
respective unpaid Interest Shortfall Amounts, in an aggregate amount up to
the sum of their Interest Shortfall Amounts; provided that prior to the
applicable Accretion Termination Date, an amount equal to the amount that
would otherwise be distributable as interest shortfalls to each Class of
Accrual Certificates pursuant to this provision will be distributed in
reduction of the Principal Balances of certain Classes of Class A
Certificates as set forth below under "-- Principal (Including
Prepayments) -- Allocation of Amount to be Distributed on the Class A
Certificates";
third, concurrently, pro rata to the Class A Certificates (other than the
Class A-PO Certificates), based on the Class A Non-PO Optimal Principal
Amount, and the Class A-PO Certificates, based on the Class A-PO Optimal
Principal Amount, (A) to the Class A Certificates (other than the Class A-
PO Certificates) in an aggregate amount up to the Classes of Class A Non-PO
Optimal Principal Amount, such distribution to be allocated among such
Classes in accordance with the priorities set forth below under "--
Principal (Including Prepayments)--Allocation of Amount to be Distributed
on the Class A Certificates" and (B) to the Class A-PO Certificates in an
amount up to the Class A-PO Optimal Principal Amount;
fourth, to the Class A-PO Certificates in an amount up to the Class A-PO
Deferred Amount, but only from amounts otherwise distributable (without
regard to this priority) to the Class B Certificates, in inverse order of
priority pursuant to priority fifth clause (C) of this Pool Distribution
Amount Allocation; and
fifth, sequentially, to the Class B-1, Class B-2, Class B-3, Class B-4,
Class B-5 and Class B-6 Certificates so that each such Class shall receive
(A) first, an amount up to its Interest Accrual Amount with respect to such
Distribution Date, (B) then, an amount up to its previously unpaid Interest
Shortfall Amounts and (C) finally, an amount up to its Class B Optimal
Principal Amount before any Classes of Class B Certificates with higher
numerical designations receive any payments in respect of interest or
principal; provided, however, that the amount distributable pursuant to
this priority fifth clause (C) to any Classes of Class B Certificates will
be reduced by the amount, if any, otherwise distributable as principal
hereunder used to pay the Class A-PO Deferred Amount in accordance with
priority fourth.
The undivided percentage interest (the "Percentage Interest") represented by
any Offered Certificate of a Class in distributions to such Class will be
equal to the percentage obtained by dividing the initial principal balance of
such Certificate (or initial notional amount in the case of the Class A-3 and
Class A-18 Certificates) by the aggregate initial Principal Balance (or
initial notional amount) of such Class.
Interest
The amount of interest that will accrue on each Class of Certificates, other
than the Class A-12 and Class A-PO Certificates, during each month, after
taking into account any Non-Supported Interest Shortfalls and the interest
portion of certain losses allocated to such Class, is referred to herein as
the "Interest Accrual Amount" for such Class.
S-20
<PAGE>
The Interest Accrual Amount for each Class of Certificates, other than the
Class A-12 and Class A-PO Certificates, will equal (a) the product of (i)
1/12th of the Pass-Through Rate for such Class and (ii) the outstanding
Principal Balance of such Class or, in the case of the Class A-3 and Class A-
18 Certificates, the outstanding Class A-3 Notional Amount or Class A-18
Notional Amount, as applicable, minus (b) the sum of (i) any Non-Supported
Interest Shortfall allocable to such Class, (ii) the interest portion of any
Excess Losses allocable to such Class and (iii) the interest portion of any
Realized Losses, other than the interest portion of any Excess Losses,
allocable to such Class on or after the Cross-Over Date. The pass-through rate
for each Class of Offered Certificates (other than the Class A-12
Certificates) (the "Pass-Through Rate"), is the percentage set forth on page
S-4 of this Prospectus Supplement.
The Class A-3 Certificates are interest-only certificates and have no
Principal Balance. The "Class A-3 Notional Amount" with respect to each
Distribution Date will be equal to approximately % of the Principal
Balance of the Class A-1 Certificates. Accordingly, any distributions in
respect of principal made to, or losses in respect of principal allocated in
reduction of, the Principal Balance of the Class A-1 Certificates will result
in a proportional reduction in the Class A-3 Notional Amount. See "--
Principal (Including Prepayments)" and "-- Subordination of Class B
Certificates -- Allocation of Losses" herein. The Class A-3 Notional Amount
with respect to the first Distribution Date will be approximately $ .
The Class A-18 Certificates are interest-only certificates and have no
Principal Balance. The "Class A-18 Notional Amount" with respect to each
Distribution Date will be equal to the Principal Balance of the Class A-17
Certificates. Accordingly, any distributions in respect of principal made to,
or losses in respect of principal allocated in reduction of, the Principal
Balance of the Class A-17 Certificates will result in a like reduction in the
Class A-18 Notional Amount. See "-- Principal (Including Prepayments)" and "--
Subordination of Class B Certificates -- Allocation of Losses" herein. The
Class A-18 Notional Amount with respect to the first Distribution Date will be
approximately $ .
No interest will accrue on the Class A-12 and Class A-PO Certificates.
The "Principal Balance" of a Class of Class A Certificates (other than the
Class A-3, Class A-18 and Class A-PO Certificates) as of any Determination
Date will be the principal balance of such Class on the date of initial
issuance of the Class A Certificates plus, in the case of the Accrual
Certificates, the applicable Accrual Distribution Amounts, as described under
"--Principal (Including Prepayments)" below, previously added to the Principal
Balance of the corresponding Class of Accrual Certificates, less (i) all
amounts previously distributed to holders of Certificates of such Class in
reduction of the principal balance of such Class and (ii) such Class's pro
rata share of the principal portion of Excess Losses allocated through such
Determination Date to the holders of Class A Certificates (other than the
Class A-PO Certificates) in the manner described herein under "--Subordination
of Class B Certificates--Allocation of Losses." After the Cross-Over Date, the
Principal Balance of a Class of Class A Certificates (other than the Class A-
3, Class A-18 and Class A-PO Certificates) may be subject to further reduction
in an amount equal to such Class's pro rata share of the difference, if any,
between (a) the Class A Non-PO Principal Balance as of such Determination Date
without regard to this provision and (b) the difference between (i) the
Adjusted Pool Amount for the preceding Distribution Date and (ii) the Adjusted
Pool Amount (PO Portion) for the preceding Distribution Date. Any pro rata
allocation among the Classes of Class A Certificates described in this
paragraph will be made among the Classes of Class A Certificates (other than
the Class A-PO Certificates) on the basis of their then-outstanding Principal
Balances or, in the case of a Class of Accrual Certificates, their initial
Principal Balance, if lower.
The Class A-3 and Class A-18 Certificates will be interest-only Certificates
and will not have a Principal Balance.
The "Principal Balance" of the Class A-PO Certificates as of any
Determination Date will be the principal balance of such Class on the date of
initial issuance of the Class A Certificates less (i) all amounts previously
distributed to the holders of the Class A-PO Certificates pursuant to
priorities third clause (B) and fourth of the Pool Distribution Amount
Allocation and (ii) the principal portion of Excess Losses allocated through
such Determination Date to the Class A-PO Certificates in the manner described
herein under "--Subordination of
S-21
<PAGE>
Class B Certificates--Allocation of Losses." After the Cross-Over Date, the
Principal Balance of the Class A-PO Certificates will be subject to further
reduction in an amount equal to the excess, if any, of (a) the Principal
Balance of the Class A-PO Certificates as of such Determination Date without
regard to this provision over (b) the Adjusted Pool Amount (PO Portion) for
the preceding Distribution Date.
The "Principal Balance" of a Class of Class B Certificates as of any
Determination Date will be the lesser of (a) the principal balance of such
Class on the date of initial issuance of the Class B Certificates less (i) all
amounts previously distributed to holders of such Class in reduction of the
principal balance thereof and (ii) the principal portion of Excess Losses
allocated through such Determination Date to the holders of such Class in the
manner described under "--Subordination of Class B Certificates--Allocation of
Losses" and (b) the Adjusted Pool Amount as of the preceding Distribution Date
less the sum of (i) the Class A Principal Balance and (ii) the Principal
Balances of the Classes of Class B Certificates with lower numerical
designations, each as of such Determination Date.
The "Class A Principal Balance" as of any Determination Date will be equal
to the sum of the Principal Balances of the Classes of Class A Certificates as
of such date.
The "Class A Non-PO Principal Balance" as of any Determination Date will be
equal to the sum of the Principal Balances of the Classes of Class A
Certificates (other than the Class A-PO Certificates) as of such date.
The "Class B Principal Balance" as of any date will be equal to the sum of
the Principal Balances of the Classes of Class B Certificates as of such date.
The "Aggregate Principal Balance" as of any date will be equal to the sum of
the Class A Principal Balance and the Class B Principal Balance as of such
date.
The "Aggregate Non-PO Principal Balance" as of any date will be equal to the
sum of the Class A Non-PO Principal Balance and the Class B Principal Balance
as of such date.
With respect to any Distribution Date, the "Adjusted Pool Amount" will equal
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans minus the
sum of (i) all amounts in respect of principal received in respect of the
Mortgage Loans (including amounts received as Periodic Advances, principal
prepayments and Liquidation Proceeds in respect of principal) and distributed
to holders of the Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of all Realized Losses
(other than Debt Service Reductions) incurred on the Mortgage Loans from the
Cut-Off Date through the end of the month preceding such Distribution Date.
With respect to any Distribution Date, the "Adjusted Pool Amount (PO
Portion)" will equal the sum as to each Mortgage Loan outstanding at the Cut-
Off Date of the product of (A) the PO Fraction for such Mortgage Loan and (B)
the principal balance of such Mortgage Loan as of the Cut-Off Date less the
sum of (i) all amounts in respect of principal received in respect of such
Mortgage Loan (including amounts received as Periodic Advances, principal
prepayments and Liquidation Proceeds in respect of principal) and distributed
to holders of the Certificates on such Distribution Date and all prior
Distribution Dates and (ii) the principal portion of any Realized Loss (other
than a Debt Service Reduction) incurred on such Mortgage Loan from the Cut-Off
Date through the end of the month preceding the month in which such
Distribution Date occurs.
The "Net Mortgage Interest Rate" on each Mortgage Loan will be equal to the
Mortgage Interest Rate on such Mortgage Loan as stated in the related mortgage
note minus the applicable Servicing Fee Rate for such Mortgage Loan. See
"Pooling and Servicing Agreement--Servicing Compensation and Payment of
Expenses" herein.
When mortgagors prepay principal, or when principal is recovered through
foreclosure sales or other liquidations of defaulted Mortgage Loans, or when
other Unscheduled Principal Receipts occur, a full month's interest for the
month of payment or recovery may not be paid or recovered, resulting in
interest shortfalls to the
S-22
<PAGE>
extent that such payment or recovery is not included in the distribution to
Certificateholders made in the month in which it is received. Interest
shortfalls resulting from full or partial principal prepayments made by
mortgagors ("Mortgagor Prepayments") are referred to herein as "Prepayment
Interest Shortfalls." The Servicer will be obligated, on or before each
Distribution Date, to pay to the Trustee for the benefit of
Certificateholders, from the Servicer's own funds (including amounts otherwise
payable to the Servicer in respect of such Distribution Date as Servicing
Fees) an amount (such amount, "Compensating Interest") equal to the lesser of
(i) the aggregate Prepayment Interest Shortfall with respect to such
Distribution Date and (ii) 1/12th of 0.25% of the aggregate Scheduled
Principal Balance of the Mortgage Loans.
As to any Distribution Date, Prepayment Interest Shortfalls to the extent
that they exceed Compensating Interest for such Distribution Date are referred
to herein as "Non-Supported Interest Shortfalls" and will be allocated to (i)
the Class A Certificates according to the percentage obtained by dividing the
then-outstanding Class A Non-PO Principal Balance by the Aggregate Non-PO
Principal Balance and (ii) the Class B Certificates according to the
percentage obtained by dividing the then-outstanding Class B Principal Balance
by the Aggregate Non-PO Principal Balance. Such allocation of the Non-
Supported Interest Shortfall will reduce the amount of interest due to be
distributed to holders of Certificates then entitled to distributions in
respect of interest. Any such reduction in respect of interest allocated to
the Class A Certificates will be allocated among the Class A Certificates, pro
rata, on the basis of their respective Interest Accrual Amounts, without
regard to any reduction pursuant to this paragraph, for such Distribution
Date. Any such reduction in respect of interest allocated to the Class B
Certificates will be allocated among such Classes of Class B Certificates, pro
rata, on the basis of their respective Interest Accrual Amounts, without
regard to any reduction pursuant to this paragraph, for such Distribution
Date.
Any interest shortfalls arising from Unscheduled Principal Receipts that are
not Mortgagor Prepayments will not be offset by Compensating Interest, but
instead will be borne first by the Classes of Class B Certificates in reverse
numerical order and then pro rata by the Class A Certificates based on
interest accrued. See "--Subordination of Class B Certificates" herein. After
the Cross-Over Date all interest shortfalls arising from Unscheduled Principal
Receipts, other than Prepayment Interest Shortfalls covered by Compensating
Interest, will be treated as Non-Supported Interest Shortfalls and allocated
in reduction of interest accrued on the Class A Certificates.
The interest portion of any Excess Losses will be allocated among the
Classes of Certificates pro rata based on their respective Interest Accrual
Amounts, without regard to any reduction pursuant to this paragraph, for such
Distribution Date.
Allocations of the interest portion of Realized Losses (other than Excess
Losses) first to the Classes of Class B Certificates in reverse numerical
order will result from the priority of distribution first to the holders of
the Class A Certificates and then to the holders of the Classes of Class B
Certificates in numerical order of the Pool Distribution Amount as described
above under "--Distributions."
On each Distribution Date on which the amount available to be distributed in
respect of interest on a Class of Certificates pursuant to the Pool
Distribution Amount Allocation is less than such Class's Interest Accrual
Amount, the amount of any such deficiency (as to each Class, an "Interest
Shortfall Amount" ) will be added to the amount of interest distributable on
such Class on subsequent Distribution Dates, but only for so long as such
Class's Principal Balance is greater than zero. No interest will accrue on any
Interest Shortfall Amounts.
Prior to the applicable Accretion Termination Date, interest in an amount
equal to the Interest Accrual Amount for a Class of Accrual Certificates will
accrue on such Class, but such amount will not be distributed as interest to
such Class until such Accretion Termination Date. Prior to such time, an
amount equal to the accrued and unpaid interest on such Class will be added to
the Principal Balance thereof and distributed as described under "-- Principal
(Including Prepayments) -- Allocation of Amount to be Distributed on the Class
A Certificates" below. The "Accretion Termination Date" (A) for the Class A-6
Certificates will be the earlier to occur of (i) the Distribution Date
following the Distribution Date on which the Principal Balances of the
S-23
<PAGE>
Class A-4 and Class A-5 Certificates have been reduced to zero or (ii) the
Cross-Over Date; (B) for the Class A-7 Certificates will be the earlier to
occur of (i) the Distribution Date following the Distribution Date on which
the Principal Balances of the Class A-4, Class A-5 and Class A-6 Certificates
have been reduced to zero or (ii) the Cross-Over Date, (C) for the Class A-9
Certificates will be the earlier to occur of (i) the Distribution Date
following the Distribution Date on which Principal Balance of the Class A-8
Certificates has been reduced to zero or (ii) the Cross-Over Date, (D) for the
Class A-10 Certificates will be the earlier to occur of (i) the Distribution
Date following the Distribution Date on which the Principal Balances of the
Class A-8 and Class A-9 Certificates have been reduced to zero or (ii) the
Cross-Over Date; (E) for the Class A-11 Certificates will be the earlier to
occur of (i) the Distribution Date following the Distribution Date on which
the Principal Balances of the Class A-8 and Class A-10 Certificates have been
reduced to zero or (ii) the Cross-Over Date and (F) for the Class A-16
Certificates will be the earlier to occur of (i) the Distribution Date
following the Distribution Date on which Principal Balances of the Class A-13,
Class A-14 and Class A-15 Certificates have been reduced to zero or (ii) the
Cross-Over Date.
Principal (Including Prepayments)
The principal balance of a Certificate at any time is equal to the product
of the related Class's Principal Balance and such Certificate's Percentage
Interest, and represents the maximum specified dollar amount (exclusive of (i)
any interest that may accrue on such Certificate (other than interest added to
the Principal Balances of the Accrual Certificates) and (ii) in the case of
the Class A-R and Class A-LR Certificates, any additional amounts to which the
holders of such Certificates may be entitled as described below under "--
Additional Rights of the Class A-R and Class A-LR Certificateholders") to
which the holder thereof is entitled from the cash flow on the Mortgage Loans
at such time, and will decline to the extent of distributions in reduction of
the principal balance of, and allocations of losses to, such Certificate. The
approximate initial Principal Balance of each Class of Offered Certificates
(other than the Class A-3 and Class A-18 Certificates) is set forth on page S-
4 of this Prospectus Supplement. The Class A-3 and Class A-18 Certificates
will have no Principal Balance. The initial Principal Balance of the Class A-
PO Certificates will be approximately $[ ].
Calculation of Amount to be Distributed on the Certificates
Distributions in reduction of the principal balance of the Class A
Certificates (other than the Class A-PO Certificates) will be made on each
Distribution Date pursuant to the Pool Distribution Amount Allocation, in an
aggregate amount equal to the Class A Non-PO Principal Distribution Amount.
The "Class A Non-PO Principal Distribution Amount" with respect to any
Distribution Date will be equal to the sum of (i) the sum of the Accrual
Distribution Amounts, if any, with respect to such Distribution Date and (ii)
the Class A Non-PO Principal Amount with respect to such Distribution Date.
The "Accrual Distribution Amount" with respect to any Distribution Date and
any Class of Accrual Certificates will be equal to the sum of (i) the portion,
if any, of current interest allocated but not distributed with respect to the
such Class of Accrual Certificates on such Distribution Date in accordance
with priority first of the Pool Distribution Amount Allocation and (ii) the
portion, if any, of the unpaid Interest Shortfall Amounts allocated but not
distributed with respect to such Class of Accrual Certificates on such
Distribution Date in accordance with priority second of the Pool Distribution
Amount Allocation.
The "Class A Non-PO Principal Amount" with respect to any Distribution Date
will be equal to the amount distributed pursuant to priority third clause (A)
of the Pool Distribution Amount Allocation, in an aggregate amount up to the
Class A Non-PO Optimal Principal Amount.
Distributions in reduction of the Principal Balance of the Class A-PO
Certificates will be made on each Distribution Date in an aggregate amount
equal to the Class A-PO Distribution Amount. The "Class A-PO Distribution
Amount" with respect to any Distribution Date will be equal to the sum of (i)
the amount distributed pursuant to priority third clause (B) of the Pool
Distribution Amount Allocation, in an aggregate amount up to the Class A-PO
Optimal Principal Amount and (ii) the amount distributed pursuant to priority
S-24
<PAGE>
fourth of the Pool Distribution Amount Allocation, in an aggregate amount up
to the Class A-PO Deferred Amount.
Distributions in reduction of the principal balances of the Class B-1, Class
B-2 and Class B-3 Certificates will be made on each Distribution Date first to
the Class B-1 Certificates, second to the Class B-2 Certificates and then to
the Class B-3 Certificates, pursuant to priority fifth clause (C) of the Pool
Distribution Amount Allocation, in an aggregate amount with respect to each
such Class (the "Class B-1 Principal Distribution Amount," "Class B-2
Principal Distribution Amount" and "Class B-3 Principal Distribution Amount,"
respectively) up to the Class B Optimal Principal Amount for such Class.
The "Class A Non-PO Optimal Principal Amount," the "Class B Optimal
Principal Amount" for each Class of Class B Certificates and the "Class A-PO
Optimal Principal Amount" with respect to each Distribution Date will be an
amount equal to the sum for each outstanding Mortgage Loan (including each
defaulted Mortgage Loan, other than a Liquidated Loan, with respect to which
the related Mortgaged Property has been acquired by the Trust Estate) of the
product of:
(A) (i) in the case of the Class A Non-PO Optimal Principal Amount and
the Class B Optimal Principal Amount, the Non-PO Fraction for such Mortgage
Loan and (ii) in the case of the Class A-PO Optimal Principal Amount, the
PO Fraction for such Mortgage Loan; and
(B) the sum of:
(i) the applicable Class Percentage of (x) the scheduled payment of
principal due on such Mortgage Loan on the first day of the month in
which the Distribution Date occurs, less (y) if the Bankruptcy Loss
Amount is zero, the principal portion of Debt Service Reductions with
respect to such Mortgage Loan;
(ii) the applicable Class Prepayment Percentage of all Unscheduled
Principal Receipts that were received by the Servicer with respect to
such Mortgage Loan during the Unscheduled Principal Receipt Period
relating to such Distribution Date;
(iii) the applicable Class Prepayment Percentage of the Scheduled
Principal Balance of such Mortgage Loan which, during the month
preceding the month of such Distribution Date was repurchased by the
Depositor, as described under the heading "Description of the Mortgage
Loans-- Mandatory Repurchase or Substitution of Mortgage Loans" herein;
and
(iv) the applicable Class Percentage of the excess of the unpaid
principal balance of any defective Mortgage Loan for which a Mortgage
Loan was substituted during the month preceding the month in which such
Distribution Date occurs over the unpaid principal balance of such
substituted Mortgage Loan, less the amount allocable to the principal
portion of any unreimbursed advances in respect of such defective
Mortgage Loan. See "The Pooling and Servicing Agreement--Assignment of
the Mortgage Loans to the Trustee" in the Prospectus.
The "Class Percentage" will equal (i) the Class A Percentage, in the case of
the calculation of the Class A Non-PO Optimal Principal Amount; (ii) the
applicable Class B Percentage, in the case of the calculation of the Class B
Optimal Principal Amount for a Class of Class B Certificates; and (iii) 100%
in the case of the calculation of the Class A-PO Optimal Principal Amount.
The "Class Prepayment Percentage" will equal (i) the Class A Prepayment
Percentage, in the case of the calculation of the Class A Non-PO Optimal
Principal Amount; (ii) the applicable Class B Prepayment Percentage, in the
case of the calculation of the Class B Optimal Principal Amount for a Class of
Class B Certificates; and (iii) 100% in the case of the calculation of the
Class A-PO Optimal Principal Amount.
The "Class A-PO Deferred Amount" for any Distribution Date prior to the
Cross-Over Date will equal the difference between (A) the sum of (i) the
amount by which the Class A-PO Optimal Principal Amount for all prior
Distribution Dates exceeds the amounts distributed to the Class A-PO
Certificates on such prior Distribution Dates pursuant to priority third,
clause (B) of the Pool Distribution Amount Allocation, but only to the extent
S-25
<PAGE>
such shortfall is not attributable to Realized Losses allocated to the Class
A-PO Certificates as described in "--Subordination of Class B Certificates--
Allocation of Losses" below and (ii) the sum of the product for each Discount
Mortgage Loan which became a Liquidated Loan at any time on or prior to the
last day of the Unscheduled Principal Receipt Period for the current
Distribution Date of (a) the PO Fraction for such Discount Mortgage Loan and
(b) an amount equal to the principal portion of Realized Losses (other than
Bankruptcy Losses due to Debt Service Reductions) incurred with respect to
such Discount Mortgage Loan other than Excess Losses and (B) amounts
distributed on the Class A-PO Certificates on prior Distribution Dates
pursuant to priority fourth of the Pool Distribution Amount Allocation. On or
after the Cross-Over Date, the Class A-PO Deferred Amount will be zero. No
interest will accrue on any Class A-PO Deferred Amount.
The principal distribution to the holders of a Class of Class B Certificates
will be reduced on any Distribution Date on which (i) the Principal Balance of
such Class of Class B Certificates on the following Determination Date would
be reduced to zero as a result of principal distributions or allocation of
losses and (ii) the Principal Balance of any Class A Certificates or any Class
of Class B Certificates with a lower numerical designation, would be subject
to reduction on such Determination Date as a result of allocation of Realized
Losses (other than Excess Losses). The amount of any such reduction in the
principal distributed to the holders of such Class of Class B Certificates
will instead be distributed pro rata to the holders of any Class (other than
the Class A-PO Certificates) senior in priority which is entitled to receive
distributions in accordance with the Pool Distribution Amount Allocation.
Generally, in the event that there is any recovery of an amount in respect
of principal which had previously been allocated as a Realized Loss to any
Class of Certificates, such Class will be entitled to its pro rata share of
such recovery in an amount up to the amount by which the Principal Balance of
such Class was reduced as a result of such Realized Loss. However, no Class of
Certificates will be entitled to receive any amounts recovered on a Mortgage
Loan after the date on which the principal balance of such Class is reduced to
zero, whether as a result of principal distributions or the allocation of
Realized Losses.
The "Unscheduled Principal Receipt Period" for any Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs.
The "Scheduled Principal Balance" of a Mortgage Loan as of any Distribution
Date is the unpaid principal balance of such Mortgage Loan as specified in the
amortization schedule at the time relating thereto (before any adjustment to
such schedule by reason of bankruptcy (other than Deficient Valuations),
moratorium or similar waiver or grace period) as of the Due Date occurring in
the month preceding the month in which such Distribution Date occurs, after
giving effect to any Deficient Valuations occurring prior to such Due Date, to
the payment of principal due on such Due Date irrespective of any delinquency
in payment by the mortgagor and to any Unscheduled Principal Receipts received
or applied prior to such Due Date.
A "Realized Loss" is any Liquidated Loan Loss (including any Special Hazard
Loss and any Fraud Loss) or any Bankruptcy Loss. A "Liquidated Loan" is a
defaulted Mortgage Loan as to which the Servicer has determined that all
recoverable liquidation and insurance proceeds have been received. A
"Liquidated Loan Loss" on a Liquidated Loan is equal to the excess, if any, of
(i) the unpaid principal balance of such Liquidated Loan, plus accrued
interest thereon in accordance with the amortization schedule at the Net
Mortgage Interest Rate through the last day of the month in which such
Mortgage Loan was liquidated, over (ii) net Liquidation Proceeds. For purposes
of calculating the amount of any Liquidated Loan Loss, all net Liquidation
Proceeds (after reimbursement of any previously unreimbursed Periodic Advance)
will be applied first to accrued interest and then to the unpaid principal
balance of the Liquidated Loan. A "Special Hazard Loss" is (A) a Liquidated
Loan Loss suffered by a Mortgaged Property on account of direct physical loss
exclusive of (i) any loss covered by a standard hazard insurance policy or, if
the Mortgaged Property is located in an area identified in the Federal
Register by the Federal Emergency Management Agency as having special flood
hazards, a flood insurance policy, of the types described in the Prospectus
under "Servicing of the Mortgage Loans--Insurance Policies" and (ii) any loss
caused by or resulting from (a) normal wear and tear, (b) dishonest acts of
the Trustee or the Servicer or (c) errors in design, faulty workmanship or
faulty materials, unless the collapse of the property or a
S-26
<PAGE>
part thereof ensues or (B) a Liquidated Loan Loss arising from or relating to
the presence or suspected presence of hazardous wastes or substances on a
Mortgaged Property. A "Fraud Loss" is a Liquidated Loan Loss incurred on a
Liquidated Loan as to which there was fraud in the origination of such
Mortgage Loan. A "Bankruptcy Loss" is a Debt Service Reduction or a Deficient
Valuation. A "Debt Service Reduction" means a reduction in the amount of
monthly payments due to certain bankruptcy proceedings, but does not include
any permanent forgiveness of principal. A "Deficient Valuation" with respect
to a Mortgage Loan means a valuation by a court of the Mortgaged Property in
an amount less than the outstanding indebtedness under the Mortgage Loan or
any reduction in the amount of monthly payments that results in a permanent
forgiveness of principal, which valuation or reduction results from a
bankruptcy proceeding.
The "Non-PO Fraction" with respect to any Mortgage Loan will equal the Net
Mortgage Interest Rate for such Mortgage Loan divided by [ ]%, but will not
be greater than 1.0.
The "Pool Balance (Non-PO Portion)" is the sum for each outstanding Mortgage
Loan of the product of (i) the Non-PO Fraction for such Mortgage Loan and (ii)
the Scheduled Principal Balance of such Mortgage Loan as of such Distribution
Date.
The "PO Fraction" with respect to any Mortgage Loan with a Net Mortgage
Interest Rate less than [ ]% (a "Discount Mortgage Loan") will equal the
difference between 1.0 and the Non-PO Fraction for such Mortgage Loan. The PO
Fraction with respect to each Mortgage Loan that is not a Discount Mortgage
Loan (a "Premium Mortgage Loan") will be zero.
The "Pool Balance (PO Portion)" is the sum for each Discount Mortgage Loan
of the product of the Scheduled Principal Balance of such Discount Mortgage
Loan and the PO Fraction for such Discount Mortgage Loan.
The "Class A Percentage" for any Distribution Date occurring on or prior to
the Cross-Over Date is the percentage (subject to rounding), which in no event
will exceed 100%, obtained by dividing the Class A Non-PO Principal Balance as
of such date (before taking into account distributions in reduction of
principal balance on such date) by the Pool Balance (Non-PO Portion). The
Class A Percentage for the first Distribution Date will be approximately
[ ]%. The Class A Percentage for each Distribution Date occurring after the
Cross-Over Date will be 100%.
The "Class A Prepayment Percentage" for any Distribution Date will be the
percentage indicated below:
<TABLE>
<CAPTION>
Distribution Date Occurring In Class A Prepayment Percentage
------------------------------ -----------------------------
<S> <C>
through ........................... 100%;
through ........................... the Class A Percentage, plus 70%
of the Subordinated Percentage;
through ........................... the Class A Percentage, plus 60%
of the Subordinated Percentage;
through ........................... the Class A Percentage, plus 40%
of the Subordinated Percentage;
through ........................... the Class A Percentage, plus 20%
of the Subordinated Percentage;
and
and thereafter .................... the Class A Percentage;
</TABLE>
provided, however, that if on any of the foregoing Distribution Dates the
Class A Percentage exceeds the initial Class A Percentage, the Class A
Prepayment Percentage for such Distribution Date will once again equal 100%.
See "Prepayment and Yield Considerations" herein and in the Prospectus.
Notwithstanding the foregoing, no reduction of the Class A Prepayment
Percentage will occur on any Distribution Date if (i) as of such Distribution
Date as to which any such reduction applies, the average outstanding principal
balance on such Distribution Date and for the preceding five Distribution
Dates on the Mortgage Loans that were delinquent 60 days or more
S-27
<PAGE>
(including for this purpose any Mortgage Loans in foreclosure and Mortgage
Loans with respect to which the related Mortgaged Property has been acquired
by the Trust Estate) is greater than or equal to 50% of the sum of the then-
outstanding Class B Principal Balance, or (ii) for any Distribution Date,
cumulative Realized Losses with respect to the Mortgage Loans exceed the
percentages of the principal balance of the Subordinated Certificates as of
the Cut-Off Date (the "Original Subordinated Principal Balance") indicated
below:
<TABLE>
<CAPTION>
Percentage of Original
Distribution Date Occurring In Subordinated Principal Balance
------------------------------ ------------------------------
<S> <C>
through ............................. 30%
through ............................. 35%
through ............................. 40%
through ............................. 45%
and thereafter ...................... 50%
</TABLE>
This disproportionate allocation of certain unscheduled payments in respect
of principal will have the effect of accelerating the amortization of the
Class A Certificates (other than the Class A-PO Certificates) while, in the
absence of Realized Losses, increasing the interest in the principal balance
of the Mortgage Loans evidenced by the Class B Certificates. Increasing the
respective interest of the Class B Certificates relative to that of the Class
A Certificates (other than the Class A-PO Certificates) is intended to
preserve the availability of the subordination provided by the Class B
Certificates. See "--Subordination of Class B Certificates" below. The
"Subordinated Percentage" for any Distribution Date will be calculated as the
difference between 100% and the Class A Percentage for such date. The
"Subordinated Prepayment Percentage" for any Distribution Date will be
calculated as the difference between 100% and the Class A Prepayment
Percentage for such date.
The "Class B Percentage" and "Class B Prepayment Percentage" for a Class of
Class B Certificates will equal the portion of the Subordinated Percentage and
Subordinated Prepayment Percentage, as the case may be, represented by the
fraction, the numerator of which is the then-outstanding Principal Balance for
such Class of Class B Certificates and the denominator of which is the sum of
the Principal Balances of the Classes of Class B Certificates entitled to
principal distributions for such Distribution Date as described below. In the
event that a Class of Class B Certificates is not entitled to principal
distributions for such Distribution Date, the Class B Percentage and Class B
Prepayment Percentage for such Class will both be 0% with respect to such
Distribution Date.
In the event that on any Distribution Date the Current Fractional Interest
of any Class of Class B Certificates is less than the Original Fractional
Interest of such Class, then the Classes of Certificates that are subordinate
to such Class will not be entitled to distributions in respect of principal
and the Principal Balances of such subordinated Classes will not be used to
determine the Class B Percentage and Class B Prepayment Percentage of the
Classes of Class B Certificates that are senior to such subordinated Classes
for such Distribution Date. The Class B-6 Certificates will not have original
or current fractional interests which are required to be maintained as
described above.
The "Original Fractional Interest" of a Class of Class B Certificates is the
percentage obtained by dividing the sum of the initial Principal Balances of
the Classes of Certificates that are subordinate to such Class by the initial
Aggregate Non-PO Principal Balance. The "Current Fractional Interest" of a
Class of Class B Certificates for any Distribution Date is the percentage
obtained by dividing the sum of the then-outstanding Principal Balances of the
Classes of Certificates that are subordinate to such Class by the then-
outstanding Aggregate Non-PO Principal Balance.
S-28
<PAGE>
The following table sets forth the expected approximate Original Fractional
Interest for each Class of Class B Certificates on the date of issuance of the
Certificates.
<TABLE>
<CAPTION>
Approximate
Original
Fractional
Class Interest
----- -----------
<S> <C>
B-1.............................................................. %
B-2.............................................................. %
B-3.............................................................. %
B-4.............................................................. %
B-5.............................................................. %
B-6.............................................................. N/A
</TABLE>
Allocation of Amount to be Distributed on the Class A Certificates
The Class A-3 and Class A-18 Certificates are interest-only Certificates and
are not entitled to distributions in respect of principal.
On each Distribution Date occurring prior to the Cross-Over Date, the Class
A Non-PO Principal Distribution Amount will be allocated among and distributed
in reduction of the Principal Balances of the Class A Certificates (other than
the Class A-PO Certificates) in accordance with the following priorities.
[Insert Payment Priorities]
The "PAC Principal Amount" for any Distribution Date and for any Class of
PAC Certificates means the amount, if any, that would reduce the Principal
Balance of such Class to the percentage of its initial Principal Balance shown
in the tables set forth below with respect to such Distribution Date.
Notwithstanding the foregoing, on each Distribution Date occurring on or
after the Cross-Over Date, the Class A Non-PO Principal Distribution Amount
will be distributed among the Classes of Class A Certificates (other than the
Class A-PO Certificates) pro rata in accordance with their respective
outstanding Principal Balances without regard to the priorities set forth
above.
Any amounts distributed on a Distribution Date to the holders of any Class
in reduction of Principal Balance will be allocated among the holders of such
Class pro rata in accordance with their respective Percentage Interests.
The following tables set forth for each Distribution Date the planned
Principal Balances for the PAC Certificates, expressed as a percentage of the
initial Principal Balance of such Class.
S-29
<PAGE>
Planned Principal Balances as Percentage
of the Initial Principal Balance
Class A-1 Certificates
<TABLE>
<CAPTION>
Percentage of
Initial
Distribution Date Principal Balance
- ----------------- -----------------
<S> <C>
</TABLE>
Class A-2 Certificates
<TABLE>
<CAPTION>
Percentage of
Initial
Distribution Date Principal Balance
- ----------------- -----------------
<S> <C>
</TABLE>
S-30
<PAGE>
Principal Payment Characteristics of the PAC Certificates and the Companion
Certificates
The percentages of the initial Principal Balances of the PAC Certificates
set forth in the preceding tables were calculated using the Structuring
Assumptions. Based on such assumptions, the Principal Balance of each Class of
PAC Certificates would be reduced to the percentage of its initial Principal
Balance indicated in the preceding table for each Distribution Date if
prepayments on the Mortgage Loans occur at any constant rate between
approximately % SPA (as defined herein under "Prepayment and Yield
Considerations") and approximately % SPA. However, it is highly unlikely
that principal prepayments on the Mortgage Loans will occur at any constant
rate or that the Mortgage Loans will prepay at the same rate. In addition,
even if principal prepayments were to occur at a constant rate, there may be
differences between the characteristics of the mortgage loans ultimately
included in the Trust Estate and the Mortgage Loans which are expected to be
included as described herein. Therefore, there can be no assurance that the
Principal Balances of the PAC Certificates, after the application of the
distributions to be made on any Distribution Date, will be equal to the
applicable percentage of the initial Principal Balances for such Distribution
Date specified in the tables above.
The weighted average lives of the Classes of PAC Certificates will vary
under different prepayment scenarios. To the extent that principal prepayments
occur at a constant rate that is slower than approximately % SPA, the Class A
Non-PO Principal Amount on each Distribution Date may be insufficient to make
distributions in reduction of the Principal Balances of the PAC Certificates
in amounts that would reduce their Principal Balances to their planned
Principal Balances for such Distribution Date. The weighted average lives of
the Classes of PAC Certificates may therefore be extended, as illustrated for
the PAC Certificates by the tables on page S- . To the extent that such
principal prepayments occur at a constant rate that is faster than
approximately % SPA, the weighted average lives of the PAC Certificates may
be shortened as illustrated for the PAC Certificates by the tables on
page S- .
Because any Excess Principal Payments (as defined below) for any
Distribution Date will be distributed to Certificateholders on such
Distribution Date, the ability to distribute the PAC Principal Amounts on any
Distribution Date will not be enhanced by the averaging of high and low
principal prepayment rates on the Mortgage Loans over several Distribution
Dates, as might be the case if any such Excess Principal Payments were held
for future applications and not distributed monthly. There is no assurance
that, with respect to the Class A Non-PO Principal Amount distributions in
reduction of the Principal Balance of a Class of PAC Certificates (i) will not
commence significantly earlier than the first Distribution Date shown in the
preceding table relating to such Class, (ii) will not commence significantly
later than the first Distribution Date shown in the preceding table relating
to such Class or (iii) will not be reduced to zero significantly earlier or
significantly later than the last Distribution Date shown in the preceding
tables.
The extent to which the planned principal balances of the PAC Certificates
will be achieved and the sensitivity of the PAC Certificates to principal
prepayments on the Mortgage Loans will depend, in part, upon the period of
time during which the Companion Certificates remain outstanding. On each
Distribution Date, the excess of the portion of the Class A Non-PO Principal
Amount available to make distributions of principal to the PAC Certificates
over the PAC Principal Amounts (the "Excess Principal Payments") for such
Distribution Date will be distributed to the Companion Certificates before
being distributed to the PAC Certificates in accordance with the priorities
set forth above under "-- Allocation of Amount to be Distributed on the Class
A Certificates." This is intended to decrease the likelihood that the PAC
Certificates will be reduced below their planned Principal Balances on a given
Distribution Date. As such, and in accordance with the priorities described
above, the Companion Certificates support the PAC Certificates. However, under
certain relatively fast prepayment scenarios, one or more Classes of the PAC
Certificates may continue to be outstanding when the Companion Certificates
are no longer outstanding. Under such circumstances, all Excess Principal
Payments will be applied to the PAC Certificates then outstanding in
accordance with the priorities described herein. Thus, when the Principal
Balances of the Companion Certificates have been reduced to zero, the PAC
Certificates if outstanding will, in accordance with the priorities set forth
above, become more sensitive to the rate of prepayment on the Mortgage Loans
as such Classes will receive all Excess Principal Payments until the principal
balances of the PAC Certificates have been reduced to zero. Conversely, under
certain relatively slow
S-31
<PAGE>
prepayment scenarios, the portion of the Class A Non-PO Principal Amount
available to make distributions of principal to the PAC Certificates may not
be sufficient to pay the PAC Principal Amounts for the PAC Certificates on a
given Distribution Date. In such cases, the portion of the Class A Non-PO
Principal Amount available to make distributions of principal to the PAC
Certificates for each subsequent Distribution Date will be applied in
accordance with the priorities described herein such that the Companion
Certificates will not receive any distributions in reduction of their
principal balances from the Class A Non-PO Principal Amount until the
outstanding principal balances of the PAC Certificates have reached their
planned principal balances for such Distribution Date. As a result, the
weighted average lives of the Classes of PAC Certificates, if they do not
receive their PAC Principal Amounts on a Distribution Date, may be extended.
The weighted average lives of the Companion Certificates will be highly
sensitive to the rate of prepayments on the Mortgage Loans. See "Prepayment
and Yield Considerations" herein.
Additional Rights of the Class A-R and Class A-LR Certificateholders
The Class A-R and Class A-LR Certificates will remain outstanding for as
long as the Trust Estate shall exist, whether or not either such Class is
receiving current distributions of principal or interest. The holders of the
Class A-R and Class A-LR Certificates will be entitled to receive the proceeds
of the remaining assets of the Trust Estate, if any, on the final Distribution
Date for the Certificates, after distributions in respect of any accrued but
unpaid interest on the Certificates and after distributions in reduction of
principal balance have reduced the principal balances of the Certificates to
zero. It is not anticipated that there will be any assets remaining in the
Trust Estate on the final Distribution Date following the distributions of
interest and in reduction of principal balance made on the Certificates on
such date.
In addition, the Class A-LR Certificateholder will be entitled on each
Distribution Date to receive any Pool Distribution Amount remaining after all
distributions pursuant to the Pool Distribution Amount Allocation have been
made and any Net Foreclosure Profits, as described under "Description of the
Certificates" in the Prospectus. It is not anticipated that there will be any
such Net Foreclosure Profits or undistributed portion of the Pool Distribution
Amounts.
Periodic Advances
If, on any Determination Date, payments of principal and interest due on any
Mortgage Loan in the Trust Estate on the related Due Date have not been
received, the Servicer will be required to advance on or before the related
Distribution Date for the benefit of holders of the Certificates an amount in
cash equal to all delinquent payments of principal and interest due on each
Mortgage Loan in the Trust Estate (with interest adjusted to the applicable
Net Mortgage Interest Rate) not previously advanced, but only to the extent
that the Servicer believes that such amounts will be recoverable by it from
liquidation proceeds or other recoveries in respect of the related Mortgage
Loan (each, a "Periodic Advance"). Upon the Servicer's failure to make a
required Periodic Advance, the Trustee will be required to make such Periodic
Advance.
The Pooling and Servicing Agreement provides that any advance of the kind
described in the preceding paragraph may be reimbursed to the Servicer or the
Trustee, as applicable, at any time from funds available in the Servicer
Custodial Account or the Certificate Account, as the case may be, to the
extent that (i) such funds represent receipts on, or liquidation, insurance,
purchase or repurchase proceeds in respect of, the Mortgage Loans to which the
advance relates or (ii) the Servicer or the Trustee, as applicable, has
determined in good faith that the advancing party will be unable to recover
such advance from funds of the type referred to in clause (i) above.
Restrictions on Transfer of the Class A-R, Class A-LR and Class B Certificates
The Class A-R and Class A-LR Certificates will be subject to the following
restrictions on transfer, and each of the Class A-R and Class A-LR
Certificates will contain a legend describing such restrictions.
S-32
<PAGE>
The REMIC provisions of the Code impose certain taxes on (i) transferors of
residual interests to, or agents that acquire residual interests on behalf of,
Disqualified Organizations and (ii) certain Pass-Through Entities (as defined
in the Prospectus) that have Disqualified Organizations as beneficial owners.
No tax will be imposed on a Pass-Through Entity (other than an "electing large
partnership" as defined in the Prospectus) with respect to the Class A-R or
Class A-LR Certificate to the extent it has received an affidavit from the
owner thereof that such owner is not a Disqualified Organization or a nominee
for a Disqualified Organization. The Pooling and Servicing Agreement will
provide that no legal or beneficial interest in the Class A-R or Class A-LR
Certificate may be transferred to or registered in the name of any person
unless (i) the proposed purchaser provides to the Trustee an affidavit (or, to
the extent acceptable to the Trustee, a representation letter signed under
penalty of perjury) to the effect that, among other items, such transferee is
not a Disqualified Organization (as defined in the Prospectus) and is not
purchasing the Class A-R or Class A-LR Certificate as an agent for a
Disqualified Organization (i.e., as a broker, nominee, or other middleman
thereof) and (ii) the transferor states in writing to the Trustee that it has
no actual knowledge that such affidavit or letter is false. Further, such
affidavit or letter requires the transferee to affirm that it (i) historically
has paid its debts as they have come due and intends to do so in the future,
(ii) understands that it may incur tax liabilities with respect to the Class
A-R or Class A-LR Certificate in excess of cash flows generated thereby, (iii)
intends to pay taxes associated with holding the Class A-R or Class A-LR
Certificate as such taxes become due and (iv) will not transfer the Class A-R
or Class A-LR Certificate to any person or entity that does not provide a
similar affidavit or letter. The transferor must certify in writing to the
Trustee that, as of the date of the transfer, it had no knowledge or reason to
know that the affirmations made by the transferee pursuant to the preceding
sentence were false.
In addition, the Class A-R and Class A-LR Certificates may not be purchased
by or transferred to any person that is not a U.S. Person, unless (i) such
person holds such Class A-R or Class A-LR Certificate in connection with the
conduct of a trade or business within the United States and furnishes the
transferor and the Trustee with an effective Internal Revenue Service Form
4224 or (ii) the transferee delivers to both the transferor and the Trustee an
opinion of a nationally recognized tax counsel to the effect that such
transfer is in accordance with the requirements of the Code and the
regulations promulgated thereunder and that such transfer of the Class A-R or
Class A-LR Certificate will not be disregarded for federal income tax
purposes. The term "U.S. Person" means a citizen or resident of the United
States, a corporation or partnership (unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise) created or organized
in or under the laws of the United States, any state thereof or the District
of Columbia, including an entity treated as a corporation or partnership for
federal income tax purposes, an estate whose income is subject to United
States federal income tax regardless of its source, or a trust if a court
within the United States is able to exercise primary supervision over the
administration of such trust, and one or more such U.S. Persons have the
authority to control all substantial decisions of such trust (or, to the
extent provided in applicable Treasury regulations, certain trusts in
existence on August 20, 1996 which are eligible to elect to be treated as U.S.
Persons).
The Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null
and void and will vest no rights in any purported transferee. Any transferor
or agent to whom the Trustee provides information as to any applicable tax
imposed on such transferor or agent may be required to bear the cost of
computing or providing such information. See "Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Residual Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates" in the Prospectus.
The Class A-R and Class A-LR Certificates may not be purchased by or
transferred to any person which is an employee benefit plan or other
retirement plan or arrangement subject to Title I of ERISA or Code Section
4975 (an "ERISA Plan") or which is a governmental plan, as defined in Section
3(32) of ERISA, subject to any federal, state or local law ("Similar Law")
which is, to a material extent, similar to the foregoing provisions of ERISA
or the Code (collectively, with an ERISA Plan, a "Plan"), or any person acting
on behalf of or investing the assets of such Plan. See "ERISA Considerations"
herein and in the Prospectus.
Under current law the purchase and holding of the Class B Certificates by or
on behalf of a Plan may result in "prohibited transactions" within the meaning
of ERISA and Code Section 4975 or Similar Law. Transfer of the Class B
Certificates will not be made unless the transferee (i) executes a
representation letter in form and
S-33
<PAGE>
substance satisfactory to the Trustee stating that (a) it is not, and is not
acting on behalf of, any such Plan or using the assets of any such Plan to
effect such purchase or (b) if it is an insurance company, that the source of
funds used to purchase the Class B Certificates is an "insurance company
general account" (as such term is defined in Section V(e) of Prohibited
Transaction Class Exemption 95-60 ("PTE 95-60"), 60 Fed. Reg. 35925 (July 12,
1995)) and there is no Plan with respect to which the amount of such general
account's reserves and liabilities for the contract(s) held by or on behalf of
such Plan and all other Plans maintained by the same employer (or affiliate
thereof as defined in Section V(a)(1) of PTE 95-60) or by the same employee
organization exceeds 10% of the total of all reserves and liabilities of such
general account (as such amounts are determined under Section I(a) of PTE 95-
60) at the date of acquisition or (ii) provides (A) an opinion of counsel in
form and substance satisfactory to the Trustee that the purchase or holding of
the Class B Certificates by or on behalf of such Plan will not result in the
assets of the Trust Estate being deemed to be "plan assets" and subject to the
prohibited transaction provisions of ERISA, the Code or Similar Law and will
not subject the Depositor, the Servicer or the Trustee to any obligation in
addition to those undertaken in the Pooling and Servicing Agreement and
(B) such other opinions of counsel, officers' certificates and agreements as
the Depositor or the Servicer may require in connection with such transfer.
The Class B Certificates will contain a legend describing such restrictions on
transfer and the Pooling and Servicing Agreement will provide that any
attempted or purported transfer in violation of these transfer restrictions
will be null and void and will vest no rights in any purported transferee. See
"ERISA Considerations" herein and in the Prospectus.
Subordination of Class B Certificates
The rights of the holders of the Class B Certificates to receive
distributions with respect to the Mortgage Loans in the Trust Estate will be
subordinated to such rights of the holders of the Class A Certificates and the
rights of the holders of the Classes of Class B Certificates with higher
numerical designations to receive distributions with respect to the Mortgage
Loans in the Trust Estate will be subordinated to such rights of the holders
of Classes of Class B Certificates with lower numerical designations, all to
the extent described below. This subordination is intended to enhance the
likelihood of timely receipt by the holders of more senior Certificates of the
full amount of their scheduled monthly payments of interest and principal and
to afford the holders of the more senior Certificates protection against
Realized Losses, as more fully described below. If Realized Losses exceed the
credit support provided through subordination to a given Class of Certificates
or if Excess Losses occur, all or a portion of such losses will be borne by
such Class of Certificates.
The protection afforded to the holders of more senior Classes of
Certificates by means of the subordination feature will be accomplished by the
preferential right of such holders to receive, prior to any distribution being
made on a Distribution Date in respect of the more junior Classes of
Certificates, the amounts of principal and interest due such holders on each
Distribution Date out of the Pool Distribution Amount with respect to such
date and, if necessary, by the right of such holders to receive future
distributions on the Mortgage Loans that would otherwise have been payable to
the holders of the more junior Classes of Certificates. Because of the
priority in which the Class A Non PO Distribution Amount is allocated among
the Class of Class A Certificates (other than the Class A PO Certificates),
the application of this subordination to cover Realized Losses experienced in
periods prior to the periods in which a Class of Class A Certificates is
entitled to distributions in reduction of principal balance will decrease the
protection provided by the subordination to any such Class.
Amounts distributed to holders of Subordinated Certificates will not be
available to cover delinquencies or Realized Losses in respect of subsequent
Distribution Dates.
Allocation of Losses
Realized Losses (other than Excess Losses) will not be allocated to the
holders of the Class A Certificates until the date on which the amount of
principal payments on the Mortgage Loans to which the holders of the
Subordinated Certificates are entitled has been reduced to zero as a result of
the allocation of losses to the Subordinated Certificates, i.e., the
Distribution Date preceding the Distribution Date for which the Subordinated
Percentage is equal to zero (the "Cross-Over Date"). Prior to such time, such
Realized Losses will be allocated
S-34
<PAGE>
to the Classes of Class B Certificates sequentially in reverse numerical
order, until the Principal Balance of each such Class has been reduced to
zero.
The allocation of the principal portion of a Realized Loss (other than a
Debt Service Reduction or Excess Loss) will be effected through the adjustment
of the Principal Balance of the most subordinate Class then outstanding in
such amount as is necessary to cause the Aggregate Principal Balance to equal
the Adjusted Pool Amount.
Allocations to the Classes of Class B Certificates of (i) the principal
portion of Debt Service Reductions, (ii) the interest portion of Realized
Losses (other than Excess Losses), (iii) any interest shortfalls resulting
from delinquencies for which the Servicer, the Master Servicer or the Trustee
does not advance, (iv) any interest shortfalls or losses resulting from the
application of the Soldiers' and Sailors' Civil Relief Act of 1940, as more
fully described under "Certain Legal Aspects of the Mortgage Loans--Soldiers'
and Sailors' Civil Relief Act" in the Prospectus and (v) any interest
shortfalls resulting from the timing of the receipt of Unscheduled Principal
Receipts (other than Mortgagor Prepayments) with respect to Mortgage Loans
will result from the priority of distributions of the Pool Distribution Amount
first to the Class A Certificates and then to the Classes of Class B
Certificates in numerical order as described above under "--Distributions."
The allocation of the principal portion of Realized Losses (other than
Excess Losses) in respect of the Mortgage Loans allocated on or after the
Cross-Over Date will be effected through the adjustment on any Determination
Date of the Class A Non-PO Principal Balance and the Principal Balance of the
Class A-PO Certificates such that (i) the Class A Non-PO Principal Balance
equals the Adjusted Pool Amount less the Adjusted Pool Amount (PO Portion) as
of the preceding Distribution Date and (ii) the Principal Balance of the Class
A-PO Certificates equals the Adjusted Pool Amount (PO Portion) as of the
preceding Distribution Date. The principal portion of such Realized Losses
allocated to the Class A Certificates (other than the Class A-PO Certificates)
will be allocated to such outstanding Classes of Class A Certificates pro rata
in accordance with their Principal Balances or, in the case of a Class of
Accrual Certificates, their initial Principal Balance, if lower. The interest
portion of any Realized Loss allocated on or after the Cross-Over Date will be
allocated among the outstanding Classes of Class A Certificates pro rata in
accordance with their respective Interest Accrual Amounts, without regard to
any reduction pursuant to this sentence. Any such losses will be allocated
among the outstanding Class A Certificates within each Class pro rata in
accordance with their respective Percentage Interests.
If the Pool Distribution Amount is not sufficient to cover the amount of
principal payable to the holders of the Class A Certificates on a particular
Distribution Date, then the percentage of principal payments on the Mortgage
Loans to which the holders of the Class A Certificates (other than the Class
A-PO Certificates) will be entitled (i.e., the Class A Percentage) on and
after the next Distribution Date will be proportionately increased, thereby
reducing, as a relative matter, the respective interest of the Class B
Certificates in future payments of principal on the Mortgage Loans in the
Trust Estate.
Special Hazard Losses, Fraud Losses and Bankruptcy Losses other than Excess
Losses, will be allocated solely to the Classes of Class B Certificates in
reverse numerical order. Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the Special Hazard Loss Amount, the Fraud Loss Amount and
the Bankruptcy Loss Amount, respectively, are "Excess Special Hazard Losses,"
"Excess Fraud Losses" and "Excess Bankruptcy Losses," respectively, and are
referred to herein collectively as "Excess Losses."
Any Excess Losses will be allocated (i) with respect to the principal
portion of such losses (a) to the outstanding Classes of the Class A
Certificates (other than the Class A-PO Certificates) and Class B Certificates
pro rata based on their outstanding Principal Balances in proportion to the
Non-PO Fraction of such losses and (b) in respect of Discount Mortgage Loans,
to the Class A-PO Certificates in proportion to the PO Fraction of such losses
and (ii) with respect to the interest portion of such losses, to the Class A
and Class B Certificates pro rata based on interest accrued by reducing their
respective Interest Accrual Amounts. The principal portion of any such losses
so allocated to the Class A Certificates (other than the Class A-PO
Certificates) will be allocated
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<PAGE>
to such outstanding Classes of Class A Certificates pro rata in accordance
with their then-outstanding Principal Balances or, in the case of a Class of
Accrual Certificates, their initial Principal Balance, if lower. Any losses
allocated to a Class of Certificates will be allocated among the outstanding
Certificates within such Class pro rata in accordance with their respective
Percentage Interests.
Upon initial issuance of the Certificates, the "Special Hazard Loss Amount"
with respect thereto will be equal to approximately [ ]% (approximately $[ ])
of the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of
any Distribution Date, the Special Hazard Loss Amount will equal the initial
Special Hazard Loss Amount less the sum of (A) any Special Hazard Losses
allocated solely to the Class B Certificates 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 greatest of (i) 1.00% (or, if greater than 1.00%, the highest percentage
of Mortgage Loans by principal balance in any California zip code) times the
aggregate principal balance of all the Mortgage Loans on such anniversary,
(ii) twice the principal balance of the single Mortgage Loan having the
largest principal balance, and (iii) that amount which is necessary to
maintain the original ratings assigned to the Class A, Class B-1, Class B-2
and Class B-3 Certificates by the applicable Rating Agenc[y][ies], as
evidenced by letters to that effect delivered by such Rating Agenc[y][ies] to
the Servicer and the Trustee. On and after the Cross-Over Date, the Special
Hazard Loss Amount will be zero.
Upon initial issuance of the Certificates, the "Fraud Loss Amount" with
respect thereto will be equal to approximately [ ]% (approximately $[ ]) of
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of any
Distribution Date prior to the first anniversary of the Cut-Off Date, the
Fraud Loss Amount will equal the initial Fraud Loss Amount minus the aggregate
amount of Fraud Losses allocated solely to the Class B Certificates through
the related Determination Date. As of any Distribution Date from the first
through fifth anniversary of the Cut-Off Date, the Fraud Loss Amount will be
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) 1.00% 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 Class B Certificates with respect to Fraud Losses since the most
recent anniversary of the Cut-Off Date through the related Determination Date.
On and after the Cross-Over Date or after the fifth anniversary of the Cut-Off
Date, the Fraud Loss Amount will be zero.
Upon initial issuance of the Certificates, the "Bankruptcy Loss Amount" with
respect thereto will be equal to approximately [ ]% (approximately $[ ]) of
the Cut-Off Date Aggregate Principal Balance of the Mortgage Loans. As of any
Distribution Date prior to the first anniversary of the Cut-Off Date, the
Bankruptcy Loss Amount will equal the initial Bankruptcy Loss Amount minus the
aggregate amount of Bankruptcy Losses allocated solely to the Class B
Certificates through the related Determination Date. As of any Distribution
Date on or after the first anniversary of the Cut-Off Date, the Bankruptcy
Loss Amount will equal the excess, if any, of (1) the lesser of (a) the
Bankruptcy Loss Amount as of the business day next preceding the most recent
anniversary of the Cut-Off Date and (b) an amount, if any, calculated pursuant
to the terms of the Pooling and Servicing Agreement, which amount as
calculated will provide for a reduction in the Bankruptcy Loss Amount, over
(2) the aggregate amount of Bankruptcy Losses allocated solely to the Class B
Certificates since such anniversary. The Bankruptcy Loss Amount and the
related coverage levels described above may be reduced or modified upon
written confirmation from each Rating Agency that such reduction or
modification will not adversely affect the then-current ratings assigned to
the Certificates by it. Such a reduction or modification may adversely affect
the coverage provided by subordination with respect to Bankruptcy Losses. On
and after the Cross-Over Date, the Bankruptcy Loss Amount will be zero.
Notwithstanding the foregoing, the provisions relating to subordination will
not be applicable in connection with a Bankruptcy Loss so long as the Servicer
has notified the Trustee in writing that the Servicer is diligently pursuing
any remedies that may exist in connection with the representations and
warranties made regarding the related Mortgage Loan and when (A) the related
Mortgage Loan is not in default with regard to the payments due thereunder or
(B) delinquent payments of principal and interest under the related Mortgage
Loan and any premiums on any applicable Standard Hazard Insurance Policy and
any related escrow payments in respect of
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<PAGE>
such Mortgage Loan are being advanced on a current basis by the Servicer, in
either case without giving effect to any Debt Service Reduction.
As a result of the mechanism described above, the risk of Special Hazard
Losses, Fraud Losses and Bankruptcy Losses will be borne solely by the Class B
Certificates to a lesser extent (i.e., only up to the Special Hazard Loss
Amount, Fraud Loss Amount and Bankruptcy Loss Amount, respectively) than the
risk of other Realized Losses, which will be allocated first to the Class B
Certificates in reverse numerical order to the full extent of their initial
Principal Balances.
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<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS(1)
General
The mortgage loans to be included in the Trust Estate will be fixed interest
rate, conventional, monthly pay, fully amortizing, one-to four-family,
residential first mortgage loans having original terms to stated maturity of
approximately [ ] years (the "Mortgage Loans"), which may include loans
secured by shares ("Co-op Shares") issued by private non-profit housing
corporations ("Cooperatives"), and the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specified units in such
Cooperatives' buildings. The Trust Estate is expected to include [ ] Mortgage
Loans, having an aggregate unpaid principal balance as of the Cut-Off Date
(the "Cut-Off Date Aggregate Principal Balance") of approximately $[ ], and
secured by first liens (the "Mortgages") on one- to four-family residential
properties (the "Mortgaged Properties"). The Mortgage Loans will have the
additional characteristics described below and in the Prospectus.
As of the Cut-Off Date, it is expected that [ ] of the Mortgage Loans,
representing approximately [ ]% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans, will be Buy-Down Loans. As of the Cut-Off Date,
it is expected that [ ] of the Mortgage Loans will be secured by Co-op Shares.
See "The Trust Estates--Mortgage Loans" in the Prospectus.
Each of the Mortgage Loans is subject to a due-on-sale clause. See "Certain
Legal Aspects of the Mortgage Loans--"Due-on-Sale" Clauses" and "Servicing of
the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" in the Prospectus.
As of the Cut-Off Date, each Mortgage Loan is expected to have an unpaid
principal balance of not less than approximately $[ ] or more than
approximately $[ ], and the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $[ ]. The latest stated maturity date of
any of the Mortgage Loans is expected to be [ , ]; however, the actual date
on which any Mortgage Loan is paid in full may be earlier than the stated
maturity date due to unscheduled payments of principal. Based on information
supplied by the mortgagors in connection with their loan applications at
origination, [ ] of the Mortgaged Properties are expected to be owner occupied
primary residences. See "The Mortgage Loan Programs--Mortgage Loan
Underwriting" in the Prospectus.
As of the Cut-Off Date, there were [ ] Discount Mortgage Loans having an
aggregate unpaid principal balance of approximately $[ ], a range of unpaid
principal balances of approximately $[ ] to approximately $[ ] an average
unpaid principal balance of approximately $[ ], a range of Mortgage Interest
Rates from [ ]% to [ ]% per annum, a weighted average Mortgage Interest Rate
of approximately [ ]% per annum, a range of remaining terms to stated maturity
of [ ] months to [ ] months, a weighted average remaining term to stated
maturity of approximately [ ] months, a range of original Loan-to-Value Ratios
of [ ]% to [ ]%, a weighted average original Loan-to-Value Ratio of
approximately [ ]% and the following geographic concentration of Mortgaged
Properties securing Mortgage Loans in excess of [ ]% of the aggregate unpaid
principal balance of the Discount Mortgage Loans: approximately [ ]% in
[STATES].
- --------
(1) The description in this Prospectus Supplement of the Trust Estate and the
properties securing the Mortgage Loans to be included in the Trust Estate
are based upon the expected characteristics of the Mortgage Loans at the
close of business on the Cut-Off Date, as adjusted for the scheduled
principal payments due on or before such date. Notwithstanding the
foregoing, any of such Mortgage Loans may be excluded from the Trust
Estate (i) as a result of principal prepayment thereof in full or (ii) if,
as a result of delinquencies or otherwise, the Depositor otherwise deems
such exclusion necessary or desirable. In either event, other Mortgage
Loans may be included in the Trust Estate. The Depositor believes that the
information set forth herein with respect to the expected characteristics
of the Mortgage Loans on the Cut-Off Date is representative of the
characteristics as of the Cut-Off Date of the Mortgage Loans to be
included in the Trust Estate as it will be constituted at the time the
Certificates are issued, although the Cut-Off Date Aggregate Principal
Balance, the range of Mortgage Interest Rates and maturities, and certain
other characteristics of the Mortgage Loans in the Trust Estate may vary.
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<PAGE>
As of the Cut-Off Date, there were [ ] Mortgage Loans that were not Discount
Mortgage Loans ("Premium Mortgage Loans") having an aggregate unpaid principal
balance of approximately $[ ], a range of unpaid principal balances of
approximately $[ ] to approximately $[ ], an average unpaid principal balance
of approximately $[ ], a range of Mortgage Interest Rates from [ ]% to [ ]%
per annum, a weighted average Mortgage Interest Rate of approximately [ ]% per
annum, a range of remaining terms to stated maturity of [ ] months to [ ]
months, a weighted average remaining term to stated maturity of approximately
[ ] months, a range of original Loan-to-Value Ratios of [ ]% to [ ]%, a
weighted average original Loan-to-Value Ratio of approximately [ ]% and the
following geographic concentration of Mortgaged Properties securing Mortgage
Loans in excess of [ ]% of the aggregate unpaid principal balance of the
Premium Mortgage Loans: approximately [ ]% in [STATES].
Certain geographic regions, including California, have, in recent years,
experienced and such regions or others in the future may experience natural
disasters, including, without limitation, earthquakes, fires, floods and
hurricanes. Any deterioration in housing prices in the states in which the
Mortgaged Properties are located and any deterioration in the economic
conditions in such states which adversely affects the ability of borrowers to
make payments on the Mortgage Loans may increase the likelihood of losses on
the Mortgage Loans. A concentration of the Mortgage Loans in such states may
therefore result in a greater risk of loss than had such concentration not
been present. Such losses, if they occur, may have an adverse effect on the
yield to maturity of the Offered Certificates and more particularly on the
Class B Certificates offered hereby, especially the Class B-3 Certificates.
As to Mortgaged Properties in regions that have recently experienced natural
disasters, neither the Depositor nor the Servicer has undertaken the physical
inspection of such Mortgaged Properties. As a result, there can be no
assurance that material damage to any Mortgaged Property in an affected region
has not occurred. In the Pooling and Servicing Agreement, the Depositor will
represent and warrant that, as of the date of issuance of the Certificates,
each Mortgaged Property is undamaged by flood, water, fire, earthquake or
earth movement, windstorm, tornado or similar casualty (excluding casualty
from the presence of hazardous wastes or hazardous substances, as to which the
Depositor makes no representation) so as to adversely affect the value of such
Mortgaged Property as security for such Mortgage Loan or the use for which
such premises were intended. In the event of a breach of such representation
with respect to a Mortgaged Property which materially and adversely affects
the interests of Certificateholders in the related Mortgage Loan, the
Depositor will be obligated to repurchase or substitute for such Mortgage
Loan, as described under "The Mortgage Loan Programs--Representations and
Warranties" and "The Pooling and Servicing Agreement--Assignment of Mortgage
Loans to the Trustee" in the Prospectus. Repurchase of any such Mortgage Loan
will affect in varying degrees the yields and weighted average lives of the
Classes of Offered Certificates and could adversely affect the yield of any
Offered Certificates purchased at a premium.
Mortgage Loan Underwriting
The Mortgage Loans were originated in conformity with the underwriting
standards described in the Prospectus under the heading "The Mortgage Loan
Programs--Mortgage Loan Underwriting" (the "Underwriting Standards") as
applied by the Seller or by eligible originators to whom the Seller had
delegated all underwriting functions. In certain instances, exceptions to the
Underwriting Standards may have been granted by the Seller. See "The Mortgage
Loan Programs--Mortgage Loan Underwriting" in the Prospectus.
S-39
<PAGE>
Mortgage Loan Data
Set forth below is a description of certain additional characteristics of
the Mortgage Loans as of the Cut-Off Date (except as otherwise indicated).
MORTGAGE INTEREST RATES
<TABLE>
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Mortgage Interest Rate Mortgage Loans Principal Balance Principal Balance
---------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
%....................... $ %
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
%.......................
--- --- ------
Total................. $ 100.00%
=== === ======
</TABLE>
As of the Cut-Off Date, the weighted average Mortgage Interest Rate of the
Mortgage Loans is expected to be approximately [ ]% per annum. The Net
Mortgage Interest Rate of each Mortgage Loan will be equal to the Mortgage
Interest Rate of such Mortgage Loan minus the applicable Servicing Fee Rate
for such Mortgage Loan. As of the Cut-Off Date, the weighted average Net
Mortgage Interest Rate of the Mortgage Loans is expected to be approximately
[ ]% per annum.
MORTGAGE LOAN DOCUMENTATION LEVELS
<TABLE>
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Documentation Level Mortgage Loans Principal Balance Principal Balance
------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Full Documentation...... $ %
Limited or Reduced
Documentation..........
--- --- ------
Total................. $ 100.00%
=== === ======
</TABLE>
Documentation levels vary depending upon several factors, including loan
amount, Loan-to-Value Ratio and the type and purpose of the Mortgage Loan.
Asset, income and mortgage verifications were obtained for Mortgage Loans
processed with "full documentation." In most instances, a verification of the
borrower's employment was obtained. However, for all of the Mortgage Loans, a
credit report on the borrower and a property appraisal were obtained. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting" in the Prospectus.
S-40
<PAGE>
REMAINING TERMS TO STATED MATURITY
<TABLE>
<CAPTION>
Percentage of Cut-
Remaining Stated Number of Aggregate Unpaid Off Date Aggregate
Term (Months) Mortgage Loans Principal Balance Principal Balance
---------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
$ %
--- --- ------
Total................. $ 100.00%
=== === ======
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to stated
maturity of the Mortgage Loans is expected to be approximately [ ] months.
YEARS OF ORIGINATION
<TABLE>
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Year of Origination Mortgage Loans Principal Balance Principal Balance
------------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
$ %
--- ---- ------
Total................. $ 100.00%
=== ==== ======
</TABLE>
It is expected that the earliest month and year of origination of any
Mortgage Loan was [ ] and the latest month and year of origination was [ ].
MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Property Mortgage Loans Principal Balance Principal Balance
-------- -------------- ----------------- ------------------
<S> <C> <C> <C>
Single-family detached.. $ %
Two- to four-family
units..................
Condominiums............
Planned unit
developments...........
Townhouses..............
Cooperative Units.......
--- ---- ------
Total................. $ 100.00%
=== ==== ======
</TABLE>
S-41
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
Aggregate Percentage of Cut-
Number of Unpaid Principal Off Date Aggregate
Geographic Area Mortgage Loans Balance Principal Balance
--------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
$ %
---- ------
Total................. $ 100.00%
==== ======
</TABLE>
No more than approximately [ ]% of the Cut-Off Date Aggregate Principal
Balance of the Mortgage Loans is expected to be secured by Mortgaged
Properties located in any one five-digit zip code.
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
Percentage of Cut-
Original Loan-to- Number of Aggregate Unpaid Off Date Aggregate
Value Ratio Mortgage Loans Principal Balance Principal Balance
----------------- -------------- ----------------- ------------------
<S> <C> <C> <C>
50% or less............. $ %
50.01-55.00%............
55.01-60.00%............
60.01-65.00%............
65.01-70.00%............
70.01-75.00%............
75.01-80.00%............
80.01-85.00%............
85.01-90.00%............
90.01-95.00%............
--- ---- ------
Total................. $ 100.00%
=== ==== ======
</TABLE>
As of the Cut-Off Date, the minimum and maximum Loan-to-Value Ratios at
origination of the Mortgage Loans are expected to be [ ]% and [ ]%,
respectively, and the weighted average Loan-to-Value Ratio at origination of
the Mortgage Loans is expected to be approximately [ ]%. The Loan-to-Value
Ratio of a Mortgage Loan is calculated using the lesser of (i) the appraised
value of the related Mortgaged Property, as established by an appraisal
obtained by the originator from an appraiser at the time of origination and
(ii) the sale price for such property. For the purpose of calculating the
Loan-to-Value Ratio of any Mortgage Loan that is the result of the refinancing
(including a refinancing for "equity take out" purposes) of an existing
mortgage loan, the appraised value of the related Mortgaged Property is
generally determined by reference to an appraisal obtained in connection with
the origination of the replacement loan. There can be no assurance that such
appraisal, which is based on the independent judgment of an appraiser and not
an arms-length sales transaction, is an accurate representation of the market
value of a Mortgaged Property. See "The Trust Estates--Mortgage Loans" in the
Prospectus. No assurance can be given that the values of the Mortgaged
Properties securing the Mortgage Loans have remained or will remain at the
levels used in calculating the Loan-to-Value Ratios shown
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<PAGE>
above. The Seller has taken no action to establish the current value of any
Mortgaged Property. See "Risk Factors--Risks of the Mortgage Loans" in the
Prospectus. It is expected that [ ] of the Mortgage Loans having Loan-to-Value
Ratios at origination in excess of [ ]%, representing approximately [ ]% (by
Cut-Off Date Aggregate Principal Balance) of the Mortgage Loans, were
originated without primary mortgage insurance.
ORIGINAL MORTGAGE LOAN PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Percentage of Cut-
Original Mortgage Loan Number of Aggregate Unpaid Off Date Aggregate
Principal Balance Mortgage Loans Principal Balance Principal Balance
---------------------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Less than or equal
to$200,000............. $ %
$200,001-$250,000.......
$250,001-$300,000.......
$300,001-$350,000.......
$350,001-$400,000.......
$400,001-$450,000.......
$450,001-$500,000.......
$500,001-$550,000.......
$550,001-$600,000.......
$600,001-$650,000.......
$650,001-$700,000.......
$700,001-$750,000.......
$800,001-$850,000.......
$900,001-$950,000.......
--- ---- ------
Total................. $ 100.00%
=== ==== ======
As of the Cut-Off Date, the average unpaid principal balance of the Mortgage
Loans is expected to be approximately $[ ]. As of the Cut-Off Date, the
weighted average Loan-to-Value Ratio at origination and the maximum Loan-to-
Value Ratio at origination of the Mortgage Loans which had original principal
balances in excess of $[ ] are expected to be approximately [ ]% and [ ]%,
respectively. See "The Trust Estates--Mortgage Loans" in the Prospectus.
ORIGINATORS OF MORTGAGE LOANS
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Originator Mortgage Loans Principal Balance Principal Balance
---------- --------------- ------------------ ------------------
<S> <C> <C> <C>
Seller or Affiliates.... $ %
Other Originators.......
--- ---- ------
Total................. $ %
=== ==== ======
</TABLE>
No single "Other Originator" is expected to have accounted for more than
[ ]% of the Cut-Off Date Aggregate Principal Balance.
S-43
<PAGE>
PURPOSES OF MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage of Cut-
Number of Aggregate Unpaid Off Date Aggregate
Loan Purpose Mortgage Loans Principal Balance Principal Balance
------------ -------------- ----------------- ------------------
<S> <C> <C> <C>
Purchase................ $
Rate/Term Refinance.....
Equity Take Out
Refinance..............
--- ---- ------
Total................. $ 100.00%
=== ==== ======
</TABLE>
In general, in the case of a Mortgage Loan made for "rate/term" refinance
purposes, substantially all of the proceeds are used to pay in full the
principal balance of a previous mortgage loan of the mortgagor with respect to
a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. However, in the case of a Mortgage Loan made for "equity
take out" refinance purposes, all or a portion of the proceeds are generally
retained by the mortgagor for uses unrelated to the Mortgaged Property. The
amount of such proceeds retained by the mortgagor may be substantial. See "The
Mortgage Loan Programs--Mortgage Loan Underwriting" in the Prospectus.
Mandatory Repurchase or Substitution of Mortgage Loans
The Depositor is required, with respect to Mortgage Loans that are found by
the Trustee to have defective documentation, or in respect of which the Seller
has breached a representation or warranty, either to repurchase such Mortgage
Loans or, if within two years of the date of initial issuance of the
Certificates, to substitute new Mortgage Loans therefor. Any Mortgage Loan so
substituted must, among other things, have an unpaid principal balance equal
to or less than the Scheduled Principal Balance of the Mortgage Loan for which
it is being substituted (after giving effect to the scheduled principal
payment due in the month of substitution on the Mortgage Loan for which a new
Mortgage Loan is being substituted), a Loan-to-Value Ratio less than or equal
to, and a Mortgage Interest Rate equal to that of the Mortgage Loan for which
it is being substituted. See "Prepayment and Yield Considerations" herein and
"The Pooling and Servicing Agreement--Assignment of Mortgage Loans to the
Trustee" in the Prospectus.
S-44
<PAGE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
Historically, a variety of factors, including the appreciation of real
estate values, have limited [ ]'s foreclosure and delinquency experience on
its portfolio of mortgage loans. Factors beyond [ ]'s control, such as
national or local economic conditions or downturns in the real estate markets
in its lending areas, may result in increased rates of delinquencies and
foreclosure losses in the future.
The information in the table below has not been adjusted to eliminate the
effect of the significant growth in the size of the portfolio of mortgage
loans originated by [ ] during the periods shown.
Accordingly, foreclosures and delinquencies as percentages of aggregate
principal balance of mortgage loans serviced for each period may be higher
than those that would be shown if a group of mortgage loans were artificially
isolated at a point in time and the information disclosed the activity only in
that isolated group. However, since most of the mortgage loans in the
portfolio of jumbo mortgage loans serviced by [ ] during the periods shown
are not fully seasoned, the foreclosure and delinquency information for such
an isolated group would also be distorted to some degree.
The following table summarizes the delinquency and foreclosure experience on
the dates indicated on non-conforming and FHLMC- and FNMA-conforming first
deed of trust or mortgage loans serviced by [ ] (excluding certain recent
bulk acquisitions of servicing rights) which were originated in a manner
consistent with the underwriting criteria of [ ] described in this
Prospectus Supplement under "Description of the Mortgage Loans -- Mortgage
Loan Underwriting." [ ]'s portfolio of non-conforming and FHLMC- and FNMA-
conforming, first deed of trust and mortgage loans described below contains
fixed- and adjustable-rate mortgage loans having a variety of original terms
to maturity and payment characteristics. Accordingly, this portfolio may
differ significantly from the Mortgage Loans at any time in terms of interest
rates, principal balances, geographic distribution, loan-to-value ratios and
other possibly relevant characteristics. It is highly likely that the
delinquency and foreclosure experience with respect to the Mortgage Loans will
differ from that reflected in the table below. Likewise, it is highly likely
that any losses experienced on liquidation of defaulted Mortgage Loans will
occur at different rates than those shown below. The actual delinquency and
foreclosure experience on the Mortgage Loans, substantially all of which are
non-conforming loans, will depend, among other things, upon the value of the
real estate securing such Mortgage Loans and the ability and willingness of
mortgagors to make required payments.
S-45
<PAGE>
Delinquency and Foreclosure Experience
on Mortgage Loans
<TABLE>
<CAPTION>
At ,199 At ,199 At ,199 At ,199
-------------------- -------------------- -------------------- --------------------
Number/% Number/% Number/% Number/%
of Outstanding of Outstanding of Outstanding of Outstanding
Mortgage Principal Mortgage Principal Mortgage Principal Mortgage Principal
Loans Amount Loans Amount Loans Amount Loans Amount
-------- ----------- -------- ----------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio.........
Delinquencies*
One installment
delinquent............
Percent Delinquent.....
Two installments
delinquent............
Percent Delinquent.....
Three or more
installments
delinquent............
Percent Delinquent.....
In Foreclosure..........
Percent in
Foreclosure...........
Delinquent and in
Foreclosure............
Percent Delinquent and
in Foreclosure**......
</TABLE>
- --------
* A mortgage loan is deemed to have "one installment delinquent " if any
scheduled payment of principal or interest is delinquent past the end of
the month in which such payment was due, "two installments delinquent" if
such delinquency persists past the end of the month following the month in
which such payment was due, and so forth.
** The sums of the Percent Delinquent and Percent in Foreclosure set forth in
this table may not equal the Percent Delinquent and in Foreclosure due to
rounding.
S-46
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of distributions in reduction of the principal balance of any Class
of the Offered Certificates, the aggregate amount of distributions on any
Class of the Offered Certificates and the yield to maturity of any Class of
the Offered Certificates purchased at a discount or premium will be directly
related to the rate of payments of principal on the Mortgage Loans in the
Trust Estate and the amount and timing of mortgagor defaults resulting in
Realized Losses. Prepayments (which, as used herein, include all unscheduled
payments of principal, including payments as the result of liquidations,
purchases and repurchases) of the Mortgage Loans in the Trust Estate will
result in distributions to Certificateholders then entitled to distributions
in respect of principal of amounts which would otherwise be distributed over
the remaining terms of such Mortgage Loans. Since the rate of prepayment on
the Mortgage Loans will depend on future events and a variety of factors (as
described more fully below and in the Prospectus under "Prepayment and Yield
Considerations"), no assurance can be given as to such rate or the rate of
principal payments on any Class of the Offered Certificates or the aggregate
amount of distributions on any Class of the Offered Certificates.
The rate of principal payments on the Mortgage Loans will in turn be
affected by the amortization schedules of the Mortgage Loans, the rate of
principal prepayments (including partial prepayments and those resulting from
refinancing) thereon by mortgagors, liquidations of defaulted Mortgage Loans,
repurchases by the Seller of Mortgage Loans as a result of defective
documentation or breaches of representations and warranties and optional
purchase by the Servicer of all of the Mortgage Loans in connection with the
termination of the Trust Estate. See "Description of the Mortgage Loans--
Mandatory Repurchase or Substitution of Mortgage Loans" and "Pooling and
Servicing Agreement--Optional Termination" herein and "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans to the Trustee," "--Optional
Purchases" and "--Termination; Optional Purchase of Mortgage Loans" in the
Prospectus. Mortgagors are permitted to prepay the Mortgage Loans, in whole or
in part, at any time without penalty. The rate of payments (including
prepayments) on pools of mortgage loans is also influenced by a variety of
economic, geographic, social and other factors. If prevailing rates for
similar mortgage loans fall below the Mortgage Interest Rates on the Mortgage
Loans, the rate of prepayment would generally be expected to increase.
Conversely, if interest rates on similar mortgage loans rise above the
Mortgage Interest Rates on the Mortgage Loans, the rate of prepayment would
generally be expected to decrease. The rate of prepayment on the Mortgage
Loans may also be influenced by programs or incentives offered by mortgage
loan originators (including [ ]), servicers (including [ ])
and mortgage loan brokers to encourage refinancing through such originators,
servicers and brokers, including, but not limited to, general or targeted
solicitations (which may be based on characteristics including, but not
limited to, the mortgage loan interest rate or payment history and the
geographic location of the Mortgaged Property), reduced or nominal origination
fees or closing costs, pre-approved applications, waiver of pre-closing
interest accrued with respect to a refinanced loan prior to the pay-off of
such loan, or other financial incentives. See "Prepayment and Yield
Considerations--Weighted Average Life of Certificates" in the Prospectus. In
addition, [ ] or third parties may enter into agreements with
borrowers providing for the bi-weekly payment of principal and interest on the
related mortgage loan, thereby accelerating payment of the mortgage loan
resulting in partial prepayments.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment or, in the case of
self-employed mortgagors or mortgagors relying on commission income,
substantial fluctuations in income, significant declines in real estate values
and adverse economic conditions either generally or in particular geographic
areas, mortgagors' equity in the Mortgaged Properties, including the use of
second or "home equity" mortgage loans by mortgagors or the use of the
properties as second or vacation homes, and servicing decisions, such as,
without limitation, the decision as to whether to foreclose on a Mortgage Loan
or to modify the terms of the related Mortgage Note and decisions as to the
timing of any foreclosure. In addition, all of the Mortgage Loans contain due-
on-sale clauses which will generally be exercised upon the sale of the related
Mortgaged Properties. Consequently, acceleration of mortgage payments as a
result of any such sale will affect the level of prepayments on the Mortgage
Loans. The extent to which defaulted Mortgage Loans are assumed by transferees
of the related Mortgaged Properties will also affect the
S-47
<PAGE>
rate of principal payments. The rate of prepayment and, therefore, the yield
to maturity of the Offered Certificates will be affected by the extent to
which (i) the Seller elects to repurchase, rather than substitute for,
Mortgage Loans which are found by the Trustee to have defective documentation
or with respect to which the Seller has breached a representation or warranty,
(ii) a Servicer elects to encourage the refinancing of any defaulted Mortgage
Loan rather than to permit an assumption thereof by a mortgagor or (iii) the
Servicer agrees to modify the payment terms of a Mortgage Note rather than
foreclose on the related Mortgage Loan. See "Servicing of the Mortgage Loans--
Enforcement of Due-on-Sale Clauses; Realization Upon Defaulted Mortgage Loans"
in the Prospectus.
As described under "Description of the Certificates--Principal (Including
Prepayments)" herein, all or a disproportionate percentage of principal
prepayments on the Mortgage Loans (including liquidations and repurchases of
Mortgage Loans) will be distributed, to the extent of the Non-PO Fraction, to
the holders of the Class A Certificates (other than the Class A-PO
Certificates) then entitled to distributions in respect of principal during
the nine years beginning on the first Distribution Date, and, to the extent
that such principal prepayments are made in respect of a Discount Mortgage
Loan, to the Class A-PO Certificates in proportion to the interest of the
Class A-PO Certificates in such Discount Mortgage Loan represented by the PO
Fraction.
The yield to maturity of the Offered Certificates will be sensitive in
varying degrees to the rate and timing of principal payments (including
prepayments, which may be made at any time without penalty) on the Mortgage
Loans. Investors in the Offered Certificates should consider the associated
risks, including, in the case of Offered Certificates purchased at a discount,
particularly the Class A-12 Certificates, the risk that a slower than
anticipated rate of payments in respect of principal (including prepayments)
on the Mortgage Loans could result in an actual yield that is lower than
anticipated and, in the case of Offered Certificates purchased at a premium,
or the Class A-3 and Class A-18 Certificates, which have no Principal
Balances, that a faster than anticipated rate of payments in respect of
principal (including prepayments) on the Mortgage Loans could result in an
actual yield that is lower than anticipated. Investors purchasing Offered
Certificates at a premium should also consider the risk that a rapid rate of
payments in respect of principal (including prepayments) on the Mortgage Loans
could result in the failure of such investors to fully recover their initial
investments. An investor is urged to make an investment decision with respect
to any Class of Offered Certificates based on the anticipated yield to
maturity of such Class of Offered Certificates resulting from its purchase
price and such investor's own determination as to anticipated Mortgage Loan
prepayment rates under a variety of scenarios.
The timing of changes in the rate of prepayment on the Mortgage Loans may
significantly affect the actual yield to maturity experienced by an investor
who purchases an Offered Certificate at a price other than par, even if the
average rate of principal payments experienced over time is consistent with
such investor's expectation. In general, the earlier a prepayment of principal
on the underlying Mortgage Loans, the greater the effect on such investor's
yield to maturity. As a result, the effect on such investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the
issuance of the Offered Certificates would not be fully offset by a subsequent
like reduction (or increase) in the rate of principal payments.
The yield to maturity on the Classes of Class B Certificates with higher
numerical designations will generally be more sensitive to losses than the
Classes with lower numerical designations because the entire amount of such
losses (except for the portion of Excess Losses allocated to the Class A
Certificates and Classes of Class B Certificates with lower numerical
designations) will be allocable to the Classes of Class B Certificates in
reverse numerical order, except as provided herein. To the extent not covered
by Periodic Advances, delinquencies on Mortgage Loans will also have a
relatively greater effect on the yield to maturity on the Classes of Class B
Certificates with higher numerical designations because amounts otherwise
distributable to holders of the Class B Certificates will be made available to
protect the holders of the Class A Certificates against interruptions in
distributions due to such unadvanced mortgagor delinquencies. Such unadvanced
delinquencies, even if subsequently cured, may affect the timing of the
receipt of distributions by the holders of the Class B Certificates.
S-48
<PAGE>
The actual yield to maturity experienced by an investor may also be affected
by the occurrence of interest shortfalls resulting from Unscheduled Principal
Receipts to the extent, if any, to which such interest shortfalls are not
covered by Compensating Interest or the subordination. See "Description of the
Certificates--Interest" herein.
The yield to maturity on the Offered Certificates and more particularly on
the Class B-1, Class B-2 and especially the Class B-3 Certificates, may be
affected by the geographic concentration of the Mortgaged Properties securing
the Mortgage Loans. In recent periods, California, the New York metropolitan
area, the Washington D.C. metropolitan area and several other regions in the
United States have experienced significant declines in housing prices. In
addition, California and several other regions have experienced natural
disasters, including earthquakes, floods and hurricanes, which may adversely
affect property values. See "Description of the Mortgage Loans." Any
deterioration in housing prices in California, as well as the other states in
which the Mortgaged Properties are located, and any deterioration of economic
conditions in such states which adversely affects the ability of borrowers to
make payments on the Mortgage Loans, may increase the likelihood of losses on
the Mortgage Loans. Such losses, if they occur, may have an adverse effect on
the yield to maturity of the Offered Certificates and more particularly on the
Class B Certificates offered hereby, especially the Class B 3 Certificates.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any Class of Offered
Certificates.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of
principal balance of the Offered Certificates, may coincide with periods of
low prevailing interest rates. During such periods, the effective interest
rates on securities in which an investor may choose to reinvest amounts
distributed in reduction of the principal balance of such investor's Offered
Certificate may be lower than the applicable Pass-Through Rate. Conversely,
slower rates of prepayments on the Mortgage Loans, and therefore of amounts
distributable in reduction of principal balance of the Offered Certificates,
may coincide with periods of high prevailing interest rates. During such
periods, the amount of principal distributions available to an investor for
reinvestment at such high prevailing interest rates may be relatively small.
Due to the special tax treatment of residual interests, the after-tax return
of the Class A-R and Class A-LR Certificates may be significantly lower than
would be the case if the Class A-R and Class A-LR Certificates were taxed as
debt instruments, or may be negative. See "Federal Income Tax Considerations"
herein.
As referred to herein, the "weighted average life" of a Class of Offered
Certificates (other than the Class A-3 and Class A-18 Certificates) refers to
the average amount of time that will elapse from the date of issuance of such
Class until each dollar in reduction of the Principal Balance of such Class is
distributed to the investor. The weighted average life of a Class A-3
Certificate is the average amount of time that will elapse between the date of
issuance of the Certificates and the date on which each dollar in reduction of
the Principal Balance of the Class A-1 Certificates (a portion of the
Principal Balance of which corresponds to the notional amount of the Class A-3
Certificates) is distributed to the investors in the Class A-1 Certificates.
The weighted average life of a Class A-18 Certificate is the average amount of
time that will elapse between the date of issuance of the Certificates and the
date on which each dollar in reduction of the Principal Balance of the Class
A-17 Certificates (the Principal Balance of which corresponds to the notional
amount of the Class A-18 Certificates) is distributed to the investors in the
Class A-17 Certificates.
The weighted average lives of the Companion Certificates will be highly
sensitive to the rate of prepayments on the Mortgage Loans. Specifically, on
each Distribution Date up to and including the Distribution Date on which the
Principal Balances of the Companion Certificates are reduced to zero, after
the PAC Principal Amounts have been distributed for such Distribution Date any
Excess Principal Payments for such Distribution Date will be applied to such
Companion Certificates before being distributed to the PAC Certificates
S-49
<PAGE>
in the priorities set forth above under "Description of the Certificates --
Principal (Including Prepayments) -- Allocation of Amount to be Distributed
on the Class A Certificates." Further, the Companion Certificates will receive
no distributions in reduction of principal on such Distribution Date from the
Class A Non-PO Principal Amount if the portion of the Class A Non-PO Principal
Amount available to make distributions of principal to the PAC Certificates in
accordance with the priorities set forth under "Description of the
Certificates -- Principal (Including Prepayments) -- Allocation of Amount to
be Distributed on the Class A Certificates" is equal to or less than the PAC
Principal Amounts on such Distribution Date.
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, "0% SPA" assumes
prepayment rates equal to 0% of SPA, i.e., no prepayments. SPA does not
purport to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage
loans, including the Mortgage Loans.
The tables set forth below have been prepared on the basis of the
characteristics of the Mortgage Loans that are expected to be included in the
Trust Estate, as described under "Description of the Mortgage Loans." The
tables set forth below have been prepared assuming, among other things, the
following (the "Structuring Assumptions"): (i) the scheduled payment in each
month for each Mortgage Loan has been based on its outstanding balance as of
the first day of the month preceding the month of such payment, its Mortgage
Interest Rate and its remaining term to stated maturity, so that such
scheduled payments would amortize the remaining balance by its remaining term
to maturity, (ii) scheduled monthly payments of the principal and interest on
the Mortgage Loans will be timely received on the first day of each month
(with no defaults), commencing in 199 , (iii) the Depositor does not
repurchase any Mortgage Loan, as described under "Description of the Mortgage
Loans--Mandatory Repurchase or Substitution of Mortgage Loans" herein, and the
Servicer does not exercise its option to purchase the Mortgage Loans and
thereby cause a termination of the Trust Estate, (iv) principal prepayments in
full on the Mortgage Loans will be received on the last day of each month
commencing in 199 at the respective constant percentages of SPA set
forth in the tables and there are no partial principal prepayments or
Prepayment Interest Shortfalls, (v) the Certificates will be issued on
199 and (vi) distributions to Certificateholders will be made on the 25th day
of each month, commencing in 199 .
It is highly unlikely that the Mortgage Loans will prepay at any constant
rate, that all of the Mortgage Loans will prepay at the same rate or that the
Mortgage Loans will not experience any losses. In addition, there may be
differences between the characteristics of the mortgage loans ultimately
included in the Trust Estate and the Mortgage Loans which are assumed to be
included, as described above. Any difference may have an effect upon the
actual percentages of initial Principal Balances (or initial Class A-3 and
Class A-18 Notional Amounts, in the case of the Class A-3 and Class A-18
Certificates) of the Classes of Certificates outstanding, the actual weighted
average lives of the Classes of Certificates and the date on which the
Principal Balance (or Class A-3 and Class A-18 Notional Amounts, in the case
of the Class A-3 and Class A-18 Certificates) of any Class of Certificates is
reduced to zero.
Based upon the foregoing assumptions, the following tables indicate the
weighted average life of each Class of Offered Certificates, and set forth the
percentages of the initial Principal Balance (or initial Class A-3 and Class
A-18 Notional Amounts, in the case of the Class A-3 and Class A-18
Certificates) of each Class of Offered Certificates that would be outstanding
after each of the dates shown at the constant percentages of SPA presented.
S-50
<PAGE>
Percentage of Initial Principal Balance(/1/) Outstanding For:
<TABLE>
<CAPTION>
Class A-1 and Class A-3 Class A-2
Certificates at the Certificates at the
Following Percentages Following Percentages
of of
SPA SPA
----------------------- -----------------------
Distribution Date 0% % % % % % 0% % % % % %
- ----------------- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
life (years)(/2/)
</TABLE>
<TABLE>
<CAPTION>
Class A-4
Certificates at the Class A-5
Following Percentages Certificates at the
of Following Percentages of
SPA SPA
----------------------- ---------------------------
Distribution Date 0% % % % % % 0% % % % % % %
- ----------------- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
life (years)(/2/)
</TABLE>
- ---------------------
(1) With respect to the Class A-3 Certificates, percentages are expressed as a
percentage of the initial Class A-3 Notional Amount.
(2) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal bal-
ance or notional amount by the number of years from the date of the issu-
ance of such Certificate to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the aggregate distribution in reduc-
tion of principal balance or notional amount referred to in clause (i).
S-51
<PAGE>
Percentage of Initial Principal Balance Outstanding For:
<TABLE>
<CAPTION>
Class A-6 Class A-7 Class A-8
Certificates at the Certificates at the Certificates at the
Following Percentages Following Percentages Following Percentages
of of of
SPA SPA SPA
----------------------- ----------------------- -----------------------
Distribution
Date 0% % % % % % 0% % % % % % 0% % % % % %
- ------------ --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted
Average Life
(years)(/1/)
</TABLE>
<TABLE>
<CAPTION>
Class A-9 Class A-10 Class A-11
Certificates at the Certificates at the Certificates at the
Following Percentages Following Percentages Following Percentages
of of of
SPA SPA SPA
----------------------- ----------------------- -----------------------
Distribution
Date 0% % % % % % 0% % % % % % 0% % % % % %
- ------------ --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted
Average LIfe
(years)(/1/)
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal bal-
ance by the number of years from the date of the issuance of such Certifi-
cate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
S-52
<PAGE>
Percentage of Initial Principal Balance(/1/) Outstanding For:
<TABLE>
<CAPTION>
Class A-12 Class A-13, Class A-14
Certificates at the and Class A-15
Following Certificates at the
Percentages of Following Percentages
SPA of
------------------- SPA
Distribution -----------------------
Date 0% % % % % 0% % % % % %
- ------------ --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life (years)(/2/)
</TABLE>
<TABLE>
<CAPTION>
Class A-17 and
Class A-18
Certificates at
Class A-16 the
Certificates at the Following
Following Percentages of Percentages of
SPA SPA
--------------------------- -------------------
Distribution
Date 0% % % % % % % 0% % % % %
- ------------ --- --- --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life (years)(/2/)
</TABLE>
- ---------------------
(1) With respect to the Class A-18 Certificates, percentages are expressed as
a percentage of the initial Class A-18 Notional Amount.
(2) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal bal-
ance or notional amount by the number of years from the date of the issu-
ance of such Certificate to the related Distribution Date, (ii) adding the
results and (iii) dividing the sum by the aggregate distributions in re-
duction of principal balance or notional amount referred to in clause (i).
S-53
<PAGE>
Percentage of Initial Principal Balance Outstanding For:
<TABLE>
<CAPTION>
Class A-19 Class A-20
Certificates at the Certificates at the
Following Percentages Following Percentages
of of
SPA SPA
---------------------------- ----------------------------
Distribution
Date 0% % % % % 0% % % % %
- ------------ --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life (years)(/1/)
</TABLE>
<TABLE>
<CAPTION>
Class A-R Class A-LR
Certificate at the Certificate at the
Following Percentages Following Percentages
of of
SPA SPA
---------------------------- ----------------------------
Distribution
Date 0% % % % % 0% % % % %
- ------------ --- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average
Life (years)(/1/)
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal bal-
ance by the number of years from the date of the issuance of such Certifi-
cate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
S-54
<PAGE>
Percentage of Initial Principal Balance Outstanding For:
<TABLE>
<CAPTION>
Class B-1, Class B-
2 and Class B-3
Certificates at the
Following
Percentages of SPA
-------------------
Distribution Date 0% % % % %
- ----------------- --- --- --- --- ---
<S> <C> <C> <C> <C> <C>
Weighted Average Life (years)(1)...........................
</TABLE>
- ---------------------
(1) The weighted average life of an Offered Certificate is determined by (i)
multiplying the amount of each distribution in reduction of principal
balance by the number of years from the date of the issuance of such
Certificate to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions in reduction of
principal balance referred to in clause (i).
Interest accrued on the Offered Certificates will be reduced by the amount
of any interest portions of Realized Losses allocated to such Certificates as
described under "Description of the Certificates--Interest" herein. The yield
on the Offered Certificates will be less than the yield otherwise produced by
their respective Pass-Through Rates and the prices at which such Certificates
are purchased because the interest which accrues on the Mortgage Loans during
each month will not be passed through to Certificateholders until the 25th day
of the month following the end of such month (or if such 25th day is not a
business day, the following business day).
The Depositor intends to file certain additional yield tables and other
computational materials with respect to one or more Classes of Offered
Certificates with the Securities and Exchange Commission in a Report on Form
8-K. See "Incorporation of Certain Information by Reference" in the
Prospectus. Such tables and materials will have been prepared by the
Underwriter at the request of certain prospective investors, based on
assumptions provided by, and satisfying the special requirements of, such
investors. Such tables and assumptions may be based on assumptions that differ
from the Structuring Assumptions. Accordingly, such tables and other materials
may not be relevant to or appropriate for investors other than those
specifically requesting them.
Sensitivity of the Class A-3, Class A-12 and Class A-18 Certificates
The yield to maturity to investors in the Class A-3, Class A-12 and Class A-
18 Certificates will be highly sensitive to the rate and timing of principal
payments (including prepayments) on the Mortgage Loans, which rate may
fluctuate significantly from time to time. An investor should fully consider
the associated risks, including the risk that a rapid rate of principal
payments (including prepayments), in the case of the Class A-3 and Class A-18
Certificates, could result in the failure of an investor in the Class A-3 and
Class A-18 Certificates to fully recover its initial investment or the risk
that a relatively low rate of
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<PAGE>
principal payments (including prepayments), in the case of the Class A-12
Certificates, will have a negative effect on the yield to maturity to an
investor in the Class A-12 Certificates.
The following tables indicate the sensitivities to various rates of
prepayment on the Mortgage Loans of the pre-tax yields to maturity on a
corporate bond equivalent ("CBE") basis of the Class A-3, Class A-12 and Class
A-18 Certificates. Such calculations are based on distributions made in
accordance with "Description of the Certificates" above, on the Structuring
Assumptions and on the further assumption that the Class A-3, Class A-12 and
Class A-18 Certificates will be purchased on , 199 at a purchase price
equal to, in the case of the Class A-3 Certificates, approximately % of the
initial Class A-3 Notional Amount plus accrued interest thereon from ,
199 to (but not including) , 199 , in the case of the Class A-12
Certificates, approximately % of initial Principal Balance of the Class
A-12 Certificates and in the case of the Class A-18 Certificates,
approximately % of the initial Class A-18 Notional Amount plus accrued
interest thereon from , 199 to (but not including) , 199 .
Sensitivity of the Pre-Tax Yield to Maturity of the Class A-3 Certificates to
Prepayments
<TABLE>
<CAPTION>
Percentages of PSA
---------------------------
% % % % % %
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE).....................
</TABLE>
Sensitivity of the Pre-Tax Yield to Maturity of the Class A-12 Certificates to
Prepayments
<TABLE>
<CAPTION>
Percentages of PSA
-----------------------
% % % % %
--- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE).........................
</TABLE>
Sensitivity of the Pre-Tax Yield to Maturity of the Class A-18 Certificates to
Prepayments
<TABLE>
<CAPTION>
Percentages of PSA
-----------------------
% % % % % %
--- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity (CBE).........................
</TABLE>
The pre-tax yields to maturity set forth in the preceding tables were
calculated by (i) determining the monthly discount rates which, when applied
to the assumed stream of cash flows to be paid on the Class A-3, Class A-12
and Class A-18 Certificates would cause the discounted present value of such
assumed stream of cash flows to equal an assumed purchase price for the Class
A-3 Certificates equal to approximately % of the initial Class A-3
Notional Amount plus accrued interest from , 199 to (but not including)
, 199 , for the Class A-12 Certificates an assumed purchase price equal to
approximately % of the initial Principal Balance of the Class A-12
Certificates and for the Class A-18 Certificates an assumed purchase price
equal to approximately % of the initial Class A-18 Notional Amount plus
accrued interest from , 199 to (but not including) , 199 ; and (ii)
converting such monthly rates to corporate bond equivalent rates. Such
calculations do not take into account the interest rates at which investors
may be able to reinvest funds received by such investors as distributions on
the Class A-3, Class A-12 or Class A-18 Certificates and consequently do not
purport to reflect the return on any investment in the Class A-3, Class A-12
or Class A-18 Certificates when such reinvestment rates are considered.
Notwithstanding the assumed prepayment rates reflected in the preceding
tables, it is highly unlikely that the Mortgage Loans will prepay at a
constant rate until maturity, that all of the Mortgage Loans will prepay at
the same rate or that the Mortgage Loans will not experience any losses. The
Mortgage Loans initially included in the Trust Estate may differ from those
currently expected to be included in the Trust Estate, and thereafter
S-56
<PAGE>
may be changed as a result of permitted substitutions. As a result of these
factors, the pre-tax yields to maturity on the Class A-3, Class A-12 and Class
A-18 Certificates are likely to differ from those shown in such tables, even
if all of the Mortgage Loans prepay at the indicated percentages of SPA.
Yield Considerations with Respect to the Class B-2 and Class B-3 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 following tables, it is assumed that
there is no delay between the default and liquidation of the mortgage loans.
As used in the following tables, "0% SDA" assumes default rates equal to 0% of
SDA (no defaults). 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.
The following tables indicate the sensitivity of the pre-tax yield to
maturity on the Class B-2 and Class B-3 Certificates to various rates of
prepayment and varying levels of aggregate Realized Losses. The tables set
forth below are based upon, among other things, the Structuring Assumptions
(other than the assumption that no defaults shall have occurred with respect
to the Mortgage Loans) and the additional assumption that liquidations (other
than those scenarios indicated as 0% of SDA (no defaults)) occur monthly on
the last day of the preceding month (other than on a Due Date) at the
percentages of SDA set forth in the table.
In addition, it was assumed that (i) Realized Losses on liquidations of 20%
or 40% of the outstanding principal balance of such liquidated Mortgage Loans,
as indicated in the tables below (referred to as a "Loss Severity
Percentage"), will occur at the time of liquidation, (ii) there are no Special
Hazard Losses, Fraud Losses or Bankruptcy Losses and (iii) the Class B-2 and
Class B-3 Certificates are purchased on [ , 199 ] at assumed purchase
prices equal to [ ]% and [ ]%, respectively, of the Principal Balances
thereof plus accrued interest from [ , 199 ] to (but not including) [
, 199 ].
It is highly unlikely that the Mortgage Loans will have the precise
characteristics referred to herein or that they will prepay or liquidate at
any of the rates specified or that the Realized Losses will be incurred
according to one particular pattern. The assumed percentages of SDA and SPA
and the loss severities shown in the tables below are for illustrative
purposes only and the Seller makes no representations with respect to the
reasonableness of such assumptions or that the actual rates of prepayment and
liquidation and loss severity experience of the Mortgage Loans will in any way
correspond to any of the assumptions made herein. For these reasons, and
because the timing of cash flows is critical to determining yield, pre-tax
yields to maturity of the Class B-2 and Class B-3 Certificates are likely to
differ from the pre-tax yields to maturity shown below in the tables.
The pre-tax yields to maturity set forth in the following tables were
calculated by determining the monthly discount rates which, when applied to
the assumed streams of cash flows to be paid on the Class B-2 and Class B-3
Certificates, would cause the discounted present value of such assumed streams
of cash flows to equal the aggregate assumed purchase prices of the Class B-2
and Class B-3 Certificates set forth above. In all cases, monthly rates were
then converted to the semi-annual corporate bond equivalent yields shown
below. Implicit in the use of any discounted present value or internal rate of
return calculations such as these is the assumption that intermediate cash
flows are reinvested at the discount rate or internal rate of return. Thus,
these calculations do not take into account the different interest rates at
which investors may be able to reinvest funds received by them as
distributions on the Class B-2 and Class B-3 Certificates. Consequently, these
yields do not purport to
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<PAGE>
reflect the total return on any investment in the Class B-2 and Class B-3
Certificates when such reinvestment rates are considered.
Sensitivity of Pre-Tax Yields to Maturity of the Class B-2
Certificates to Prepayments and Realized Losses
<TABLE>
<CAPTION>
Loss Percentage of SPA
Severity ---------------------------------
Percentage of SDA Percentage 0% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ----------------- ---------- --- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
</TABLE>
Sensitivity of Pre-Tax Yields to Maturity of the Class B-3
Certificates to Prepayments and Realized Losses
<TABLE>
<CAPTION>
Loss Percentage of SPA
Severity ---------------------------------
Percentage of SDA Percentage 0% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ----------------- ---------- --- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
</TABLE>
The following table sets forth the amount of Realized Losses that would be
incurred with respect to the Mortgage Loans, 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>
Loss Percentage of SPA
Severity ---------------------------------
Percentage of SDA Percentage 0% [ ]% [ ]% [ ]% [ ]% [ ]% [ ]%
- ----------------- ---------- --- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
[ ]%...............................
</TABLE>
Investors are urged to make their investment decisions based on their
determinations as to anticipated rates of prepayment and Realized Losses under
a variety of scenarios. Investors in Class B-2 and Class B-3 Certificates
should fully consider the risk that Realized Losses on the Mortgage Loans
could result in the failure of such investors to fully recover their
investments.
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<PAGE>
POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of the date of initial issuance of the Certificates
(the "Pooling and Servicing Agreement") among the Depositor, the Servicer and
the Trustee. Reference is made to the Prospectus for important additional
information regarding the terms and conditions of the Pooling and Servicing
Agreement and the Certificates. See "Description of the Certificates,"
"Servicing of the Mortgage Loans" and "The Pooling and Servicing Agreement" in
the Prospectus.
The Trust Estate created pursuant to the Pooling and Servicing Agreement
will consist of (i) the Mortgage Loans as described under "Description of the
Mortgage Loans," (ii) such assets as from time to time are identified as
deposited in any account held for the benefit of the Certificateholders, (iii)
any Mortgaged Properties acquired on behalf of the Certificateholders by
foreclosure or by deed in lieu of foreclosure after the date of original
issuance of the Certificates and (iv) the rights of the Trustee to receive the
proceeds of all insurance policies and performance bonds, if any, required to
be maintained pursuant to the Pooling and Servicing Agreement.
Distributions
Distributions (other than the final distribution in retirement of the
Offered Certificates of each Class) will be made by check mailed to the
address of the person entitled thereto as it appears on the Certificate
Register. However, with respect to any holder of an Offered Certificate
evidencing at least a $[ ] initial Principal Balance or notional amount,
distributions will be made on each Distribution Date by wire transfer in
immediately available funds. The final distribution in respect of each Class
of Offered Certificates will be made only upon presentation and surrender of
the related Certificate at the office or agency appointed by the Trustee
specified in the notice of final distribution with respect to the related
Class. See "Description of the Certificates--General" in the Prospectus.
DTC will receive distributions on the Book-Entry Certificates from the
Trustee and transmit them to participants for distribution to Beneficial
Owners or their nominees.
Voting
With respect to any provisions of the Pooling and Servicing Agreement
providing for the action, consent or approval of the holders of all
Certificates evidencing specified Voting Interests in the Trust Estate, the
Class A-3 and Class A-18 Certificates will each be entitled to % of the
aggregate Voting Interest represented by all Certificates and each remaining
Class of Certificates will be entitled to a pro rata portion of the aggregate
remaining Voting Interest represented by all Certificates based on the
outstanding Principal Balance of such Class. Each Certificateholder of a Class
will have a Voting Interest equal to the product of the Voting Interest to
which such Class is collectively entitled and the Percentage Interest in such
Class represented by such holder's Certificates. With respect to any
provisions of the Pooling and Servicing Agreement providing for action,
consent or approval of each Class of Certificates or specified Classes of
Certificates, each Certificateholder of a Class will have a Voting Interest in
such Class equal to such holder's Percentage Interest in such Class. Unless
Definitive Certificates are issued as described above, Beneficial Owners of
Book-Entry Certificates may exercise their voting rights only through
Participants.
Trustee
The Trustee for the Certificates will be [ ], a national banking
association. The corporate trust office of the Trustee is located at [
]. See "The Pooling and Servicing Agreement
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<PAGE>
- --The Trustee" in the Prospectus. In addition, the Trustee will be required to
make Periodic Advances to the limited extent described herein if the Servicer
fails to make a Periodic Advance required by the related Pooling and Servicing
Agreement. The Trustee will calculate distributions on, and the allocation of
losses to, the Certificateholders based on information supplied to it by the
Servicer. See "Description of the Certificates--Periodic Advances" herein.
Under the Pooling and Servicing Agreement, any good faith interpretation of
the Trustee of any provisions of the Pooling and Servicing Agreement relating
to the distributions to be made on or the allocation of any losses to the
Certificates which the Trustee concludes are ambiguous or unclear will be
binding on Certificateholders.
Special Servicing Agreements
The Pooling and Servicing Agreement may permit the Servicer to enter into a
special servicing agreement with an unaffiliated holder of a Class of Class B
Certificates or of a class of securities representing interests in one or more
Classes of Class B Certificates and/or other subordinated mortgage pass-
through certificates. Pursuant to such an agreement, such holder may instruct
the Servicer to commence or delay foreclosure proceedings with respect to
delinquent Mortgage Loans. Such commencement or delay at such holder's
direction will be taken by the Servicer only after such holder deposits a
specified amount of cash with the Servicer. Such cash will be available for
distribution to Certificateholders if Liquidation Proceeds are less than they
otherwise may have been had the Servicer acted pursuant to its normal
servicing procedures.
Optional Termination
At its option, the Servicer may purchase from the Trust Estate all of the
Mortgage Loans, and thereby effect early retirement of the Certificates, on
any Distribution Date when the Pool Scheduled Principal Balance is less than
[ ]% of the Cut-Off Date Aggregate Principal Balance. Any such purchase will
be made only in connection with a "qualified liquidation" of the Upper-Tier
REMIC and Lower-Tier REMIC within the meaning of Section 860F(a)(4)(A) of the
Code. The purchase price will be equal to the unpaid principal balance of each
Mortgage Loan plus the fair market value of other property (including any
Mortgaged Property title to which has been acquired by the Trust Estate ("REO
Property")) in the Trust Estate plus accrued interest. In the event the Trust
Estate is liquidated as described above, holders of the Certificates, to the
extent funds are available, will receive the unpaid principal balance of their
Certificates and any accrued and unpaid interest thereon. The amount, if any,
remaining in the Certificate Account after the payment of all principal and
interest on the Certificates and expenses of the Upper-Tier REMIC and Lower-
Tier REMIC will be distributed to the holder of the Class A-LR Certificate.
See "Description of the Certificates--Additional Rights of the Class A-R and
Class A-LR Certificateholders" herein and "The Pooling and Servicing
Agreement--Termination; Optional Purchase of Mortgage Loans" in the
Prospectus. The exercise of the foregoing option will be in the Servicer's
sole discretion. Without limitation, the Servicer may enter into agreements
with third parties to (i) exercise such option at the direction of such third
party or (ii) forbear from the exercise of such option.
Servicer Custodial Account
The Servicer is required to establish and maintain a custodial account for
principal and interest (the "Servicer Custodial Account"), into which it will
deposit all collections of principal (including principal prepayments and
Liquidation Proceeds in respect of principal, if any) on the Mortgage Loans,
interest (net of Servicing Fees) on the Mortgage Loans, related insurance
proceeds, advances made from the Servicer's own funds and the proceeds of any
purchase of a related Mortgage Loan for breach of a representation or warranty
or the sale of a Mortgaged Property in connection with liquidation of the
related Mortgage Loan. The Servicer Custodial Account is required to be held
in a depository institution and invested in the manner specified in the
Pooling and Servicing Agreement. Funds in such account must be held separate
and apart from the assets of the Servicer and generally may not be commingled
with funds held by the Servicer with respect to mortgage loans other than the
Mortgage Loans.
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<PAGE>
Not later than the Remittance Date, the Servicer is obligated to remit to
the Certificate Account all amounts on deposit in the Servicer Custodial
Account as of the close of business on the business day preceding the
Remittance Date other than the following:
(a) amounts received as late payments of principal or interest respecting
which the Servicer previously has made one or more unreimbursed Periodic
Advances;
(b) any unreimbursed Periodic Advances of the Servicer with respect to
Liquidated Loans;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent the applicable Servicing Fee, as adjusted where
applicable in respect of Compensating Interest as described under
"Description of the Certificates--Interest";
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all Unscheduled Principal Receipts received by the Servicer after the
Unscheduled Principal Receipt Period with respect to such Distribution
Date, and all related payments of interest on such amounts;
(f) all amounts representing certain expenses reimbursable to the
Servicer and any other amounts permitted to be retained by the Servicer or
withdrawn by the Servicer from the Servicer Custodial Account pursuant to
the Pooling and Servicing Agreement;
(g) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which the Servicer is entitled to retain as
additional servicing compensation; and
(h) reinvestment earnings on payments received in respect of the Mortgage
Loans or on other amounts on deposit in the Servicer Custodial Account.
Servicing Compensation and Payment of Expenses
The primary compensation payable to the Servicer is the aggregate of the
Servicing Fees applicable to the Mortgage Loans. The Servicing Fee applicable
to each Mortgage Loan is expressed as a fixed percentage (the "Servicing Fee
Rate") of the Scheduled Principal Balance of such Mortgage Loan as of the
first day of each month. The Servicing Fee Rate for each Mortgage Loan will be
a fixed percentage rate per annum. The Servicing Fee Rate for each Mortgage
Loan will be the per annum rate equal to (i) the related Mortgage Interest
Rate less (ii) [ ]%; provided, however, that the Servicing Fee Rate will not
be less than [ ]% per annum with respect to any Mortgage Loan. The Servicing
Fee Rates for the Mortgage Loans are expected to range from [ ]% per annum to
[ ]% per annum and, as of the Cut-Off Date, the weighted average Servicing Fee
Rate is expected to be approximately [ ]% per annum. In addition to the
Servicing Fees, late payment fees, loan assumption fees and prepayment fees
with respect to the Mortgage Loans, and any interest or other income earned on
collections with respect to the Mortgage Loans pending remittance to the
Certificate Account, will be paid to, or retained by, the Servicer as
additional servicing compensation. No Fixed Retained Yield (as defined in the
Prospectus) will be retained with respect to any of the Mortgage Loans.
The Servicer will pay all routine expenses, including fees of the Trustee
incurred in connection with its responsibilities under the Pooling and
Servicing Agreement, subject to certain rights of reimbursement as described
in the Prospectus. The servicing fees and other expenses of the Upper-Tier
REMIC and Lower-Tier REMIC will be allocated to the holders of the Class A-R
and Class A-LR Certificates, respectively. Unless and until applicable
authority provides otherwise, the Depositor intends to treat all such expenses
as incurred by the Lower-Tier REMIC and, therefore as allocable to the holder
of the Class A-LR Certificates. See ""Federal Income Tax Considerations''
herein and ""Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Limitations on Deduction of Certain Expenses" in the
Prospectus.
Servicer Defaults
The Trustee will have the right pursuant to the Pooling and Servicing
Agreement to terminate the Servicer in certain events, including the breach by
the Servicer of any of its material obligations under the Pooling and
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<PAGE>
Servicing Agreement. In the event of such termination, the Trustee is required
to assume certain of the Servicer's servicing obligations under the Pooling
and Servicing Agreement, including the obligation to make Periodic Advances
(limited as provided herein under the heading "Description of the
Certificates--Periodic Advances"), until such time as a successor servicer is
appointed. Any successor Servicer, including the Trustee, will be entitled to
compensation arrangements similar to those provided to the Servicer. See
"Servicing of the Mortgage Loans--Fixed Retained Yield, Servicing Compensation
and Payment of Expenses" in the Prospectus.
S-62
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion represents the opinion of [Cadwalader, Wickersham &
Taft] [Kennedy Covington Lobdell & Hickman, L.L.P.] as to the material federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates.
The Trust Estate will consist of two segregated asset groupings, each of
which will qualify as a REMIC for federal income tax purposes. One REMIC (the
"Lower-Tier REMIC") will issue certain uncertificated interests (each, a
"Lower-Tier REMIC Regular Interest"), each of which will be designated as a
regular interest in the Lower-Tier REMIC, and the Class A-LR Certificate,
which will be designated as the residual interest in the Lower-Tier REMIC. The
assets of the Lower-Tier REMIC will include the Mortgage Loans, together with
the amounts held by the Trustee in a separate account in which collections on
the Mortgage Loans will be deposited (the "Certificate Account"), the hazard
insurance policies and primary mortgage insurance policies, if any, relating
to the Mortgage Loans and any property that secured a Mortgage Loan that is
acquired by foreclosure or deed in lieu of foreclosure.
The second REMIC (the "Upper-Tier REMIC") will issue all Classes of the
Class A Certificates (other than the Class A-LR Certificate) and all Class B
Certificates. Each Class of Offered Certificates (other than the Class A-R and
Class A-LR Certificates) (collectively, the "Regular Certificates"), together
with each Class of Certificates not offered hereby, will be designated as
regular interests in the Upper-Tier REMIC, and the Class A-R Certificate will
be designated as the residual interest in the Upper-Tier REMIC. The regular
interests and the residual interest in the Upper-Tier REMIC are referred to
herein collectively as the "Upper-Tier Certificates." The Class A-R and Class
A-LR Certificates are "Residual Certificates" for purposes of the Prospectus.
The assets of the Upper-Tier REMIC will include the uncertificated Lower-Tier
REMIC Regular Interests and a separate account in which distributions on the
uncertificated Lower-Tier REMIC Regular Interests will be deposited. The
aggregate amount distributed to the holders of the Upper-Tier Certificates,
payable from such separate account, will be equal to the aggregate
distributions in respect of the Mortgage Loans on the uncertificated Lower-
Tier REMIC Regular Interests.
The Offered Certificates will be treated as "a regular or residual interest
in a REMIC" for a domestic building and loan association, "real estate assets"
for a real estate investment trust and, other than the Class A-R and Class A-
LR Certificates, "qualified mortgages" for a REMIC and "permitted assets" for
a financial asset securitization investment trust, to the extent described in
the Prospectus.
Regular Certificates
The Regular Certificates generally will be treated as newly-originated debt
instruments for federal income tax purposes. Beneficial Owners (or, in the
case of Definitive Certificates, holders) of the Regular Certificates will be
required to report income on such Certificates in accordance with the accrual
method of accounting.
The Class A-12 Certificates will be issued with original issue discount in
an amount equal to the excess of the initial Principal Balance thereof over
their issue price. The Class A- , Class A- , Class A- , Class A- , Class A-
and Class A- Certificates will be issued with original issue discount in an
amount equal to the excess of the sum of all distributions of principal and
interest (whether current or accrued) expected to be received thereon over
their respective issue prices (including accrued interest). It is anticipated
that the Class B- Certificates will be issued with original issue discount in
an amount equal to the excess of their initial Principal Balance (plus [ ]
day[s] of interest at the Pass-Through Rate thereon) over their issue price
(including accrued interest). It is also anticipated that the Class A- , Class
A- , Class A- , Class A- , Class A- and Class A- Certificates will be issued
at a premium and that the Class A- , Class A- , Class A- , Class A- , Class A-
, Class B- and Class B- Certificates will be issued with de minimis
original issue discount for federal income tax purposes. Finally, it is
anticipated that the Class A-PO, Class B-4, Class B-5 and Class B-6
Certificates, which are not offered hereby, will be issued with original issue
discount for federal income tax purposes.
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<PAGE>
Although unclear for federal income tax purposes, it is anticipated that the
Class A-3 and Class A-18 Certificates will be considered to be issued with
original issue discount in an amount equal to the excess of all distributions
of interest expected to be received thereon over their issue price (including
accrued interest). Any "negative" amounts of original issue discount on the
Class A-3 or Class A-18 Certificates attributable to rapid prepayments with
respect to the Mortgage Loans will not be deductible currently, but may be
offset against future positive accruals of original issue discount, if any.
Finally, a holder of a Class A-3 or Class A-18 Certificate may be entitled to
a loss deduction to the extent it becomes certain that such holder will not
recover a portion of its basis in such Certificate, assuming no further
prepayments. In the alternative, it is possible that rules similar to the
"noncontingent bond method" of the contingent interest rules in the OID
Regulations, as amended on June 12, 1996, may be promulgated with respect to
the Class A-3 and Class A-18 Certificates. See "Federal Income Tax
Consequences -- Federal Income Tax Consequences for REMIC Certificates --
Taxation of Regular Certificates -- Original Issue Discount" in the
Prospectus. Under the noncontingent bond method, if the interest payable for
any period is greater or less than the amount projected, the amount of income
included for that period would be either increased or decreased accordingly.
Any net reduction in the income accrual for the taxable year below zero (a
"Negative Adjustment") would be treated by a Certificateholder as ordinary
loss to the extent of prior income accruals and would be carried forward to
offset future interest accruals. At maturity, any remaining Negative
Adjustment would be treated as a loss on retirement of the Certificate. The
legislative history of relevant Code provisions indicates, however, that
negative amounts of original issue discount on an instrument such as a REMIC
regular interest may not give rise to taxable losses in any accrual period
prior to the instrument's disposition or retirement. Thus, it is not clear
whether any losses resulting from a Negative Adjustment would be recognized
currently or be carried forward until disposition or retirement of the debt
obligation.
The Prepayment Assumption (as defined in the Prospectus) that the Servicer
intends to use in determining the rate of accrual of original issue discount
and whether the original issue discount is considered de minimis, and that may
be used by Beneficial Owners (or holders) to amortize premium, will be
calculated using % of SPA. No representation is made as to the actual rate
at which the Mortgage Loans will prepay.
Residual Certificates
The holders of the Class A-R and Class A-LR Certificates must include the
taxable income or loss of the Upper-Tier REMIC and Lower-Tier REMIC,
respectively, in determining their federal taxable income. The Class A-R and
Class A-LR Certificates will remain outstanding for federal income tax
purposes until there are no Certificates of any other Class outstanding.
Prospective investors are cautioned that the Class A-R and Class A-LR
Certificateholders' REMIC taxable income and the tax liability thereon may
exceed, and may substantially exceed, cash distributions to such holders
during certain periods, in which event, the holders thereof must have
sufficient alternative sources of funds to pay such tax liability.
Furthermore, it is anticipated that all or a substantial portion of the
taxable income of the Upper-Tier and Lower-Tier REMIC includible by holders of
the Class A-R and Class A-LR Certificates will be treated as "excess
inclusion" income, resulting in (i) the inability of such holders to use net
operating losses to offset such income from the REMIC, (ii) the treatment of
such income as "unrelated business taxable income" to certain holders who are
otherwise tax-exempt, and (iii) the treatment of such income as subject to 30%
withholding tax to certain non-U.S. investors, with no exemption or treaty
reduction.
Each of the Class A-R and Class A-LR Certificates will be considered a
"noneconomic residual interest," with the result that transfers thereof would
be disregarded for federal income tax purposes if any significant purpose of
the transferor was to impede the assessment or collection of tax. Accordingly,
the Class A-R and Class A-LR Certificates are subject to certain restrictions
on transfer and any prospective transferee thereof will be required to furnish
to the Trustee an affidavit as described herein under "Description of the
Certificates--Restrictions on Transfer of the Class A-R and Class B
Certificates." See "Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates," "--Taxation of Residual Certificates --
Limitations on Offset or Exemption of REMIC Income" and "--Tax-Related
Restrictions on Transfer of Residual Certificates--Noneconomic Residual
Interests" in the Prospectus.
S-64
<PAGE>
An individual, trust or estate that holds the Class A-R or Class A-LR
Certificate (whether such Certificate is held directly or indirectly through
certain pass-through entities) also may have additional gross income with
respect to, but may be subject to limitations on the deductibility of,
Servicing Fees on the Mortgage Loans and other administrative expenses of the
respective REMIC in computing such holder's regular tax liability, and may not
be able to deduct such fees or expenses to any extent in computing such
holder's alternative minimum tax liability. In addition, some portion of a
purchaser's basis, if any, in the Class A-R or Class A-LR Certificate may not
be recovered until termination of the respective REMIC. Furthermore, the
federal income tax consequences of any consideration paid to a transferee on a
transfer of the Class A-R or Class A-LR Certificate are unclear. The preamble
to the REMIC Regulations indicates that the Internal Revenue Service
anticipates providing guidance with respect to the federal tax treatment of
such consideration. Any transferee receiving consideration with respect to the
Class A-R Certificate should consult its tax advisors.
Due to the special tax treatment of residual interests, the effective after-
tax return of the Class A-R and Class A-LR Certificates may be significantly
lower than would be the case if the Class A-R and Class A-LR Certificates were
taxed as debt instruments, or may be negative.
See "Federal Income Tax Consequences" in the Prospectus.
S-65
<PAGE>
ERISA CONSIDERATIONS
Neither the Class A-R nor Class A-LR Certificate may be purchased by or
transferred to a Plan or a person acting on behalf of or investing the assets
of a Plan. See "Description of the Certificates--Restrictions on Transfer of
the Class A-R, Class A-LR and Class B Certificates" herein.
Because the Class B Certificates are subordinated to the Class A
Certificates, the Class B Certificates may not be transferred unless the
transferee has delivered (i) a representation letter to the Trustee and the
Depositor stating either (a) that the transferee is not a Plan and is not
acting on behalf of a Plan or using the assets of a Plan to effect such
purchase or (b) subject to the conditions described herein, that the source of
funds used to purchase the Class B Certificates is an "insurance company
general account" or (ii) an opinion of counsel and such other documentation as
described herein under "Description of the Certificates--Restrictions on
Transfer of the Class A-R, Class A-LR and Class B Certificates" herein.
Accordingly, the following discussion applies to the Class A Certificates
(other than the Class A-R and Class A-LR Certificate) offered hereby and does
not purport to discuss the considerations under ERISA, Code Section 4975 or
Similar Law with respect to the purchase, acquisition or resale of the Class
A-R, Class A-LR or Class B Certificates.
As described in the Prospectus under "ERISA Considerations," ERISA and the
Code impose certain duties and restrictions on ERISA Plans and certain persons
who perform services for ERISA Plans. Comparable duties and restrictions may
exist under Similar Law on governmental plans and certain persons who perform
services for governmental plans. For example, unless exempted, investment by a
Plan in the Class A Certificates may constitute a prohibited transaction under
ERISA, the Code or Similar Law. There are certain exemptions issued by the
United States Department of Labor (the "DOL") that may be applicable to an
investment by an ERISA Plan in the Class A Certificates, including the
individual administrative exemption described below and Prohibited Transaction
Class Exemption 83-1 ("PTE 83-1"). For a further discussion of the individual
administrative exemption and PTE 83-1, including the necessary conditions to
their applicability, and other important factors to be considered by an ERISA
Plan contemplating investing in the Class A Certificates, see "ERISA
Considerations" in the Prospectus.
On [ ], the DOL issued to the Underwriter an individual administrative
exemption, Prohibited Transaction Exemption [ ] (the "Exemption"), from
certain of the prohibited transaction rules of ERISA with respect to the
initial purchase, the holding and the subsequent resale by an ERISA Plan of
certificates in pass-through trusts that meet the conditions and requirements
of the Exemption. The Exemption might apply to the acquisition, holding and
resale of the Class A Certificates by an ERISA Plan, provided that specified
conditions are met.
Among the conditions which would have to be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Class A Certificates is the
condition that the ERISA Plan investing in the Class A Certificates be an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Securities Act").
Before purchasing a Class A Certificate, a fiduciary of an ERISA Plan should
make its own determination as to the availability of the exemptive relief
provided in the Exemption or the availability of any other prohibited
transaction exemptions (including PTE 83-1), and whether the conditions of any
such exemption will be applicable to the Class A Certificates, and a fiduciary
of a governmental plan should make its own determination as to the need for
and availability of any exemptive relief under Similar Law. Any fiduciary of
an ERISA Plan considering whether to purchase a Class A Certificate should
also carefully review with its own legal advisors the applicability of the
fiduciary duty provisions of ERISA and the prohibited transaction provisions
of ERISA and the Code to such investment. See "ERISA Considerations" in the
Prospectus.
S-66
<PAGE>
LEGAL INVESTMENT
The Class A and Class B-1 Certificates constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA") so long as they are rated in one of the two highest
rating categories by at least one nationally recognized statistical rating
organization. The Class B-2 and Class B-3 Certificates will not constitute
"mortgage related securities" under SMMEA. Prospective purchasers 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 their own legal, tax and accounting advisors in determining the
suitability of and consequences to them of the purchase, ownership and
disposition of the Offered Certificates. See "Legal Investment" in the
Prospectus.
SECONDARY MARKET
There will not be any market for the Offered Certificates prior to the
issuance thereof. The Underwriter intends to act as a market maker in the
Offered Certificates subject to applicable provisions of federal and state
securities laws and other regulatory requirements, but is under no obligation
to do so. There can be no assurance that a secondary market in the Offered
Certificates will develop or, if such a market does develop, that it will
provide holders of Offered Certificates with liquidity of investment at any
particular time or for the life of the Offered Certificates. As a source of
information concerning the Certificates and the Mortgage Loans, prospective
investors in Certificates may obtain copies of the reports included in monthly
statements to Certificateholders described under "The Pooling and Servicing
Agreement--Reports to Certificateholders" in the Prospectus upon written
request to the Trustee at the Corporate Trust Office.
S-67
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
[ ] and the terms agreement dated [ , 199 ] (together, the "Underwriting
Agreement") among the Depositor and [Underwriter] (the "Underwriter"), as
underwriter, the Offered Certificates are being purchased from the Depositor
by the Underwriter upon issuance thereof. The Underwriter is committed to
purchase all of the Offered Certificates if any Offered Certificates are
purchased. The Underwriter has advised the Seller that it proposes to offer
the Offered Certificates, from time to time, for sale in negotiated
transactions or otherwise at prices determined at the time of sale. Proceeds
to the Depositor from the sale of the Offered Certificates are expected to be
approximately [ ]% of the aggregate initial Principal Balance of the Class A
Certificates offered hereby, approximately [ ]% of the aggregate initial
Principal Balance of the Class B-1 Certificates, approximately [ ]% of the
aggregate initial Principal Balance of the Class B-2 Certificates and
approximately [ ]% of the aggregate initial Principal Balance of the Class B-3
Certificates plus, in each case, accrued interest thereon at the rate of [ ]%
per annum, from [ , 199 ] to (but not including) [ , 199 ], before
deducting expenses payable by the Depositor estimated to be $[ ]. The
Underwriter is [not] an affiliate of the Seller. The Underwriter has advised
the Depositor that it has not allocated the purchase price paid to the
Depositor for the Classes of Class A Certificates among such Classes. The
Underwriter and any dealers that participate with the Underwriter in the
distribution of the Offered Certificates may be deemed to be underwriters, and
any discounts or commissions received by them and any profit on the resale of
Offered Certificates by them may be deemed to be underwriting discounts or
commissions, under the Securities Act.
[This Prospectus Supplement and Prospectus may be used by Banc of America
Securities LLC, which is an affiliate of the Depositor, to the extent
required, in connection with market making transactions in the Offered
Certificates. Banc of America Securities LLC may act as principal or agent in
such transaction.]
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities under the Securities Act or
contribute to payments which such Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
The validity of the Offered Certificates and certain tax matters with
respect thereto will be passed upon for the Depositor by [Cadwalader,
Wickersham & Taft, New York, New York] [Kennedy Covington Lobdell & Hickman,
L.L.P., Charlotte, North Carolina]. Certain legal matters will be passed upon
for the Underwriter by [ ], [ ].
USE OF PROCEEDS
The net proceeds to be received from the sale of the Offered Certificates
will be applied by the Depositor to the purchase from the Seller of the
Mortgage Loans underlying the Certificates.
RATINGS
It is a condition to the issuance of the Class A Certificates offered hereby
that each Class will have been rated [ ] by [ ] and [ ] by [ ]. It
is a condition to the issuance of the Class B-1 Certificates that they will
have been rated at least [ ] by [ ] and [ ] by [ ]. It is a condition
to the issuance of the Class B-2 and Class B-3 Certificates that they will
have been rated [ ] and [ ], respectively by [ ]. A security rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating agency. Each
security rating should be evaluated independently of any other security
rating.
S-68
<PAGE>
The ratings assigned by [ ] to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
[ ]'s ratings reflect its analysis of the riskiness of the mortgage loans
and its analysis of the structure of the transaction as set forth in the
operative documents. [ ]'s ratings do not address the effect on the
certificates' yield attributable to prepayments or recoveries on the
underlying mortgage loans. In addition, the ratings of the Class A-R and Class
A-LR Certificates do not assess the likelihood of return to an investor in the
Class A-R or Class A-LR Certificate, except to the extent of the Principal
Balance thereof and interest thereon.
The ratings of [ ] on mortgage pass-through certificates address the
likelihood of the receipt by certificateholders of all distributions of
principal and interest to which such certificateholders are entitled.
[ ]'s rating opinions address the structural, legal and issuer aspects
associated with the certificates, including the nature of the underlying
mortgage loans and the credit quality of the credit support provider, if any.
[ ]'s ratings on pass-through certificates do not represent any assessment
of the likelihood that principal prepayments may differ from those originally
anticipated and consequently any adverse effect the timing of such prepayments
could have on an investor's anticipated yield.
The Depositor has not requested a rating on the Offered Certificates of any
Class by any rating agency other than [ ] and [ ], although data with
respect to the Mortgage Loans may have been provided to other rating agencies
solely for their informational purposes. There can be no assurance that any
rating assigned by any other rating agency to the Offered Certificates will be
as high as those assigned by [ ] and [ ].
S-69
<PAGE>
INDEX OF SIGNIFICANT
PROSPECTUS SUPPLEMENT DEFINITIONS
<TABLE>
<S> <C>
A
Accretion Termination Date.......... S-23
Accrual Distribution Amount......... S-24
Adjusted Pool Amount................ S-22
Adjusted Pool Amount (PO Portion)... S-22
Adjustment Amount................... S-36
Aggregate Non-PO Principal Balance.. S-22
Aggregate Principal Balance......... S-22
B
Bankruptcy Loss..................... S-27
Bankruptcy Loss Amount.............. S-36
Beneficial Owner.................... S-18
Book-Entry Certificates............. S-18
C
CBE................................. S-56
Cede................................ S-18
Certificate Account................. S-63
Certificates........................ S-5
Class A Certificates................ S-5
Class A Non-PO Optimal Principal
Amount............................. S-25
Class A Non-PO Principal Amount..... S-24
Class A Non-PO Principal Balance.... S-22
Class A Non-PO Principal
Distribution Amount................ S-24
Class A Percentage.................. S-27
Class A Prepayment Percentage....... S-27
Class A Principal Balance........... S-22
Class A-PO Deferred Amount.......... S-25
Class A-PO Distribution Amount...... S-24
Class A-PO Optimal Principal
Amount............................. S-25
Class A-3 Notional Amount........... S-21
Class A-18 Notional Amount.......... S-21
Class B Certificates................ S-5
Class B Optimal Principal Amount.... S-25
Class B Percentage.................. S-28
Class B Prepayment Percentage....... S-28
Class B Principal Balance........... S-22
Class B-1 Principal Distribution
Amount............................. S-25
Class B-2 Principal Distribution
Amount............................. S-25
Class B-3 Principal Distribution
Amount............................. S-25
Class Percentage.................... S-25
Class Prepayment Percentage......... S-25
Closing Date........................ S-5
Code................................ S-12
Compensating Interest............... S-23
</TABLE>
<TABLE>
<S> <C>
Co-op Shares......................... S-38
Cooperatives......................... S-38
Cross-Over Date...................... S-34
Current Fractional Interest.......... S-28
Cut-Off Date......................... S-7
Cut-Off Date Aggregate Principal
Balance............................. S-38
D
Debt Service Reduction............... S-27
Deficient Valuation.................. S-27
Definitive Certificates.............. S-18
Depositor............................ S-5
Determination Date................... S-18
Discount Mortgage Loan............... S-27
Distribution Date.................... S-18
DOL.................................. S-66
DTC.................................. S-18
E
ERISA................................ S-12
ERISA Plan........................... S-33
Excess Bankruptcy Losses............. S-35
Excess Fraud Losses.................. S-35
Excess Losses........................ S-35
Excess Principal Payments............ S-31
Excess Special Hazard Losses......... S-35
Exemption............................ S-66
F
Fixed Program Loans.................. S-45
Fraud Loss........................... S-27
Fraud Loss Amount.................... S-36
I
Interest Accrual Amount.............. S-20
Interest Shortfall Amount............ S-23
L
Liquidated Loan...................... S-26
Liquidated Loan Loss................. S-26
Loss Severity Percentage............. S-57
Lower-Tier REMIC..................... S-63
Lower-Tier REMIC Regular Interest.... S-63
M
Mortgage Loans....................... S-38
Mortgaged Properties................. S-38
Mortgages............................ S-38
Mortgagor Prepayments................ S-23
</TABLE>
S-70
<PAGE>
<TABLE>
<S> <C>
N
Negative Adjustment.................. S-64
Net Mortgage Interest Rate........... S-22
Non-PO Fraction...................... S-27
Non-Supported Interest Shortfalls.... S-23
O
Offered Certificates................. S-5
OID.................................. S-12
Original Fractional Interest......... S-28
Original Subordinated Principal
Balance............................. S-28
P
PAC Principal Amount................. S-29
Partial Liquidation Proceeds......... S-20
Pass-Through Rate.................... S-21
Percentage Interest.................. S-20
Periodic Advance..................... S-32
Plan................................. S-33
PO Fraction.......................... S-27
Pool Balance (Non-PO Portion)........ S-27
Pool Balance (PO Portion)............ S-27
Pool Distribution Amount............. S-19
Pool Distribution Amount Allocation.. S-20
Pooling and Servicing Agreement...... S-59
Premium Mortgage Loan................ S-27
Premium Mortgage Loans............... S-39
Prepayment Interest Shortfalls....... S-23
Principal Balance.................... S-21
Program Loans........................ S-45
Prospectus........................... S-5
PTE 83-1............................. S-66
PTE 95-60............................ S-34
R
Rating Agencies...................... S-5
Realized Loss........................ S-26
Record Date.......................... S-19
Regular Certificates................. S-63
</TABLE>
<TABLE>
<S> <C>
REMIC................................ S-12
Remittance Date...................... S-19
REO Property......................... S-60
Residual Certificates................ S-63
S
Scheduled Principal Balance.......... S-26
SDA.................................. S-57
Securities Act....................... S-66
Seller............................... S-5
Servicer............................. S-5
Servicer Custodial Account........... S-60
Servicing Fee Rate................... S-61
Similar Law.......................... S-33
SMMEA................................ S-66
SPA.................................. S-50
Special Hazard Loss.................. S-26
Special Hazard Loss Amount........... S-36
Structuring Assumptions.............. S-50
Subordinated Certificates............ S-5
Subordinated Percentage.............. S-28
Subordinated Prepayment Percentage... S-28
T
Trust ............................... S-5
Trustee.............................. S-5
U
U.S. Person.......................... S-33
Underwriter.......................... S-66
Underwriting Agreement............... S-66
Underwriting Standards............... S-39
Unscheduled Principal Receipt
Period.............................. S-26
Unscheduled Principal Receipts....... S-19
Upper-Tier Certificates.............. S-63
Upper-Tier REMIC..................... S-63
W
Weighted Average Life................ S-49
</TABLE>
S-71
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. The +
+Depositor may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This prospec- +
+tus is not an offer to sell these securities and is not soliciting an offer +
+to buy these securities in any state where the offer or sale is not permit- +
+ted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS, SUBJECT TO COMPLETION, DATED DECEMBER 8, 1999
Bank of America Mortgage Securities, Inc.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series by separate Trusts)
-----------
- ------------------ Each Trust--
You should
carefully . will issue a series of mortgage pass-through certificates,
consider the which will consist of one or more classes of certificates;
risk factors and
beginning
on page 10 . will own--
of this
prospectus. . a pool or pools of fixed or adjustable interest rate,
conventional mortgage loans, each of which is secured by
Neither the a first lien on a one- to four-family residential
certificates property; and
of any
series nor . other assets described in this prospectus and the
the related accompanying prospectus supplement.
underlying
mortgage Each Pool of Mortgage Loans--
loans will
be insured . will be sold to the related Trust by the Depositor, who
or guaranteed will have in turn purchased them from affiliated or
by any unaffiliated sellers;
governmental
agency or . will be underwritten to such standards as described in this
instrumentality. prospectus or the accompanying prospectus supplement; and
The . will be serviced by servicers affiliated or unaffiliated
certificates with the Depositor.
of each
series will Each Series of Certificates--
represent
interests in . will represent interests in the related Trust;
the related
Trust only . may provide credit support by "subordinating" certain
and will not classes to other classes of certificates; any subordinated
represent classes will be entitled to payment subject to the payment
interests in of more senior classes and may bear losses before more
or obligations senior classes;
of the
Depositor or . may be entitled to one or more of the other types of credit
any other support described in this prospectus; and
entity.
. will be paid only from the assets of the related Trust.
This prospectus
may be used
to offer and
sell any series
of certificates
only if
accompanied
by the
prospectus
supplement
for that series.
- ------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved the certificates or determined that this prospectus is
accurate or complete. Any representation to the contrary is a criminal offense.
-----------
The date of this Prospectus is , 1999
<PAGE>
Important Notice About Information Presented
in this Prospectus and the Prospectus Supplement
Information is provided to you about the Certificates in two separate
documents that progressively provide more detail: (a) this Prospectus, which
provides general information, some of which may not apply to a particular
Series of Certificates, including your Series, and (b) the accompanying
Prospectus Supplement, which will describe the specific terms of your Series
of Certificates, including:
.the principal balances and/or interest rates of each Class;
.the timing and priority of interest and principal payments;
.statistical and other information about the Mortgage Loans;
.information about credit enhancement, if any, for each Class;
.the ratings for each Class; and
.the method for selling the Certificates.
If the terms of a particular Series of Certificates vary between this
Prospectus and the Prospectus Supplement, you should rely on the information
in the Prospectus Supplement.
You should rely only on the information provided in this Prospectus and the
accompanying Prospectus Supplement including the information incorporated by
reference. No one has been authorized to provide you with different
information. The Certificates are not being offered in any state where the
offer is not permitted. The Depositor does not claim the accuracy of the
information in this Prospectus or the accompanying Prospectus Supplement as of
any date other than the dates stated on their respective covers.
Cross-references are included in this Prospectus and in the accompanying
Prospectus Supplement to captions in these materials where you can find
further related discussions. The following Table of Contents and the Table of
Contents included in the accompanying Prospectus Supplement provide the pages
on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
Prospectus are defined under the caption "Index of Significant Definitions"
beginning on page 98 in this Prospectus.
----------------
2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS
<TABLE>
<CAPTION>
Page
----
<S> <C>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS PROSPECTUS AND THE
PROSPECTUS SUPPLEMENT.................................................... 2
SUMMARY OF PROSPECTUS..................................................... 6
RISK FACTORS.............................................................. 10
Limited Liquidity....................................................... 10
Limited Assets for Payment of Certificates.............................. 10
Credit Enhancement is Limited in Amount and Coverage.................... 10
Real Estate Market Conditions Affect Mortgage Loan Performance.......... 11
Geographic Concentration May Increase Risk of Loss...................... 11
General Economic Conditions May Increase Risk of Loss................... 12
Yield is Sensitive to Rate of Principal Prepayment...................... 12
Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections
on Mortgage Loans...................................................... 13
Book-Entry System for Certain Classes of Certificates May Decrease
Liquidity and Delay Payment............................................ 13
Cash Flow Agreements are Subject to Counterparty Risk................... 13
THE TRUST ESTATES......................................................... 14
General................................................................. 14
Mortgage Loans.......................................................... 14
Fixed Rate Loans...................................................... 15
Adjustable Rate Loans................................................. 16
Net 5 Loans........................................................... 16
Graduated Payment Loans............................................... 16
Subsidy Loans......................................................... 17
Buy-Down Loans........................................................ 18
Balloon Loans......................................................... 18
Pledged Asset Mortgage Loans.......................................... 18
THE DEPOSITOR............................................................. 18
THE MORTGAGE LOAN PROGRAMS................................................ 19
General................................................................. 19
Mortgage Loan Underwriting.............................................. 19
Representations and Warranties.......................................... 21
DESCRIPTION OF THE CERTIFICATES........................................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
General................................................................. 22
Definitive Form......................................................... 22
Book-Entry Form......................................................... 23
Distributions to Certificateholders..................................... 25
General............................................................... 25
Distributions of Interest............................................. 26
Distributions of Principal............................................ 26
Categories of Classes of Certificates................................... 28
Other Credit Enhancement................................................ 31
Limited Guarantee..................................................... 32
Financial Guaranty Insurance Policy or Surety Bond.................... 32
Letter of Credit...................................................... 32
Pool Insurance Policy................................................. 32
Special Hazard Insurance Policy....................................... 32
Mortgagor Bankruptcy Bond............................................. 32
Reserve Fund.......................................................... 32
Cross Support......................................................... 32
Cash Flow Agreements.................................................... 33
PREPAYMENT AND YIELD CONSIDERATIONS....................................... 33
Pass-Through Rates...................................................... 33
Scheduled Delays in Distributions....................................... 33
Effect of Principal Prepayments......................................... 34
Weighted Average Life of Certificates................................... 34
SERVICING OF THE MORTGAGE LOANS........................................... 36
The Master Servicer..................................................... 36
The Servicers........................................................... 36
Payments on Mortgage Loans.............................................. 37
Periodic Advances and Limitations Thereon............................... 40
Collection and Other Servicing Procedures............................... 40
Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted
Mortgage Loans......................................................... 41
Insurance Policies...................................................... 42
Fixed Retained Yield, Servicing Compensation and Payment of Expenses.... 43
Evidence as to Compliance............................................... 44
CERTAIN MATTERS REGARDING THE MASTER SERVICER............................. 45
THE POOLING AND SERVICING AGREEMENT....................................... 46
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Assignment of Mortgage Loans to the Trustee............................. 46
Optional Purchases...................................................... 48
Reports to Certificateholders........................................... 48
List of Certificateholders.............................................. 49
Events of Default....................................................... 49
Rights Upon Event of Default............................................ 49
Amendment............................................................... 50
Termination; Optional Purchase of Mortgage Loans........................ 51
The Trustee............................................................. 51
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS............................... 52
General................................................................. 52
Foreclosure............................................................. 53
Foreclosure on Shares of Cooperatives................................... 53
Rights of Redemption.................................................... 54
Anti-Deficiency Legislation, the Bankruptcy Code and Other Limitations
on Lenders............................................................. 54
Texas Home Equity Loans................................................. 57
Soldiers' and Sailors' Civil Relief Act and Similar Laws................ 57
Environmental Considerations............................................ 58
"Due-on-Sale" Clauses................................................... 60
Applicability of Usury Laws............................................. 61
Enforceability of Certain Provisions.................................... 61
FEDERAL INCOME TAX CONSEQUENCES........................................... 61
Federal Income Tax Consequences for REMIC Certificates.................. 62
General................................................................. 62
Status of REMIC Certificates............................................ 62
Qualification as a REMIC................................................ 63
Taxation of Regular Certificates........................................ 64
General............................................................... 64
Original Issue Discount............................................... 65
Acquisition Premium................................................... 67
Variable Rate Regular Certificates.................................... 67
Market Discount....................................................... 68
Premium............................................................... 69
Election to Treat All Interest Under the Constant Yield Method........ 69
Treatment of Losses................................................... 70
Sale or Exchange of Regular Certificates.............................. 70
</TABLE>
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Taxation of Residual Certificates....................................... 71
Taxation of REMIC Income.............................................. 71
Basis and Losses...................................................... 72
Treatment of Certain Items of REMIC Income and Expense................ 73
Limitations on Offset or Exemption of REMIC Income.................... 74
Tax-Related Restrictions on Transfer of Residual Certificates......... 74
Sale or Exchange of a Residual Certificate............................ 77
Mark to Market Regulations............................................ 77
Taxes That May Be Imposed on the REMIC Pool............................. 77
Prohibited Transactions............................................... 77
Contributions to the REMIC Pool After the Startup Day................. 78
Net Income from Foreclosure Property.................................. 78
Liquidation of the REMIC Pool........................................... 78
Administrative Matters.................................................. 78
Limitations on Deduction of Certain Expenses............................ 79
Taxation of Certain Foreign Investors................................... 79
Regular Certificates.................................................. 79
Residual Certificates................................................. 80
Backup Withholding...................................................... 80
Reporting Requirements.................................................. 81
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election Is Made....................................................... 81
General................................................................. 81
Tax Status.............................................................. 82
Premium and Discount.................................................... 83
Premium............................................................... 83
Original Issue Discount............................................... 83
Market Discount....................................................... 83
Recharacterization of Servicing Fees.................................... 83
Sale or Exchange of Certificates........................................ 84
Stripped Certificates................................................... 84
General............................................................... 84
Status of Stripped Certificates....................................... 86
Taxation of Stripped Certificates..................................... 86
Reporting Requirements and Backup Withholding........................... 87
Taxation of Certain Foreign Investors................................... 88
ERISA CONSIDERATIONS...................................................... 89
</TABLE>
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General.................................................................. 89
Certain Requirements Under ERISA and the Code............................ 89
General................................................................ 89
Parties in Interest/Disqualified Persons............................... 89
Delegation of Fiduciary Duty........................................... 90
Applicability to Non-ERISA Plans ...................................... 90
Administrative Exemptions................................................ 90
Individual Administrative Exemptions................................... 90
PTE 83-1............................................................... 92
Non-ERISA Plans and Exempt Plans......................................... 92
Unrelated Business Taxable Income--Residual Certificates................. 93
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LEGAL INVESTMENT........................................................... 93
PLAN OF DISTRIBUTION....................................................... 94
USE OF PROCEEDS............................................................ 96
LEGAL MATTERS.............................................................. 96
RATING..................................................................... 96
REPORTS TO CERTIFICATEHOLDERS.............................................. 96
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE.......................... 96
WHERE YOU CAN FIND MORE INFORMATION........................................ 97
INDEX OF SIGNIFICANT DEFINITIONS........................................... 98
</TABLE>
5
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SUMMARY OF PROSPECTUS
. This summary highlights selected information from this document, but does
not contain all of the information that you should consider in making your
investment decision. To understand all of the terms of a Series of
Certificates, please read this entire document and the accompanying
Prospectus Supplement carefully.
. This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding of the terms of the Certificates
and is qualified by the full description of these calculations, cash flows
and other information in this Prospectus and the accompanying Prospectus
Supplement.
RELEVANT PARTIES FOR EACH SERIES OF CERTIFICATES
Issuer
Each series (each, a "Series") of certificates (the "Certificates") will be
issued by a separate trust (a "Trust" and the assets owned by such Trust, a
"Trust Estate"). Each Trust will be formed pursuant to a pooling and servicing
agreement (each, a "Pooling and Servicing Agreement") among the Depositor, one
or more Servicers and/or the Master Servicer and the Trustee specified in the
applicable Prospectus Supplement.
Depositor
With respect to each Trust Estate, Bank of America Mortgage Securities, Inc.
(the "Depositor") will acquire the Mortgage Loans from affiliated or unaffili-
ated mortgage loan originators or sellers (each, a "Seller") and will transfer
the Mortgage Loans to the Trust. The Depositor is a direct, wholly-owned sub-
sidiary of Bank of America, N.A.
Servicer(s)
One or more entities affiliated or unaffiliated with the Depositor specified
in the applicable Prospectus Supplement (each, a "Servicer") will service the
Mortgage Loans in each Trust. Each Servicer will perform certain servicing
functions with respect to the Mortgage Loans serviced by it pursuant to the
related Pooling and Servicing Agreement or a related servicing agreement
(each, an "Underlying Servicing Agreement").
Master Servicer
To the extent specified in the related Prospectus Supplement, if there is more
than one Servicer of the Mortgage Loans related to a Series or the sole
Servicer is not an affiliate of the Depositor, a master servicer, affiliated
or unaffiliated with the Depositor, (the "Master Servicer") may be appointed
to supervise the Servicers. In addition, the Master Servicer will generally be
required to make Periodic Advances with respect to the Mortgage Loans in each
Trust Estate if the related Servicer fails to make a required Periodic Ad-
vance.
THE MORTGAGE LOANS
Each Trust will own the related Mortgage Loans (other than the Fixed Retained
Yield described in this Prospectus, if any) and certain other related proper-
ty, as specified in the applicable Prospectus Supplement.
The Mortgage Loans in each Trust Estate:
. will be conventional, fixed or adjustable interest rate, mortgage loans
secured by first liens on some or all of the following types of property, to
the extent set forth in the applicable Prospectus Supplement: (i) one-family
attached or detached residences, (ii) two- to four-family units, (iii) row
houses, (iv) townhouses, (v) condominium units, (vi) units within planned
unit developments, (vii) long-term leases with respect to any of the
foregoing, and (viii) shares issued by private non-profit housing
corporations and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in such cooperatives'
buildings.
. will have been acquired by the Depositor, either directly or indirectly
through an affiliate from the Sellers;
. will have been originated by mortgage loan originators which are either
affiliated or unaffiliated with the Depositor; and
6
<PAGE>
. will have been underwritten to the standards specified herein or in the
applicable Prospectus Supplement.
See "The Trust Estates" and "The Mortgage Loan Programs--Mortgage Loan Under-
writing."
You should refer to the applicable Prospectus Supplement for the precise char-
acteristics or expected characteristics of the Mortgage Loans and a description
of the other property, if any, included in a particular Trust Estate.
DISTRIBUTIONS ON THE CERTIFICATES
Each Series of Certificates will include one or more classes (each, a "Class").
A Class of Certificates will be entitled, to the extent of funds available, to
either:
. principal and interest payments in respect of the related Mortgage Loans;
. principal distributions, with no interest distributions;
. interest distributions, with no principal distributions; or
. such other distributions as are described in the applicable Prospectus
Supplement.
Interest Distributions
With respect to each Series of Certificates, interest on the related Mortgage
Loans at the weighted average of their mortgage interest rates (net of servic-
ing fees and certain other amounts as described in this Prospectus or in the
applicable Prospectus Supplement), will be passed through to holders of the re-
lated Classes of Certificates in accordance with the particular terms of each
such Class of Certificates. The terms of each Class of Certificates will be de-
scribed in the related Prospectus Supplement. See "Description of the Certifi-
cates--Distributions to Certificateholders--Distributions of Interest."
Except as otherwise specified in the applicable Prospectus Supplement, interest
will accrue at the pass-through rate for each Class indicated in the applicable
Prospectus Supplement (each, a "Pass-Through Rate") on its outstanding princi-
pal balance or notional amount.
Principal Distributions
With respect to a Series of Certificates, principal payments (including prepay-
ments) on the related Mortgage Loans will be passed through to holders of the
related Certificates or otherwise applied in accordance with the related Pool-
ing and Servicing Agreement on each Distribution Date. Distributions in reduc-
tion of principal balance will be allocated among the Classes of Certificates
of a Series in the manner specified in the applicable Prospectus Supplement.
See "Description of the Certificates--Distributions to Certificateholders--Dis-
tributions of Principal."
Distribution Dates
Distributions on the Certificates will generally be made on the 25th day (or,
if such day is not a business day, the business day following the 25th day) of
each month, commencing with the month following the month in which the applica-
ble Cut-Off Date occurs (each, a "Distribution Date"). The "Cut-Off Date" for
each Series will be the date specified in the applicable Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, distributions on Cer-
tificates may be made on a different day of each month or may be made quarter-
ly, or semi-annually, on the dates specified in such Prospectus Supplement.
Record Dates
Distributions will be made on each Distribution Date to Certificateholders of
record at the close of business on (unless a different date is specified in the
applicable Prospectus Supplement) the last business day of the month preceding
the month in which such Distribution Date occurs (each, a "Record Date").
CREDIT ENHANCEMENT
Subordination
A Series of Certificates may include one or more Classes of senior certificates
(the "Senior Certificates") and one or more Classes of subordinated certifi-
cates (the "Subordinated Certificates"). The rights of the holders of Subordi-
nated Certificates of a Series to receive distributions will be subordinated to
such rights of the holders of the Senior Certificates of the same Series to the
extent and in the manner specified in the applicable Prospectus Supplement.
7
<PAGE>
Subordination is intended to enhance the likelihood of the timely receipt by
the Senior Certificateholders of their proportionate share of scheduled
monthly principal and interest payments on the related Mortgage Loans and to
protect them from losses. This protection will be effected by:
. the preferential right of the Senior Certificateholders to receive, prior to
any distribution being made in respect of the related Subordinated Certifi-
cates on each Distribution Date, current distributions on the related Mort-
gage Loans of principal and interest due them on each Distribution Date out
of the funds available for distributions on such date;
. the right of such holders to receive future distributions on the Mortgage
Loans that would otherwise have been payable to the holders of Subordinated
Certificates; and/or
. the prior allocation to the Subordinated Certificates of all or a portion of
losses realized on the underlying Mortgage Loans.
Other Types of Credit Enhancement
If so specified in the applicable Prospectus Supplement, the Certificates of
any Series, or any one or more Classes of a Series, may be entitled to the
benefits of other types of credit enhancement, including but not limited to:
. limited guarantee . mortgage pool
. financial guaranty insurance policy
insurance policy . reserve fund
. surety bond . cross-support
. letter of credit
Any credit support will be described in the applicable Prospectus Supplement.
See "Description of the Certificates--Other Credit Enhancement."
PERIODIC ADVANCES ON DELINQUENT PAYMENTS
In the event that a payment on a Mortgage Loan is delinquent, the Servicer of
the Mortgage Loan will be obligated to make cash advances ("Periodic Advanc-
es") to the Servicer Custodial Account or the Certificate Account if the
Servicer determines that it will be able to recover such amounts from future
payments and collections on such Mortgage Loan. A Servicer who makes Periodic
Advances will be reimbursed for such Periodic Advances as described in this
Prospectus and in the applicable Prospectus Supplement. In certain circum-
stances, the Master Servicer or Trustee will be required to make Periodic Ad-
vances upon a Servicer default.
See "Servicing of the Mortgage Loans--Periodic Advances and Limitations There-
on."
FORMS OF CERTIFICATES
The Certificates will be issued either:
. in book-entry form ("Book-Entry Certificates") through the facilities of The
Depository Trust Company ("DTC"); or
. in fully-registered, certificated form ("Definitive Certificates").
If you own Book-Entry Certificates, you will not receive a physical certifi-
cate representing your ownership interest in such Book-Entry Certificates, ex-
cept under extraordinary circumstances which are discussed in "Description of
the Certificates--Definitive Form" in this Prospectus. Instead, DTC will ef-
fect payments and transfers by means of its electronic recordkeeping services,
acting through certain participating organizations. This may result in certain
delays in your receipt of distributions and may restrict your ability to
pledge your securities. Your rights with respect to Book-Entry Certificates
may generally only be exercised through DTC and its participating organiza-
tions.
See "Description of the Certificates--Book-Entry Form."
OPTIONAL PURCHASE OF ALL MORTGAGE LOANS
If so specified in the Prospectus Supplement with respect to a Series, all,
but not less than all, of the Mortgage Loans in the related Trust and any
property acquired with respect to such Mortgage Loans may be purchased by the
Depositor or such other party as is specified in the applicable Prospectus
Supplement. Any such purchase must be made in the manner and at the price
specified in such Prospectus Supplement.
If an election is made to treat the related Trust Estate (or one or more seg-
regated pools of assets in the
8
<PAGE>
Trust Estate) as a "real estate mortgage investment conduit" (a "REMIC"), any
such purchase will be effected only pursuant to a "qualified liquidation," as
defined under Section 860F(a)(4)(A) of the Internal Revenue Code of 1986, as
amended (the "Code").
Exercise of the right of purchase will effect the early retirement of the Cer-
tificates of that Series.
See "Prepayment and Yield Considerations."
ERISA LIMITATIONS
If you are a fiduciary of any employee benefit plan or another type of retire-
ment plan or arrangement subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), the Code or similar law, you should carefully
review with your legal advisors whether the purchase or holding of Certificates
could give rise to a transaction prohibited or otherwise impermissible under
ERISA or the Code.
Certain Classes of Certificates may not be transferred unless the Trustee and
the Depositor are furnished with a letter of representation or an opinion of
counsel to the effect that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA or the Code and will not subject the
Trustee, the Depositor, any Servicers or the Master Servicer to additional
obligations.
See "ERISA Considerations."
TAX STATUS
The treatment of the Certificates for federal income tax purposes will depend
on:
. whether a REMIC election is made with respect to a Series of Certificates;
and
. if a REMIC election is made, whether the Certificates are Regular Interests
or Residual Interests.
See "Federal Income Tax Consequences."
LEGAL INVESTMENT
The applicable Prospectus Supplement will specify whether the Class or Classes
of Certificates offered will constitute "mortgage related securities" for pur-
poses of the Secondary Mortgage Market Enhancement Act of 1984, as amended. If
your investment authority is subject to legal restrictions you should consult
your own legal advisors to determine whether and to what extent such Certifi-
cates constitute legal investments for you.
See "Legal Investment" in this Prospectus and "Summary of Terms--Legal Invest-
ment" in the applicable Prospectus Supplement.
RATING
Certificates of any Series will not be offered pursuant to this Prospectus and
a Prospectus Supplement unless each offered Class is rated in one of the four
highest rating categories by at least one nationally recognized statistical
rating organization (a "Rating Agency").
. A security rating is not a recommendation to buy, sell or hold the
Certificates of any Series and is subject to revision or withdrawal at any
time by the assigning rating agency.
. Ratings do not address the effect of prepayments on the yield you may antici-
pate when you purchase your Certificates.
9
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following description of
the material risks associated with the purchase of Certificates.
Limited Liquidity
The liquidity of your Certificates may be limited. You should consider that:
. a secondary market for the Certificates of any Series may not develop, or
if it does, it may not provide you with liquidity of investment, or it
may not continue for the life of the Certificates of any Series;
. the Prospectus Supplement for any Series of Certificates may indicate
that an underwriter intends to establish a secondary market in such
Certificates, but no underwriter will be obligated to do so; and
. unless specified in the applicable Prospectus Supplement, the
Certificates will not be listed on any securities exchange.
Limited Assets for Payment of Certificates
Except for any related insurance policies and any reserve fund or credit
enhancement described in the applicable Prospectus Supplement:
. Mortgage Loans included in the related Trust Estate will be the sole
source of payments on the Certificates of a Series;
. the Certificates of any Series will not represent an interest in or
obligation of the Depositor, the Trustee or any of their affiliates,
except for the Depositor's limited obligations with respect to certain
breaches of its representations and warranties and, to the extent an
affiliate of the Depositor acts as such, its obligations as a Servicer or
Master Servicer, if applicable; and
. neither the Certificates of any Series nor the related Mortgage Loans
will be guaranteed or insured by any governmental agency or
instrumentality, the Depositor, the Trustee, any of their affiliates or
any other person.
Consequently, in the event that payments on the Mortgage Loans underlying
your Series of Certificates are insufficient or otherwise unavailable to make
all payments required on your Certificates, there will be no recourse to the
Depositor, the Trustee or any of their affiliates or, except as specified in
the applicable Prospectus Supplement, any other entity.
Credit Enhancement is Limited in Amount and Coverage
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 in this Prospectus, including, but not limited to:
subordination of other Classes of Certificates of the same Series; a limited
guarantee; a financial guaranty insurance policy; a surety bond; a letter of
credit; a pool insurance policy; a special hazard insurance policy; a
mortgagor bankruptcy bond; a reserve fund; cross-support; and any combination
of the preceding types of credit enhancement. See "Description of the
Certificates--Other Credit Enhancement."
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;
. may provide only very limited coverage as to certain types of losses, and
may provide no coverage as to certain other types of losses; and
10
<PAGE>
. all or a portion of the credit enhancement for any Series of Certificates
will generally be permitted to be reduced, terminated or substituted for,
in the sole discretion of the Servicer or the Master Servicer, if each
applicable Rating Agency indicates that the then-current ratings will not
be adversely affected.
If 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).
The rating of any Class of Certificates by a Rating Agency may be lowered
following its issuance 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 nor any of its affiliates will have any obligation to
replace or supplement any credit enhancement, or to take any other action to
maintain any rating of any Class of Certificates.
See "Description of the Certificates--Other Credit Enhancement."
Real Estate Market Conditions Affect Mortgage Loan Performance
An investment in securities such as the Certificates, which generally
represent interests in pools of residential mortgage loans, may be affected by
a decline in real estate values and changes in the mortgagor's financial
condition. There is no assurance that the values of the Mortgaged Properties
securing the Mortgage Loans underlying any Series of Certificates 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
contained in a particular Trust Estate and any secondary financing on the
Mortgaged Properties, become equal to or greater than the value of the
Mortgaged Properties, delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry and
those experienced in a Servicer's servicing portfolio.
If losses on Mortgage Loans underlying a Series are not covered by credit
enhancement, Certificateholders of the Series 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. See "The Trusts Estates--
Mortgage Loans" and "The Mortgage Loan Programs--Mortgage Loan Underwriting."
Geographic Concentration May Increase Risk of Loss
The Mortgage Loans underlying certain Series of Certificates may be
concentrated in certain regions. Such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. Certain geographic regions of
the United States from time to time will experience weaker regional economic
conditions and housing markets or be directly or indirectly affected by
natural disasters or civil disturbances such as earthquakes, hurricanes,
floods, eruptions or riots. Mortgage loans in such areas will experience
higher rates of loss and delinquency than on mortgage loans generally.
Although Mortgaged Properties located in certain identified flood zones will
be required to be covered, to the maximum extent available, by flood
insurance, as described under "Servicing of the Mortgage Loans--Insurance
Policies," no Mortgaged Properties will otherwise be required to be insured
against earthquake damage or any other loss not covered by Standard Hazard
Insurance Policies, as described under "Servicing of the Mortgage Loans--
Insurance Policies."
11
<PAGE>
See "The Mortgage Pool" in the related Prospectus Supplement for further
information regarding the geographic concentration of the Mortgage Loans
underlying the Certificates of any Series. See also "The Mortgage Loan
Programs--Mortgage Loan Underwriting" and "Prepayment and Yield
Considerations--Weighted Average Life of Certificates."
General Economic Conditions May Increase Risk of Loss
Adverse economic conditions generally, in particular geographic areas or
industries, or affecting particular segments of the borrowing community (such
as mortgagors relying on commission income and self-employed mortgagors) and
other factors which may or may not affect real property values (including the
purposes for which the Mortgage Loans were made and the uses of the Mortgaged
Properties) may affect the timely payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to any Trust
Estate. See "The Mortgage Loan Programs--Mortgage Loan Underwriting" and
"Prepayment and Yield Considerations--Weighted Average Life of Certificates."
If such losses are not covered by the applicable credit enhancement, holders
of Certificates of the Series evidencing interests in the related Trust Estate
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. See
"The Trust Estates--Mortgage Loans" and "The Mortgage Loan Programs--Mortgage
Loan Underwriting."
Yield is Sensitive to Rate of Principal Prepayment
The yield on the Certificates of each Series will depend in part on the rate
of principal payment on the Mortgage Loans (including prepayments,
liquidations due to defaults and mortgage loan repurchases). Such yield may be
adversely affected, depending upon whether a particular Certificate is
purchased at a premium or a discount, by a higher or lower than anticipated
rate of prepayments on the related Mortgage Loans. In particular:
. the yield on Classes of Certificates entitling their holders primarily or
exclusively to payments of interest or primarily or exclusively to
payments of principal will be extremely sensitive to the rate of
prepayments on the related Mortgage Loans; and
. the yield on certain Classes of Certificates may be relatively more
sensitive to the rate of prepayment of specified Mortgage Loans than
other Classes of Certificates.
The rate of prepayments on Mortgage loans is influenced by a number of
factors, including:
. prevailing mortgage market interest rates;
. local and national economic conditions;
. homeowner mobility; and
. the ability of the borrower to obtain refinancing.
In addition, your yield may be adversely affected by interest shortfalls
which may result from the timing of the receipt of prepayments or liquidations
to the extent that such interest shortfalls are not covered by aggregate
Servicing Fees or other mechanisms specified in the applicable Prospectus
Supplement. Your yield will be also adversely affected to the extent that
losses on the Mortgage Loans in the related Trust Estate are allocated to your
Certificates and may be adversely affected to the extent of unadvanced
delinquencies on the Mortgage Loans in the related Trust. Classes of
Certificates identified in the applicable Prospectus Supplement as
Subordinated Certificates are more likely to be affected by delinquencies and
losses than other Classes of Certificates.
See "Prepayment and Yield Considerations."
12
<PAGE>
Bankruptcy of the Depositor or a Seller May Delay or Reduce Collections on
Mortgage Loans
Neither the United States Bankruptcy Code nor similar applicable state laws
(the "Insolvency Laws") prohibit the Depositor from filing a voluntary
application for relief under the Insolvency Laws. However, the transactions
contemplated hereby and by the related Prospectus Supplement will be
structured such that the voluntary or involuntary application for relief under
the Insolvency Laws by the Depositor is unlikely and such filings by a Seller
which is an affiliate of the Depositor from whom the Depositor acquires the
Mortgage Loans should not result in consolidation of the assets and
liabilities of the Depositor with those of such Seller. These steps include
the creation of the Depositor as a separate, limited purpose subsidiary, the
certificate of incorporation of which contains limitations on the nature of
the Depositor's business and restrictions on the ability of the Depositor to
commence voluntary or involuntary cases or proceedings under the Insolvency
Laws without the prior unanimous affirmative vote of all its directors.
However, there can be no assurance that the activities of the Depositor would
not result in a court concluding that the assets and liabilities of the
Depositor should be consolidated with those of such Seller.
Each Seller will transfer its related Mortgage Loans to the Depositor and
the Depositor will transfer the Mortgage Loans to the related Trust Estate. If
a Seller were to become a debtor in a bankruptcy case, a creditor or trustee
(or the debtor itself) may take the position that the contribution or transfer
of the Mortgage Loans by the Seller to the Depositor should be characterized
as a pledge of such Mortgage Loans to secure a borrowing of such debtor, with
the result that the Depositor is deemed to be a creditor of such Seller,
secured by a pledge of the applicable Mortgage Loans. If such an attempt were
successful, delays in payments of collections on the Mortgage Loans could
occur or reductions in the amount of such payments could result, or such a
trustee in bankruptcy could elect to accelerate payment of the obligation to
the Depositor and liquidate the Mortgage Loans.
Book-Entry System for Certain Classes of Certificates May Decrease Liquidity
and Delay Payment
Since transactions in the Classes of Book-Entry Certificates of any Series
generally can be effected only through DTC, DTC Participants and Indirect DTC
Participants:
. your ability to pledge Book-Entry Certificates to someone who does not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate;
. you may experience delays in your receipt of payments on Book-Entry
Certificates because distributions will be made by the Trustee, or a
Paying Agent on behalf of the Trustee, to Cede, as nominee for DTC; and
. the liquidity of Book-Entry Certificates in any secondary trading market
that may develop may be limited because investors may be unwilling to
purchase securities for which they cannot obtain delivery of physical
certificates.
See "Description of the Certificates--Book-Entry Form."
Cash Flow Agreements are Subject to Counterparty Risk
The assets of a Trust Estate may, if specified in the related Prospectus
Supplement, include agreements, such as interest rate swap, cap, floor or
similar agreements (each a "Cash Flow Agreement"), which will require the
provider of such instrument (the "Counterparty") to make payments to the Trust
Estate under the circumstances described in the Prospectus Supplement. If
payments on the Certificates of the related Series depend in part on payments
to be received under a Cash Flow Agreement, the ability of the Trust Estate to
make payments on the Certificates will be subject to the credit risk of the
Counterparty. The Prospectus Supplement for a Series of Certificates will
describe any mechanism, such as the payment of "breakage fees," which may
exist to facilitate replacement of a Cash Flow Agreement upon the default or
credit impairment of the related Counterparty. However, there can be no
assurance that any such mechanism will result in the ability of the Master
Servicer to obtain a replacement Cash Flow Agreement.
13
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THE TRUST ESTATES
General
The Trust Estate for each Series of Certificates will consist primarily of
mortgage loans (the "Mortgage Loans") evidenced by promissory notes (the
"Mortgage Notes") secured by mortgages, deeds of trust or other instruments
creating first liens (the "Mortgages") on some or all of the following eight
types of property (as so secured, the "Mortgaged Properties"), to the extent
set forth in the applicable Prospectus Supplement: (i) one-family attached or
detached residences, (ii) two- to four-family units, (iii) row houses, (iv)
townhouses, (v) condominium units, (vi) units within planned unit
developments, (vii) long-term leases with respect to any of the foregoing, and
(viii) shares issued by private non-profit housing corporations
("cooperatives") and the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specified units in such cooperatives'
buildings. In addition, a Trust Estate will also include (i) amounts held from
time to time in the related Certificate Account, (ii) the Depositor's interest
in any primary mortgage insurance, hazard insurance, title insurance or other
insurance policies relating to a Mortgage Loan, (iii) any property which
initially secured a Mortgage Loan and which has been acquired by foreclosure
or trustee's sale or deed in lieu of foreclosure or trustee's sale, (iv) if
applicable, and to the extent set forth in the applicable Prospectus
Supplement, any reserve fund or funds, (v) if applicable, and to the extent
set forth in the applicable Prospectus Supplement, contractual obligations of
any person to make payments in respect of any form of credit enhancement or
any interest subsidy agreement and (vi) such other assets of the kind
described herein as may be specified in the applicable Prospectus Supplement.
The Trust Estate will not include the portion of interest on the Mortgage
Loans which constitutes the Fixed Retained Yield, if any. See "Servicing of
the Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment
of Expenses."
Mortgage Loans
The Mortgage Loans will have been acquired by the Depositor from affiliates
of the Depositor or unaffiliated mortgage loan originators or sellers (each, a
"Seller"). The Mortgage Loans will have been originated by affiliated or
unaffiliated mortgage loan originators. Each Mortgage Loan will have been
underwritten either to the standards set forth herein or to such other
standards set forth in the applicable Prospectus Supplement. See "The Mortgage
Loan Programs--Mortgage Loan Underwriting."
Each of the Mortgage Loans will be secured by a Mortgage on a Mortgaged
Property located in any of the 50 states or the District of Columbia.
If specified in the applicable Prospectus Supplement, the Mortgage Loans may
be secured by leases on real property under circumstances that the applicable
Seller determines in its discretion are commonly acceptable to institutional
mortgage investors. A Mortgage Loan secured by a lease on real property is
secured not by a fee simple interest in the Mortgaged Property but rather by a
lease under which the mortgagor has the right, for a specified term, to use
the related real estate and the residential dwelling located thereon.
Generally, a Mortgage Loan will be secured by a lease only if the use of
leasehold estates as security for mortgage loans is customary in the area
where the Mortgaged Property is located, the lease is not subject to any prior
lien that could result in termination of the lease and the term of the lease
ends at least five years beyond the maturity date of the related Mortgage
Loan. The provisions of each lease securing a Mortgage Loan will expressly
permit (i) mortgaging of the leasehold estate, (ii) assignment of the lease
without the lessor's consent and (iii) acquisition by the holder of the
Mortgage, in its own or its nominee's name, of the rights of the lessee upon
foreclosure or assignment in lieu of foreclosure, unless alternative
arrangements provide the holder of the Mortgage with substantially similar
protections. No lease will contain provisions which (i) provide for
termination upon the lessee's default without the holder of the Mortgage being
entitled to receive written notice of, and opportunity to cure, such default,
(ii) provide for termination in the event of damage or destruction as long as
the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from
being insured under the hazard insurance policy or policies related to the
premises.
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The Prospectus Supplement will set forth the geographic distribution of
Mortgaged Properties and the number and aggregate unpaid principal balances of
the Mortgage Loans by category of Mortgaged Property. The Prospectus
Supplement for each Series will also set forth the range of original terms to
maturity of the Mortgage Loans in the Trust Estate, the weighted average
remaining term to stated maturity at the Cut-Off Date of such Mortgage Loans,
the earliest and latest months of origination of such Mortgage Loans, the
range of Mortgage Interest Rates borne by such Mortgage Loans, if such
Mortgage Loans have varying Net Mortgage Interest Rates, the weighted average
Net Mortgage Interest Rate at the Cut-Off Date of such Mortgage Loans, the
range of loan-to-value ratios at the time of origination of such Mortgage
Loans and the range of principal balances at origination of such Mortgage
Loans.
A Mortgage Loan will generally provide for level monthly installments
(except, in the case of Balloon Loans, the final payment) consisting of
interest equal to one-twelfth of the applicable Mortgage Interest Rate times
the unpaid principal balance, with the remainder of such payment applied to
principal (an "Actuarial Mortgage Loan"). No adjustment is made if payment on
an Actuarial Mortgage Loan is made earlier or later than the Due Date,
although the mortgagor may be subject to a late payment charge. If so
specified in the applicable Prospectus Supplement, some Mortgage Loans may
provide for payments that are allocated to principal and interest according to
the daily simple interest method (each, a "Simple Interest Mortgage Loan"). A
Simple Interest Mortgage Loan provides for the amortization of the amount
financed under the Mortgage Loan over a series of equal monthly payments
(except, in the case of a Balloon Loan, the final payment). Each monthly
payment consists of an installment of interest which is calculated on the
basis of the outstanding principal balance of the Mortgage Loan multiplied by
the stated Mortgage Interest Rate and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator of which is the
number of days in the annual period for which interest accrues on such
Mortgage Loan. As payments are received under a Simple Interest Mortgage Loan,
the amount received is applied first to interest accrued to the date of
payment and the balance is applied to reduce the unpaid principal balance.
Accordingly, if a borrower pays a fixed monthly installment on a Simple
Interest Mortgage Loan before its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid
principal balance will be correspondingly greater. The next scheduled payment,
however, will result in an allocation of a greater amount to interest if such
payment is made on its scheduled due date. Conversely, if a borrower pays a
fixed monthly installment after its scheduled due date, the portion of the
payment allocable to interest for the period since the preceding payment was
made will be greater than it would have been had the payment been made as
scheduled, and the remaining portion, if any, of the payment applied to reduce
the unpaid principal balance will be correspondingly less. Accordingly, if the
borrower consistently makes scheduled payments after the scheduled due date,
the Mortgage Loan will amortize more slowly than scheduled. If a Mortgage Loan
is prepaid, the borrower is required to pay interest only to the date of
prepayment.
The information with respect to the Mortgage Loans and Mortgaged Properties
described in the preceding three paragraphs may be presented in the Prospectus
Supplement for a Series as ranges in which the actual characteristics of such
Mortgage Loans and Mortgaged Properties are expected to fall. In all such
cases, information as to the final characteristics of the Mortgage Loans and
Mortgaged Properties will be available in a Current Report on Form 8-K which
will be filed with the Commission within 15 days of the initial issuance of
the related Series.
The Mortgage Loans in a Trust Estate will generally have monthly payments
due on the first of each month (each, a "Due Date") but may, if so specified
in the applicable Prospectus Supplement, have payments due on a different day
of each month and will be of one of the following types of mortgage loans:
a. Fixed Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, fully-amortizing Mortgage
Loans providing for level monthly payments of principal and interest and terms
at origination or modification of not more than 30 years. If specified in the
applicable Prospectus Supplement, fixed rates on certain Mortgage Loans may be
converted to adjustable rates after origination of such
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Mortgage Loans and upon the satisfaction of other conditions specified in the
applicable Prospectus Supplement. If so specified in the applicable Prospectus
Supplement, the Pooling and Servicing Agreement will require the Depositor or
another party to repurchase each such converted Mortgage Loan at the price set
forth in the applicable Prospectus Supplement. A Trust Estate containing
fixed-rate Mortgage Loans may contain convertible Mortgage Loans which have
converted from an adjustable interest rate prior to the formation of the Trust
Estate and which are subject to no further conversions.
b. Adjustable Rate Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain adjustable-rate, fully-amortizing
Mortgage Loans having an original or modified term to maturity of not more
than 40 years with a related Mortgage Interest Rate which generally adjusts
initially either one, three or six months, one, three, five, seven or ten
years subsequent to the initial Due Date, and thereafter at either one-month,
six-month, one-year or other intervals over the term of the Mortgage Loan to
equal the sum of a fixed margin set forth in the related Mortgage Note (the
"Note Margin") and an index. The applicable Prospectus Supplement will set
forth the relevant index and the highest, lowest and weighted average Note
Margin with respect to the adjustable-rate Mortgage Loans in the related Trust
Estate. The applicable Prospectus Supplement will also indicate any periodic
or lifetime limitations on the adjustment of any Mortgage Interest Rate.
If specified in the applicable Prospectus Supplement, adjustable rates on
certain Mortgage Loans may be converted to fixed rates after origination of
such Mortgage Loans and upon the satisfaction of the conditions specified in
the applicable Prospectus Supplement. If specified in the applicable
Prospectus Supplement, the Depositor or another party will generally be
required to repurchase each such converted Mortgage Loan at the price set
forth in the applicable Prospectus Supplement. A Trust Estate containing
adjustable-rate Mortgage Loans may contain convertible Mortgage Loans which
have converted from a fixed interest rate prior to the formation of the Trust
Estate.
If so specified in the applicable Prospectus Supplement, a Trust Estate may
contain adjustable-rate Mortgage Loans which have Mortgage Interest Rates that
generally adjust monthly or may adjust at other intervals as specified in the
applicable Prospectus Supplement. The scheduled monthly payment will be
adjusted as and when described in the applicable Prospectus Supplement (at
intervals which may be different from those at which the Mortgage Interest
Rate is adjusted) to an amount that would fully amortize the Mortgage Loan
over its remaining term on a level debt service basis. Increases in the
scheduled monthly payment may be subject to certain limitations, as specified
in the applicable Prospectus Supplement, which may result in negative
amortization of principal. If an adjustment to the Mortgage Interest Rate on
such a Mortgage Loan causes the amount of interest accrued thereon in any
month to exceed the current scheduled monthly payment on such mortgage loan,
the resulting amount of interest that has accrued but is not then payable
("Deferred Interest") will be added to the principal balance of such Mortgage
Loan.
c. Net 5 Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may contain Mortgage Loans having an original term to maturity of
not more than 30 years with a Mortgage Interest 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 Interest
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 Trust Estate. The related Prospectus
Supplement will also indicate any periodic or lifetime limitations on changes
in any per annum Mortgage Interest Rate at the time of any adjustment.
d. Graduated Payment Loans. If so specified in the applicable Prospectus
Supplement, a Trust Estate may contain fixed-rate, graduated-payment Mortgage
Loans having original or modified terms to maturity of not more than 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Interest Rate on such Mortgage Loan. Such monthly
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payments increase at the beginning of the second year by a specified
percentage of the monthly payment during the preceding year and each year
specified thereafter to the extent necessary to amortize the Mortgage Loan
over the remainder of its term or other shorter period. Mortgage Loans
incorporating such graduated payment features may include (i) "Graduated Pay
Mortgage Loans," pursuant to which amounts constituting Deferred Interest are
added to the principal balances of such Mortgage Loans, (ii) "Tiered Payment
Mortgage Loans," pursuant to which, if the amount of interest accrued in any
month exceeds the current scheduled payment for such month, such excess
amounts are paid from a subsidy account (usually funded by a home builder or
family member) established at closing and (iii) "Growing Equity Mortgage
Loans," for which the monthly payments increase at a rate which has the effect
of amortizing the loan over a period shorter than the stated term.
e. Subsidy Loans. If so specified in the applicable Prospectus Supplement, a
Trust Estate may contain Mortgage Loans subject to temporary interest subsidy
agreements ("Subsidy Loans") pursuant to which the monthly payments made by
the related mortgagors will be less than the scheduled monthly payments on
such Mortgage Loans with the present value of the resulting difference in
payment ("Subsidy Payments") being provided by the employer of the mortgagor,
generally on an annual basis. Subsidy Payments will generally be placed in a
custodial account ("Subsidy Account") by the related Servicer. Despite the
existence of a subsidy program, a mortgagor remains primarily liable for
making all scheduled payments on a Subsidy Loan and for all other obligations
provided for in the related Mortgage Note and Mortgage Loan.
Subsidy Loans are offered by employers generally through either a graduated
or fixed subsidy loan program, or a combination thereof. The terms of the
subsidy agreements relating to Subsidy Loans generally range from one to ten
years. The subsidy agreements relating to Subsidy Loans made under a graduated
program generally will provide for subsidy payments that result in effective
subsidized interest rates between three percentage points and five percentage
points below the Mortgage Interest Rates specified in the related Mortgage
Notes. Generally, under a graduated program, the subsidized rate for a
Mortgage Loan will increase approximately one percentage point per year until
it equals the full Mortgage Interest Rate. For example, if the initial
subsidized interest rate is five percentage points below the Mortgage Interest
Rate in year one, the subsidized rate will increase to four percentage points
below the Mortgage Interest Rate in year two, and likewise until year six,
when the subsidized rate will equal the Mortgage Interest Rate. Where the
subsidy agreements relating to Subsidy Loans are in effect for longer than
five years, the subsidized interest rates generally increase at smaller
percentage increments for each year. The subsidy agreements relating to
Subsidy Loans made under a fixed program generally will provide for subsidized
interest rates at fixed percentages (generally one percentage point to two
percentage points) below the Mortgage Interest Rates for specified periods,
generally not in excess of ten years. Subsidy Loans are also offered pursuant
to combination fixed/graduated programs. The subsidy agreements relating to
such Subsidy Loans generally will provide for an initial fixed subsidy of up
to five percentage points below the related Mortgage Interest Rate for up to
five years, and then a periodic reduction in the subsidy for up to five years,
at an equal fixed percentage per year until the subsidized rate equals the
Mortgage Interest Rate.
Generally, employers may terminate subsidy programs in the event of (i) the
mortgagor's death, retirement, resignation or termination of employment, (ii)
the full prepayment of the Subsidy Loan by the mortgagor, (iii) the sale or
transfer by the mortgagor of the related Mortgaged Property as a result of
which the mortgagee is entitled to accelerate the Subsidy Loan pursuant to the
"due-on-sale" clause contained in the Mortgage, or (iv) the commencement of
foreclosure proceedings or the acceptance of a deed in lieu of foreclosure. In
addition, some subsidy programs provide that if prevailing market rates of
interest on mortgage loans similar to a Subsidy Loan are less than the
Mortgage Interest Rate of such Subsidy Loan, the employer may request that the
mortgagor refinance such Subsidy Loan and may terminate the related subsidy
agreement if the mortgagor fails to refinance such Subsidy Loan. In the event
the mortgagor refinances such Subsidy Loan, the new loan will not be included
in the Trust Estate. See "Prepayment and Yield Considerations." In the event a
subsidy agreement is terminated, the amount remaining in the Subsidy Account
will be returned to the employer, and the mortgagor will be obligated to make
the full amount of all remaining scheduled payments, if any. The mortgagor's
reduced monthly housing expense as a consequence of payments under a subsidy
agreement is used by certain Sellers in determining certain expense-to-income
ratios utilized in underwriting a Subsidy Loan. See "The Mortgage Loan
Programs--Mortgage Loan Underwriting."
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f. Buy-Down Loans. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans subject to temporary buy-down plans
("Buy-Down Loans") pursuant to which the monthly payments made by the
mortgagor during the early years of the Mortgage Loan will be less than the
scheduled monthly payments on the Mortgage Loan. The resulting difference in
payment will be compensated for from an amount contributed by the seller of
the related Mortgaged Property or another source, including the originator of
the Mortgage Loan (generally on a present value basis) and, if so specified in
the applicable Prospectus Supplement, placed in a custodial account (the "Buy-
Down Fund") by the related Servicer. If the mortgagor on a Buy-Down Loan
prepays such Mortgage Loan in its entirety, or defaults on such Mortgage Loan
and the Mortgaged Property is sold in liquidation thereof, during the period
when the mortgagor is not obligated, by virtue of the buy-down plan, to pay
the full monthly payment otherwise due on such loan, the unpaid principal
balance of such Buy-Down Loan will be reduced by the amounts remaining in the
Buy-Down Fund with respect to such Buy-Down Loan, and such amounts will be
deposited in the Servicer Custodial Account or the Certificate Account, net of
any amounts paid with respect to such Buy-Down Loan by any insurer, guarantor
or other person pursuant to a credit enhancement arrangement described in the
applicable Prospectus Supplement.
g. Balloon Loans. If so specified in the applicable Prospectus Supplement,
a Trust Estate may contain Mortgage Loans which are amortized over a fixed
period not exceeding 30 years but which have shorter terms to maturity
("Balloon Loans") that causes the outstanding principal balance of the related
Mortgage Loan to be due and payable at the end of a certain specified period
(the "Balloon Period"). The borrower of such Balloon Loan will be obligated to
pay the entire outstanding principal balance of the Balloon Loan at the end of
the related Balloon Period. In the event the related mortgagor refinances a
Balloon Loan at maturity, the new loan will not be included in the Trust
Estate. See "Prepayment and Yield Considerations" herein.
h. Pledged Asset Mortgage Loans. If so specified in the applicable
Prospectus Supplement, a Trust Estate may contain fixed-rate mortgage loans
having original terms to stated maturity of not more than 30 years which are
either (i) secured by a security interest in additional collateral (normally
securities) owned by the borrower or (ii) supported by a third party guarantee
(usually a parent of the borrower); which is in turn secured by a security
interest in collateral (usually securities) owned by such guarantor (any such
loans, "Pledged Asset Mortgage Loans," and any such collateral, "Additional
Collateral"). Generally, the amount of such Additional Collateral will not
exceed 30% of the amount of such loan, and the requirement to maintain
Additional Collateral will terminate when the principal amount of the loan is
paid down to a predetermined amount.
A Trust Estate may also include other types of first-lien, residential
Mortgage Loans to the extent set forth in the applicable Prospectus
Supplement.
THE DEPOSITOR
Bank of America Mortgage Securities, Inc. (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 "Bank of America Mortgage
Securities, Inc." on January 8, 1999. The Depositor is a wholly-owned
subsidiary of Bank of America, N.A. It is not expected that the Depositor will
have any business operations other than offering Certificates and related
activities.
The Depositor maintains its principal executive office at 201 North Tryon
Street, Charlotte, North Carolina 28255. Its telephone number is 704-388-4503.
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THE MORTGAGE LOAN PROGRAMS
General
The Depositor will purchase the Mortgage Loans, either directly or through
its affiliates, from Sellers. The Sellers may be affiliated or unaffiliated
with the Depositor. The Mortgage Loans will generally have been underwritten
in accordance with the underwriting standards set forth below. In the event
the Mortgage Loans in a particular Trust Estate have been originated in
accordance with underwriting standards which vary materially from those
described below, the underwriting standards will be described in the related
Prospectus Supplement.
Mortgage Loan Underwriting
The underwriting guidelines are intended to evaluate the mortgagor's credit
standing and repayment ability and the value and adequacy of the mortgaged
property as collateral. The underwriting guidelines are applied in a standard
procedure which is intended to comply with applicable federal and state laws
and regulations. With respect to the underwriting guidelines described below,
as well as any other underwriting guidelines that may be applicable to the
Mortgage Loans, such underwriting standards generally include a set of
specific criteria pursuant to which the underwriting evaluation is made.
However, the application of such underwriting guidelines does not imply that
each specific criteria was satisfied individually. A Seller will have
considered a Mortgage Loan to be originated in accordance with a given set of
underwriting guidelines if, based on an overall qualitative evaluation, the
loan is in substantial compliance with such underwriting guidelines. A
Mortgage Loan may be considered to comply with a set of underwriting
standards, even if one or more specific criteria included in such underwriting
standards were not satisfied, if other factors compensated for the criteria
that were not satisfied or the Mortgage Loan is considered to be in
substantial compliance with the underwriting standards.
Initially, a prospective mortgagor is required to fill out a detailed
application designed to provide pertinent credit information. As part of the
description of the prospective mortgagor's financial condition, the applicant
is required to provide current information describing assets and liabilities
and a statement of income and expenses, as well as an authorization to apply
for a credit report which summarizes the applicant's credit history with
merchants and lenders and any record of bankruptcy. In most cases, an
employment verification is obtained either from the applicant's employer
wherein the employer reports the length of employment with that organization,
the current salary and an indication as to whether it is expected that the
applicant will continue such employment in the future or through analysis of
copies of federal withholding (IRS W-2) forms, current payroll earnings
statements and account statements of the applicant. If a prospective mortgagor
is self-employed, the applicant is required to submit copies of signed tax
returns. The applicant also authorizes deposit verification at all financial
institutions where the applicant has accounts. A Seller may, as part of its
overall evaluation of the applicant's creditworthiness, use a credit scoring
system or mortgage scoring system to evaluate in a statistical manner the
expected performance of a Mortgage Loan based on the pertinent credit
information concerning the applicant provided through national credit bureaus,
certain other information provided by the applicant and an assessment of
specific mortgage loan characteristics, including loan-to-value ratio and type
of loan product.
Certain Sellers may use an automated process to assist in making credit
decisions on certain mortgage 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 lower probability of default is
subject to less stringent underwriting guidelines and documentation standards
to verify the information in the application.
In addition, certain Sellers may maintain alternative underwriting
guidelines for certain qualifying Mortgage Loans underwritten through an
underwriting program ("Limited or Reduced Documentation Guidelines") designed
to streamline the loan underwriting process. Certain reduced loan
documentation programs may not require income, employment or asset
verifications. Generally, in order to be eligible for a reduced loan
documentation program, the Mortgaged Property must have a loan-to-value ratio
which supports the amount of the Mortgage Loan and the mortgagor must have a
good credit history. Eligibility for such program may be determined by use of
a credit scoring model.
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Once all applicable employment and deposit documentation and the credit
report are received, a determination is made as to whether the prospective
mortgagor has sufficient monthly income available to meet the mortgagor's
monthly obligations on the proposed mortgage loan and other expenses related
to the mortgaged property (such as property taxes, hazard insurance and
maintenance and utility costs) and to meet other financial obligations and
monthly living expenses.
To determine the adequacy of the Mortgaged Property as collateral, an
appraisal is made of each property considered for financing. The appraisal is
conducted by either a staff appraiser of the applicable Seller or an
independent appraiser. The appraiser is required to inspect the property and
verify that it is in acceptable condition and that construction, if recent,
has been completed. The appraisal is based on various factors including the
appraiser's estimate of values, giving appropriate weight to both the market
value of comparable housing, as well as the cost of replacing the property.
Appraisers may be required by a Seller to note on their appraisal any
environmental hazard the appraiser becomes aware of while appraising the
property. Properties with contaminated water or septic may be ineligible for
financing by certain originators. EPA Lead Paint requirements for notice and
an inspection period are standard for properties built before 1978. Properties
containing other hazards may be eligible for financing if the appraiser can
value the property showing the impact of the hazard, and the borrower executes
a "hold harmless" letter to the lender.
The title insurance policy may include Environmental Protection Lien
Endorsement coverage (ALTA Form 8.1 or its equivalent) excepting only
Superliens which may arise after the loan is made. See "Certain Legal Aspects
of the Mortgage Loans--Environmental Considerations."
With respect to certain mortgage loans, the underwriting of such mortgage
loans may be based on data obtained by parties, other than the applicable
Seller, that are involved at various stages in the mortgage origination or
acquisition process. This typically occurs under circumstances in which loans
are subject to more than one approval process, as when correspondents, certain
mortgage brokers or similar entities that have been approved by a Seller to
process loans on its behalf, or independent contractors hired by such Seller
to perform underwriting services on its behalf make initial determinations as
to the consistency of loans with such Seller's underwriting guidelines. The
underwriting of mortgage loans acquired by a Seller pursuant to a delegated
underwriting arrangement with a correspondent may not be reviewed prior to
acquisition of the mortgage loan by such Seller although the mortgage loan
file may be reviewed by such Seller to confirm that certain documents are
included in the file. Instead, such Seller may rely on (i) the correspondent's
representations that such mortgage loan was underwritten in accordance with
such Seller's underwriting standards and (ii) a post-purchase review of a
sampling of all mortgage loans acquired from such originator. In addition, in
order to be eligible to sell mortgage loans to such Seller pursuant to a
delegated underwriting arrangement, the originator must meet certain
requirements including, among other things, certain quality, operational and
financial guidelines.
Certain states where the Mortgaged Properties securing the Mortgage Notes
are located are "anti-deficiency" states where, in general, lenders providing
credit on one-to-four-family properties must look solely to the property for
repayment in the event of foreclosure, see "Certain Legal Aspects of the
Mortgage Loans--Anti-Deficiency Legislation, the Bankruptcy Code and Other
Limitations on Lenders." The underwriting guidelines in 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 and provides sufficient
value to mitigate the effects of adverse shifts in real estate values,
although there can be no assurance that such value will support the
outstanding loan balance in the future.
Except as described in the related Prospectus Supplement, Mortgage Loans
originated with Loan-to-Value Ratios in excess of 80% will be covered by
primary mortgage insurance. The "Loan-to-Value Ratio" is the ratio, expressed
as a percentage, of the principal amount of the Mortgage Loan at origination
to the lesser of (i) the appraised value of the related Mortgaged Property, as
established by an appraisal obtained by the originator prior to origination,
or (ii) the sale price for such property. For the purpose of calculating the
Loan-to-Value
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Ratio of any Mortgage Loan that is the result of the refinancing (including a
refinancing for "equity take out" purposes) of an existing mortgage loan, the
appraised value of the related Mortgaged Property is generally determined by
reference to an appraisal obtained in connection with the origination of the
replacement loan.
Certain of the Mortgage Loans may be purchased by the Depositor either
directly or through an affiliate in negotiated transactions, and such
negotiated transactions may be governed by contractual agreements. The
contractual agreements with Sellers may provide the commitment by the
Depositor or an affiliate to accept the delivery of a certain dollar amount of
mortgage loans over a specific period of time; this commitment may allow for
the delivery of mortgage loans one at a time or in multiples as aggregated by
the Seller. Many of the contractual agreements allow the delegation of all
underwriting functions to the Seller, who will represent that the Mortgage
Loans have been originated in accordance with underwriting standards agreed to
by the Depositor or its affiliate. In the event such standards differ
naturally from those set forth above, the related Prospectus Supplement will
describe such standards.
Representations and Warranties
In connection with the transfer of the Mortgage Loans related to any Series
by the Depositor to the Trust Estate, the Depositor will generally make
certain representations and warranties regarding the Mortgage Loans. If so
indicated in the applicable Prospectus Supplement, the Depositor may, rather
than itself making representations and warranties, cause the representations
and warranties made by the Seller in connection with its sale of Mortgage
Loans to the Depositor or to another affiliate of the Depositor to be assigned
to the Trust Estate. In such cases, the Seller's representations and
warranties may have been made as of a date prior to the date of execution of
the Pooling and Servicing Agreement. Such representations and warranties
(whether made by the Depositor or another party) will generally include the
following with respect to the Mortgage Loans, or each Mortgage Loan, as the
case may be: (i) the schedule of Mortgage Loans appearing as an exhibit to
such Pooling and Servicing Agreement is correct in all material respects at
the date or dates respecting which such information is furnished as specified
therein; (ii) immediately prior to the transfer and assignment contemplated by
the Pooling and Servicing Agreement, the Depositor is the sole owner and
holder of the Mortgage Loan, free and clear of any and all liens, pledges,
charges or security interests of any nature and has full right and authority
to sell and assign the same; (iii) to the knowledge of the representing party,
no Mortgage Note or Mortgage is subject to any right of rescission, set-off,
counterclaim or defense; (iv) the Mortgage Loan is covered by a title
insurance policy (or in the case of any Mortgage Loan secured by a Mortgaged
Property located in a jurisdiction where such policies are generally not
available, an opinion of counsel of the type customarily rendered in such
jurisdiction in lieu of title insurance is instead received); (v) the Mortgage
is a valid, subsisting and enforceable first lien on the related Mortgaged
Property; (vi) the Mortgaged Property is undamaged by water, fire, earthquake
or earth movement, windstorm, flood, tornado or similar casualty (excluding
casualty from the presence of hazardous wastes or hazardous substances, as to
which no representation is made), so as to affect adversely the value of the
Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended; (vii) all payments required to be made up to the Due
Date immediately preceding the Cut-Off Date for such Mortgage Loan under the
terms of the related Mortgage Note have been made and no Mortgage Loan had
more than one delinquency in the 12 months preceding the Cut-Off Date; and
(viii) any and all requirements of any federal, state or local law with
respect to the origination of the Mortgage Loans including, without
limitation, usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws
applicable to the Mortgage Loans have been complied with.
No representations or warranties are made by the Depositor or any other
party as to the environmental condition of any Mortgaged Property including
the absence, presence or effect of hazardous wastes or hazardous substances on
such Mortgaged Property or any effect from the presence or effect of hazardous
wastes or hazardous substances on, near or emanating from such Mortgaged
Property. See "Certain Legal Aspects of the Mortgage Loans--Environmental
Considerations."
See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans to
the Trustee" for a description of the limited remedies available in connection
with breaches of the foregoing representations and warranties.
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DESCRIPTION OF THE CERTIFICATES
General
Each Series of Certificates will include one or more Classes. Any Class of
Certificates may consist of two or more non-severable components, each of
which may exhibit any of the principal or interest payment characteristics
described herein with respect to a Class of Certificates. A Series may include
one or more Classes of Certificates entitled, to the extent of funds
available, to (i) principal and interest distributions in respect of the
related Mortgage Loans, (ii) principal distributions, with no interest
distributions, (iii) interest distributions, with no principal distributions
or (iv) such other distributions as are described in the applicable Prospectus
Supplement.
Each Series of Certificates will be issued on the date specified in the
applicable Prospectus Supplement (the "Closing Date") pursuant to a Pooling
and Servicing Agreement (the "Pooling and Servicing Agreement") among the
Depositor, the Servicer(s) (or, if applicable, the Master Servicer), and the
Trustee named in the applicable Prospectus Supplement. An illustrative form of
Pooling and Servicing Agreement has been filed as an exhibit to the
registration statement of which this Prospectus is a part. The following
summaries describe material provisions common to the Certificates and to each
Pooling and Servicing Agreement. The summaries are subject to, and are
qualified by reference to, the further material provisions of the Pooling and
Servicing Agreement for each specific Series of Certificates, as described in
the applicable Prospectus Supplement. Wherever particular sections or defined
terms of the Pooling and Servicing Agreement are referred to, such sections or
defined terms are thereby incorporated herein by reference from the form of
Pooling and Servicing Agreement filed as an exhibit to the registration
statement.
Distributions to holders of Certificates (the "Certificateholders") of all
Series (other than the final distribution in retirement of the Certificates)
will be made by check mailed to the address of the person entitled thereto
(which in the case of Book-Entry Certificates will be Cede as nominee for DTC)
as it appears on the certificate register, except that, with respect to any
holder of a Certificate evidencing not less than a certain minimum
denomination set forth in the applicable Prospectus Supplement, distributions
will be made by wire transfer in immediately available funds, provided that
the Trustee or the Paying Agent acting on behalf of the Trustee shall have
been furnished with appropriate wiring instructions not less than seven
business days prior to the related Distribution Date. The final distribution
in retirement of Certificates will be made only upon presentation and
surrender of the Certificates at the office or agency maintained by the
Trustee or other entity for such purpose, as specified in the final
distribution notice to Certificateholders.
Each Series of Certificates will represent ownership interests in the
related Trust Estate. An election may be made to treat the Trust Estate (or
one or more segregated pools of assets therein) with respect to a Series of
Certificates as a REMIC. If such an election is made, such Series will consist
of one or more Classes of Certificates that will represent "regular interests"
within the meaning of Code Section 860G(a)(1) (such Class or Classes
collectively referred to as the "Regular Certificates") and one Class of
Certificates with respect to each REMIC that will be designated as the
"residual interest" within the meaning of Code Section 860G(a)(2) (the
"Residual Certificates") representing the right to receive distributions as
specified in the Prospectus Supplement for such Series. See "Federal Income
Tax Consequences."
The Depositor may sell certain Classes of the Certificates of a Series,
including one or more Classes of Subordinated Certificates, in privately
negotiated transactions exempt from registration under the Securities Act.
Alternatively, if so specified in a Prospectus Supplement relating to such
Subordinated Certificates, the Depositor may offer one or more Classes of the
Subordinated Certificates of a Series by means of this Prospectus and such
Prospectus Supplement.
Definitive Form
Certificates of a Series that are issued in fully-registered, certificated
form are referred to herein as "Definitive Certificates." Distributions of
principal of, and interest on, the Definitive Certificates will be made
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directly to holders of Definitive Certificates in accordance with the
procedures set forth in the Pooling and Servicing Agreement. The Definitive
Certificates of a Series offered hereby and by means of the applicable
Prospectus Supplements will be transferable and exchangeable at the office or
agency maintained by the Trustee or such other entity for such purpose set
forth in the applicable Prospectus Supplement. No service charge will be made
for any transfer or exchange of Definitive Certificates, but the Trustee or
such other entity may require payment of a sum sufficient to cover any tax or
other governmental charge in connection with such transfer or exchange.
In the event that an election is made to treat the Trust Estate (or one or
more segregated pools of assets therein) as a REMIC, the "residual interest"
thereof will be issued as a Definitive Certificate. No legal or beneficial
interest in all or any portion of any "residual interest" may be transferred
without the receipt by the transferor and the Trustee of an affidavit signed
by the transferee stating, among other things, that the transferee (i) is not
a disqualified organization within the meaning of Code Section 860E(e) or an
agent (including a broker, nominee or middleman) thereof and (ii) understands
that it may incur tax liabilities in excess of any cash flows generated by the
residual interest. Further, the transferee must state in the affidavit that it
(a) historically has paid its debts as they have come due, (b) intends to pay
its debts as they come due in the future and (c) intends to pay taxes
associated with holding the residual interest as they become due. The
transferor must certify to the Trustee that, as of the time of the transfer,
it has no actual knowledge that any of the statements made in the transferee
affidavit are false and no reason to know that the statements made by the
transferee pursuant to clauses (a), (b) and (c) of the preceding sentence are
false. See "Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates."
Book-Entry Form
Each Class of the Book-Entry Certificates of a Series initially will be
represented by one or more physical certificates registered in the name of
Cede & Co. ("Cede"), as nominee of DTC, which will be the "holder" or
"Certificateholder" of such Certificates, as such terms are used herein. No
person acquiring an interest in a Book-Entry Certificate (a "Beneficial
Owner") will be entitled to receive a Definitive Certificate representing such
person's interest in the Book-Entry Certificate, except as set forth below.
Unless and until Definitive Certificates are issued under the limited
circumstances described herein, all references to actions taken by
Certificateholders or holders shall, in the case of the Book-Entry
Certificates, refer to actions taken by DTC upon instructions from its DTC
Participants, and all references herein to distributions, notices, reports and
statements to Certificateholders or holders shall, in the case of the Book-
Entry Certificates, refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Certificates, as the
case may be, for distribution to Beneficial Owners in accordance with DTC
procedures.
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 Section 17A of the Securities Exchange Act of
1934, as amended. DTC was created to hold securities for its participating
organizations ("DTC Participants") and to facilitate the clearance and
settlement of securities transactions among DTC Participants through
electronic book entries, thereby eliminating the need for physical movement of
certificates. DTC Participants include securities brokers and dealers (which
may include any underwriter identified in the Prospectus Supplement applicable
to any Series), banks, trust companies and clearing corporations. Indirect
access to the DTC system also is available to banks, brokers, dealers, trust
companies and other institutions that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly ("Indirect
DTC 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 DTC Participants on whose behalf it acts with
respect to the Book-Entry Certificates and to receive and transmit
distributions of principal of
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and interest on the Book-Entry Certificates. DTC Participants and Indirect DTC
Participants with which Beneficial Owners have accounts with respect to the
Book-Entry Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Beneficial Owners.
Beneficial Owners that are not DTC Participants or Indirect DTC Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through DTC Participants
and Indirect DTC Participants. In addition, Beneficial Owners will receive all
distributions of principal and interest from the Trustee, or a Paying Agent on
behalf of the Trustee, through DTC Participants. DTC will forward such
distributions to its DTC Participants, which thereafter will forward them to
Indirect DTC Participants or Beneficial Owners. Beneficial Owners will not be
recognized by the Trustee, any Servicer, or the Master Servicer or any Paying
Agent as Certificateholders, as such term is used in the Pooling and Servicing
Agreement, and Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its DTC Participants.
Because DTC can only act on behalf of DTC Participants, who in turn act on
behalf of Indirect DTC Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities that
do not participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to the lack of a physical
certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee, or a Paying Agent on behalf
of the Trustee, to Cede, as nominee for DTC.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more DTC Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the
Depositor that it will take such actions with respect to specified Voting
Interests only at the direction of and on behalf of DTC Participants whose
holdings of Book-Entry Certificates evidence such specified Voting Interests.
DTC may take conflicting actions with respect to Voting Interests to the
extent that DTC Participants whose holdings of Book-Entry Certificates
evidence such Voting Interests authorize divergent action.
None of the Depositor, any Servicer, the Master Servicer or the Trustee will
have any responsibility for any aspect of the records relating to or payments
made on account of beneficial ownership interests of 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. In
the event of the insolvency of DTC, a DTC Participant or an Indirect DTC
Participant in whose name Book-Entry Certificates are registered, the ability
of the Beneficial Owners of such Book-Entry Certificates to obtain timely
payment and, if the limits of applicable insurance coverage by the Securities
Investor Protection Corporation are exceeded or if such coverage is otherwise
unavailable, ultimate payment, of amounts distributable with respect to such
Book-Entry Certificates may be impaired.
The Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i) the Trustee is advised in writing that DTC is no longer
willing or able to discharge properly its responsibilities as depository with
respect to the Book-Entry Certificates and the Trustee is unable to locate a
qualified successor, (ii) the Servicer(s) or the Master Servicer, as
applicable, optionally, elect to terminate the book-entry system through DTC,
(iii) after the occurrence of a dismissal or resignation of the Servicer(s) or
the Master Servicer, as applicable, under the Pooling and Servicing Agreement,
Beneficial Owners representing not less than 51% of the Voting Interests of
the outstanding Book-Entry Certificates advise the Trustee through DTC, in
writing, that the continuation of a book-entry system through DTC (or a
successor thereto) is no longer in the Beneficial Owners' best interest or
(iv) under such other circumstances as described in the related Prospectus
Supplement.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Trustee will be required to notify all Beneficial Owners
through DTC Participants of the availability of Definitive Certificates. Upon
surrender by DTC of the physical certificates representing the Book-Entry
Certificates and receipt of instructions for re-registration, the Trustee will
reissue the Book-Entry Certificates as Definitive Certificates to
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Beneficial Owners. The procedures relating to payment on and transfer of
Certificates initially issued as Definitive Certificates will thereafter apply
to those Book-Entry Certificates that have been reissued as Definitive
Certificates.
Distributions to Certificateholders
General. On each Distribution Date, each holder of a Certificate of a Class
will be entitled to receive its Certificate's Percentage Interest of the
portion of the Pool Distribution Amount allocated to such Class. The undivided
percentage interest (the "Percentage Interest") represented by any Certificate
of a Class in distributions to such Class will be equal to the percentage
obtained by dividing the initial principal balance (or notional amount) of
such Certificate by the aggregate initial principal balance (or notional
amount) of all Certificates of such Class.
In general, the funds available for distribution to Certificateholders of a
Series of Certificates with respect to each Distribution Date for such Series
(the "Pool Distribution Amount") will be the sum of all previously
undistributed payments or other receipts on account of principal (including
principal prepayments and Liquidation Proceeds, if any) and interest on or in
respect of the related Mortgage Loans received by the related Servicer after
the Cut-Off Date (except for amounts due on or prior to the Cut-Off Date), or
received by the related Servicer on or prior to the Cut-Off Date but due after
the Cut-Off Date, in either case received on or prior to the business day
preceding the Determination Date in the month in which such Distribution Date
occurs, plus all Periodic Advances with respect to payments due to be received
on the Mortgage Loans on the Due Date preceding such Distribution Date, but
excluding the following:
(a) amounts received as late payments of principal or interest respecting
which one or more unreimbursed Periodic Advances has been made;
(b) that portion of Liquidation Proceeds with respect to a Mortgage Loan
which represents any unreimbursed Periodic Advances;
(c) those portions of each payment of interest on a particular Mortgage
Loan which represent (i) the Fixed Retained Yield, if any, (ii) the
applicable Servicing Fee, (iii) the applicable Master Servicing Fee, if
any, (iv) the Trustee Fee and (v) any other amounts described in the
applicable Prospectus Supplement;
(d) all amounts representing scheduled payments of principal and interest
due after the Due Date occurring in the month in which such Distribution
Date occurs;
(e) all proceeds (including Liquidation Proceeds other than, in certain
cases as specified in the applicable Prospectus Supplement, Liquidation
Proceeds which were received prior to the related Servicer's determination
that no further recoveries on a defaulted Mortgage Loan will be forthcoming
("Partial Liquidation Proceeds")) of any Mortgage Loans, or property
acquired in respect thereof, that were liquidated, foreclosed, purchased or
repurchased pursuant to the applicable Pooling and Servicing Agreement,
which proceeds were received on or after the Due Date occurring in the
month in which such Distribution Date occurs and all principal prepayments
in full, partial principal prepayments and Partial Liquidation Proceeds
received by the related Servicer on or after the Determination Date (or,
with respect to any such amount, and if specified in the applicable
Prospectus Supplement, the Due Date) occurring in the month in which such
Distribution Date occurs, and all related payments of interest on such
amounts;
(f) that portion of Liquidation Proceeds which represents any unpaid
Servicing Fees, Master Servicing Fee or any Trustee Fee to which the
related Servicer, the Trustee or the Master Servicer, respectively, is
entitled and any unpaid Fixed Retained Yield;
(g) if an election has been made to treat the applicable Trust Estate as
a REMIC, any Net Foreclosure Profits with respect to such Distribution
Date;
(h) all amounts representing certain expenses reimbursable to the Master
Servicer or any Servicer and other amounts permitted to be withdrawn by the
Master Servicer or such Servicer from the Certificate Account, in each case
pursuant to the applicable Pooling and Servicing Agreement;
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(i) all amounts in the nature of late fees, assumption fees, prepayment
fees and similar fees which the related Servicer is entitled to retain
pursuant to the applicable Underlying Servicing Agreement or applicable
Pooling and Servicing Agreement;
(j) reinvestment earnings on payments received in respect of the Mortgage
Loans; and
(k) any recovery of an amount in respect of principal which had
previously been allocated as a realized loss to such Series of
Certificates.
The applicable Prospectus Supplement for a Series will describe any
variation in the calculation of the Pool Distribution Amount for such Series.
"Net Foreclosure Profits" with respect to a Distribution Date will be the
excess of (i) the amount by which any aggregate profits on liquidated Mortgage
Loans with respect to which net Liquidation Proceeds exceed the unpaid
principal balance thereof plus accrued interest thereon at the Mortgage
Interest Rate over (ii) aggregate realized losses on liquidated Mortgage Loans
with respect to which net Liquidation Proceeds are less than the unpaid
principal balance thereof plus accrued interest thereon at the Mortgage
Interest Rate.
Distributions of Interest. With respect to each Series of Certificates,
interest on the related Mortgage Loans at the weighted average of the
applicable Net Mortgage Interest Rates thereof, will be passed through monthly
to holders of the related Classes of Certificates in the aggregate, in
accordance with the particular terms of each such Class of Certificates. The
"Net Mortgage Interest Rate" for each Mortgage Loan in a given period will
equal the mortgage interest rate for such Mortgage Loan in such period, as
specified in the related Mortgage Note (the "Mortgage Interest Rate"), less
the portion thereof, if any, not contained in the Trust Estate (the "Fixed
Retained Yield"), and less amounts payable to the Servicer for servicing the
Mortgage Loan (the "Servicing Fee"), the fee payable to the Master Servicer,
if any (the "Master Servicing Fee"), the fee payable to the Trustee (the
"Trustee Fee") and any related expenses specified in the applicable Prospectus
Supplement.
Interest will accrue on the principal balance (or notional amount, as
described below) of each Class of Certificates entitled to interest at the
Pass-Through Rate for such Class indicated in the applicable Prospectus
Supplement (which may be a fixed rate or an adjustable rate) from the date and
for the periods specified in such Prospectus Supplement. To the extent the
Pool Distribution Amount is available therefor, interest accrued during each
such specified period on each Class of Certificates entitled to interest
(other than a Class that provides for interest that accrues, but is not
currently payable, referred to hereinafter as "Accrual Certificates") will be
distributable on the Distribution Dates specified in the applicable Prospectus
Supplement until the principal balance (or notional amount) of such Class has
been reduced to zero. Distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will generally be
calculated based on the notional amount of such Certificate. The notional
amount of a Certificate will not evidence an interest in or entitlement to
distributions allocable to principal but will be solely for convenience in
expressing the calculation of interest and for certain other purposes.
With respect to any Class of Accrual Certificates, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
principal balance of such Class of Certificates on that Distribution Date.
Distributions of interest on each Class of Accrual Certificates will commence
only after the occurrence of the events or the existence of the circumstance
specified in such Prospectus Supplement and, prior to such time, or in the
absence of such circumstances, the principal balance of such Class will
increase on each Distribution Date by the amount of interest that accrued on
such Class during the preceding interest accrual period but that was not
required to be distributed to such Class on such Distribution Date. Any such
Class of Accrual Certificates will thereafter accrue interest on its
outstanding principal balance as so adjusted.
Distributions of Principal. The principal balance of any Class of
Certificates entitled to distributions of principal will generally be the
original principal balance of such Class specified in such Prospectus
Supplement, reduced by all distributions reported to the holders of such
Certificates as allocable to principal and any losses
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on the related Mortgage Loans allocated to such Class of Certificates and (i)
in the case of Accrual Certificates, increased by all interest accrued but not
then distributable on such Accrual Certificates and (ii) in the case of a
Series of Certificates representing interests in a Trust Estate containing
adjustable-rate Mortgage Loans, increased by any Deferred Interest allocable
to such Class. The principal balance of a Class of Certificates generally
represents the maximum specified dollar amount (exclusive of any interest that
may accrue on such Class to which the holder thereof is entitled from the cash
flow on the related Mortgage Loans at such time) and will decline to the
extent of distributions in reduction of the principal balance of, and
allocations of losses to, such Class. Certificates with no principal balance
will not receive distributions in respect of principal. The applicable
Prospectus Supplement will specify the method by which the amount of principal
to be distributed on the Certificates on each Distribution Date will be
calculated and the manner in which such amount will be allocated among the
Classes of Certificates entitled to distributions of principal.
If so provided in the applicable Prospectus Supplement, one or more Classes
of Senior Certificates will be entitled to receive all or a disproportionate
percentage of the payments of principal that are received from borrowers in
advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the months of such payments or of
other unscheduled principal receipts or recoveries in the percentages and
under the circumstances or for the periods specified in such Prospectus
Supplement. Any such allocation of principal prepayments or other unscheduled
receipts or recoveries in respect of principal to such Class or Classes of
Senior Certificates will have the effect of accelerating the amortization of
such Senior Certificates while increasing the interests evidenced by the
Subordinated Certificates in the Trust Estate. Increasing the interests of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination provided by the
Subordinated Certificates.
If specified in the applicable Prospectus Supplement, the rights of the
holders of the Subordinated Certificates of a Series of Certificates for which
credit enhancement is provided through subordination to receive distributions
with respect to the Mortgage Loans in the related Trust Estate will be
subordinated to such rights of the holders of the Senior Certificates of the
same Series to the extent described below, except as otherwise set forth in
such Prospectus Supplement. This subordination is intended to enhance the
likelihood of regular receipt by holders of Senior Certificates of the full
amount of scheduled monthly payments of principal and interest due them and to
provide limited protection to the holders of the Senior Certificates against
losses due to mortgagor defaults.
The protection afforded to the holders of Senior Certificates of a Series of
Certificates for which credit enhancement is provided by the subordination
feature described above will be effected by (i) the preferential right of such
holders to receive, prior to any distribution being made in respect of the
related Subordinated Certificates on each Distribution Date, current
distributions on the related Mortgage Loans of principal and interest due them
on each Distribution Date out of the funds available for distribution on such
date in the related Certificate Account, (ii) by the right of such holders to
receive future distributions on the Mortgage Loans that would otherwise have
been payable to the holders of Subordinated Certificates and/or (iii) by the
prior allocation to the Subordinated Certificates of all or a portion of
losses realized on the related Mortgage Loans.
Losses realized on liquidated Mortgage Loans (other than Excess Special
Hazard Losses, Excess Fraud Losses and Excess Bankruptcy Losses as described
below) will be allocated to the holders of Subordinated Certificates through a
reduction of the amount of principal payments on the Mortgage Loans to which
such holders are entitled before any corresponding reduction is made in
respect of the Senior Certificate.
A "Special Hazard Loss" is a loss on a liquidated Mortgage Loan occurring as
a result of a hazard not insured against under a standard hazard insurance
policy of the type described herein under "Servicing of the Mortgage Loans--
Insurance Policies." A "Fraud Loss" is a loss on a liquidated Mortgage Loan as
to which there was fraud in the origination of such Mortgage Loan. A
"Bankruptcy Loss" is a loss on a liquidated Mortgage Loan 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 interest rate on a Mortgage Loan or an extension of its
maturity. Special Hazard Losses in excess of the amount specified in the
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applicable Prospectus Supplement (the "Special Hazard Loss Amount") are
"Excess Special Hazard Losses." Fraud Losses in excess of the amount specified
in the applicable Prospectus Supplement (the "Fraud Loss Amount") are "Excess
Fraud Losses." Bankruptcy losses in excess of the amount specified in the
applicable Prospectus Supplement (the "Bankruptcy Loss Amount") are "Excess
Bankruptcy Losses." Any Excess Special Hazard Losses, Excess Fraud Losses or
Excess Bankruptcy Losses with respect to a Series will be allocated on a pro
rata basis among the related Classes of Senior and Subordinated Certificates.
An allocation of a loss on a "pro rata basis" among two or more Classes of
Certificates means an allocation on a pro rata basis to each such Class of
Certificates on the basis of their then-outstanding principal balances in the
case of the principal portion of a loss or based on the accrued interest
thereon in the case of an interest portion of a loss.
Since the Special Hazard Loss Amount, Fraud Loss Amount and Bankruptcy Loss
Amount for a Series of Certificates are each expected to be less than the
amount of principal payments on the Mortgage Loans to which the holders of the
Subordinated Certificates of such Series are initially entitled (such amount
being subject to reduction, as described above, as a result of allocation of
losses on liquidated Mortgage Loans that are not Special Hazard Losses, Fraud
Losses or Bankruptcy Losses), the holders of Subordinated Certificates of such
Series will bear the risk of Special Hazard Losses, Fraud Losses and
Bankruptcy Losses to a lesser extent than they will bear other losses on
liquidated Mortgage Loans.
Although the subordination feature described above is intended to enhance
the likelihood of timely payment of principal and interest to the holders of
Senior Certificates, shortfalls could result in certain circumstances. For
example, a shortfall in the payment of principal otherwise due the holders of
Senior Certificates could occur if losses realized on the Mortgage Loans in a
Trust Estate were exceptionally high and were concentrated in a particular
month.
The holders of Subordinated Certificates will not be required to refund any
amounts previously properly distributed to them, regardless of whether there
are sufficient funds on a subsequent Distribution Date to make a full
distribution to holders of each Class of Senior Certificates of the same
Series.
Categories of Classes of Certificates
The Certificates of any Series may be comprised of one or more Classes. Such
Classes, in general, fall into different categories. The following chart
identifies and generally defines certain of the more typical categories. The
Prospectus Supplement for a Series of Certificates may identify the Classes
which comprise such Series by reference to the following categories or another
category specified in the Prospectus Supplement.
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PRINCIPAL TYPES
Categories of Classes Definitions
Accretion Directed A Class that receives principal payments from
Class................... amounts that would otherwise be distributed as
interest on specified Accrual Classes. Such
principal payments may be in lieu of or in addition
to principal payments from principal receipts on
the Mortgage Loans for the related Series.
Companion Class
(also sometimes referred
to as a
"Support Class")........ A Class that is entitled to receive principal
payments on any Distribution Date only if scheduled
payments have been made on specified Planned
Amortization Classes, Targeted Amortization Classes
and/or Scheduled Amortization Classes.
Component Class.......... A Class consisting of two or more specified
components (each, a "Component"), as described in
the applicable Prospectus Supplement. The
Components of a Class of Component Certificates may
have different principal and/or interest payment
characteristics but together constitute a single
class and do not represent severable interests.
Each Component of a Class of Component Certificates
may be identified as falling into one or more of
the categories in this chart.
Lockout Class............ A senior Class that is designed not to participate
in or to participate to a limited extent in (i.e.,
to be "locked out" of ), for a specified period,
the receipt of (1) principal prepayments on the
Mortgage Loans that are allocated
disproportionately to the senior Classes of such
Series as a group pursuant to a "shifting interest"
structure and/or (2) scheduled principal payments
on the Mortgage Loans that are allocated to the
senior Classes as a group. A Lockout Class will
typically not be entitled to receive, or will be
entitled to receive only a restricted portion of,
distributions of principal prepayments and/or
scheduled principal prepayments, as applicable, for
a period of several years, during which time all or
a portion of such principal payments that it would
otherwise be entitled to receive in the absence of
a "lockout" structure will be distributed in
reduction of the Principal Balance of other senior
Classes. Lockout Classes are designed to minimize
weighted average life volatility during the lockout
period.
Notional Amount Class.... A Class having no principal balance and bearing
interest on the related notional amount. The
notional amount is used for purposes of the
determination of interest distributions.
Pass-Through Class....... A Class of Senior Certificates that is entitled to
receive a specified percentage of the principal
payments that are distributable to the Senior
Certificates or applicable group of Senior
Certificates (other than any Ratio Strip Class) in
the aggregate on a Distribution Date and that is
not designated as a Sequential Pay Class.
Planned Amortization
Class (also sometimes
referred to as
a "PAC")................ A Class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming two
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constant prepayment rates for the underlying
Mortgage Loans. These two rates are the endpoints
for the "structuring range" for the Planned
Amortization Class. The Planned Amortization
Classes in any Series of Certificates may be
subdivided into different categories (e.g., Planned
Amortization Class I ("PAC I"), Planned
Amortization Class II ("PAC II") and so forth)
derived using different structuring ranges. A PAC
is designed to provide protection against
prepayments occurring at a constant rate within the
structuring range.
Ratio Strip Class........ A Class that is entitled to receive a constant
proportion, or "ratio strip," of the principal
payments on the underlying Mortgage Loans.
Scheduled Amortization
Class................... A Class that is designed to receive principal
payments using a predetermined principal balance
schedule but is not designated as a Planned
Amortization Class or Targeted Amortization Class.
The schedule is derived by assuming either two
constant prepayment rates or a single constant
prepayment rate for the underlying Mortgage Loans.
In the former case, the two rates are the endpoints
for the "structuring range" for the Scheduled
Amortization Class and such range generally is
narrower than that for a Planned Amortization
Class. Typically, the Support Class for the
applicable Series of Certificates generally will
represent a smaller percentage of the Scheduled
Amortization Class than a Support Class generally
would represent in relation to a Planned
Amortization Class or a Targeted Amortization
Class. A Scheduled Amortization Class is generally
less sensitive to prepayments than a Companion
Class, but more sensitive than a Planned
Amortization Class or a Targeted Amortization
Class.
Senior Class............. A Class that is entitled to receive payments of
principal and interest on each Distribution Date
prior to the Classes of Subordinated Certificates.
Sequential Pay Class..... Classes that are entitled to receive principal
payments in a prescribed sequence, that do not have
predetermined principal balance schedules and that,
in most cases, are entitled to receive payments of
principal continuously from the first Distribution
Date on which they receive principal until they are
retired. Sequential Pay Classes may receive
principal payments concurrently with one or more
other Sequential Pay Classes. A single Class that
is entitled to receive principal payments before or
after other Classes in the same Series of
Certificates may be identified as a Sequential Pay
Class.
Subordinated Class....... A Class that is entitled to receive payments of
principal and interest on each Distribution Date
only after the Senior Certificates and certain
Classes of Subordinated Certificates with higher
priority of distributions have received their full
principal and interest entitlements.
Targeted Amortization
Class (also sometimes
referred to as
a "TAC")................ A Class that is designed to receive principal
payments using a predetermined principal balance
schedule derived by assuming a single constant
prepayment rate for the underlying Mortgage Loans.
A TAC is designed to provide some protection
against prepayments at a rate exceeding the assumed
constant prepayment rate used to derive such Class
principal balance schedule.
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INTEREST TYPES
Categories of Class Definitions
Accrual Class............ A Class that accretes the amount of accrued
interest otherwise distributable on such Class,
which amount will be added as principal to the
principal balance of such Class on each applicable
Distribution Date. Such accretion may continue
until some specified event has occurred or until
such Accrual Class is retired.
Fixed Rate Class......... A Class with an interest rate that is fixed
throughout the life of the Class or a Class with
more than one interest rate where such is fixed for
a specified period during the life of the Class.
Floating Rate Class...... A Class with an interest rate that resets
periodically based upon a designated index and that
varies directly with changes in such index.
Interest Only Class...... A Class that is entitled to receive some or all of
the interest payments made on the Mortgage Loans
and little or no principal. Interest Only Classes
have either a nominal principal balance or a
notional amount. A nominal principal balance
represents actual principal that will be paid on
the Class. It is referred to as nominal since it is
extremely small compared to other Classes. A
notional amount is the amount used as a reference
to calculate the amount of Interest due on an
Interest Only Class that is not entitled to any
distributions in respect of principal.
Inverse Floating Rate
Class................... A Class with an interest rate that resets
periodically based upon a designated index and that
varies inversely with changes in such index and
with changes in the interest rate payable on the
related Floating Rate Class.
Principal Only Class..... A Class that does not bear interest and is entitled
to receive only distributions in respect of
principal.
Step Coupon Class........ A Class with a fixed interest rate that is reduced
to a lower fixed rate after a specified period of
time. The difference between the initial interest
rate and the lower interest rate will be supported
by a reserve fund established on the Closing Date.
Variable Rate Class...... A Class with an interest rate that resets
periodically and is calculated by reference to the
rate or rates of interest applicable to the
Mortgage Loans.
Other Credit Enhancement
In addition to, or in substitution for, the subordination discussed above,
credit enhancement may be provided with respect to any Series of Certificates
in any other manner which may be described in the applicable
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Prospectus Supplement, including, but not limited to, credit enhancement
through an alternative form of subordination and/or one or more of the methods
described below.
Limited Guarantee. If so specified in the Prospectus Supplement with respect
to a Series of Certificates, credit enhancement may be provided in the form of
a limited guarantee issued by a guarantor named therein.
Financial Guaranty Insurance Policy or Surety Bond. If so specified in the
Prospectus Supplement with respect to a Series of Certificates, credit
enhancement may be provided in the form of a financial guaranty insurance
policy or a surety bond issued by an insurer named therein.
Letter of Credit. Alternative credit support with respect to a Series of
Certificates may be provided by the issuance of a letter of credit by the bank
or financial institution specified in the applicable Prospectus Supplement.
The coverage, amount and frequency of any reduction in coverage provided by a
letter of credit issued with respect to a Series of Certificates will be set
forth in the Prospectus Supplement relating to such Series.
Pool Insurance Policy. If so specified in the Prospectus Supplement relating
to a Series of Certificates, the Seller will obtain a pool insurance policy
for the Mortgage Loans in the related Trust Estate. The pool insurance policy
will cover any loss (subject to the limitations described in the applicable
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan is not covered by any primary mortgage insurance policy. The amount and
principal terms of any such coverage will be set forth in the Prospectus
Supplement.
Special Hazard Insurance Policy. If so specified in the applicable
Prospectus Supplement, for each Series of Certificates as to which a pool
insurance policy is provided, the Depositor will also obtain a special hazard
insurance policy for the related Trust Estate in the amount set forth in such
Prospectus Supplement. The special hazard insurance policy will, subject to
the limitations described in the applicable Prospectus Supplement, protect
against loss by reason of damage to Mortgaged Properties caused by certain
hazards not insured against under the standard form of hazard insurance policy
for the respective states in which the Mortgaged Properties are located. The
amount and principal terms of any such coverage will be set forth in the
Prospectus Supplement.
Mortgagor Bankruptcy Bond. If so specified in the applicable Prospectus
Supplement, losses resulting from a bankruptcy proceeding relating to a
mortgagor affecting the Mortgage Loans in a Trust Estate with respect to a
Series of Certificates will be covered under a mortgagor bankruptcy bond (or
any other instrument that will not result in a downgrading of the rating of
the Certificates of a Series by the Rating Agency or Rating Agencies that
rated such Series). Any mortgagor bankruptcy bond or such other instrument
will provide for coverage in an amount meeting the criteria of the Rating
Agency or Rating Agencies rating the Certificates of the related Series, which
amount will be set forth in the applicable Prospectus Supplement. The
principal terms of any such coverage will be set forth in the Prospectus
Supplement.
Reserve Fund. If so specified in the applicable Prospectus Supplement,
credit enhancement with respect to a Series of Certificates may be provided by
the establishment of one or more reserve funds (each, a "Reserve Fund") for
such Series.
The Reserve Fund for a Series may be funded (i) by the deposit therein of
cash, U.S. Treasury securities or instruments evidencing ownership of
principal or interest payments thereon, letters of credit, demand notes,
certificates of deposit or a combination thereof in the aggregate amount
specified in the applicable Prospectus Supplement, (ii) by the deposit therein
from time to time of certain amounts, as specified in the applicable
Prospectus Supplement, to which the certain Classes of Certificates would
otherwise be entitled or (iii) in such other manner as may be specified in the
applicable Prospectus Supplement.
Cross Support. If specified in the applicable Prospectus Supplement, the
beneficial ownership of separate groups of Mortgage Loans included in a Trust
Estate may be evidenced by separate Classes of Certificates. In
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such case, credit support may be provided by a cross support feature which
requires that distributions be made with respect to certain Classes from
mortgage loan payments that would otherwise be distributed to Subordinated
Certificates evidencing a beneficial ownership interest in other loan groups
within the same Trust Estate. As a result, the amount of credit enhancement
available to a Class of Certificates against future losses on the Mortgage
Loans in which such Class represents an interest may be reduced as the result
of losses on a group of Mortgage Loans in which such Class has no interest.
The applicable Prospectus Supplement for a Series that includes a cross
support feature will describe the specific operation of any such cross support
feature.
Cash Flow Agreements
If specified in the Prospectus Supplement, the Trust Estate may include
guaranteed investment contracts pursuant to which moneys held in the funds and
accounts established for the related Series of Certificates will be invested
at a specified rate. The Trust Estate may also include certain other
agreements, such as interest rate exchange or swap agreements, interest rate
cap or floor agreements, or similar agreements provided to reduce the effects
of interest rate fluctuations on the assets or on one or more Classes of
Certificates. The principal terms of any such guaranteed investment contract
or other agreement (any such agreement, a "Cash Flow Agreement"), including,
without limitation, provisions relating to the timing, manner and amount of
payments thereunder and provisions relating to the termination thereof, will
be described in the Prospectus Supplement for the related Series of
Certificates. In addition, the related Prospectus Supplement will provide
certain information with respect to the obligor under any such Cash Flow
Agreement.
PREPAYMENT AND YIELD CONSIDERATIONS
Pass-Through Rates
Any Class of Certificates of a Series may have a fixed Pass-Through Rate, or
a Pass-Through Rate which varies based on changes in an index or based on
changes with respect to the underlying Mortgage Loans (such as, for example,
varying on the basis of changes in the weighted average Net Mortgage Interest
Rate of the underlying Mortgage Loans).
The Prospectus Supplement for each Series will specify the range and the
weighted average of the Mortgage Interest Rates and, if applicable, Net
Mortgage Interest Rates for the Mortgage Loans underlying such Series as of
the Cut-Off Date. If the Trust Estate includes adjustable-rate Mortgage Loans
or Net 5 Loans or includes Mortgage Loans with different Net Mortgage Interest
Rates, the weighted average Net Mortgage Interest Rate may vary from time to
time as set forth below. See "The Trust Estates." The Prospectus Supplement
for a Series will also specify the initial Pass-Through Rate for each Class of
Certificates of such Series and will specify whether each such Pass-Through
Rate is fixed or is variable.
The Net Mortgage Interest Rate for any adjustable-rate Mortgage Loan will
change with any changes in the index specified in the applicable Prospectus
Supplement on which such Mortgage Interest Rate adjustments are based, subject
to any applicable periodic or aggregate caps or floors on the related Mortgage
Interest Rate. The weighted average Net Mortgage Interest Rate with respect to
any Series may vary due to changes in the Net Mortgage Interest Rates of
adjustable-rate Mortgage Loans, to the timing of the Mortgage Interest Rate
readjustments of such Mortgage Loans and to different rates of payment of
principal of fixed- or adjustable-rate Mortgage Loans bearing different
Mortgage Interest Rates.
Scheduled Delays in Distributions
At the date of initial issuance of the Certificates of each Series offered
hereby, the initial purchasers of a Class of Certificates may be required to
pay accrued interest at the applicable Pass-Through Rate for such Class from
the Cut-Off Date for such Series to, but not including, the date of issuance.
The effective yield to Certificateholders will be below the yield otherwise
produced by the applicable Pass-Through Rate because the distribution of
principal and interest which is due on each Due Date will not be made until
the 25th day (or, if
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such day is not a business day, the first business day following the 25th day)
of the month in which such Due Date occurs (or until such other Distribution
Date specified in the applicable Prospectus Supplement).
Effect of Principal Prepayments
When a Mortgage Loan is prepaid in full, the mortgagor pays interest on the
amount prepaid only to the date of prepayment and not thereafter. Liquidation
Proceeds and amounts received in settlement of insurance claims are also
likely to include interest only to the time of payment or settlement. When a
Mortgage Loan is prepaid in full or in part, an interest shortfall may result
depending on the timing of the receipt of the prepayment and the timing of
when those prepayments are passed through to Certificateholders. To partially
mitigate this reduction in yield, the Pooling and Servicing Agreement and/or
Underlying Servicing Agreements relating to a Series may provide, to the
extent specified in the applicable Prospectus Supplement, that with respect to
certain principal prepayments received, the applicable Servicer or the Master
Servicer will be obligated, on or before each Distribution Date, to pay an
amount equal to the lesser of (i) the aggregate interest shortfall with
respect to such Distribution Date resulting from such principal prepayments by
mortgagors and (ii) all or a portion of the Servicer's or the Master
Servicer's, as applicable, servicing compensation for such Distribution Date
specified in the applicable Prospectus Supplement. No comparable interest
shortfall coverage will be provided by the Servicer or the Master Servicer
with respect to liquidations of any Mortgage Loans. Any interest shortfall
arising from liquidations will be covered by means of the subordination of the
rights of Subordinated Certificateholders or any other credit support
arrangements.
A lower rate of principal prepayments than anticipated would negatively
affect the total return to investors in any Certificates of a Series that are
offered at a discount to their principal amount and a higher rate of principal
prepayments than anticipated would negatively affect the total return to
investors in the Certificates of a Series that are offered at a premium to
their principal amount. The yield on Certificates that are entitled solely or
disproportionately to distributions of principal or interest may be
particularly sensitive to prepayment rates, and further information with
respect to yield on such Certificates will be included in the applicable
Prospectus Supplement.
Weighted Average Life of Certificates
The Mortgage Loans may be prepaid in full or in part at any time. The
Mortgage Loans generally will not provide for a prepayment penalty but may so
provide if indicated in the related Prospectus Supplement. Fixed-rate Mortgage
Loans generally will contain due-on-sale clauses permitting the mortgagee to
accelerate the maturities of the Mortgage Loans upon conveyance of the related
Mortgaged Properties, and adjustable-rate Mortgage Loans generally will permit
creditworthy borrowers to assume the then-outstanding indebtedness on the
Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The Prospectus Supplement for each Series of Certificates
may describe one or more such prepayment standards or models and contain
tables setting forth the weighted average life of each Class and the
percentage of the original aggregate principal balance of each Class that
would be outstanding on specified Distribution Dates for such Series and the
projected yields to maturity on certain Classes thereof, in each case based on
the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Mortgage Loans are made at rates corresponding to
various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is no assurance that prepayment of the Mortgage Loans underlying a
Series of Certificates will conform to any level of the prepayment standard or
model specified in the applicable Prospectus Supplement. A number of factors,
including but not limited to homeowner mobility, economic conditions, natural
disasters, changes in mortgagors' housing needs, job transfers, unemployment
or, in the case of borrowers relying on commission income and self-employed
borrowers, significant fluctuations in income or adverse economic conditions,
mortgagors' net equity in the properties securing the mortgage loans,
including the use of second or
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"home equity" mortgage loans by mortgagors or the use of the properties as
second or vacation homes, servicing decisions, enforceability of due-on-sale
clauses, mortgage market interest rates, mortgage recording taxes, competition
among mortgage loan originators resulting in reduced refinancing costs,
reduction in documentation requirements and willingness to accept higher loan-
to-value ratios, and the availability of mortgage funds, may affect prepayment
experience. In general, however, if prevailing mortgage interest rates fall
below the Mortgage Interest Rates borne by the Mortgage Loans underlying a
Series of Certificates, the prepayment rates of such Mortgage Loans are likely
to be higher than if prevailing rates remain at or above the rates borne by
such Mortgage Loans. Conversely, if prevailing mortgage interest rates rise
above the Mortgage Interest Rates borne by the Mortgage Loans, the Mortgage
Loans are likely to experience a lower prepayment rate than if prevailing
rates remain at or below such Mortgage Interest Rates. However, there can be
no assurance that prepayments will rise or fall according to such changes in
mortgage interest rates. It should be noted that Certificates of a Series may
evidence an interest in a Trust Estate with different Mortgage Interest Rates.
Accordingly, the prepayment experience of such Certificates will to some
extent be a function of the mix of interest rates of the Mortgage Loans. In
addition, the terms of the Underlying Servicing Agreements will require the
related Servicer to enforce any due-on-sale clause to the extent it has
knowledge of the conveyance or the proposed conveyance of the underlying
Mortgaged Property; provided, however, that any enforcement action that the
Servicer determines would jeopardize any recovery under any related primary
mortgage insurance policy will not be required and provided, further, that the
Servicer may permit the assumption of defaulted Mortgage Loans. See "Servicing
of the Mortgage Loans--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" and "Certain Legal Aspects of the Mortgage Loans--
Due-On-Sale Clauses" for a description of certain provisions of each Pooling
and Servicing Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
At the request of the mortgagor, a Servicer may allow the refinancing of a
Mortgage Loan in any Trust Estate serviced by such Servicer by accepting
prepayments thereon and permitting a new loan secured by a Mortgage on the
same property. Upon such refinancing, the new loan will not be included in the
Trust Estate. A mortgagor may be legally entitled to require the Servicer to
allow such a refinancing. Any such refinancing will have the same effect as a
prepayment in full of the related Mortgage Loan. In this regard a Servicer
may, from time to time, implement programs designed to encourage refinancing
through such Servicer, including but not limited to general or targeted
solicitations, or the offering of pre-approved applications, reduced or
nominal origination fees or closing costs, or other financial incentives. A
Servicer may also encourage refinancing of defaulted Mortgage Loans, including
Mortgage Loans that would permit creditworthy borrowers to assume the
outstanding indebtedness.
The Depositor will be obligated, under certain circumstances, to repurchase
certain of the Mortgage Loans. In addition, if specified in the applicable
Prospectus Supplement, the Pooling and Servicing Agreement will permit, but
not require, the Depositor, and the terms of certain insurance policies
relating to the Mortgage Loans may permit the applicable insurer, to purchase
any Mortgage Loan which is in default or as to which default is reasonably
foreseeable. The proceeds of any such purchase or repurchase will be deposited
in the related Certificate Account and such purchase or repurchase will have
the same effect as a prepayment in full of the related Mortgage Loan. See "The
Pooling and Servicing Agreement--Assignment of Mortgage Loans to the Trustee"
and "--Optional Purchases." In addition, if so specified in the applicable
Prospectus Supplement, the Depositor or another person identified therein will
have the option to purchase all, but not less than all, of the Mortgage Loans
in any Trust Estate under the limited conditions specified in such Prospectus
Supplement. For any Series of Certificates for which an election has been made
to treat the Trust Estate (or one or more segregated pools of assets therein)
as a REMIC, any such purchase or repurchase may be effected only pursuant to a
"qualified liquidation," as defined in Code Section 860F(a)(4)(A). See "The
Pooling and Servicing Agreement--Termination; Optional Purchase of Mortgage
Loans."
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SERVICING OF THE MORTGAGE LOANS
The following includes a summary of the material provisions of the form of
Pooling and Servicing Agreement that has been filed as an exhibit to the
registration statement of which this Prospectus forms a part. Such summary
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all of the provisions of the Pooling and Servicing
Agreement for each Series of Certificates and the applicable Prospectus
Supplement.
The Master Servicer
In the event that there is more than one Servicer with respect to the
Mortgage Loans related to a Series or the sole Servicer is not an affiliate of
the Depositor, a master servicer may act as the Master Servicer with respect
to such Series of Certificates. The Master Servicer may be affiliated or
unaffiliated with the Depositor. The Master Servicer generally will be
responsible under each Pooling and Servicing Agreement for, among other
things, (i) administering and supervising the performance by the Servicers of
their duties and responsibilities under the Underlying Servicing Agreements,
(ii) oversight of payments received on Mortgage Loans, (iii) preparation of
periodic reports to the Trustee with respect to the foregoing matters, (iv)
performing certain of the servicing obligations of a terminated Servicer as
described below under "--The Servicers" and (v) making advances of delinquent
payments of principal and interest on the Mortgage Loans to the limited extent
described below under the heading "--Periodic Advances and Limitations
Thereon," if such amounts are not advanced by a Servicer. The Master Servicer
will also perform additional duties as described in the applicable Pooling and
Servicing Agreement. The Master Servicer will be entitled to receive a portion
of the interest payments on the Mortgage Loans included in the Trust Estate
for such a Series to cover its fees as Master Servicer. The Master Servicer
may subcontract with any other entity the obligations of the Master Servicer
under any Pooling and Servicing Agreement. The Master Servicer will remain
primarily liable for any such contractor's performance in accordance with the
applicable Pooling and Servicing Agreement. The Master Servicer may be
released from its obligations in certain circumstances. See "Certain Matters
Regarding the Master Servicer."
The Servicers
With respect to any Series, one or more Servicers will provide certain
customary servicing functions with respect to the Mortgage Loans pursuant to
the related Pooling and Servicing Agreement or separate Underlying Servicing
Agreements with the Depositor or an affiliate thereof. Such Servicers are
expected to be the Sellers of the Mortgage Loans or affiliates of such
Sellers. The rights of the Depositor or such affiliate under the applicable
Underlying Servicing Agreements in respect of the Mortgage Loans included in
the Trust Estate for any such Series will be assigned (directly or indirectly)
to the Trustee for the benefit of Certificateholders of such Series. The
Servicers may be entitled to withhold their Servicing Fees and certain other
fees and charges from remittances of payments received on Mortgage Loans
serviced by them.
Each Servicer generally will be approved by Fannie Mae ("FNMA") or The
Federal Home Loan Mortgage Corporation ("FHLMC") as a servicer of mortgage
loans.
The duties to be performed by each Servicer include collection and
remittance of principal and interest payments on the Mortgage Loans,
administration of mortgage escrow accounts, collection of insurance claims,
foreclosure procedures, and, if necessary, the advance of funds to the extent
certain payments are not made by the mortgagor and have not been determined by
the Servicer to be not recoverable under the applicable insurance policies
with respect to such Series, from proceeds of liquidation of such Mortgage
Loans or otherwise. Each Servicer also will provide such accounting and
reporting services as are necessary to provide required information to the
Trustee or to enable the Master Servicer to provide required information to
the Trustee with respect to the Mortgage Loans included in the Trust Estate
for such Series. Each Servicer is entitled to a periodic Servicing Fee equal
to a specified percentage of the outstanding principal balance of each
Mortgage Loan serviced by such Servicer. The servicing obligations of a
Servicer may be delegated to another person as provided in the Pooling and
Servicing Agreement or Underlying Servicing Agreement.
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The Trustee, or if so provided in the applicable Pooling and Servicing
Agreement, the Master Servicer, may terminate a Servicer who has failed to
comply with its covenants or breached one of its representations contained in
the Underlying Servicing Agreement or in certain other circumstances. Upon
termination of a Servicer by the Trustee or the Master Servicer, the Master
Servicer will assume certain servicing obligations of the terminated Servicer,
or, at its option, may appoint a substitute Servicer acceptable to the Trustee
to assume the servicing obligations of the terminated Servicer. The Master
Servicer's obligations to act as substitute Servicer following the termination
of an Underlying Servicing Agreement will not, however, require the Master
Servicer to purchase a Mortgage Loan from the Trust Estate due to a breach by
the terminated Servicer of a representation or warranty in respect of such
Mortgage Loan.
Each Prospectus Supplement relating to such a Series of Certificates will
contain information concerning recent delinquency, foreclosure and loan loss
experience on the mortgage loans in a Servicer's servicing portfolio to the
extent such information is material and reasonably available to the Depositor.
Payments on Mortgage Loans
The Trustee for each Series will establish and maintain a separate trust
account in the name of the Trustee (the "Certificate Account"). Each such
account must be maintained with a depository institution (the "Depository")
either (i) whose long-term debt obligations (or, in the case of a Depository
which is part of a holding company structure, the long-term debt obligations
of such parent holding company) are, at the time of any deposit therein rated
in at least one of the two highest rating categories by the Rating Agency or
Rating Agencies rating the Certificates of such Series, or (ii) that is
otherwise acceptable to the Rating Agency or Rating Agencies rating the
Certificates of such Series and, if a REMIC election has been made, that would
not cause the related Trust Estate (or one or more segregated pools of assets
therein) to fail to qualify as a REMIC. To the extent that the portion of
funds deposited in the Certificate Account at any time exceeds the limit of
insurance coverage established by the Federal Deposit Insurance Corporation
(the "FDIC"), such excess will be subject to loss in the event of the failure
of the Depository. Such insurance coverage will be based on the number of
holders of Certificates, rather than the number of underlying mortgagors.
Holders of the Subordinated Certificates of a Series will bear any such loss
up to the amount of principal payments on the related Mortgage Loans to which
such holders are entitled.
Pursuant to the applicable Pooling and Servicing Agreement or the Underlying
Servicing Agreements, if any, with respect to a Series, each Servicer will be
required to establish and maintain one or more accounts (collectively, the
"Servicer Custodial Account") into which the Servicer will be required to
deposit on a daily basis amounts received with respect to Mortgage Loans
serviced by such Servicer included in the Trust Estate for such Series, as
more fully described below. Each Servicer Custodial Account must be a separate
custodial account insured to the available limits by the FDIC or otherwise
acceptable to the applicable Rating Agencies (such acceptable account, an
"Eligible Custodial Account") and limited to funds held with respect to a
particular Series, unless the Pooling and Servicing Agreement or the
Underlying Servicing Agreement specifies that a Servicer may establish an
account which is an eligible account to serve as a unitary Servicer Custodial
Account both for such Series and for other Series of Certificates as well as
other Mortgage Loans serviced by such Servicer.
Each Servicer will be required to deposit in the Certificate Account for
each Series of Certificates on the date the Certificates are issued any
amounts representing scheduled payments of principal and interest on the
Mortgage Loans serviced by such Servicer due after the applicable Cut-Off Date
but received on or prior thereto. Each Servicer will be required, not later
than the 24th calendar day of each month or such earlier day as may be
specified in the Pooling and Servicing Agreement or the applicable Underlying
Servicing Agreement (the "Remittance Date"), to remit to the Master Servicer
for deposit in an Eligible Custodial Account maintained by the Master Servicer
in the name of the Trustee (the "Master Servicer Custodial Account") or, if
there is no Master Servicer, to remit to the Trustee for deposit in the
Certificate Account, the following payments and collections received or made
by such Servicer with respect to the Mortgage Loans serviced by such Servicer
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subsequent to the applicable Cut-Off Date (other than (a) payments due on or
before the Cut-Off Date and (b) amounts held for future distribution):
(i) all payments on account of principal, including prepayments, and
interest;
(ii) all amounts received by the Servicer in connection with the
liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, whether through foreclosure sale or otherwise, including payments
in connection with defaulted Mortgage Loans received from the mortgagor
other than amounts required to be paid to the mortgagor pursuant to the
terms of the applicable Mortgage Loan or otherwise pursuant to law
("Liquidation Proceeds") less, to the extent permitted under the applicable
Underlying Servicing Agreement, the amount of any expenses incurred in
connection with the liquidation of such Mortgage Loans;
(iii) all proceeds received by the Servicer under any title, hazard or
other insurance policy covering any such Mortgage Loan, other than proceeds
to be applied to the restoration or repair of the property subject to the
related Mortgage or released to the mortgagor in accordance with the
Underlying Servicing Agreement;
(iv) all Periodic Advances made by the Servicer;
(v) all amounts withdrawn from Buy-Down Funds or Subsidy Funds, if any,
with respect to such Mortgage Loans, in accordance with the terms of the
respective agreements applicable thereto;
(vi) all proceeds of any such Mortgage Loans or property acquired in
respect thereof purchased or repurchased pursuant to the Pooling and
Servicing Agreement or the Underlying Servicing Agreement; and
(vii) all other amounts required to be deposited therein pursuant to the
applicable Pooling and Servicing Agreement or the Underlying Servicing
Agreement.
Notwithstanding the foregoing, if at any time the sums in (a) any Servicer
Custodial Account, other than any Eligible Custodial Account, exceed $100,000
or (b) any such Servicer Custodial Account, in certain circumstances, exceed
such amount less than $100,000 as shall have been specified by the Trustee,
each Servicer will be required within one business day to withdraw such excess
funds from such account and remit such amounts to the Master Servicer
Custodial Account or the Certificate Account.
Notwithstanding the foregoing, each Servicer will be entitled, at its
election, either (a) to withhold and pay itself the applicable Servicing Fee
from any payment or other recovery on account of interest as received and
prior to deposit in the Servicer Custodial Account or (b) to withdraw from the
Servicer Custodial Account the applicable Servicing Fee after the entire
payment or recovery has been deposited in such account.
The Master Servicer or Trustee will deposit in the Certificate Account any
Periodic Advances made by the Master Servicer or Trustee, as applicable, in
the event of a Servicer default not later than the Distribution Date on which
such amounts are required to be distributed. All other amounts deposited in
the Master Servicer Custodial Account (other than Master Servicing Fees and,
to the extent the Master Servicer is entitled thereto under the applicable
Pooling and Servicing Agreement, interest on amounts in the Master Servicer
Custodial Account) are required to be remitted by the Master Servicer to the
Trustee for deposit in the Certificate Account not later than the business day
preceding the applicable Distribution Date. On each Distribution Date, the
Trustee will withdraw from the Certificate Account and remit to
Certificateholders all amounts allocable to the Pool Distribution Amount for
such Distribution Date.
If a Servicer, the Master Servicer or the Trustee deposits in the
Certificate Account for a Series any amount not required to be deposited
therein, the Trustee may at any time withdraw such amount from such account
for itself or for remittance to such Servicer or the Master Servicer, as
applicable. Funds on deposit in the Certificate Account may be invested in
certain investments acceptable to the Rating Agencies ("Eligible Investments")
maturing in general not later than the business day preceding the next
Distribution Date. In the event that an election has been made to treat the
Trust Estate (or one or more segregated pools of assets therein) with respect
to a Series as a REMIC, no such Eligible Investments will be sold or disposed
of at a gain prior to maturity
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unless the Trustee has received an opinion of counsel or other evidence
satisfactory to it that such sale or disposition will not cause the Trust
Estate (or segregated pool of assets) to be subject to the tax on "prohibited
transactions" imposed by Code Section 860F(a)(1), otherwise subject the Trust
Estate (or segregated pool of assets) to tax, or cause the Trust Estate (or
any segregated pool of assets) to fail to qualify as a REMIC while any
Certificates of the Series are outstanding. All income and gain realized from
any such investment will generally be for the account of the Trustee as
additional compensation and all losses from any such investment will be
deposited by the Trustee out of its own funds to the Certificate Account
immediately as realized.
The Trustee is permitted, from time to time, to make withdrawals from the
Certificate Account for the following purposes, to the extent permitted in the
applicable Pooling and Servicing Agreement (and, in the case of Servicer or
Master Servicer reimbursements by the Trustee, only to the extent funds in the
respective Servicer Custodial Account or Master Servicer Custodial Account are
not sufficient therefor):
(i) to reimburse the Master Servicer, itself or any Servicer for
Advances;
(ii) to reimburse any Servicer for liquidation expenses and for amounts
expended by the Master Servicer or any Servicer, as applicable, in
connection with the restoration of damaged property;
(iii) to pay to the Master Servicer the applicable Master Servicing Fee
and any other amounts constituting additional master servicing
compensation, to pay itself the applicable Trustee Fee, to pay any other
fees described in the applicable Prospectus Supplement; and to pay to the
owner thereof any Fixed Retained Yield;
(iv) to reimburse the Master Servicer or any Servicer for certain
expenses (including taxes paid on behalf of the Trust Estate) incurred by
and recoverable by or reimbursable to the Master Servicer or the Servicer,
as applicable;
(v) to pay to the Depositor, a Servicer or the Master Servicer with
respect to each Mortgage Loan or property acquired in respect thereof that
has been repurchased by the Depositor or purchased by a Servicer or the
Master Servicer all amounts received thereon and not distributed as of the
date as of which the purchase price of such Mortgage Loan was determined;
(vi) to pay to itself any interest earned on or investment income earned
with respect to funds in the Certificate Account (all such interest or
income to be withdrawn not later than the next Distribution Date);
(vii) to pay to the Master Servicer, the Servicer and itself from net
Liquidation Proceeds allocable to interest, the amount of any unpaid Master
Servicing Fee, Servicing Fees or Trustee Fees and any unpaid assumption
fees, late payment charges or other mortgagor charges on the related
Mortgage Loan;
(viii) to withdraw from the Certificate Account any amount deposited in
such account that was not required to be deposited therein; and
(ix) to clear and terminate the Certificate Account.
The Trustee will be authorized to appoint a paying agent (the "Paying
Agent") to make distributions, as agent for the Trustee, to Certificateholders
of a Series. If the Paying Agent for a Series is not the Trustee for such
Series, the Trustee will, on each Distribution Date, deposit in immediately
available funds in an account designated by any such Paying Agent the amount
required to be distributed to the Certificateholders on such Distribution
Date.
The Trustee will cause any Paying Agent to execute and deliver to the
Trustee an instrument in which such Paying Agent agrees with the Trustee that
such Paying Agent will hold all amounts deposited with it by the Trustee for
distribution to Certificateholders in trust for the benefit of
Certificateholders until such amounts are distributed to Certificateholders or
otherwise disposed of as provided in the applicable Pooling and Servicing
Agreement.
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Periodic Advances and Limitations Thereon
Generally each Servicer will be required to make (i) Periodic Advances to
cover delinquent payments of principal and interest on such Mortgage Loan and
(ii) other advances of cash ("Other Advances" and, collectively with Periodic
Advances, "Advances") to cover (a) delinquent payments of taxes, insurance
premiums, and other escrowed items and (b) rehabilitation expenses and
foreclosure costs, including reasonable attorneys' fees, in either case unless
such Servicer has determined that any subsequent payments on that Mortgage
Loan or from the borrower will ultimately not be available to reimburse such
Servicer for such amounts. The failure of the Servicer to make any required
Periodic Advances or Other Advances under an Underlying Servicing Agreement
constitutes a default under such agreement for which the Servicer will be
terminated. Upon default by a Servicer, the Master Servicer or the Trustee
may, in each case if so provided in the Pooling and Servicing Agreement, be
required to make Periodic Advances to the extent necessary to make required
distributions on certain Certificates or certain Other Advances, provided that
the Master Servicer or Trustee, as applicable, determines that funds will
ultimately be available to reimburse it from proceeds of the related Mortgaged
Property. In the case of Certificates of any Series for which credit
enhancement is provided in the form of a mortgage pool insurance policy, the
Depositor may obtain an endorsement to the mortgage pool insurance policy
which obligates the pool insurer to advance delinquent payments of principal
and interest. The pool insurer would only be obligated under such endorsement
to the extent the mortgagor fails to make such payment and the Master Servicer
or Trustee fails to make a required advance.
The advance obligation of the Master Servicer and Trustee may be further
limited to an amount specified by the Rating Agency rating the Certificates.
Any such Periodic Advances by the Servicers, the Master Servicer or Trustee,
as the case may be, must be deposited into the applicable Servicer Custodial
Account or the Certificate Account and will be due no later than the business
day before the Distribution Date to which such delinquent payment relates.
Advances by the Servicers, the Master Servicer or Trustee, as the case may be,
will be reimbursable out of insurance proceeds or Liquidation Proceeds of, or,
except for Other Advances, future payments on, the Mortgage Loans for which
such amounts were advanced. If an Advance made by a Servicer, the Master
Servicer or the Trustee later proves, or is deemed by the Servicer, the Master
Servicer or the Trustee, to be unrecoverable, such Servicer, the Master
Servicer or the Trustee, as the case may be, will be entitled to reimbursement
from funds in the Certificate Account prior to the distribution of payments to
the Certificateholders to the extent provided in the Pooling and Servicing
Agreement.
Any Periodic Advances made by a Servicer, the Master Servicer or the Trustee
with respect to Mortgage Loans included in the Trust Estate for any Series are
intended to enable the Trustee to make timely payment of the scheduled
distributions of principal and interest on the Certificates of such Series.
However, none of the Master Servicer, the Trustee, any Servicer or any other
person will, except as specified in the applicable Prospectus Supplement with
respect to credit enhancement described therein, insure or guarantee the
Certificates of any Series or the Mortgage Loans included in the Trust Estate
for any Certificates.
Collection and Other Servicing Procedures
Each Servicer will be required by the related Underlying Servicing Agreement
to make reasonable efforts to collect all payments called for under the
Mortgage Loans and, consistent with the applicable Underlying Servicing
Agreement or the Pooling and Servicing Agreement and any applicable agreement
governing any form of credit enhancement, to follow such collection procedures
as it follows with respect to mortgage loans serviced by it that are
comparable to the Mortgage Loans. Consistent with the above, the Servicer may,
in its discretion, (i) waive any prepayment charge, assumption fee, late
payment charge or any other charge in connection with the prepayment of a
Mortgage Loan and (ii) arrange with a mortgagor a schedule for the liquidation
of deficiencies running for not more than 180 days (or such longer period to
which the Master Servicer and any applicable pool insurer or primary mortgage
insurer have consented) after the applicable Due Date.
Under each Underlying Servicing Agreement or the Pooling and Servicing
Agreement, each Servicer, to the extent permitted by law, will establish and
maintain one or more escrow accounts (each such account, an
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"Escrow Account") in which each such Servicer will be required to deposit any
payments made by mortgagors in advance for taxes, assessments, primary
mortgage (if applicable) and hazard insurance premiums and other similar
items. Withdrawals from the Escrow Account may be made to effect timely
payment of taxes, assessments, mortgage and hazard insurance, to refund to
mortgagors amounts determined to be overages, to pay interest to mortgagors on
balances in the Escrow Account, if required, and to clear and terminate such
account. Each Servicer will be responsible for the administration of its
Escrow Account. A Servicer will be obligated to advance certain amounts which
are not timely paid by the mortgagors, to the extent that it determines, in
good faith, that they will be recoverable out of insurance proceeds,
liquidation proceeds, or otherwise. Alternatively, in lieu of establishing a
Escrow Account, a Servicer may procure a performance bond or other form of
insurance coverage, in an amount acceptable to the Master Servicer and each
Rating Agency rating the related Series of Certificates, covering loss
occasioned by the failure to escrow such amounts.
Enforcement of "Due-on-Sale Clauses"; Realization Upon Defaulted Mortgage
Loans
With respect to each Mortgage Loan having a fixed interest rate, the
applicable Underlying Servicing Agreement or Pooling and Servicing Agreement
will generally provide that, when any Mortgaged Property is about to be
conveyed by the mortgagor, the Servicer will, to the extent it has knowledge
of such prospective conveyance, exercise its rights to accelerate the maturity
of such Mortgage Loan under the "due-on-sale" clause applicable thereto, if
any, unless it is not exercisable under applicable law or if such exercise
would result in loss of insurance coverage with respect to such Mortgage Loan
or would, in the Servicer's judgment, be reasonably likely to result in
litigation by the mortgagor and such Servicer, if applicable, has not obtained
the Master Servicer's consent to such exercise. In either case, the Servicer
is authorized to take or enter into an assumption and modification agreement
from or with the person to whom such Mortgaged Property has been or is about
to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note and, unless prohibited by applicable state law, the mortgagor
remains liable thereon, provided that the Mortgage Loan will continue to be
covered by any pool insurance policy and any related primary mortgage
insurance policy and the Mortgage Interest Rate with respect to such Mortgage
Loan and the payment terms shall remain unchanged. The Servicer will also be
authorized, with the prior approval of the pool insurer and the primary
mortgage insurer, if any, to enter into a substitution of liability agreement
with such person, pursuant to which the original mortgagor is released from
liability and such person is substituted as mortgagor and becomes liable under
the Mortgage Note.
Each Underlying Servicing Agreement and Pooling and Servicing Agreement with
respect to a Series will require the Servicer or the Master Servicer, as the
case may be, to present claims to the insurer under any insurance policy
applicable to the Mortgage Loans included in the Trust Estate for such Series
and to take such reasonable steps as are necessary to permit recovery under
such insurance policies with respect to defaulted Mortgage Loans, or losses on
the Mortgaged Property securing the Mortgage Loans.
Each Servicer is obligated to realize upon defaulted Mortgage Loans in
accordance with its normal servicing practices, which will conform generally
to those of prudent mortgage lending institutions which service mortgage loans
of the same type in the same jurisdictions. Notwithstanding the foregoing,
each Servicer is authorized to permit the assumption of a defaulted Mortgage
Loan rather than to foreclose or accept a deed-in-lieu of foreclosure if, in
the Servicer's judgment, the default is unlikely to be cured and the assuming
borrower meets the applicable underwriting guidelines. In connection with any
such assumption, the Mortgage Interest Rate and the payment terms of the
related Mortgage Note will not be changed. Each Servicer may also, with the
consent of the Master Servicer, modify the payment terms of Mortgage Loans
that are in default, or as to which default is reasonably foreseeable, that
remain in the Trust Estate rather than foreclose on such Mortgage Loans;
provided that no such modification shall forgive principal owing under such
Mortgage Loan or permanently reduce the interest rate on such Mortgage Loan.
Any such modification will be made only upon the determination by the Servicer
and, if applicable, the Master Servicer that such modification is likely to
increase the proceeds of such Mortgage Loan over the amount expected to be
collected pursuant to foreclosure. See also "The Pooling and Servicing
Agreement--Optional Purchases," with respect to the Seller's right to
repurchase Mortgage Loans that are in default, or as to which default is
reasonably foreseeable. Further, a Servicer may encourage the refinancing
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of such defaulted Mortgage Loans, including Mortgage Loans that would permit
creditworthy borrowers to assume the outstanding indebtedness.
In the case of foreclosure or of damage to a Mortgaged Property from an
uninsured cause, the Servicer will not be required to expend its own funds to
foreclose or restore any damaged property, unless it reasonably determines (i)
that such foreclosure or restoration will increase the proceeds to
Certificateholders of such Series of liquidation of the Mortgage Loan after
reimbursement to the related Servicer for its expenses and (ii) that such
expenses will be recoverable to it through Liquidation Proceeds or any
applicable insurance policy in respect of such Mortgage Loan. In the event
that Servicer has expended its own funds for foreclosure or to restore damaged
property, it will be entitled to be reimbursed from the Certificate Account
for such Series an amount equal to all costs and expenses incurred by it.
No Servicer will be obligated to foreclose on any Mortgaged Property which
it believes may be contaminated with or affected by hazardous wastes or
hazardous substances. See "Certain Legal Aspects of the Mortgage Loans--
Environmental Considerations." If a Servicer does not foreclose on a Mortgaged
Property, the Certificateholders of the related Series may experience a loss
on the related Mortgage Loan. A Servicer will not be liable to the
Certificateholders if it fails to foreclose on a Mortgaged Property which it
believes may be so contaminated or affected, even if such Mortgaged Property
is, in fact, not so contaminated or affected. Conversely, a Servicer will not
be liable to the Certificateholders if, based on its belief that no such
contamination or effect exists, the Servicer forecloses on a Mortgaged
Property and takes title to such Mortgaged Property, and thereafter such
Mortgaged Property is determined to be so contaminated or affected.
The Servicer may foreclose against property securing a defaulted Mortgage
Loan either by foreclosure, by sale or by strict foreclosure and in the event
a deficiency judgment is available against the mortgagor or other person (see
"Certain Legal Aspects of the Mortgage Loans--Anti-Deficiency Legislation, the
Bankruptcy Code and Other Limitations on Lenders" for a discussion of the
availability of deficiency judgments), may proceed for the deficiency. It is
anticipated that in most cases the Servicer will not seek deficiency
judgments, and will not be required under the applicable Underlying Servicing
Agreement to seek deficiency judgments. In lieu of foreclosure, each Servicer
may arrange for the sale by the borrower of the Mortgaged Property related to
a defaulted Mortgage Loan to a third party, rather than foreclosing upon and
selling such Mortgaged Property.
With respect to a Trust Estate (or any segregated pool of assets therein) as
to which a REMIC election has been made, if the Trustee acquires ownership of
any Mortgaged Property as a result of a default or reasonably foreseeable
default of any Mortgage Loan secured by such Mortgaged Property, the Trustee
or Master Servicer will be required to dispose of such property prior to the
close of the third calendar year following the year the Trust Estate acquired
such property (or such shorter period as is provided in the applicable
Underlying Servicing Agreement) unless the Trustee (a) receives an opinion of
counsel to the effect that the holding of the Mortgaged Property by the Trust
Estate will not cause the Trust Estate to be subject to the tax on "prohibited
transactions" imposed by Code Section 860F(a)(1) or cause the Trust Estate (or
any segregated pool of assets therein as to which one or more REMIC elections
have been made or will be made) to fail to qualify as a REMIC or (b) applies
for and is granted an extension of the applicable period in the manner
contemplated by Code Section 856(e)(3). The Servicer also will be required to
administer the Mortgaged Property in a manner which does not cause the
Mortgaged Property to fail to qualify as "foreclosure property" within the
meaning of Code Section 860G(a)(8) or result in the receipt by the Trust
Estate of any "net income from foreclosure property" within the meaning of
Code Section 860G(c)(2), respectively. In general, this would preclude the
holding of the Mortgaged Property by a party acting as a dealer in such
property or the receipt of rental income based on the profits of the lessee of
such property. See "Federal Income Tax Consequences."
Insurance Policies
Each Servicer will be required to cause to be maintained for each Mortgage
Loan (other than Mortgage Loans secured by cooperative shares and condominium
apartments) a standard hazard insurance policy issued by a generally
acceptable insurer insuring the improvements on the Mortgaged Property
underlying such Mortgage
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Loan against loss by fire, with extended coverage (a "Standard Hazard
Insurance Policy"). Such Standard Hazard Insurance Policy will be required to
be in an amount at least equal to the lesser of 100% of the insurable value of
the improvements on the Mortgaged Property or the principal balance of such
Mortgage Loan; provided, however, that such insurance may not be less than the
minimum amount required to fully compensate for any damage or loss on a
replacement cost basis. Each Servicer will also maintain on property acquired
upon foreclosure, or deed in lieu of foreclosure, of any Mortgage Loan, a
Standard Hazard Insurance Policy in an amount that is at least equal to the
lesser of 100% of the insurable value of the improvements which are a part of
such property or the principal balance of such Mortgage Loan plus accrued
interest and liquidation expenses; provided, however, that such insurance may
not be less than the minimum amount required to fully compensate for any
damage or loss on a replacement cost basis. Any amounts collected under any
such policies (other than amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the borrower in accordance with
normal servicing procedures) will be deposited in the Servicer Custodial
Account for remittance to the Certificate Account by the applicable Servicer.
The Standard Hazard Insurance Policies covering the Mortgage Loans generally
will cover physical damage to, or destruction of, the improvements on the
Mortgaged Property caused by fire, lightning, explosion, smoke, windstorm,
hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the Standard Hazard
Insurance Policies relating to such Mortgage Loans will be underwritten by
different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The
most significant terms thereof, however, generally will be determined by state
law and generally will be similar. Most such policies typically will 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 reaction, wet or dry
rot, vermin, rodents, insects or domestic animals, hazardous wastes or
hazardous substances, theft and, in certain cases, vandalism. The foregoing
list is merely indicative of certain kinds of uninsured risks and is not all-
inclusive.
In general, if the improvements on a Mortgaged Property are located in an
area identified in the Federal Register by the Federal Emergency Management
Agency as having special flood hazards (and such flood insurance has been made
available) each Underlying Servicing Agreement will require the related
Servicer to cause to be maintained a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier. Generally, the Underlying
Servicing Agreement will require that such flood insurance be in an amount not
less than the least of (i) the outstanding principal balance of the Mortgage
Loan, (ii) the full insurable value of the improvements, or (iii) the maximum
amount of insurance which is available under the National Flood Insurance Act
of 1968, as amended.
Each Servicer may maintain a blanket policy insuring against hazard losses
on all of the Mortgaged Properties in lieu of maintaining the required
Standard Hazard Insurance Policies and may maintain a blanket policy insuring
against special hazards in lieu of maintaining any required flood insurance.
Each Servicer will be liable for the amount of any deductible under a blanket
policy if such amount would have been covered by a required Standard Hazard
Insurance Policy or flood insurance, had it been maintained.
Any losses incurred with respect to Mortgage Loans due to uninsured risks
(including earthquakes, mudflows, floods and hazardous wastes or hazardous
substances) or insufficient hazard insurance proceeds will adversely affect
distributions to the Certificateholders.
Fixed Retained Yield, Servicing Compensation and Payment of Expenses
Fixed Retained Yield with respect to any Mortgage Loan is that portion, if
any, of interest at the Mortgage Interest Rate that is not included in the
related Trust Estate and is retained by the Depositor or a Seller. The
Prospectus Supplement for a Series will describe the Fixed Retained Yield, if
any, with respect to the Mortgage Loans of such Series. If so, the Fixed
Retained Yield will be established on a loan-by-loan basis and will be
specified in the schedule of Mortgage Loans attached as an exhibit to the
applicable Pooling and Servicing Agreement. If the Seller retaining the Fixed
Retained Yield is a Servicer, such Servicer may deduct the Fixed
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Retained Yield from mortgagor payments as received or deposit such payments in
the Servicer Custodial Account or Certificate Account for such Series and then
request the Master Servicer or the Trustee to withdraw the Fixed Retained
Yield from the Master Servicer Custodial Account or the Certificate Account
for remittance to such Servicer. In the case of any Fixed Retained Yield with
respect to other Mortgage Loans, serviced by the Master Servicer or the
Trustee will make withdrawals from the Master Servicer Custodial Account or
the Certificate Account for the purpose of remittances to the Owner of the
Fixed Retained Yield. Notwithstanding the foregoing, with respect to any
payment of interest received relating to a Mortgage Loan (whether paid by the
mortgagor or received as Liquidation Proceeds, insurance proceeds or
otherwise) which is less than the full amount of interest then due with
respect to such Mortgage Loan, the owner of the Fixed Retained Yield with
respect to such Mortgage Loan will bear a ratable share of such interest
shortfall.
For each Series of Certificates, each Servicer will be entitled to be paid
the Servicing Fee on the related Mortgage Loans serviced by such Servicer
until termination of the applicable Underlying Servicing Agreement, or the
Pooling and Servicing Agreement. A Servicer, at its election, will pay itself
the Servicing Fee for a Series with respect to each Mortgage Loan by (a)
withholding the Servicing Fee from any scheduled payment of interest prior to
deposit of such payment in the Servicer Custodial Account for such Series or
(b) withdrawing the Servicing Fee from the Servicer Custodial Account after
the entire interest payment has been deposited in such account. A Servicer may
also pay itself out of the Liquidation Proceeds of a Mortgage Loan or other
recoveries with respect thereto, or withdraw from the Servicer Custodial
Account or request the Master Servicer or the Trustee to withdraw from the
Master Servicer Custodial Account or the Certificate Account for remittance to
the Servicer such amounts after the deposit thereof in such accounts, or if
such Liquidation Proceeds or other recoveries are insufficient, from Net
Foreclosure Profits with respect to the related Distribution Date the
Servicing Fee in respect of such Mortgage Loan to the extent provided in the
applicable Pooling and Servicing Agreement. The Servicing Fee or the range of
Servicing Fees with respect to the Mortgage Loans underlying the Certificates
of a Series will be specified in the applicable Prospectus Supplement.
Additional servicing compensation in the form of prepayment charges,
assumption fees, late payment charges or otherwise will be retained by the
Servicers.
Each Servicer will pay all expenses incurred in connection with the
servicing of the Mortgage Loans serviced by such Servicer underlying a Series,
including, without limitation, payment of the Standard Hazard Insurance Policy
premiums. The Servicer will be entitled, in certain circumstances, to
reimbursement from the Certificate Account of Periodic Advances, of Other
Advances made by it to pay taxes, insurance premiums and similar items with
respect to any Mortgaged Property or for expenditures incurred by it in
connection with the restoration, foreclosure or liquidation of any Mortgaged
Property (to the extent of Liquidation Proceeds or insurance policy proceeds
in respect of such Mortgaged Property) and of certain losses against which it
is indemnified by the Trust Estate.
As set forth in the preceding paragraph, a Servicer may be entitled to
reimbursement for certain expenses incurred by it, and payment of additional
fees for certain extraordinary services rendered by it (provided that such
fees do not exceed those which would be charged by third parties for similar
services) in connection with the liquidation of defaulted Mortgage Loans and
related Mortgaged Properties. In the event that claims are either not made or
are not fully paid from any applicable form of credit enhancement, the related
Trust Estate will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Servicing Fee and the expenses of the Servicer, are less
than the principal balance of the related Mortgage Loan.
Evidence as to Compliance
Each Servicer will deliver annually to the Trustee or Master Servicer, as
applicable, on or before the date specified in the applicable Pooling and
Servicing Agreement or Underlying Servicing Agreement, an Officer's
Certificate stating that (i) a review of the activities of such Servicer
during the preceding calendar year and of performance under the applicable
Pooling and Servicing Agreement or Underlying Servicing Agreement has been
made under the supervision of such officer, and (ii) to the best of such
officer's knowledge, based on such review, such Servicer has fulfilled all its
obligations under the applicable Pooling and Servicing Agreement or
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Underlying Servicing Agreement throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such
default known to such officer and the nature and status thereof. Such
Officer's Certificate shall be accompanied by a statement of a firm of
independent public accountants to the effect that, on the basis of an
examination of certain documents and records relating to a random sample of
the mortgage loans being serviced by such Servicer pursuant to such Pooling
and Servicing Agreement or Underlying Servicing Agreement and/or other similar
agreements, conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers, the servicing of such mortgage loans
was conducted in compliance with the provisions of the applicable Underlying
Servicing Agreement and other similar agreements, except for (i) such
exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement.
The Master Servicer will deliver annually to the Trustee, on or before the
date specified in the applicable Pooling and Servicing Agreement, an Officer's
Certificate stating that such officer has received, with respect to each
Servicer, the Officer's Certificate and accountant's statement described in
the preceding paragraph, and, that on the basis of such officer's review of
such information, each Servicer has fulfilled all its obligations under the
applicable Underlying Servicing Agreement throughout such year, or, if there
has been a default in the fulfillment of any such obligation, specifying each
such default known to such officer and the nature and status thereof.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
In the event there is a Master Servicer with respect to a Series of
Certificates, such Master Servicer may not resign from its obligations and
duties under the Pooling and Servicing Agreement for each Series without the
consent of the Trustee, except upon its determination that its duties
thereunder are no longer permissible under applicable law or are in material
conflict by reason of applicable law with any other activities of a type and
nature carried on by it. No such resignation will become effective until the
Trustee for such Series or a successor master servicer has assumed the Master
Servicer's obligations and duties under the Pooling and Servicing Agreement.
If the Master Servicer resigns for any of the foregoing reasons and the
Trustee is unable or unwilling to assume responsibility for its duties under
the Pooling and Servicing Agreement, it may appoint another institution to so
act as described under "The Pooling and Servicing Agreement--Rights Upon Event
of Default" below.
The Pooling and Servicing Agreement will also provide that neither the
Master Servicer nor any subcontractor, nor any partner, director, officer,
employee or agent of any of them, will be under any liability to the Trust
Estate or the Certificateholders, for the taking of any action or for
refraining from the taking of any action in good faith pursuant to the Pooling
and Servicing Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer, any subcontractor, nor any such person will be
protected against any liability that would otherwise be imposed by reason of
willful misfeasance, bad faith or gross negligence in the performance of his
or its duties or by reason of reckless disregard of his or its obligations and
duties thereunder. The Pooling and Servicing Agreement will further provide
that the Master Servicer, any subcontractor, and any partner, director,
officer, employee or agent of either of them shall be entitled to
indemnification by the Trust Estate and will be held harmless against any
loss, liability or expense incurred in connection with any legal action
relating to the Pooling and Servicing Agreement or the Certificates, other
than any loss, liability or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of its duties thereunder or
by reason of reckless disregard of its obligations and duties thereunder. In
addition, the Pooling and Servicing Agreement will provide that the Master
Servicer will not be under any obligation to appear in, prosecute or defend
any legal action that is not incidental to its duties under the Pooling and
Servicing Agreement and that in its opinion may involve it in any expense or
liability. The Master Servicer may, however, in its discretion, undertake any
such action deemed by it necessary or desirable with respect to the Pooling
and Servicing 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 Estate and the Master Servicer
will be entitled to be reimbursed therefor out of the Certificate Account, and
any loss to the Trust Estate arising from such right of reimbursement will be
allocated first to the Subordinated Certificate of a Series before being
allocated to the related Senior
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Certificates, or if such Series does not contain Subordinated Certificates,
pro rata among the various Classes of Certificates unless otherwise specified
in the applicable Pooling and Servicing Agreement.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger, conversion or consolidation to which the
Master Servicer is a party, or any person succeeding to the business through
the transfer of substantially all of its assets or all assets relating to such
business, or otherwise, of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement for each Series
provided that such successor or resulting entity has a net worth of not less
than $15,000,000 and is qualified to service mortgage loans for FNMA or FHLMC.
The Master Servicer also has the right to assign its rights and delegate its
duties and obligations under the Pooling and Servicing Agreement for each
Series; provided that, if the Master Servicer desires to be released from its
obligations under the Pooling and Servicing Agreement, (i) the purchaser or
transferee accepting such assignment or delegation is qualified to service
mortgage loans for FNMA or FHLMC, (ii) the purchaser is satisfactory to the
Trustee for such Series, in the reasonable exercise of its judgment, and
executes and delivers to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by such
purchaser or transferee of the due and punctual performance and observance of
each covenant and condition to be performed or observed by the Master Servicer
under the Pooling and Servicing Agreement from and after the date of such
agreement; and (iii) each applicable Rating Agency's rating of any
Certificates for such Series in effect immediately prior to such assignment,
sale or transfer would not be qualified, downgraded or withdrawn as a result
of such assignment, sale or transfer and the Certificates would not be placed
on credit review status by any such Rating Agency. The Master Servicer will be
released from its obligations under the Pooling and Servicing Agreement upon
any such assignment and delegation, except that the Master Servicer will
remain liable for all liabilities and obligations incurred by it prior to the
time that the conditions contained in clauses (i), (ii) and (iii) above are
met.
THE POOLING AND SERVICING AGREEMENT
Assignment of Mortgage Loans to the Trustee
The Depositor will have acquired the Mortgage Loans included in each Trust
Estate pursuant to one or more agreements (each, a "Sale Agreement"). In
connection with the conveyance of the Mortgage Loans to the Depositor, a
Seller will (i) agree to deliver to the Depositor all of the documents which
the Depositor is required to deliver to the Trustee; (ii) make certain
representations and warranties to the Depositor which will be the basis of
certain of the Depositor's representations and warranties to the Trustee or
assign the representations and warranties made by the originator of the
Mortgage Loans; and (iii) agree to repurchase or substitute (or assign rights
to a comparable agreement of the originator of the Mortgage Loans) for any
Mortgage Loan for which any document is not delivered or is found to be
defective in any material respect, or which Mortgage Loan is discovered at any
time not to be in conformance with the representations and warranties the
Seller has made to the Depositor and the breach of such representations and
warranties materially and adversely affects the interests of the
Certificateholders in the related Mortgage Loan, if the Seller cannot deliver
such document or cure such defect or breach within 60 days after notice
thereof. Such agreement will inure to the benefit of the Trustee and is
intended to help ensure the Depositor's performance of its limited obligation
to repurchase or substitute for Mortgage Loans. See "The Mortgage Loan
Programs--Representations and Warranties" above. To the extent specified in
the related Prospectus Supplement, the applicable Seller or other entity
specified therein rather than the Depositor will have the limited obligation
to repurchase or substitute for Mortgage Loans.
At the time of issuance of each Series of Certificates, the Mortgage Loans
in the related Trust Estate will, pursuant to the applicable Pooling and
Servicing Agreement, be assigned to the Trustee for the benefit of the
Certificateholders, together with all principal and interest received on or
with respect to such Mortgage Loans after the applicable Cut-Off Date other
than principal and interest due and payable on or before such Cut-Off Date and
interest attributable to the Fixed Retained Yield on such Mortgage Loans, if
any. See "Servicing of the
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Mortgage Loans--Fixed Retained Yield, Servicing Compensation and Payment of
Expenses." The Trustee or its agent will, concurrently with such assignment,
authenticate and deliver the Certificates evidencing such Series to the
Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the applicable Pooling and
Servicing Agreement. Each such schedule will include, among other things, the
unpaid principal balance as of the close of business on the applicable Cut-Off
Date, the maturity date and the Mortgage Interest Rate for each Mortgage Loan
in the related Trust Estate.
In addition, with respect to each Mortgage Loan in a Trust Estate, the
mortgage or other promissory note, any assumption, modification or conversion
to fixed interest rate agreement, a mortgage assignment in recordable form and
the recorded Mortgage (or other documents as are required under applicable law
to create perfected security interest in the Mortgaged Property in favor of
the Trustee) will be delivered to the Trustee or, if indicated in the
applicable Prospectus Supplement, to a custodian; provided that, in instances
where recorded documents cannot be delivered due to delays in connection with
recording, copies thereof, certified by the Depositor to be true and complete
copies of such documents sent for recording, may be delivered and the original
recorded documents will be delivered promptly upon receipt. The assignment of
each Mortgage will be recorded promptly after the initial issuance of
Certificates for the related Trust Estate, except in states where, in the
opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Mortgage Loan against the claim of
any subsequent transferee or any successor to or creditor of the Depositor, or
another affiliate that sold the Mortgage Loan to the Depositor, or the
originator of such Mortgage Loan. Notwithstanding the foregoing, with respect
to any Mortgage which has been recorded in the name of Mortgage Electronic
Registration Systems, Inc. ("MERS") or its designee, no mortgage assignment in
favor of the Trustee will be required to be prepared or delivered. Instead,
the applicable Servicers will be required to take all actions as are necessary
to cause the applicable Trust Estate to be shown as the owner of the related
Mortgage Loan on the records of MERS for purposes of the system of recording
transfers of beneficial ownership of mortgages maintained by MERS.
The Trustee or custodian will hold such documents in trust for the benefit
of Certificateholders of the related Series and will review such documents
within 90 days of the date of the applicable Pooling and Servicing Agreement.
If any document is not delivered or is found to be defective in any material
respect, or if the Depositor or other representing party is in breach of any
of its representations and warranties, and such breach materially and
adversely affects the interests of the Certificateholders in a Mortgage Loan,
and the Depositor or other entity specified in the related Prospectus
Supplement cannot deliver such document or cure such defect or breach within
90 days after written notice thereof, the Depositor or other entity specified
in the related Prospectus Supplement will, within 90 days of such notice,
either repurchase the related Mortgage Loan from the Trustee at a price equal
to the then unpaid principal balance thereof, plus accrued and unpaid interest
at the applicable Mortgage Interest Rate (minus any Fixed Retained Yield)
through the last day of the month in which such repurchase takes place, or (in
the case of a Series for which one or more REMIC elections have been or will
be made, unless the maximum period as may be provided by the Code or
applicable regulations of the Department of the Treasury ("Treasury
Regulations") shall have elapsed since the execution of the applicable Pooling
and Servicing Agreement) substitute for such Mortgage Loan a new mortgage loan
having characteristics such that the representations and warranties of the
Depositor or other representing party made pursuant to the applicable Pooling
and Servicing Agreement (except for representations and warranties as to the
correctness of the applicable schedule of mortgage loans) would not have been
incorrect had such substitute Mortgage Loan originally been a Mortgage Loan.
In the case of a repurchased Mortgage Loan, the purchase price will be
deposited by the Seller in the related Certificate Account. In the case of a
substitute Mortgage Loan, the mortgage file relating thereto will be delivered
to the Trustee or the custodian and the Depositor or other entity specified in
the related Prospectus Supplement will deposit in the Certificate Account, an
amount equal to the excess of (i) the unpaid principal balance of the Mortgage
Loan for which it is being substituted (the "Removed Mortgage Loan"), over
(ii) the unpaid principal balance of the substitute Mortgage Loan, together
with interest on such excess at the Mortgage Interest Rate (minus any Fixed
Retained Yield) to the next scheduled Due Date of the Removed Mortgage Loan.
In no event will any substitute Mortgage Loan have (i) an unpaid principal
balance greater than the scheduled principal balance calculated in accordance
with the amortization schedule (the
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"Scheduled Principal Balance") of the Mortgage Loan for which it is
substituted (after giving effect to the scheduled principal payment due in the
month of substitution on the Removed Mortgage Loan), or (ii) a term greater
than, a Mortgage Interest Rate less than, a Mortgage Interest Rate more than
two percent per annum greater than or a loan-to-value ratio greater than, the
Removed Mortgage Loan. If substitution is to be made for an adjustable-rate
Mortgage Loan, the substitute Mortgage Loan will have (i) an unpaid principal
balance no greater than the Scheduled Principal Balance of the Removed
Mortgage Loan (after giving effect to the scheduled principal payment due in
the month of substitution on the Removed Mortgage Loan), (ii) a loan-to-value
ratio less than or equal to, and a Mortgage Interest Rate at least equal to,
that of the Removed Mortgage Loan, and (iii) will bear interest based on the
same index, margin and frequency of adjustment as the Removed Mortgage Loan.
The repurchase obligation and the mortgage substitution referred to above will
constitute the sole remedies available to the Certificateholders or the
Trustee with respect to missing or defective documents or breach of the
Depositor's or other representing entity's representations and warranties.
If no custodian is named in the related Pooling and Servicing Agreement, the
Trustee will be authorized to appoint a custodian to maintain possession of
the documents relating to the Mortgage Loans and to conduct the review of such
documents described above. Any custodian so appointed will keep and review
such documents as the Trustee's agent under a custodial agreement.
Optional Purchases
Subject to the provisions of the applicable Pooling and Servicing Agreement,
the Depositor or the Master Servicer may, at such party's option, repurchase
(i) any Mortgage Loan which is in default or as to which default is reasonably
foreseeable if, in the Depositor's or the Master Servicer's judgment, the
related default is not likely to be cured by the borrower or default is not
likely to be averted, up to the limit, if any, specified in such Pooling and
Servicing Agreement and (ii) any Mortgage Loan as to which the originator of
such Mortgage Loan breached a representation or warranty to a Seller regarding
the characteristics of such Mortgage Loan, at a price equal to the unpaid
principal balance thereof plus accrued interest thereon and under the
conditions set forth in the applicable Prospectus Supplement.
Reports to Certificateholders
Unless otherwise specified or modified in the related Pooling and Servicing
Agreement for each Series, the Trustee will prepare and include with each
distribution to Certificateholders of record of such Series a statement
setting forth the following information, if applicable:
(i) the amount of such distribution allocable to principal of the related
Mortgage Loans, separately identifying the aggregate amount of any
principal prepayments included therein, the amount of such distribution
allocable to interest on the related Mortgage Loans and the aggregate
unpaid principal balance of the Mortgage Loans evidenced by each Class
after giving effect to the principal distributions on such Distribution
Date;
(ii) the amount of servicing compensation with respect to the related
Trust Estate and such other customary information as is required to enable
Certificateholders to prepare their tax returns;
(iii) the amount by which the Servicing Fee or Master Servicing Fee, as
applicable, for the related Distribution Date has been reduced by interest
shortfalls due to prepayments;
(iv) the aggregate amount of any Periodic Advances by the Servicer, the
Master Servicer or the Trustee included in the amounts actually distributed
to the Certificateholders;
(v) to each holder of a Certificate entitled to the benefits of payments
under any form of credit enhancement:
(a) the amounts so distributed under any such form of credit
enhancement on the applicable Distribution Date; and
(b) the amount of coverage remaining under any such form of credit
enhancement, after giving effect to any payments thereunder and other
amounts charged thereto on the Distribution Date;
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(vi) in the case of a Class of Certificates with a variable Pass-Through
Rate, such Pass-Through Rate;
(vii) the book value of any collateral acquired by the Trust Estate
through foreclosure or otherwise;
(viii) the unpaid principal balance of any Mortgage Loan as to which the
Servicer has notified the Master Servicer and/or the Trustee that such
Servicer has determined not to foreclose because it believes the related
Mortgaged Property may be contaminated with or affected by hazardous wastes
or hazardous substances; and
(ix) the number and aggregate principal amount of Mortgage Loans one
month, two months and three or more months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Trustee will furnish a report to each Certificateholder of
record at any time during such calendar year such information as required by
the Code and applicable regulations thereunder to enable Certificateholders to
prepare their tax returns. In the event that an election has been made to
treat the Trust Estate (or one or more segregated pools of assets therein) as
a REMIC, the Trustee will be required to prepare and sign the federal and
applicable state and local income tax returns of the REMIC. See "Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Administrative Matters."
List of Certificateholders
The Pooling and Servicing Agreement for each Series will require the Trustee
to provide access to the most current list of names and addresses of
Certificateholders of such Series to any group of five or more
Certificateholders who advise the Trustee in writing that they desire to
communicate with other Certificateholders with respect to their rights under
the Pooling and Servicing Agreement or under the Certificates.
Events of Default
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Master Servicer or, if a Servicer has executed
the Pooling and Servicing Agreement, such Servicer, to make a required deposit
which continues unremedied for five days; (ii) any failure by the Master
Servicer or a Servicer that has executed the Pooling and Servicing Agreement
duly to observe or perform in any material respect any other of its covenants
or agreements in the Pooling and Servicing Agreement which continues
unremedied for 30 days after the giving of written notice of such failure to
the Master Servicer or such Servicer by the Trustee, or to the Master Servicer
or such Servicer and the Trustee by the holders of Certificates of such Series
having voting rights allocated to such Certificates ("Voting Interests")
aggregating not less than 25% of the Voting Interests allocated to all
Certificates for such Series; and (iii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain action by the Master Servicer or a Servicer that has
executed the Pooling and Servicing Agreement indicating its insolvency,
reorganization or inability to pay its obligations.
Rights Upon Event of Default
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or holders of
Certificates of such Series evidencing not less than 51% of the Voting
Interests in the Trust Estate for such Series may terminate all of the rights
and obligations of the Master Servicer or a Servicer executing the Pooling and
Servicing Agreement, under the Pooling and Servicing Agreement and in and to
the Mortgage Loans (other than the Master Servicer's or such Servicer's right
to recovery of the aggregate Servicing Fees or Master Servicing Fees, as
applicable, due prior to the date of termination, and other expenses and
amounts advanced pursuant to the terms of the Pooling and Servicing Agreement,
which rights the Master Servicer or such Servicer will retain under all
circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer or such
Servicer under the Pooling and Servicing Agreement and will be entitled to
monthly compensation not to exceed the aggregate fees together with the other
compensation to which the Master Servicer or such Servicer is entitled under
the Pooling and Servicing
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Agreement. In the event that the Trustee is unwilling or unable so to act, it
may select, pursuant to the public bid procedure described in the applicable
Pooling and Servicing Agreement, or petition a court of competent jurisdiction
to appoint, a housing and home finance institution, bank or mortgage servicing
institution with a net worth of at least $10,000,000 to act as successor to
the Master Servicer or such Servicer, under the provisions of the Pooling and
Servicing Agreement; provided however, that until such a successor Master
Servicer or Servicer is appointed and has assumed the responsibilities, duties
and liabilities of the Master Servicer or such Servicer under the Pooling and
Servicing Agreement, the Trustee shall continue as the successor to the Master
Servicer or such Servicer as described above. In the event such public bid
procedure is utilized, the successor would be entitled to compensation in an
amount equal to the aggregate fees, together with the other compensation to
which the Master Servicer or such Servicer, is entitled under the Pooling and
Servicing Agreement, and the Master Servicer or such Servicer would be
entitled to receive the net profits, if any, realized from the sale of its
rights and obligations under the Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
holders of Certificates evidencing not less than 25% of the Voting Interests
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon the Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or
powers unless such Certificateholders have offered the Trustee reasonable
security or indemnity against the cost, expenses and liabilities which may be
incurred by the Trustee thereby. Also, the Trustee may decline to follow any
such direction if the Trustee determines that the action or proceeding so
directed may not lawfully be taken or would involve it in personal liability
or be unjustly prejudicial to the non-assenting Certificateholders.
No Certificateholder of a Series, solely by virtue of such holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the
Pooling and Servicing Agreement, unless (i) such holder previously has given
to the Trustee for such Series written notice of default and (ii) the holders
of Certificates evidencing not less than 25% of the Voting Interests for such
Series 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 has neglected or refused to
institute any such proceeding.
Amendment
Each Pooling and Servicing Agreement may be amended by the Depositor, the
Servicer(s) (or the Master Servicer, if applicable) and the Trustee without
the consent of the Certificateholders, (i) to cure any ambiguity or mistake,
(ii) to correct or supplement any provision therein that may be inconsistent
with any other provision therein, (iii) if a REMIC election has been made, to
modify, eliminate or add to any of its provisions to such extent as shall be
necessary to maintain the qualification of the Trust Estate (or one or more
segregated pools of assets therein) as a REMIC at all times that any
Certificates are outstanding or to avoid or minimize the risk of the
imposition of any tax on the Trust Estate pursuant to the Code that would be a
claim against the Trust Estate, provided that the Trustee has received an
opinion of counsel to the effect that such action is necessary or desirable to
maintain such qualification or to avoid or minimize the risk of the imposition
of any such tax and such action will not, as evidenced by such opinion of
counsel, adversely affect in any material respect the interests of any
Certificateholder, (iv) to change the timing and/or nature of deposits into
the Certificate Account, provided that such change will not, as evidenced by
an opinion of counsel, adversely affect in any material respect the interests
of any Certificateholder and that such change will not adversely affect the
then current rating assigned to any Certificates, as evidenced by a letter
from each Rating Agency to such effect, (v) if a REMIC election has been made,
to add to, modify or eliminate any provisions therein restricting transfers of
Residual Certificates to certain disqualified organizations described below
under "Federal Income Tax Consequences--Federal Income Tax Consequences for
REMIC Certificates--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates," (vi) to make certain
provisions with respect to the
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denominations of, and the manner of payments on, certain Classes of
Certificates initially retained by the Depositor or an affiliate, or (vii) to
make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement that are not inconsistent with the
provisions thereof, provided that such action will not, as evidenced by an
opinion of counsel, adversely affect in any material respect the interests of
the Certificateholders of the related Series. The Pooling and Servicing
Agreement may also be amended by the Depositor, the Servicer(s) (or the Master
Servicer, if applicable) and the Trustee with the consent of the holders of
Certificates evidencing interests aggregating not less than 66 2/3% of the
Voting Interests evidenced by the Certificates of each Class affected thereby,
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Pooling and Servicing Agreement or
of modifying in any manner the rights of the Certificateholders; provided,
however, that no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, any payments received on or with respect to Mortgage
Loans that are required to be distributed on any Certificate, without the
consent of the holder of such Certificate, (ii) adversely affect in any
material respect the interests of the holders of a Class of Certificates of a
Series in a manner other than that set forth in (i) above without the consent
of the holders of Certificates aggregating not less than 66 2/3% of the Voting
Interests evidenced by such Class, or (iii) reduce the aforesaid percentage of
Certificates of any Class, the holders of which are required to consent to
such amendment, without the consent of the holders of all Certificates of such
affected Class then outstanding. Notwithstanding the foregoing, the Trustee
will not consent to any such amendment if such amendment would subject the
Trust Estate (or any segregated pool of assets therein) to tax or, if a REMIC
election has been made, cause the Trust Estate (or any segregated pool of
assets therein) to fail to qualify as a REMIC.
Termination; Optional Purchase of Mortgage Loans
The obligations created by the Pooling and Servicing Agreement for a Series
of Certificates will terminate on the Distribution Date following the final
payment or other liquidation of the last Mortgage Loan subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage
Loan. In no event, however, will the trust created by the Pooling and
Servicing Agreement continue beyond the expiration of 21 years from the death
of the last survivor of certain persons named in such Pooling and Servicing
Agreement. For each Series of Certificates, the Trustee will give written
notice of termination of the Pooling and Servicing Agreement 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
Depositor and specified in the notice of termination.
If so provided in the applicable Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Depositor or such other party as is specified in the applicable
Prospectus Supplement, to purchase from the Trust Estate for such Series all
remaining Mortgage Loans at the time and price specified in such Prospectus
Supplement. In the event that such party has caused the related Trust Estate
(or any segregated pool of assets therein) to be treated as a REMIC, any such
purchase will be effected only pursuant to either (a) a "clean up call" as
defined in Treasury Regulations Section 1.860G-2(j) or (b) a "qualified
liquidation" as defined in Code Section 860F(a)(4)(A). Any qualified
liquidation will effect early retirement of the Certificates of that Series,
but the right so to purchase may be exercised only after the aggregate
principal balance of the Mortgage Loans for such Series at the time of
purchase is less than a specified percentage, not exceeding 10%, of the
aggregate principal balance at the Cut-Off Date for the Series, or after the
date set forth in the applicable Prospectus Supplement. A clean up call will
result in the early retirement of one or more Classes of Certificates as
specified in the related Prospectus Supplement. Such a clean up call may be
effected only when the outstanding principal balance of each Class to be
redeemed is 10% or less of the original principal balance of such Class.
The Trustee
The Trustee under each Pooling and Servicing Agreement (the "Trustee") will
be named in the applicable Prospectus Supplement. The commercial bank or trust
company serving as Trustee may have normal banking relationships with the
Depositor or any of its affiliates.
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The Trustee generally will be responsible under each Pooling and Servicing
Agreement for providing general administrative services for the Trust Estate
for any such Series, including, among other things, (i) monitoring the amounts
on deposit in various trust accounts; (ii) calculation of the amounts payable
to Certificateholders on each Distribution Date; (iii) preparation of federal
and applicable state and local tax and information returns; (iv) preparation
of reports, if any, required under the Securities and Exchange Act of 1934, as
amended; (v) maintaining any mortgage pool insurance policy, mortgagor
bankruptcy bond, special hazard insurance policy or other form of credit
enhancement that may be required with respect to any Series; and (vi) making
Periodic Advances on the Mortgage Loans to the limited extent described under
"Servicing of the Mortgage Loans--Periodic Advances and Limitations Thereon,"
if such amounts are not advanced by a Servicer or the Master Servicer.
The Trustee may resign at any time, in which event the Master Servicer or,
if there is no Master Servicer, the Servicer(s) will be obligated to appoint a
successor trustee. The Master Servicer or, if there is no Master Servicer, the
Servicer(s) may also remove the Trustee if the Trustee ceases to be eligible
to act as Trustee under the Pooling and Servicing Agreement, if the Trustee
becomes insolvent or in order to change the situs of the Trust Estate for
state tax reasons. Upon becoming aware of such circumstances, the Master
Servicer or, if there is no Master Servicer, the Servicer(s) will become
obligated to appoint a successor trustee. The Trustee may also be removed at
any time by the holders of Certificates evidencing not less than 50% of the
Voting Interests in the Trust Estate, except that any Certificate registered
in the name of the Depositor or any affiliate thereof will not be taken into
account in determining whether the requisite Voting Interest in the Trust
Estate necessary to effect any such removal has been obtained. Any resignation
and removal of the Trustee, and the appointment of a successor trustee, will
not become effective until acceptance of such appointment by the successor
trustee. The Trustee, and any successor trustee, must have a combined capital
and surplus of at least $50,000,000, or be a member of a bank holding system,
the aggregate combined capital and surplus of which is at least $50,000,000,
provided that the Trustee's and any such successor trustee's separate capital
and surplus shall at all times be at least the amount specified in Section
310(a)(2) of the Trust Indenture Act of 1939, as amended, and will be subject
to supervision or examination by federal or state authorities.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), 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 security for the
Mortgage Loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the Mortgage
Loans.
General
The Mortgage Loans will be secured by either first mortgages, first deeds of
trust or similar security devices creating a first lien, depending upon the
prevailing practice in the state in which the underlying property is located.
A mortgage creates a lien upon the real property described in the mortgage.
There are two parties to a mortgage: the mortgagor, who is the borrower (or,
in the case of a Mortgage Loan secured by a property that has been conveyed to
an inter vivos revocable trust, the settlor of such trust); and the mortgagee,
who is the lender. In a mortgage instrument state, the mortgagor delivers to
the mortgagee a note or bond evidencing the loan and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust has three parties: a
borrower called the trustor (similar to a mortgagor), a lender called the
beneficiary (similar to a mortgagee), 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 loan. The trustee's authority under a deed of
trust and the mortgagee's authority under a mortgage are governed by the
express provisions of the deed of trust or mortgage, applicable law, and, in
some cases, with respect to the deed of trust, the directions of the
beneficiary.
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Foreclosure
Foreclosure of a mortgage is generally 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 occasionally may result from difficulties in
locating necessary parties defendant. When the mortgagee's right of
foreclosure is contested, the legal proceedings necessary to resolve the issue
can be time-consuming. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a
receiver or other officer to conduct the sale of the property. In some states,
mortgages may also be foreclosed by advertisement, pursuant to a power of sale
provided in the mortgage. Foreclosure of a mortgage by advertisement is
essentially similar to foreclosure of a deed of trust by non-judicial power of
sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In certain states, such
foreclosure also may be accomplished by judicial action in the manner provided
for foreclosure of mortgages. 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 a notice of default and notice of sale. In
addition, the trustee must provide notice in some states to any other
individual having an interest of record in the real property, including any
junior lienholders. If the deed of trust is not reinstated within any
applicable cure period, a notice of sale must be posted in a public place and,
in most states, published for a specified period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the property.
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, 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. Certain state laws control the amount of foreclosure expenses
and costs, including attorneys' fees, which may be recovered by a lender.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the receiver or other designated officer, or by the trustee, is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or receiver for an amount equal to the unpaid principal
amount of the note, accrued and unpaid interest and the expenses of
foreclosure. 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. The lender commonly will obtain the services of a real estate broker
and pay the broker a commission in connection with the sale of the property.
Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may
be reduced by the receipt of mortgage insurance proceeds, if any, or by
judicial action against the borrower for the deficiency, if such action is
permitted by law. See "--Anti-Deficiency Legislation, the Bankruptcy Code and
Other Limitations on Lenders" below.
Foreclosure on Shares of Cooperatives
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the cooperative's certificate of incorporation and by-laws, as well
as in the proprietary lease or occupancy agreement, and may be canceled by the
cooperative for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such tenant-stockholder, including mechanics'
liens against the cooperative apartment building incurred by such tenant-
stockholder. The proprietary lease or occupancy agreement generally permits
the cooperative to terminate such lease or agreement in the event an obligor
fails to make payments or defaults in the performance of covenants required
thereunder. Typically,
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the lender and the cooperative enter into a recognition agreement which
establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder on its obligations under the proprietary
lease or occupancy agreement. A default by the tenant-stockholder under the
proprietary lease or occupancy agreement will usually constitute a default
under the security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited by the agreement in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the cooperative shares is accomplished by a sale in
accordance with the provisions of Article 9 of the Uniform Commercial Code
(the "UCC") and the security agreement relating to those shares. Article 9 of
the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor
and the method, manner, time, place and terms of the foreclosure. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See "--Anti-
Deficiency Legislation, the Bankruptcy Code and Other Limitations on Lenders"
below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust and/or foreclosure of
a mortgage, the borrower and certain foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. In
most states where the right of redemption is available, statutory redemption
may occur upon payment of the foreclosure purchase price, accrued interest and
taxes. In some states, the right to redeem is an equitable right. The effect
of a right of redemption is to delay the ability of the lender to sell the
foreclosed property. The exercise of a right of redemption would defeat the
title of any purchaser at a foreclosure sale, or of any purchaser from the
lender subsequent to judicial 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 run.
Anti-Deficiency Legislation, the Bankruptcy Code 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, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A
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deficiency judgment would be a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or mortgagee to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. Finally,
other statutory provisions limit any deficiency judgment against the former
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of public sale. The purpose
of these statutes is generally to prevent a beneficiary or a mortgagee from
obtaining a large deficiency judgment against the former borrower as a result
of low or no bids at the judicial sale.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement and foreclosure on
the beneficial interest in a land trust. Some courts have interpreted Section
9-504 of the UCC to prohibit a deficiency award unless the creditor
establishes that the sale of the collateral (which, in the case of a Mortgage
Loan secured by shares of a cooperative, would be such shares and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
A Servicer generally will not be required under the Pooling and Servicing
Agreement or applicable Underlying Servicing Agreement to pursue deficiency
judgments on the Mortgage Loans even if permitted by law.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the United States Bankruptcy
Code, 11 U.S.C. Sections 101 et seq. (the "Bankruptcy Code"), and state laws
affording relief to debtors may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay, an action, the court may be
reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not
deteriorating in value. The delay and the consequences thereof caused by such
automatic stay can be significant. Also, under the Bankruptcy Code, the filing
of a petition in bankruptcy by or on behalf of a junior lienor (a subordinate
lender secured by a mortgage on the property) may stay a senior lender from
taking action to foreclose.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in" (i.e., bid
up to the amount of the debt) at the sale of the asset. See "--Foreclosure." A
homeowner may also file for relief under Chapter 11 of the Bankruptcy Code and
reorganize his or her debts through his or her reorganization plan.
Alternatively, a homeowner may file for relief under Chapter 13 of the
Bankruptcy Code and address his or her debts in a rehabilitation plan.
(Chapter 13 is often referred to as the "wage earner chapter" or "consumer
chapter" because most individuals seeking to restructure their debts file for
relief under Chapter 13 rather than Chapter 11).
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. Under the Bankruptcy Code, the lender's security interest
may be reduced to the then-current value of the property as determined by the
court if the value is less than the amount due on the loan, thereby leaving
the lender as a general unsecured creditor for the difference between the
value of the collateral and the outstanding balance of the mortgage loan. A
borrower's unsecured indebtedness will typically be discharged in full upon
payment of a substantially reduced amount. Other modifications to a mortgage
loan may include a reduction in the amount of each scheduled payment, which
reduction may result from a reduction in the rate of interest, an alteration
of the repayment schedule, an extension of the final maturity date, and/or a
reduction in the outstanding balance of the secured portion of the loan. In
certain circumstances, subject to the
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court's approval, a debtor in a case under Chapter 11 of the Bankruptcy Code
may have the power to grant liens senior to the lien of a mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default
with respect to a mortgage loan on such debtor's residence by paying
arrearages over a period of time and to deaccelerate and reinstate the
original mortgage loan payment schedule, even though the lender accelerated
the loan and a final judgment of foreclosure had been entered in state court
(provided no sale of the property had yet occurred) prior to the filing of the
debtor's petition under the Bankruptcy Code. Under a Chapter 13 plan, curing
of defaults must be accomplished within the five year maximum term permitted
for repayment plans, such term commencing when repayment plan becomes
effective, while defaults may be cured over a longer period of time under a
Chapter 11 plan of reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender
if the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by
the debtor's principal residence and by collateral that is not "inextricably
bound" to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under
the debtor's Chapter 13 plan (which date could be up to five years after the
debtor emerges from bankruptcy). Under several recently decided cases, the
terms of such a loan can be modified in the manner described above. While
these decisions are contrary to the holding in a prior case by a senior
appellate court, it is possible that the later decisions will become the
accepted interpretation in view of the language of the applicable statutory
provision. If this interpretation is adopted by a court considering the
treatment in a Chapter 13 repayment plan of a Mortgage Loan, it is possible
that the Mortgage Loan could be modified.
State statutes and general principles of equity may also provide a mortgagor
with means to halt a foreclosure proceeding or sale and to force a
restructuring of a mortgage loan on terms a lender would not otherwise accept.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan prior to the
bankruptcy or similar proceeding. Payments on long-term debt may be protected
from recovery as preferences if they are payments in the ordinary course of
business made on debts incurred in the ordinary course of business or if the
value of the collateral exceeds the debt at the time of payment. Whether any
particular payment would be protected depends upon the facts specific to a
particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of a
payment to the lender. Moreover, the laws of certain states also give priority
to certain tax and mechanics liens over the lien of a mortgage. Under the
Bankruptcy Code, if the court finds that actions of the mortgagee have been
unreasonable and inequitable, the lien of the related mortgage may be
subordinated to the claims of unsecured creditors.
Bankruptcy reform legislation that was passed by the Senate on September 23,
1998 would have amended the Bankruptcy Code (such amendment, the "TILA
Amendment") to authorize bankruptcy court judges to disallow claims based on
secured debt if the creditor failed to comply with certain provisions of the
federal Truth in Lending Act. As proposed, such provision would apply
retroactively to secured debt incurred by a debtor prior to the date of
effectiveness of such legislation, including the Mortgage Loans. The House
bill and the conference report did not have a similar provision, and Congress
adjourned from its last session without acting on the proposed legislation.
However, such legislation may be reintroduced in the current session. If the
TILA Amendment were to become law, a violation of the Truth in Lending Act
with respect to a Mortgage Loan could result in a total loss with respect to
such loan in a bankruptcy proceeding. Any such violation would be a breach
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of representation and warranty of the depositor, and the depositor would be
obligated to repurchase such Mortgage Loan as described herein.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans in a trust have been considered by
Congress, and more such proposed legislation may be considered in the future.
No assurance can be given that any particular proposal will or will not be
enacted into law, or that any provision so enacted will not differ materially
from the proposals described above.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws
include the federal Trust-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act, and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail
to comply with the provisions of the applicable laws. In some cases, this
liability may affect assignees of the Mortgage Loans.
Texas Home Equity Loans
Generally, any "cash-out" refinance or other non-purchase money transaction
(except for certain rate/term refinance loans and certain other narrow
exceptions) secured by a Texas resident's principal residence is subject to
the provisions set forth in Section 50(a)(6) of Article XVI of the
Constitution of Texas (the "Texas Home Equity Laws"). The Texas Home Equity
Laws provide for certain disclosure requirements, caps on allowable fees,
required loan closing procedures and other restrictions. Failure, inadvertent
or otherwise, to comply with any requirement may render the Mortgage Loan
unenforceable and/or the lien on the Mortgaged Property invalid. Because
mortgage loans which are subject to the Texas Home Equity Laws can be
foreclosed only pursuant to court order, rather than non-judicial foreclosure
as is available for other types of mortgage loans in Texas, delays and
increased losses may result in connection with foreclosures of such loans. If
a court were to find that any requirement of the Texas Home Equity Laws was
not complied with, the court could refuse to allow foreclosure to proceed,
declare the lien on the Mortgaged Property to be invalid, and/or require the
originating lender or the holder of the note to forfeit some or all principal
and interest of the related Mortgage Loan. Title insurance generally available
on such Mortgage Loans may exclude coverage for some of the risks described in
this paragraph.
Soldiers' and Sailors' Civil Relief Act and Similar Laws
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the "Relief Act"), a borrower who enters military service
after the origination of such borrower's Mortgage Loan (including a borrower
who is a member of the National Guard or is in reserve status at the time of
the origination of the Mortgage Loan and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
borrower's active duty status, unless a court orders otherwise upon
application of the lender. It is possible that such action could have an
effect, for an indeterminate period of time, on the ability of the Servicer to
collect full amounts of interest on certain of the Mortgage Loans in a Trust
Estate. Any shortfall in interest collections resulting from the application
of the Relief Act could result in losses to the holders of the Certificates of
the related Series. Further, the Relief Act imposes limitations which would
impair the ability of the Servicer to foreclose on an affected Mortgage Loan
during the borrower's period of active duty status. Thus, in the event that
such a Mortgage Loan goes into default, there may be delays and losses
occasioned by the inability to realize upon the Mortgaged Property in a timely
fashion. Certain states have enacted comparable legislation which may
interfere with or affect the ability of the Servicer to timely collect
payments of principal and interest on, or to foreclose on, Mortgage Loans of
borrowers in such states who are active or reserve members of the armed
services.
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Environmental Considerations
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property. Property subject to such a
security interest may be subject to federal, state, and local laws and
regulations relating to environmental protection. Such laws may regulate,
among other things: emissions of air pollutants; discharges of wastewater or
storm water; generation, transport, storage or disposal of hazardous waste or
hazardous substances; operation, closure and removal of underground storage
tanks; removal and disposal of asbestos-containing materials; management of
electrical or other equipment containing polychlorinated biphenyls ("PCBs").
Failure to comply with such laws and regulations may result in significant
penalties, including civil and criminal fines. Under the laws of certain
states, environmental contamination on a property may give rise to a lien on
the property to ensure the availability and/or reimbursement of cleanup costs.
Generally all subsequent liens on such property are subordinated to such a
lien and, in some states, even prior recorded liens are subordinated to such
liens ("Superliens"). In the latter states, the security interest of the
Trustee in a property that is subject to such a Superlien could be adversely
affected. Environmental contamination on a property is likely to have a
negative impact on the value of such property, which may lead to losses on the
related Series of Certificates.
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed in lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, operates a mortgaged property or undertakes
certain types of activities that may constitute management of the mortgaged
property may become liable in certain circumstances for the costs of remedial
action ("Cleanup Costs") if hazardous wastes or hazardous substances have been
released or disposed of on the property. Such Cleanup Costs may be
substantial. CERCLA imposes strict, as well as joint and several liability for
environmental remediation and/or damage costs on several classes of
"potentially responsible parties," including current "owners and/or operators"
of property, irrespective of whether those owners or operators caused or
contributed to contamination on the property. In addition, owners and
operators of properties that generate hazardous substances that are disposed
of at other "off-site" locations may held strictly, jointly and severally
liable for environmental remediation and/or damages at those off-site
locations. Many states also have laws that are similar to CERCLA. Liability
under CERCLA or under similar state law could exceed the value of the property
itself as well as the aggregate assets of the property owner.
The law is unclear as to whether and under what precise circumstances
cleanup costs, or the obligation to take remedial actions, could be imposed on
a secured lender such as the Trust Estate. Under the laws of some states and
under CERCLA, a lender may be liable as an "owner or operator" for costs of
addressing releases or threatened releases of hazardous substances on a
mortgaged property if such lender or its agents or employees have
"participated in the management" of the operations of the borrower, even
though the environmental damage or threat was caused by a prior owner or
current owner or operator or other third party. Excluded from CERCLA's
definition of "owner or operator," is a person "who without participating in
the management of . . . [the] facility, holds indicia of ownership primarily
to protect his security interest" (the "secured-creditor exemption"). This
exemption for holders of a security interest such as a secured lender applies
only to the extent that a lender seeks to protect its security interest in the
contaminated facility or property. Thus, if a lender's activities begin to
encroach on the actual management of such facility or property, the lender
faces potential liability as an "owner or operator" under CERCLA. Similarly,
when a lender forecloses and takes title to a contaminated facility or
property, the lender may incur potential CERCLA liability in various
circumstances, including among others, when it holds the facility or property
as an investment (including leasing the facility or property to a third
party), fails to market the property in a timely fashion or fails to properly
address environmental conditions at the property or facility.
The Resource Conservation and Recovery Act, as amended ("RCRA"), contains a
similar secured-creditor exemption for those lenders who hold a security
interest in a petroleum underground storage tank ("UST") or in real estate
containing a UST, or that acquire title to a petroleum UST or facility or
property on which such a UST is located. As under CERCLA, a lender may lose
its secured-creditor exemption and be held liable under RCRA as a UST owner or
operator if such lender or its employees or agents participate in the
management of
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the UST. In addition, if the lender takes title to or possession of the UST or
the real estate containing the UST, under certain circumstances the secured-
creditor exemption may be deemed to be unavailable.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly
construed CERCLA's secured-creditor exemption. The court's opinion suggested
that a lender need not have involved itself in the day-to-day operations of
the facility or participated in decisions relating to hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility were broad enough to support
the inference that the lender had the capacity to influence the borrower's
treatment of hazardous waste. The court added that a lender's capacity to
influence such decisions could be inferred from the extent of its involvement
in the facility's financial management. A subsequent decision by the United
States Court of Appeals for the Ninth Circuit in In re Bergsoe Metal Corp.,
apparently disagreeing with, but not expressly contradicting, the Fleet
Factors court, held that a secured lender had no liability absent "some actual
management of the facility" on the part of the lender.
Court decisions have taken varying views of the scope of the secured-
creditor exemption, leading to administrative and legislative efforts to
provide guidance to lenders on the scope of activities that would trigger
CERCLA and/or RCRA liability. Until recently, these efforts have failed to
provide substantial guidance.
On September 30, 1996 the President signed into law (the Asset Conservation,
Lender Liability and Deposit Insurance Protection Act of 1996 (the "Asset
Conservation Act"). The Asset Conservation Act was intended to clarify the
scope of the secured creditor exemption under both CERCLA and RCRA. The Asset
Conservation Act more clearly defined the kinds of "participation in
management" that would trigger liability under CERCLA and specified certain
activities that would not constitute "participation in management" or
otherwise result in a forfeiture of the secured-creditor exemption prior to
foreclosure or during a workout period. The Asset Conservation Act also
clarified the extent of protection against liability under CERCLA in the event
of foreclosure and authorized certain regulatory clarifications of the scope
of the secured-creditor exemption for purposes of RCRA, similar to the
statutory protections under CERCLA. However, since the courts have not yet had
the opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the Asset Conservation Act is not fully
defined. It also is important to note that the Asset Conservation Act does not
offer complete protection to lenders and that the risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an
action for contribution against the owner or operator who created the
environmental contamination or against some other liable party, but that
person or entity may be bankrupt or otherwise judgment-proof. It is therefore
possible that cleanup or other environmental liability costs could become a
liability of the Trust Estate and occasion a loss to the Trust Estate and to
Certificateholders in certain circumstances. The new secured creditor
amendments to CERCLA, also, would not necessarily affect the potential for
liability in actions by either a state or a private party under other federal
or state laws which may impose liability on "owners or operators" but do not
incorporate the secured-creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present with respect to
any mortgaged property prior to the origination of the mortgage loan or prior
to foreclosure or accepting a deed-in-lieu of foreclosure. Accordingly, at the
time the Mortgage Loans were originated no such evaluations were required, nor
were any such evaluations required prior to foreclosure or accepting a deed-
in-lieu of foreclosure. Neither the Depositor nor any other entity makes any
representations or warranties or assumes any liability with respect to: the
environmental condition of such Mortgaged Property; the absence, presence or
effect of hazardous wastes or hazardous substances on any Mortgaged Property;
any casualty resulting from the presence or effect of hazardous wastes or
hazardous substances on, near or emanating from such Mortgaged Property; the
impact on Certificateholders of any environmental condition or presence of any
substance on or near such Mortgaged Property; or the compliance of any
Mortgaged Property with any environmental laws, nor is any agent, person or
entity otherwise affiliated with the Depositor authorized or able to make any
such representation, warranty or assumption of liability relative to
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any such Mortgaged Property. See "The Mortgage Loan Programs--Representations
and Warranties" and "Servicing of the Mortgage Loans--Enforcement of Due-on-
Sale Clauses; Realization Upon Defaulted Mortgage Loans" above.
"Due-on-Sale" Clauses
The forms of note, mortgage and deed of trust relating to conventional
Mortgage Loans may contain a "due-on-sale" clause permitting acceleration of
the maturity of a loan if the borrower transfers its interest in the property.
In recent years, court decisions and legislative actions placed substantial
restrictions on the right of lenders to enforce such clauses in many states.
However, effective October 15, 1982, Congress enacted the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn Act") which purports to preempt
state laws which prohibit the enforcement of "due-on-sale" clauses by
providing among other matters, that "due-on-sale" clauses in certain loans
(which loans may include the Mortgage Loans) made after the effective date of
the Garn Act are enforceable, within certain limitations as set forth in the
Garn Act and the regulations promulgated thereunder. "Due-on-sale" clauses
contained in mortgage loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Office of Thrift Supervision ("OTS"), as successor to the
Federal Home Loan Bank Board ("FHLBB"), which preempt state law restrictions
on the enforcement of such clauses. Similarly, "due-on-sale" clauses in
mortgage loans made by national banks and federal credit unions are now fully
enforceable pursuant to preemptive regulations of the Comptroller of the
Currency and the National Credit Union Administration, respectively.
The Garn Act created a limited exemption from its general rule of
enforceability for "due-on-sale" clauses in certain mortgage loans ("Window
Period Loans") which were originated by non-federal lenders and made or
assumed in certain states ("Window Period States") during the period, prior to
October 15, 1982, in which that state prohibited the enforcement of "due-on-
sale" clauses by constitutional provision, statute or statewide court decision
(the "Window Period"). Though neither the Garn Act nor the OTS regulations
actually names the Window Period States, FHLMC has taken the position, in
prescribing mortgage loan servicing standards with respect to mortgage loans
which it has purchased, that the Window Period States were: Arizona, Arkansas,
California, Colorado, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and
Washington. Under the Garn Act, unless a Window Period State took action by
October 15, 1985, the end of the Window Period, to further regulate
enforcement of "due-on-sale" clauses in Window Period Loans, "due-on-sale"
clauses would become enforceable even in Window Period Loans. Five of the
Window Period States (Arizona, Minnesota, Michigan, New Mexico and Utah) have
taken actions which restrict the enforceability of "due-on-sale" clauses in
Window Period Loans beyond October 15, 1985. The actions taken vary among such
states.
By virtue of the Garn Act, a Servicer may generally be permitted to
accelerate any conventional Mortgage Loan which contains a "due-on-sale"
clause upon transfer of an interest in the property subject to the mortgage or
deed of trust. With respect to any Mortgage Loan secured by a residence
occupied or to be occupied by the borrower, this ability to accelerate will
not apply to certain types of transfers, including (i) the granting of a
leasehold interest which has a term of three years or less and which does not
contain an option to purchase; (ii) a transfer to a relative resulting from
the death of a borrower, or a transfer where the spouse or children become an
owner of the property in each case where the transferee(s) will occupy the
property; (iii) a transfer resulting from a decree of dissolution of marriage,
legal separation agreement or from an incidental property settlement agreement
by which the spouse becomes an owner of the property; (iv) the creation of a
lien or other encumbrance subordinate to the lender's security instrument
which does not relate to a transfer of rights of occupancy in the property
(provided that such lien or encumbrance is not created pursuant to a contract
for deed); (v) a transfer by devise, descent or operation of law on the death
of a joint tenant or tenant by the entirety; (vi) a transfer into an inter
vivos trust in which the borrower is the beneficiary and which does not relate
to a transfer of rights of occupancy; and (vii) other transfers as set forth
in the Garn Act and the regulations thereunder. Regulations promulgated under
the Garn Act also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. The extent of the
effect of the Garn Act on the average lives and delinquency rates of the
Mortgage Loans cannot be predicted. See "Prepayment and Yield Considerations."
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. The OTS as successor
to the FHLBB 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. Fifteen states have adopted laws reimposing or reserving the
right to reimpose interest rate limits. In addition, even where Title V is not
so rejected, any state is authorized to adopt a provision limiting certain
other loan charges.
The Depositor or other entity specified in the related Prospectus Supplement
will represent and warrant in the Pooling and Servicing Agreement to the
Trustee for the benefit of Certificateholders that all Mortgage Loans are
originated in full compliance with applicable state laws, including usury
laws. See "The Pooling and Servicing Agreement--Assignment of Mortgage Loans
to the Trustee."
Enforceability of Certain Provisions
Standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. Under the Pooling and Servicing Agreement, late charges
and prepayment fees (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing
compensation.
Courts have imposed general equitable principles upon foreclosure. These
equitable principles are generally designed to relieve the borrower from the
legal effect of defaults under the loan documents. Examples of judicial
remedies that may be 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 substituted their judgment for
the lender's judgment and have required lenders to reinstate loans or recast
payment schedules to accommodate borrowers who are suffering from temporary
financial disability. In some cases, courts have limited the right of lenders
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.
In other cases, some courts have been faced with the issue of whether federal
or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under the deeds of trust receive
notices in addition to the statutorily-prescribed minimum requirements. 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.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion represents the opinion of Cadwalader, Wickersham &
Taft or Kennedy Covington Lobdell & Hickman, L.L.P. as to the material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the Code,
as well as regulations (the "REMIC Regulations") promulgated by the U.S.
Department of the Treasury. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of Certificates.
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For purposes of this discussion, where the applicable Prospectus Supplement
provides for a Fixed Retained Yield with respect to the Mortgage Loans of a
Series of Certificates, references to the Mortgage Loans will be deemed to
refer to that portion of the Mortgage Loans held by the Trust Estate that does
not include the Fixed Retained Yield. References to a "holder" or
"Certificateholder" in this discussion generally mean the Beneficial Owner of
a Certificate.
Federal Income Tax Consequences for REMIC Certificates
General
With respect to a particular Series of Certificates, an election may be made
to treat the Trust Estate or one or more segregated pools of assets therein as
one or more REMICs within the meaning of Code Section 860D. A Trust Estate or
a portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Certificates of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Certificates" and will consist of one or more Classes of
"Regular Certificates" and one Class of "Residual Certificates" in the case of
each REMIC Pool. Qualification as a REMIC requires ongoing compliance with
certain conditions. With respect to each Series of REMIC Certificates,
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P.,
counsel to the Depositor, has advised the Depositor that in each firm's
opinion, assuming (i) the making of an appropriate election, (ii) compliance
with the Pooling and Servicing Agreement, and (iii) compliance with any
changes in the law, including any amendments to the Code or applicable
Treasury regulations thereunder, each REMIC Pool will qualify as a REMIC. In
such case, the Regular Certificates will be considered to be "regular
interests" in the REMIC Pool and generally will be treated for federal income
tax purposes as if they were newly originated debt instruments, and the
Residual Certificates will be considered to be "residual interests" in the
REMIC Pool. The Prospectus Supplement for each Series of Certificates will
indicate whether one or more REMIC elections with respect to the related Trust
Estate will be made, in which event references to "REMIC" or "REMIC Pool"
herein shall be deemed to refer to each such REMIC Pool.
Status of REMIC Certificates
REMIC Certificates held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a)(19)(C)(xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" within the meaning of Code
Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C). REMIC Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section
856(c)(4)(A), and interest on the Regular Certificates and income with respect
to Residual Certificates will be considered "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B) in the same proportion that, for both
purposes, the assets of the REMIC Pool would be so treated. If at all times
95% or more of the assets of the REMIC Pool qualify for each of the foregoing
treatments, the REMIC Certificates will qualify for the corresponding status
in their entirety. For purposes of Code Section 856(c)(4)(A), payments of
principal and interest on the Mortgage Loans that are reinvested pending
distribution to holders of REMIC Certificates qualify for such treatment.
Regular Certificates held by a financial asset securitization investment trust
will be "permitted assets" within the meaning of Code Section 860L(a).
Where two REMIC Pools are a part of a tiered structure they will be treated
as one REMIC for purposes of the tests described above respecting asset
ownership of more or less than 95%. In addition, if the assets of the REMIC
include Buy-Down Loans, it is possible that the percentage of such assets
constituting "loans . . . secured by an interest in real property which is
. . . residential real property" for purposes of Code Section
7701(a)(19)(C)(v), may be required to be reduced by the amount of the related
Buy-Down Funds. REMIC Certificates held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). REMIC Certificates held by certain financial institutions
will constitute
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an "evidence of indebtedness" within the meaning of Code Section 582(c)(1).
The Small Business Job Protection Act of 1996 (the "SBJPA of 1996") repealed
the reserve method for bad debts of domestic building and loan associations
and mutual savings banks, and thus has eliminated the asset category of
"qualifying real property loans" in former Code Section 593(d) for taxable
years beginning after December 31, 1995. The requirement in the SBJPA of 1996
that such institutions must "recapture" a portion of their existing bad debt
reserves is suspended if a certain portion of their assets are maintained in
"residential loans" under Code Section 7701(a)(19)(C)(v), but only if such
loans were made to acquire, construct or improve the related real property and
not for the purpose of refinancing. However, no effort will be made to
identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in
the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis portion of the assets of the REMIC Pool, as of the
close of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Certificates)
and at all times thereafter, may consist of assets other than "qualified
mortgages" and "permitted investments." The REMIC Regulations provide a safe
harbor pursuant to which the de minimis requirement will be met if at all
times the aggregate adjusted basis of the nonqualified assets is less than 1%
of the aggregate adjusted basis of all the REMIC Pool's assets. An entity that
fails to meet the safe harbor may nevertheless demonstrate that it holds no
more than a de minimis amount of nonqualified assets. A REMIC Pool also must
provide "reasonable arrangements" to prevent its residual interests from being
held by "disqualified organizations" or agents thereof and must furnish
applicable tax information to transferors or agents that violate this
requirement. See "--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified
Organizations."
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans, regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC and regular interests in a Financial Asset
Securitization Investment Trust (a "FASIT") within the meaning of Code Section
860L if 95% or more of the value of the assets of the FASIT is at all times
attributable to whole mortgage loans such as the Mortgage Loans. The REMIC
Regulations specify that loans secured by timeshare interests and shares held
by a tenant stockholder in a cooperative housing corporation can be qualified
mortgages. A qualified mortgage includes a qualified replacement mortgage,
which is any property that would have been treated as a qualified mortgage if
it were transferred to the REMIC Pool on the Startup Day and that is received
either (i) in exchange for any qualified mortgage within a three-month period
thereafter or (ii) in exchange for a "defective obligation" within a two-year
period thereafter. A "defective obligation" includes (i) a mortgage in default
or as to which default is reasonably foreseeable, (ii) a mortgage as to which
a customary representation or warranty made at the time of transfer to the
REMIC Pool has been breached, (iii) a mortgage that was fraudulently procured
by the mortgagor, and (iv) a mortgage that was not in fact principally secured
by real property (but only if such mortgage is disposed of within 90 days of
discovery). A Mortgage Loan that is "defective" as described in clause (iv)
that is not sold or, if within two years of the Startup Day, exchanged, within
90 days of discovery, ceases to be a qualified mortgage after such 90-day
period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13
months, until the next scheduled distribution to holders of interests in the
REMIC Pool. A qualified reserve asset is any intangible property held for
investment that is part of any reasonably required reserve maintained by the
REMIC Pool to provide for
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payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held
for less than three months, unless required to prevent a default on the
regular interests caused by a default on one or more qualified mortgages. A
reserve fund must be reduced "promptly and appropriately" as payments on the
Mortgage Loans are received. Foreclosure property is real property acquired by
the REMIC Pool in connection with the default or imminent default of a
qualified mortgage and generally not held beyond the close of the third
calendar year following the year in which such property is acquired with an
extension that may be granted by the Internal Revenue Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests
or (ii) a single class of residual interests on which distributions, if any,
are made pro rata. A regular interest is an interest in a REMIC Pool that is
issued on the Startup Day with fixed terms, is designated as a regular
interest, and unconditionally entitles the holder to receive a specified
principal amount (or other similar amount), and provides that interest
payments (or other similar amounts), if any, at or before maturity either are
payable based on a fixed rate or a qualified variable rate, or consist of a
specified, nonvarying portion of the interest payments on qualified mortgages.
Such a specified portion may consist of a fixed number of basis points, a
fixed percentage of the total interest, or a qualified variable rate, inverse
variable rate or difference between two fixed or qualified variable rates on
some or all of the qualified mortgages. The specified principal amount of a
regular interest that provides for interest payments consisting of a
specified, nonvarying portion of interest payments on qualified mortgages may
be zero. A residual interest is an interest in a REMIC Pool other than a
regular interest that is issued on the Startup Day and that is designated as a
residual interest. An interest in a REMIC Pool may be treated as a regular
interest even if payments of principal with respect to such interest are
subordinated to payments on other regular interests or the residual interest
in the REMIC Pool, and are dependent on the absence of defaults or
delinquencies on qualified mortgages or permitted investments, lower than
reasonably expected returns on permitted investments, unanticipated expenses
incurred by the REMIC Pool or prepayment interest shortfalls. Accordingly, the
Regular Certificates of a Series will constitute one or more classes of
regular interests, and the Residual Certificates with respect to that Series
will constitute a single class of residual interests on which distributions
are made pro rata.
If an entity, such as the REMIC Pool, fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
the Code provides that the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under Treasury regulations, and the Regular Certificates may be treated as
equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent
regulatory relief. Investors should be aware, however, that the Conference
Committee Report to the Tax Reform Act of 1986 (the "1986 Act") indicates that
the relief may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the REMIC Pool's income for the period of
time in which the requirements for REMIC status are not satisfied.
Taxation of Regular Certificates
General
In general, interest, original issue discount, and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the "Regular Certificateholder"), and principal payments
on a Regular Certificate will be treated as a return of capital to the extent
of the Regular Certificateholder's basis in the Regular Certificate allocable
thereto (other than accrued market discount not previously reported as
income). Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
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Original Issue Discount
Compound Interest Certificates will be, and other classes of Regular
Certificates may be, issued with "original issue discount" within the meaning
of Code Section 1273(a). Holders of any Class of Regular Certificates having
original issue discount generally must include original issue discount in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant interest method that takes into account the compounding of
interest, in advance of receipt of the cash attributable to such income. The
following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the "OID
Regulations") under Code Sections 1271 through 1273 and 1275 and in part on
the provisions of the 1986 Act. Regular Certificateholders should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Regular Certificates. To the
extent such issues are not addressed in such regulations, it is anticipated
that the Trustee will apply the methodology described in the Conference
Committee Report to the 1986 Act. No assurance can be provided that the
Internal Revenue Service will not take a different position as to those
matters not currently addressed by the OID Regulations. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service
to apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory
provisions. A tax result will not be considered unreasonable under the anti-
abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed in a single
installment or by lots of specified principal amounts upon the request of a
Certificateholder or by random lot (a "Non-Pro Rata Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income.
The total amount of original issue discount on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular Certificate
over its "issue price." The issue price of a Class of Regular Certificates
offered pursuant to this Prospectus generally is the first price at which a
substantial amount of such Class is sold to the public (excluding bond houses,
brokers and underwriters). Although unclear under the OID Regulations, it is
anticipated that the Trustee will treat the issue price of a Class as to which
there is no substantial sale as of the issue date or that is retained by the
Seller as the fair market value of that Class as of the issue date. The issue
price of a Regular Certificate also includes any amount paid by an initial
Regular Certificateholder for accrued interest that relates to a period prior
to the issue date of the Regular Certificate, unless the Regular
Certificateholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but
generally will not include distributions of interest if such distributions
constitute "qualified stated interest." Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below) provided that such interest
payments are unconditionally payable at intervals of one year or less during
the entire term of the Regular Certificate. Because there is no penalty or
default remedy in the case of nonpayment of interest with respect to a Regular
Certificate, it is possible that no interest on any Class of Regular
Certificates will be treated as qualified stated interest. However, except as
provided in the following three sentences or in the applicable Prospectus
Supplement, because the underlying Mortgage Loans provide for remedies in the
event of default, it is anticipated that the Trustee will treat interest with
respect to the Regular Certificates as qualified stated interest.
Distributions of interest on a Compound Interest Certificate, or on other
Regular Certificates with respect to which deferred interest will accrue, will
not constitute qualified stated interest, in which case the stated redemption
price at maturity of such Regular Certificates includes all distributions of
interest as well as principal thereon. Likewise, it is anticipated that the
Trustee will treat an interest-only Class or a Class on which interest is
substantially disproportionate to its principal amount (a so-called "super-
premium" Class) as having no qualified stated interest. Where the interval
between the issue date and the first Distribution Date on a Regular
Certificate is shorter than the interval between subsequent Distribution
Dates, the interest attributable to the additional days will be included in
the stated redemption price at maturity.
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Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. The Conference Committee Report
to the 1986 Act provides that the schedule of such distributions should be
determined in accordance with the assumed rate of prepayment of the Mortgage
Loans (the "Prepayment Assumption") and the anticipated reinvestment rate, if
any, relating to the Regular Certificates. The Prepayment Assumption with
respect to a Series of Regular Certificates will be set forth in the
applicable Prospectus Supplement. Holders generally must report de minimis
original issue discount pro rata as principal payments are received, and such
income will be capital gain if the Regular Certificate is held as a capital
asset. Under the OID Regulations, however, Regular Certificateholders may
elect to accrue all de minimis original issue discount as well as market
discount and market premium, under the constant yield method. See "--Election
to Treat All Interest Under the Constant Yield Method."
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which it holds the Regular Certificate, including the
date of purchase but excluding the date of disposition. The Trustee will treat
the monthly period ending on the day before each Distribution Date as the
accrual period. With respect to each Regular Certificate, a calculation will
be made of the original issue discount that accrues during each successive
full accrual period (or shorter period from the date of original issue) that
ends on the day before the related Distribution Date on the Regular
Certificate. The Conference Committee Report to the 1986 Act states that the
rate of accrual of original issue discount is intended to be based on the
Prepayment Assumption. Other than as discussed below with respect to a Non-Pro
Rata Certificate, the original issue discount accruing in a full accrual
period would be the excess, if any, of (i) the sum of (a) the present value of
all of the remaining distributions to be made on the Regular Certificate as of
the end of that accrual period, and (b) the distributions made on the Regular
Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity, over (ii) the adjusted
issue price of the Regular Certificate at the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period, and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular
Certificate at the beginning of any accrual period equals the issue price of
the Regular Certificate, increased by the aggregate amount of original issue
discount with respect to the Regular Certificate that accrued in all prior
accrual periods and reduced by the amount of distributions included in the
Regular Certificate's stated redemption price at maturity that were made on
the Regular Certificate in such prior periods. The original issue discount
accruing during any accrual period (as determined in this paragraph) will then
be divided by the number of days in the period to determine the daily portion
of original issue discount for each day in the period. With respect to an
initial accrual period shorter than a full accrual period, the daily portions
of original issue discount must be determined according to an appropriate
allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
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In the case of a Non-Pro Rata Certificate, it is anticipated that the
Trustee will determine the yield to maturity of such Certificate based upon
the anticipated payment characteristics of the Class as a whole under the
Prepayment Assumption. In general, the original issue discount accruing on
each Non-Pro Rata Certificate in a full accrual period would be its allocable
share of the original issue discount with respect to the entire Class, as
determined in accordance with the preceding paragraph. However, in the case of
a distribution in retirement of the entire unpaid principal balance of any
Non-Pro Rata Certificate (or portion of such unpaid principal balance), (a)
the remaining unaccrued original issue discount allocable to such Certificate
(or to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining unpaid principal balance of a partially redeemed
Non-Pro Rata Certificate after a distribution of principal has been received)
will be adjusted by reducing the present value of the remaining payments on
such Class and the adjusted issue price of such Class to the extent
attributable to the portion of the unpaid principal balance thereof that was
distributed. The Depositor believes that the foregoing treatment is consistent
with the "pro rata prepayment" rules of the OID Regulations, but with the rate
of accrual of original issue discount determined based on the Prepayment
Assumption for the Class as a whole. Investors are advised to consult their
tax advisors as to this treatment.
Acquisition Premium
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted
issue price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively,
such a subsequent purchaser may elect to treat all such acquisition premium
under the constant yield method, as described below under the heading "--
Election to Treat All Interest Under the Constant Yield Method."
Variable Rate Regular Certificates
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate
if, generally, (i) the issue price does not exceed the original principal
balance by more than a specified amount and (ii) the interest compounds or is
payable at least annually at current values of (a) one or more "qualified
floating rates," (b) a single fixed rate and one or more qualified floating
rates, (c) a single "objective rate," or (d) a single fixed rate and a single
objective rate that is a "qualified inverse floating rate." A floating rate is
a qualified floating rate if variations in the rate can reasonably be expected
to measure contemporaneous variations in the cost of newly borrowed funds,
where such rate is subject to a fixed multiple that is greater than 0.65 but
not more than 1.35. Such rate may also be increased or decreased by a fixed
spread or subject to a fixed cap or floor, or a cap or floor that is not
reasonably expected as of the issue date to affect the yield of the instrument
significantly. An objective rate is any rate (other than a qualified floating
rate) that is determined using a single fixed formula and that is based on
objective financial or economic information, provided that such information is
not (i) within the control of the issuer or a related party or (ii) unique to
the circumstances of the issuer or a related party. A qualified inverse
floating rate is a rate equal to a fixed rate minus a qualified floating rate
that inversely reflects contemporaneous variations in the cost of newly
borrowed funds; an inverse floating rate that is not a qualified inverse
floating rate may nevertheless be an objective rate. A Class of Regular
Certificates may be issued under this Prospectus that does not have a variable
rate under the foregoing rules, for example, a Class that bears different
rates at different times during the period it is outstanding such that it is
considered significantly "front-loaded" or "back-loaded" within the meaning of
the OID Regulations. It is possible that such a Class may be considered to
bear "contingent interest" within the meaning of the OID Regulations. The OID
Regulations, as they relate to the treatment of contingent interest, are by
their terms not applicable to Regular Certificates. However, if final
regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such
regulations may lead to different timing of income inclusion than would be the
case under the OID Regulations for non-contingent debt instruments.
Furthermore, application of such principles could lead to the characterization
of gain on the
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sale of contingent interest Regular Certificates as ordinary income. Investors
should consult their tax advisors regarding the appropriate treatment of any
Regular Certificate that does not pay interest at a fixed rate or variable
rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a
rate (plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such
a rate that is subject to one or more caps or floors, or (ii) bearing one or
more such variable rates for one or more periods, or one or more fixed rates
for one or more periods, and a different variable rate or fixed rate for other
periods, qualifies as a regular interest in a REMIC. Accordingly, unless
otherwise indicated in the applicable Prospectus Supplement, it is anticipated
that the Trustee will treat Regular Certificates that qualify as regular
interests under this rule in the same manner as obligations bearing a variable
rate for original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under "--Original Issue Discount," with the yield to maturity and future
payments on such Regular Certificate generally to be determined by assuming
that interest will be payable for the life of the Regular Certificate based on
the initial rate (or, if different, the value of the applicable variable rate
as of the pricing date) for the relevant Class. Unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
such variable interest as qualified stated interest, other than variable
interest on an interest-only or super-premium Class, which will be treated as
non-qualified stated interest includible in the stated redemption price at
maturity. Ordinary income reportable for any period will be adjusted based on
subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Certificates bearing an interest rate that is a weighted average of
the net interest rates on Mortgage Loans as having qualified stated interest,
except to the extent that initial "teaser" rates cause sufficiently "back-
loaded" interest to create more than de minimis original issue discount. The
yield on such Regular Certificates for purposes of accruing original issue
discount will be a hypothetical fixed-rate based on the fixed rates, in the
case of fixed rate Mortgage Loans, and initial "teaser rates" followed by
fully indexed rates, in the case of adjustable-rate Mortgage Loans. In the
case of adjustable-rate Mortgage Loans, the applicable index used to compute
interest on the Mortgage Loans in effect on the pricing date (or possibly the
issue date) will be deemed to be in effect beginning with the period in which
the first weighted average adjustment date occurring after the issue date
occurs. Adjustments will be made in each accrual period either increasing or
decreasing the amount of ordinary income reportable to reflect the actual
Pass-Through Rate on the Regular Certificates.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate, or (ii) in the case of a Regular
Certificate having original issue discount, is exceeded by the adjusted issue
price of such Regular Certificate at the time of purchase. Such purchaser
generally will be required to recognize ordinary income to the extent of
accrued market discount on such Regular Certificate as distributions
includible in the stated redemption price at maturity thereof are received, in
an amount not exceeding any such distribution. Such market discount would
accrue in a manner to be provided in Treasury regulations and should take into
account the Prepayment Assumption. The Conference Committee Report to the 1986
Act provides that until such regulations are issued, such market discount
would accrue either (i) on the basis of a constant interest rate, or (ii) in
the ratio of stated interest allocable to the relevant period to the sum of
the interest for such period plus the remaining interest as of the end of such
period, or in the case of a Regular Certificate issued with original issue
discount, in
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the ratio of original issue discount accrued for the relevant period to the
sum of the original issue discount accrued for such period plus the remaining
original issue discount as of the end of such period. Such purchaser also
generally will be required to treat a portion of any gain on a sale or
exchange of the Regular Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income as partial distributions in reduction of the stated redemption price at
maturity were received. Such purchaser will be required to defer deduction of
a portion of the excess of the interest paid or accrued on indebtedness
incurred to purchase or carry a Regular Certificate over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed
of. As an alternative to the inclusion of market discount in income on the
foregoing basis, the Regular Certificateholder may elect to include market
discount in income currently as it accrues on all market discount instruments
acquired by such Regular Certificateholder in that taxable year or thereafter,
in which case the interest deferral rule will not apply. See "--Election to
Treat All Interest Under the Constant Yield Method" below regarding an
alternative manner in which such election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (determined as described above in the third paragraph under "--
Original Issue Discount") remaining after the date of purchase. It appears
that de minimis market discount would be reported in a manner similar to de
minimis original issue discount. See "--Original Issue Discount" above.
Treasury regulations implementing the market discount rules have not yet been
issued, and therefore investors should consult their own tax advisors
regarding the application of these rules. Investors should also consult
Revenue Procedure 92-67 concerning the elections to include market discount in
income currently and to accrue market discount on the basis of the constant
yield method.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. Such election will apply to all debt
obligations acquired by the Regular Certificateholder at a premium held in
that taxable year or thereafter, unless revoked with the permission of the
Internal Revenue Service. Final Treasury Regulations issued under Code Section
171 do not by their terms apply to prepayable debt instruments such as the
Regular Certificates. However, the Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that apply to the accrual
of market discount on installment obligations will also apply to amortizing
bond premium under Code Section 171 on installment obligations such as the
Regular Certificates, although it is unclear whether the alternatives to the
constant interest method described above under "--Market Discount" are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Certificate, rather than as a separate deduction item. See
"--Election to Treat All Interest Under the Constant Yield Method" below
regarding an alternative manner in which the Code Section 171 election may be
deemed to be made.
Election to Treat All Interest Under the Constant Yield Method
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument
subject to such an election, (i) "interest" includes stated interest, original
issue discount, de minimis original issue discount, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (ii) the debt
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instrument is treated as if the instrument were issued on the holder's
acquisition date in the amount of the holder's adjusted basis immediately
after acquisition. It is unclear whether, for this purpose, the initial
Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or
for a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or
with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own
tax advisors regarding the advisability of making such an election.
Treatment of Losses
Regular Certificateholders will be required to report income with respect to
Regular Certificates on the accrual method of accounting, without giving
effect to delays or reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans, except to the extent it can be
established that such amounts are uncollectible. Accordingly, the holder of a
Regular Certificate, particularly a Subordinated Certificate, may have income,
or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the
discussion below) for the corresponding loss until a subsequent taxable year.
In this regard, investors are cautioned that while they may generally cease to
accrue interest income if it reasonably appears that the interest will be
uncollectible, the Internal Revenue Service may take the position that
original issue discount must continue to be accrued in spite of its
uncollectibility until the debt instrument is disposed of in a taxable
transaction or becomes worthless in accordance with the rules of Code Section
166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Certificateholders that are corporations
or that otherwise hold the Regular Certificates in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Certificates becoming wholly or partially worthless, and that, in
general, Regular Certificateholders that are not corporations and do not hold
the Regular Certificates in connection with a trade or business should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of a portion of any such Regular Certificates becoming
wholly worthless. Although the matter is not free from doubt, such non-
corporate Regular Certificateholders should be allowed a bad debt deduction at
such time as the principal balance of such Regular Certificates is reduced to
reflect losses resulting from any liquidated Mortgage Loans. The Internal
Revenue Service, however, could take the position that non-corporate holders
will be allowed a bad debt deduction to reflect such losses only after all the
Mortgage Loans remaining in the Trust Estate have been liquidated or the
applicable Class of Regular Certificates has been otherwise retired. The
Internal Revenue Service could also assert that losses on the Regular
Certificates are deductible based on some other method that may defer such
deductions for all holders, such as reducing future cash flow for purposes of
computing original issue discount. This may have the effect of creating
"negative" original issue discount which would be deductible only against
future positive original issue discount or otherwise upon termination of the
Class. Regular Certificateholders are urged to consult their own tax advisors
regarding the appropriate timing, amount and character of any loss sustained
with respect to such Regular Certificates. While losses attributable to
interest previously reported as income should be deductible as ordinary losses
by both corporate and non-corporate holders, the Internal Revenue Service may
take the position that losses attributable to accrued original issue discount
may only be deducted as capital losses in the case of non-corporate holders
who do not hold the Regular Certificates in connection with a trade or
business. Special loss rules are applicable to banks and thrift institutions,
including rules regarding reserves for bad debts. Such taxpayers are advised
to consult their tax advisors regarding the treatment of losses on Regular
Certificates.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and its adjusted basis in the
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Regular Certificate. The adjusted basis of a Regular Certificate generally
will equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller, by any amortized premium and by
any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate
as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
applicable holding period (as described below). Such gain will be treated as
ordinary income (i) if a Regular Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Regular Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with
respect to any prior disposition of property that was held as part of such
transaction, (ii) in the case of a non-corporate taxpayer, to the extent such
taxpayer has made an election under Code Section 163(d)(4) to have net capital
gains taxed as investment income at ordinary income rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount
that would have been includible in the gross income of the holder if its yield
on such Regular Certificate were 110% of the applicable federal rate as of the
date of purchase, over (b) the amount of income actually includible in the
gross income of such holder with respect to such Regular Certificate. In
addition, gain or loss recognized from the sale of a Regular Certificate by
certain banks or thrift institutions will be treated as ordinary income or
loss pursuant to Code Section 582(c). Long-term capital gains of certain non-
corporate taxpayers generally are subject to a lower maximum tax rate (20%)
than ordinary income or short-term capital gains of such taxpayers (39.6%) for
property held for more than one year. The maximum tax rate for corporations is
the same with respect to both ordinary income and capital gains.
Taxation of Residual Certificates
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Holders"), and will not
be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Holder are determined by allocating the REMIC
Pool's taxable income or net loss for each calendar quarter ratably to each
day in such quarter and by allocating such daily portion among the Residual
Holders in proportion to their respective holdings of Residual Certificates in
the REMIC Pool on such day. REMIC taxable income is generally determined in
the same manner as the taxable income of an individual using the accrual
method of accounting, except, in addition to certain other adjustments, that
(i) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply, (ii) all bad loans will be
deductible as business bad debts and (iii) the limitation on the deductibility
of interest and expenses related to tax-exempt income will apply. The REMIC
Pool's gross income includes interest, original issue discount income and
market discount income, if any, on the Mortgage Loans, reduced by amortization
of any premium on the Mortgage Loans, plus income from amortization of issue
premium, if any, on the Regular Certificates, plus income on reinvestment of
cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Certificates. The REMIC
Pool's deductions include interest and original issue discount expense on the
Regular Certificates, servicing fees on the Mortgage Loans, other
administrative expenses of the REMIC Pool and realized losses on the Mortgage
Loans. The requirement that Residual Holders report their pro rata share of
taxable income or net loss of the REMIC Pool will continue until there are no
Certificates of any Class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market
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discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) or income from amortization of issue premium on the Regular
Certificates on the other hand. In the event that an interest in the Mortgage
Loans is acquired by the REMIC Pool at a discount, and one or more of such
Mortgage Loans is prepaid, the Residual Holder may recognize taxable income
without being entitled to receive a corresponding amount of cash because (i)
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Certificates and (ii) the discount on
the Mortgage Loans which is includible in income may exceed the deduction
allowed upon such distributions on those Regular Certificates on account of
any unaccrued original issue discount relating to those Regular Certificates.
When there is more than one Class of Regular Certificates that distribute
principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier Classes of Regular Certificates to the extent that
such Classes are not issued with substantial discount or are issued at a
premium. If taxable income attributable to such a mismatching is realized, in
general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Certificates are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Certificates, may increase over
time as distributions in reduction of principal are made on the lower yielding
Classes of Regular Certificates, whereas, to the extent the REMIC Pool
consists of fixed- rate Mortgage Loans, interest income with respect to any
given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Holders must
have sufficient other sources of cash to pay any federal, state, or local
income taxes due as a result of such mismatching or unrelated deductions
against which to offset such income, subject to the discussion of "excess
inclusions" below under "--Limitations on Offset or Exemption of REMIC
Income." The timing of such mismatching of income and deductions described in
this paragraph, if present with respect to a Series of Certificates, may have
a significant adverse effect upon a Residual Holder's after-tax rate of
return. In addition, a Residual Holder's taxable income during certain periods
may exceed the income reflected by such Residual Holder for such periods in
accordance with generally accepted accounting principles. Investors should
consult their own accountants concerning the accounting treatment of their
investment in Residual Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual
Certificate as of the close of the quarter (or time of disposition of the
Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Holder and will be decreased (but not below
zero), first, by a cash distribution from the REMIC Pool and, second, by the
amount of loss of the REMIC Pool reportable by the Residual Holder. Any loss
that is disallowed on account of this limitation may be carried over
indefinitely with respect to the Residual Holder as to whom such loss was
disallowed and may be used by such Residual Holder only to offset any income
generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Certificate as an offset to its share of the taxable income of the
related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's
basis in its assets. Such recovery of basis by the REMIC Pool will have the
effect of amortization of the issue price of the Residual Certificates over
their life. However, in view of the possible acceleration of the income of
Residual Holders described above under "--Taxation of REMIC Income," the
period of time over which such issue price is effectively amortized may be
longer than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of
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such a residual interest as zero rather than such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The preamble to the REMIC
Regulations states that the Internal Revenue Service may provide future
guidance on the proper tax treatment of payments made by a transferor of such
a residual interest to induce the transferee to acquire the interest, and
Residual Holders should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Certificate is greater than
the corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See "--Treatment of Certain
Items of REMIC Income and Expense" and "Market Discount" below regarding the
basis of Mortgage Loans to the REMIC Pool and "--Sale or Exchange of a
Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
It is anticipated that the Trustee will compute REMIC income and expense in
accordance with the Code and applicable regulations. However, the authorities
regarding the determination of specific items of income and expense are
subject to differing interpretations. The Trustee makes no representation as
to the specific method that it will use for reporting income with respect to
the Mortgage Loans and expenses with respect to the Regular Certificates and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Certificates as described above under "--Taxation of Regular Certificates--
Original Issue Discount" and "--Variable Rate Regular Certificates," without
regard to the de minimis rule described therein, and "--Premium."
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis
in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The REMIC
Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool. The accrued
portion of such market discount would be recognized currently as an item of
ordinary income in a manner similar to original issue discount. Market
discount income generally should accrue in the manner described above under
"--Taxation of Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "--Taxation of Regular Certificates--
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Loans originated after September 27, 1985 under the constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors on the Mortgage Loans are expected to be
individuals, Code Section 171 will not be available for premium on Mortgage
Loans originated on or prior to September 27, 1985. Premium with respect to
such Mortgage Loans may be deductible in accordance with a reasonable method
regularly employed by the holder thereof. The allocation of such premium pro
rata among principal payments should be considered a reasonable method;
however, the Internal Revenue Service may argue that such premium should be
allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
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Limitations on Offset or Exemption of REMIC Income
A portion (or all) of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the "excess inclusion," is equal to
the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Certificate over the daily accruals for such quarterly period of (i)
120% of the long-term applicable federal rate that would have applied to the
Residual Certificate (if it were a debt instrument) on the Startup Day under
Code Section 1274(d), multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning
of a quarter is the issue price of the Residual Certificate, plus the amount
of such daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to such
Residual Certificate prior to the beginning of such quarterly period.
Accordingly, the portion of the REMIC Pool's taxable income that will be
treated as excess inclusions will be a larger portion of such income as the
adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including
net operating loss carryforwards, on such Residual Holder's return. However,
net operating loss carryovers are determined without regard to excess
inclusion income. Further, if the Residual Holder is an organization subject
to the tax on unrelated business income imposed by Code Section 511, the
Residual Holder's excess inclusions will be treated as unrelated business
taxable income of such Residual Holder for purposes of Code Section 511. In
addition, REMIC taxable income is subject to 30% withholding tax with respect
to certain persons who are not U.S. Persons (as defined below under "--Tax-
Related Restrictions on Transfer of Residual Certificates--Foreign
Investors"), and the portion thereof attributable to excess inclusions is not
eligible for any reduction in the rate of withholding tax (by treaty or
otherwise). See "--Taxation of Certain Foreign Investors--Residual
Certificates" below. Finally, if a real estate investment trust or a regulated
investment company owns a Residual Certificate, a portion (allocated under
Treasury regulations yet to be issued) of dividends paid by the real estate
investment trust or regulated investment company could not be offset by net
operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The
SBJPA of 1996 has eliminated the special rule permitting Section 593
institutions ("thrift institutions") to use net operating losses and other
allowable deductions to offset their excess inclusion income from Residual
Certificates that have "significant value" within the meaning of the REMIC
Regulations, effective for taxable years beginning after December 31, 1995,
except with respect to Residual Certificates continuously held by a thrift
institution since November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual
Holder is determined without regard to the special rule, discussed above, that
taxable income cannot be less than excess inclusions. Second, a Residual
Holder's alternative minimum taxable income for a taxable year cannot be less
than the excess inclusions for the year. Third, the amount of any alternative
minimum tax net operating loss deduction must be computed without regard to
any excess inclusions. These rules are effective for taxable years beginning
after December 31, 1986, unless a Residual Holder elects to have such rules
apply only to taxable years beginning after August 20, 1996.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last
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calendar quarter in which excess inclusions are expected to accrue. Such rate
is applied to the anticipated excess inclusions from the end of the remaining
calendar quarters in which they arise to the date of the transfer. Such a tax
generally would be imposed on the transferor of the Residual Certificate,
except that where such transfer is through an agent (including a broker,
nominee or other middleman) for a Disqualified Organization, the tax would
instead be imposed on such agent. However, a transferor of a Residual
Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit stating
that the transferee is not a Disqualified Organization and, as of the time of
the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Internal Revenue Service
if the Disqualified Organization promptly disposes of the Residual Certificate
and the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a Pass-Through Entity (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. The Pass-Through Entity would
not be liable for such tax if it has received an affidavit from such record
holder that it is not a Disqualified Organization or stating such holder's
taxpayer identification number and, during the period such person is the
record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a Residual Certificate, all interests in the electing
large partnership are treated as held by Disqualified Organizations for
purposes of the tax imposed upon a Pass-Through Entity by Section 860E(c) of
the Code. An exception to this tax, otherwise available to a Pass-Through
Entity that is furnished certain affidavits by record holders of interests in
the entity and that does not know such affidavits are false, is not available
to an electing large partnership.
For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis, and (iii) an "electing large partnership"
means any partnership having more than 100 members during the preceding tax
year (other than certain service partnerships and commodity pools), which
elect to apply simplified reporting provisions under the Code. Except as may
be provided in Treasury regulations, any person holding an interest in a Pass-
Through Entity as a nominee for another will, with respect to such interest,
be treated as a Pass-Through Entity.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee furnishes to the
Depositor and the Trustee an affidavit providing its taxpayer identification
number and stating that such transferee is the beneficial owner of the
Residual Certificate and is not a Disqualified Organization and is not
purchasing such Residual Certificate on behalf of a Disqualified Organization
(i.e., as a broker, nominee or middleman thereof) and (ii) the transferor
provides a statement in writing to the Depositor and the Trustee that it has
no actual knowledge that such affidavit is false. Moreover, the Pooling and
Servicing Agreement will provide that any attempted or purported transfer in
violation of these transfer restrictions will be null and void and will
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vest no rights in any purported transferee. Each Residual Certificate with
respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a
condition of ownership thereof, to any amendments to the related Pooling and
Servicing Agreement required under the Code or applicable Treasury regulations
to effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC Pool. Under the REMIC Regulations, a transfer of a noneconomic
residual interest (as defined below) to a Residual Holder (other than a
Residual Holder who is not a U.S. Person, as defined below under "--Foreign
Investors") is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual
interest with a positive value at issuance) is a "noneconomic residual
interest" unless, at the time of the transfer, (i) the present value of the
expected future distributions on the residual interest at least equals the
product of the present value of the anticipated excess inclusions and the
highest federal corporate income tax rate in effect for the year in which the
transfer occurs, and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes on each excess inclusion. The
anticipated excess inclusions and the present value rate are determined in the
same manner as set forth above under "--Disqualified Organizations." The REMIC
Regulations explain that a significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer,
either knew or should have known that the transferee would be unwilling or
unable to pay taxes due on its share of the taxable income of the REMIC. A
safe harbor is provided if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as
they came due and found no significant evidence to indicate that the
transferee would not continue to pay its debts as they came due in the future,
and (ii) the transferee represents to the transferor that it understands that,
as the holder of the non-economic residual interest, the transferee may incur
tax liabilities in excess of any cash flows generated by the interest and that
the transferee intends to pay taxes associated with holding the residual
interest as they become due. The Pooling and Servicing Agreement with respect
to each Series of Certificates will require the transferee of a Residual
Certificate to certify to the matters in the preceding sentence as part of the
affidavit described above under the heading "--Disqualified Organizations."
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has "tax avoidance potential" to a "foreign person"
will be disregarded for all federal tax purposes. This rule appears intended
to apply to a transferee who is not a U.S. Person (as defined below), unless
such transferee's income is effectively connected with the conduct of a trade
or business within the United States. A Residual Certificate is deemed to have
tax avoidance potential unless, at the time of the transfer, (i) the future
value of expected distributions equals at least 30% of the anticipated excess
inclusions after the transfer, and (ii) the transferor reasonably expects that
the transferee will receive sufficient distributions from the REMIC Pool at or
after the time at which the excess inclusions accrue and prior to the end of
the next succeeding taxable year for the accumulated withholding tax liability
to be paid. If the non-U.S. Person transfers the Residual Certificate back to
a U.S. Person, the transfer will be disregarded and the foreign transferor
will continue to be treated as the owner unless arrangements are made so that
the transfer does not have the effect of allowing the transferor to avoid tax
on accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Certificate may not be purchased by or transferred to
any person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership (unless, in the case of a partnership, Treasury regulations
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are adopted that provide otherwise) created or organized in or under the laws
of the United States, any state thereof or the District of Columbia, including
an entity treated as a corporation or partnership for federal income tax
purposes, an estate that is subject to United States federal income tax
regardless of its source, or a trust if a court within the United States is
able to exercise primary supervision over the administration of such trust,
and one or more such U.S. Persons have the authority to control all
substantial decisions of such trust (or, to the extent provided in applicable
Treasury regulations, certain trusts in existence on August 20, 1996 which are
eligible to elect to be treated as U.S. Persons).
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual Holder
will recognize gain or loss equal to the excess, if any, of the amount
realized over the adjusted basis (as described above under "--Basis and
Losses") of such Residual Holder in such Residual Certificate at the time of
the sale or exchange. In addition to reporting the taxable income of the REMIC
Pool, a Residual Holder will have taxable income to the extent that any cash
distribution to it from the REMIC Pool exceeds such adjusted basis on that
Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual Holder's
Residual Certificate, in which case, if the Residual Holder has an adjusted
basis in its Residual Certificate remaining when its interest in the REMIC
Pool terminates, and if it holds such Residual Certificate as a capital asset
under Code Section 1221, then it will recognize a capital loss at that time in
the amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a "conversion
transaction" as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
in effect at the time the taxpayer entered into the transaction minus any
amount previously treated as ordinary income with respect to any prior
disposition of property that was held as a part of such transaction or (ii) in
the case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss
recognized from the sale of a Residual Certificate by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six
months after such sale or disposition, acquires (or enters into any other
transaction that results in the application of Code Section 1091) any residual
interest in any REMIC or any interest in a "taxable mortgage pool" (such as a
non-REMIC owner trust) that is economically comparable to a Residual
Certificate.
Mark to Market Regulations
The Internal Revenue Service has issued final regulations (the "Mark to
Market Regulations") under Code Section 475 relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities of a dealer, except to
the extent that the dealer has specifically identified a security as held for
investment. The Mark to Market Regulations provide that, for purposes of this
mark-to-market requirement, a Residual Certificate is not treated as a
security and thus may not be marked to market. The Mark to Market Regulations
apply to all Residual Certificates acquired on or after January 4, 1995.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be
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taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include (i) the disposition of a qualified mortgage other than for
(a) substitution within two years of the Startup Day for a defective
(including a defaulted) obligation (or repurchase in lieu of substitution of a
defective (including a defaulted) obligation at any time) or for any qualified
mortgage within three months of the Startup Day, (b) foreclosure, default, or
imminent default of a qualified mortgage, (c) bankruptcy or insolvency of the
REMIC Pool, or (d) a qualified (complete) liquidation, (ii) the receipt of
income from assets that are not the type of mortgages or investments that the
REMIC Pool is permitted to hold, (iii) the receipt of compensation for
services, or (iv) the receipt of gain from disposition of cash flow
investments other than pursuant to a qualified liquidation. Notwithstanding
(i) and (iv) of the preceding sentence, it is not a prohibited transaction to
sell REMIC Pool property to prevent a default on Regular Certificates as a
result of a default on qualified mortgages or to facilitate a clean-up call
(generally, an optional prepayment of the remaining principal balance of a
Class of Regular Certificates to save administrative costs when no more than a
small percentage of the Certificates is outstanding). The REMIC Regulations
indicate that the modification of a qualified mortgage generally will not be
treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a due-
on-sale or due-on-encumbrance clause, or the conversion of an interest rate by
a mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan.
Contributions to the REMIC Pool After the Startup Day
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during
the three months following the Startup Day, (ii) made to a qualified reserve
fund by a Residual Holder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call, and (v) as otherwise
permitted in Treasury regulations yet to be issued. It is not anticipated that
there will be any contributions to the REMIC Pool after the Startup Day.
Net Income from Foreclosure Property
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on "net income from foreclosure property," determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
"foreclosure property" for a period not exceeding the close of the third
calendar year after the year in which the REMIC Pool acquired such property,
with a possible extension. Net income from foreclosure property generally
means gain from the sale of a foreclosure property that is inventory property
and gross income from foreclosure property other than qualifying rents and
other qualifying income for a real estate investment trust. It is not
anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
Liquidation of the REMIC Pool
If a REMIC Pool adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular
Certificates and Residual Holders within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury
regulations provide that, except where there is a single
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Residual Holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction, or credit in a unified administrative proceeding. A Servicer or the
Master Servicer will be obligated to act as "tax matters person," as defined
in applicable Treasury regulations, with respect to the REMIC Pool, in its
capacity as either Residual Holder or agent of the Residual Holders. If the
Code or applicable Treasury regulations do not permit a Servicer or the Master
Servicer, as applicable, to act as tax matters person in its capacity as agent
of the Residual Holders, the Residual Holder chosen by the Residual Holders or
such other person specified pursuant to Treasury regulations will be required
to act as tax matters person.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $124,500 for 1998 ($62,250 in
the case of a married individual filing a separate return) (subject to
adjustment for inflation in subsequent years), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses
generally are to be allocated entirely to the holders of Residual Certificates
in the case of a REMIC Pool that would not qualify as a fixed investment trust
in the absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses
to holders of Regular Certificates, as well as holders of Residual
Certificates, where such Regular Certificates are issued in a manner that is
similar to pass-through certificates in a fixed investment trust. Unless
indicated otherwise in the applicable Prospectus Supplement, all such expenses
will be allocable to the Residual Certificates. In general, such allocable
portion will be determined based on the ratio that a REMIC Certificateholder's
income, determined on a daily basis, bears to the income of all holders of
Regular Certificates and Residual Certificates with respect to a REMIC Pool.
As a result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC or certain other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are
issued in a single class or otherwise consistently with fixed investment trust
status or in excess of cash distributions for the related period on Residual
Certificates.
Taxation of Certain Foreign Investors
Regular Certificates
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholder"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among other things, that the beneficial owner of the Regular
Certificate is a Non-U.S. Person, and the Non-U.S. Person
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provides the Trustee, or the person who would otherwise be required to
withhold tax from such distributions under Code Section 1441 or 1442, with the
appropriate Internal Revenue Service form establishing the applicability of
either of these two exemptions. If such statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Certificate is effectively connected with the conduct of a trade or
business within the United States by such Non-U.S. Person. In the latter case,
such Non-U.S. Person will be subject to United States federal income tax at
regular rates. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person.
The Internal Revenue Service recently issued final regulations (the "New
Regulations") which would provide alternative methods of satisfying the
beneficial ownership certification requirement described above. The New
Regulations will be effective January 1, 2001. Current withholding
certificates will remain valid until the earlier of December 31, 2000 or the
date of expiration of the certificate under the rules as currently in effect.
The New Regulations would require, in the case of Regular Certificates held by
a foreign partnership, that (x) the certification described above be provided
by the partners rather than by the foreign partnership and (y) the partnership
provide certain information, including a United States taxpayer identification
number. A look-through rule would apply in the case of tiered partnerships.
Non-U.S. Persons should consult their own tax advisors concerning the
application of the certification requirements in the New Regulations.
Residual Certificates
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Holders may qualify as "portfolio interest," subject to the
conditions described in "Regular Certificates" above, but only to the extent
that (i) the Mortgage Loans were issued after July 18, 1984 and (ii) the Trust
Estate or segregated pool of assets therein (as to which a separate REMIC
election will be made), to which the Residual Certificate relates, consists of
obligations issued in "registered form" within the meaning of Code Section
163(f)(1). Generally, Mortgage Loans will not be, but regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Holder will not be entitled to any exemption from the
30% withholding tax (or lower treaty rate) to the extent of that portion of
REMIC taxable income that constitutes an "excess inclusion." See "--Taxation
of Residual Certificates--Limitations on Offset or Exemption of REMIC Income."
If the amounts paid to Residual Holders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the
United States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding
will not apply. Instead, the amounts paid to such Non-U.S. Persons will be
subject to United States federal income tax at regular rates. If 30% (or lower
treaty rate) withholding is applicable, such amounts generally will be taken
into account for purposes of withholding only when paid or otherwise
distributed (or when the Residual Certificate is disposed of) under rules
similar to withholding upon disposition of debt instruments that have original
issue discount. See "--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Foreign Investors" above
concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Certificates.
Backup Withholding
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt
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recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Certificates would be refunded by the
Internal Revenue Service or allowed as a credit against the Regular
Certificateholder's federal income tax liability. The New Regulations change
certain of the rules relating to certain presumptions currently available
relating to information reporting and backup withholding. Non-U.S. Persons are
urged to contact their own tax advisors regarding the application to them of
backup withholding and information reporting.
Reporting Requirements
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and non-
charitable trusts, and partnerships who are either holders of record of
Regular Certificates or beneficial owners who own Regular Certificates through
a broker or middleman as nominee. All brokers, nominees and all other non-
exempt holders of record of Regular Certificates (including corporations, non-
calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person
designated in Internal Revenue Service Publication 938 with respect to a
particular Series of Regular Certificates. Holders through nominees must
request such information from the nominee.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Certificates, and
filed annually with the Internal Revenue Service concerning Code Section 67
expenses (see "Limitations on Deduction of Certain Expenses" above) allocable
to such holders. Furthermore, under such regulations, information must be
furnished quarterly to Residual Holders, furnished annually to holders of
Regular Certificates and filed annually with the Internal Revenue Service
concerning the percentage of the REMIC Pool's assets meeting the qualified
asset tests described above under "Status of REMIC Certificates."
Federal Income Tax Consequences for Certificates as to Which No REMIC Election
Is Made
General
In the event that no election is made to treat a Trust Estate (or a
segregated pool of assets therein) with respect to a Series of Certificates as
a REMIC, the Trust Estate will be classified as a grantor trust under subpart
E, Part 1 of subchapter J of the Code and not as an association taxable as a
corporation or a "taxable mortgage pool" within the meaning of Code Section
7701(i). Where there is no Fixed Retained Yield with respect to the Mortgage
Loans underlying the Certificates of a Series, and where such Certificates are
not designated as "Stripped Certificates," the holder of each such Certificate
in such Series will be treated as the owner of a pro rata undivided interest
in the ordinary income and corpus portions of the Trust Estate represented by
its Certificate and will be considered the beneficial owner of a pro rata
undivided interest in each of the Mortgage Loans, subject to the discussion
below under "--Recharacterization of Servicing Fees." Accordingly, the holder
of a Certificate of a particular Series will be required to report on its
federal income tax return its pro rata share of the entire income from the
Mortgage Loans represented by its Certificate, including interest at the
coupon rate on such Mortgage Loans, original issue discount (if any),
prepayment fees, assumption fees, and late payment charges received by the
Servicer, in accordance with such Certificateholder's method of accounting. A
Certificateholder generally will be able to deduct its share of the Servicing
Fee and all administrative and other
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expenses of the Trust Estate in accordance with its method of accounting,
provided that such amounts are reasonable compensation for services rendered
to that Trust Estate. However, investors who are individuals, estates or
trusts who own Certificates, either directly or indirectly through certain
pass-through entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for the Servicing Fee and all such administrative and other
expenses of the Trust Estate, to the extent that such deductions, in the
aggregate, do not exceed two percent of an investor's adjusted gross income.
In addition, Code Section 68 provides that itemized deductions otherwise
allowable for a taxable year of an individual taxpayer will be reduced by the
lesser of (i) 3% of the excess, if any, of adjusted gross income over $124,500
for 1998 ($62,250 in the case of a married individual filing a separate
return) (in each case, as adjusted for inflation in subsequent years), or (ii)
80% of the amount of itemized deductions otherwise allowable for such year. As
a result, such investors holding Certificates, directly or indirectly through
a pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Certificates with respect to
interest at the pass-through rate or as discount income on such Certificates.
In addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is Fixed Retained
Yield with respect to the Mortgage Loans underlying a Series of Certificates
or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "--Stripped Certificates" and "--Recharacterization of Servicing Fees,"
respectively.
Tax Status
Cadwalader, Wickersham & Taft or Kennedy Covington Lobdell & Hickman, L.L.P.
has advised the Depositor that, except as described below with respect to
Stripped Certificates:
(i) A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property which is
. . . residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Certificate is of the type described in such
section of the Code.
(ii) A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Trust
Estate consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" to such extent within the meaning of Code Section 856(c)(3)(B).
(iii) A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Estate consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
(iv) A Certificate owned by a financial asset securitization investment
trust will be considered to represent "permitted assets" within the
meanings of Section 860L(c) to the extent that the assets of the related
Trust Estate consist of "debt instruments" within the meaning of Code
Section 860L(c)(1)(B).
An issue arises as to whether Buy-Down Loans may be characterized in their
entirety under the Code provisions cited in clauses 1 and 2 of the immediately
preceding paragraph. There is indirect authority supporting treatment of an
investment in a Buy-Down Loan as entirely secured by real property if the fair
market value of the real property securing the loan exceeds the principal
amount of the loan at the time of issuance or acquisition, as the case may be.
There is no assurance that the treatment described above is proper.
Accordingly, Certificateholders are urged to consult their own tax advisors
concerning the effects of such arrangements on the characterization of such
Certificateholder's investment for federal income tax purposes.
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Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium
The treatment of premium incurred upon the purchase of a Certificate will be
determined generally as described above under "--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual Certificates--
Treatment of Certain Items of REMIC Income and Expense--Premium."
Original Issue Discount
The original issue discount rules of Code Sections 1271 through 1275 will be
applicable to a Certificateholder's interest in those Mortgage Loans as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. Under the
OID Regulations, such original issue discount could arise by the charging of
points by the originator of the mortgages in an amount greater than the
statutory de minimis exception, including a payment of points that is
currently deductible by the borrower under applicable Code provisions or,
under certain circumstances, by the presence of "teaser" rates on the Mortgage
Loans. See "--Stripped Certificates" below regarding original issue discount
on Stripped Certificates.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires
the obligation after its initial issuance at a price greater than the sum of
the original issue price and the previously accrued original issue discount,
less prior payments of principal. Accordingly, if such Mortgage Loans acquired
by a Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Loans (i.e., points) will be includible by
such holder.
Market Discount
Certificateholders also will be subject to the market discount rules to the
extent that the conditions for application of those sections are met. Market
discount on the Mortgage Loans will be determined and will be reported as
ordinary income generally in the manner described above under "--Federal
Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount," except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market
discount pro rata over the life of the Mortgage Loans, unless the constant
yield method is elected. Unless indicated otherwise in the applicable
Prospectus Supplement, no prepayment assumption will be assumed for purposes
of such accrual.
Recharacterization of Servicing Fees
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither
income nor a deduction to Certificateholders. In this regard, there are no
authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Certificate, the reasonableness of servicing compensation should be determined
on a weighted average or loan-by-loan basis. If a loan-by-loan basis is
appropriate, the likelihood that such amount would exceed reasonable servicing
compensation as to some of the Mortgage Loans would be increased. Internal
Revenue
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Service guidance indicates that a servicing fee in excess of reasonable
compensation ("excess servicing") will cause the Mortgage Loans to be treated
under the "stripped bond" rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that
the value of servicing fees in excess of such amounts is not greater than the
value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of such
Mortgage Loans as "stripped coupons" and "stripped bonds." Subject to the de
minimis rule discussed below under "--Stripped Certificates," each stripped
bond or stripped coupon could be considered for this purpose as a non-interest
bearing obligation issued on the date of issue of the Certificates, and the
original issue discount rules of the Code would apply to the holder thereof.
While Certificateholders would still be treated as owners of beneficial
interests in a grantor trust for federal income tax purposes, the corpus of
such trust could be viewed as excluding the portion of the Mortgage Loans the
ownership of which is attributed to the Servicer, or as including such portion
as a second class of equitable interest. Applicable Treasury regulations treat
such an arrangement as a fixed investment trust, since the multiple classes of
trust interests should be treated as merely facilitating direct investments in
the trust assets and the existence of multiple classes of ownership interests
is incidental to that purpose. In general, such a recharacterization should
not have any significant effect upon the timing or amount of income reported
by a Certificateholder, except that the income reported by a cash method
holder may be slightly accelerated. See "--Stripped Certificates" below for a
further description of the federal income tax treatment of stripped bonds and
stripped coupons.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss generally would be capital gain or loss
if the Certificate was held as a capital asset. However, gain on the sale of a
Certificate will be treated as ordinary income (i) if a Certificate is held as
part of a "conversion transaction" as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any
prior disposition of property that was held as a part of such transaction or
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed
as investment income at ordinary income rates. Long-term capital gains of
certain noncorporate taxpayers generally are subject to a lower maximum tax
rate (20%) than ordinary income or short-term capital gains of such taxpayers
(39.6%) for property held more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital
gains.
Stripped Certificates
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be
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referred to as "Stripped Certificates." The Certificates will be subject to
those rules if (i) the Depositor or any of its affiliates retains (for its own
account or for purposes of resale), in the form of Fixed Retained Yield or
otherwise, an ownership interest in a portion of the payments on the Mortgage
Loans, (ii) the Depositor or any of its affiliates is treated as having an
ownership interest in the Mortgage Loans to the extent it is paid (or retains)
servicing compensation in an amount greater than reasonable consideration for
servicing the Mortgage Loans (see "--Recharacterization of Servicing Fees"
above), and (iii) a Class of Certificates issued in two or more Classes or
subclasses representing the right to non-pro-rata percentages of the interest
and principal payments on the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
"--Recharacterization of Servicing Fees." Although not free from doubt, for
purposes of reporting to Stripped Certificateholders, the servicing fees will
be allocated to the Stripped Certificates in proportion to the respective
entitlements to distributions of each Class of Stripped Certificates for the
related period or periods. The holder of a Stripped Certificate generally will
be entitled to a deduction each year in respect of the servicing fees, as
described above under "Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made--General," subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued at an original issue discount on the date that such
stripped interest is purchased. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Mortgage Pool containing variable-rate Mortgage Loans, the Seller
has been advised by counsel that (i) the Trust Estate will be treated as a
grantor trust under subpart E, Part I of subchapter J of the Code and not as
an association taxable as a corporation or a "taxable mortgage pool" within
the meaning of Code Section 7701(i), and (ii) each Stripped Certificate should
be treated as a single installment obligation for purposes of calculating
original issue discount and gain or loss on disposition. This treatment is
based on the interrelationship of Code Section 1286, Code Sections 1272
through 1275, and the OID Regulations. Although it is possible that
computations with respect to Stripped Certificates could be made in one of the
ways described below under "--Taxation of Stripped Certificates--Possible
Alternative Characterizations," the OID Regulations state, in general, that
two or more debt instruments issued by a single issuer to a single investor in
a single transaction should be treated as a single debt instrument.
Accordingly, for OID purposes, all payments on any Stripped Certificates
should be aggregated and treated as though they were made on a single debt
instrument. The Pooling and Servicing Agreement will require that the Trustee
make and report all computations described below using this aggregate
approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount.
In addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as
issued with original issue discount or market discount (as described below),
at a de minimis original issue discount, or, presumably, at a premium. This
treatment indicates that the interest component of such a Stripped Certificate
would be treated as qualified stated interest under the OID Regulations,
assuming it is not an interest-only or super-premium Stripped Certificate.
Further, these final regulations provide that the purchaser of such a Stripped
Certificate will be required to account for any discount as market discount
rather than original issue discount if either (i) the initial discount with
respect to the Stripped Certificate was treated as zero under the de minimis
rule, or (ii) no more than 100 basis points in excess of reasonable servicing
is stripped off the related Mortgage Loans. Any such market discount would be
reportable as described above under "Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular
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Certificates--Market Discount," without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in such computation.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Seller that Stripped Certificates owned by applicable holders
should be considered to represent "real estate assets" within the meaning of
Code Section 856(c)(4)(A), "obligation[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), and interest (including original issue
discount) income attributable to Stripped Certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case
the Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. The application of such Code provisions to Buy-Down Loans is
uncertain. See "--Tax Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "--General," each
Stripped Certificate will be considered to have been issued at an original
issue discount for Federal income tax purposes. Original issue discount with
respect to a Stripped Certificate must be included in ordinary income as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the
1986 Act, the amount of original issue discount required to be included in the
income of a holder of a Stripped Certificate (referred to in this discussion
as a "Stripped Certificateholder") in any taxable year likely will be computed
generally as described above under " Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount" and
"--Variable Rate Regular Certificates." However, with the apparent exception
of a Stripped Certificate qualifying as a market discount obligation as
described above under "--General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Certificate to such Stripped Certificateholder,
presumably under the Prepayment Assumption, other than qualified stated
interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize a loss (which may be a capital loss)
equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of
contingent interest, are by their terms not applicable to prepayable
securities such as the Stripped Certificates. However, if final regulations
dealing with contingent interest with respect to the Stripped Certificates
apply the same principles as the OID Regulations, such regulations may lead to
different timing of income inclusion than would be the case under the OID
Regulations for non-contingent debt instruments. Furthermore, application of
such principles could lead to the characterization of gain on the sale of
contingent interest Stripped Certificates as ordinary income. Investors should
consult their tax advisors regarding the appropriate tax treatment of Stripped
Certificates.
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Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "--Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Sale or Exchange of Regular Certificates."
To the extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount in the manner described above. It
is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than an original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. When an investor
purchases more than one Class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such Classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible
interpretations of the applicable Code provisions. For example, the Stripped
Certificateholder may be treated as the owner of (i) one installment
obligation consisting of such Stripped Certificate's pro rata share of the
payments attributable to principal on each Mortgage Loan and a second
installment obligation consisting of such Stripped Certificate's pro rata
share of the payments attributable to interest on each Mortgage Loan, (ii) as
many stripped bonds or stripped coupons as there are scheduled payments of
principal and/or interest on each Mortgage Loan, or (iii) a separate
installment obligation for each Mortgage Loan, representing the Stripped
Certificate's pro rata share of payments of principal and/or interest to be
made with respect thereto. Alternatively, the holder of one or more Classes of
Stripped Certificates may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Certificate, or Classes of Stripped Certificates in the aggregate, represent
the same pro rata portion of principal and interest on each such Mortgage
Loan, and a stripped bond or stripped coupon (as the case may be), treated as
an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those regulations states that they
are premised on the assumption that an aggregation approach is appropriate for
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis, and solicits comments on appropriate rules for
aggregating stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described
above) as is necessary to enable such Certificateholders to prepare their
federal income tax returns. Such information will include the amount of
original issue discount accrued on Certificates held by persons other than
Certificateholders exempted from the reporting requirements. The amount
required to be reported by the Trustee may not be equal to the proper amount
of original issue discount required to be reported as taxable income by a
Certificateholder, other than an original Certificateholder that purchased at
the issue price. In particular, in the case of Stripped Certificates, unless
provided otherwise in the applicable Prospectus Supplement, such reporting
will be based upon a representative initial offering price of each Class of
Stripped Certificates. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his
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federal income tax return, 31% backup withholding may be required in respect
of any reportable payments, as described above under "--Federal Income Tax
Consequences for REMIC Certificates--Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other non-U.S. persons ("foreign
persons") generally will be subject to 30% United States withholding tax, or
such lower rate as may be provided for interest by an applicable tax treaty.
Accrued original issue discount recognized by the Certificateholder on the
sale or exchange of such a Certificate also will be subject to federal income
tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a foreign person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements, described above under "--
Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
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ERISA CONSIDERATIONS
General
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain requirements on those employee
benefit plans and arrangements to which they apply and on those persons who
are fiduciaries with respect to such employee benefit plans and arrangements.
The following is a general discussion of such requirements, and certain
applicable exceptions to and administrative exemptions from such requirements.
For purposes of this discussion, employee benefit plans and arrangements to
which both ERISA and the Code apply are referred to as "ERISA Plans." An
individual retirement account established under Code Section 408 (an "IRA") is
an ERISA Plan if the IRA is endorsed by or contributed to by the IRA
participant's employer or employee organization. Other IRAs, as well as
certain employee benefit plans covering only self-employed individuals
(collectively, "Non-ERISA Plans"), are not considered ERISA Plans, but such
Non-ERISA Plans are subject to ERISA-like requirements as well as the
prohibited transaction provisions of the Code. Employee benefit plans that are
governmental plans (as defined in Section 3(32) of ERISA) and certain church
plans (as defined in Section 3(33) of ERISA) (collectively, "Exempt Plans")
are exempt from the provisions of Title I of ERISA and the prohibited
transaction provisions of the Code. Accordingly, Exempt Plans also are not
considered ERISA Plans, but such Exempt Plans may be subject to the provisions
and special requirements of other applicable federal, state and local law.
Exempt Plans, ERISA Plans and Non-ERISA Plans are collectively referred to as
"Benefit Plans."
Before purchasing any Certificates, an ERISA Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to such
purchase under the requirements of ERISA or the Code, whether prohibited
transaction exemptions such as PTE 83-1 or any individual administrative
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable, and further should consult the applicable
Prospectus Supplement relating to such Series of Certificates.
Certain Requirements Under ERISA and the Code
General
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for
the ERISA Plan in view of its overall investment policy and the composition
and diversification of its portfolio. An ERISA Plan fiduciary should
especially consider the ERISA requirement of investment prudence and the
sensitivity of the return on the Certificates to the rate of principal
repayments (including prepayments) on the Mortgage Loans, as discussed in
"Prepayment and Yield Considerations" herein.
Parties in Interest/Disqualified Persons
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and
persons who have certain specified relationships to the ERISA Plan (so-called
"parties in interest" within the meaning of ERISA or "disqualified persons"
within the meaning of the Code). The Depositor, the Master Servicer, any
Servicer or the Trustee or certain affiliates thereof might be considered or
might become "parties in interest" or "disqualified persons" with respect to
an ERISA Plan. If so, the acquisition or holding of Certificates by or on
behalf of such ERISA Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless an administrative
exemption described below or some other exemption is available.
Special caution should be exercised before the assets of an ERISA Plan
(including assets that may be held in an insurance company's separate or
general accounts where assets in such accounts may be deemed plan assets for
purposes of ERISA) are used to purchase a Certificate if, with respect to such
assets, the Depositor, any Servicer, the Master Servicer or the Trustee or an
affiliate thereof either: (a) has investment discretion with
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respect to the investment of such assets of such ERISA Plan; or (b) has
authority or responsibility to give, or regularly gives, investment advice
with respect to such assets for a fee and pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on
the particular investment needs of the ERISA Plan.
Delegation of Fiduciary Duty
Further, if the assets included in a Trust Estate were deemed to constitute
assets of an ERISA Plan, it is possible that an ERISA Plan's investment in the
Certificates might be deemed to constitute a delegation, under ERISA, of the
duty to manage plan assets by the fiduciary deciding to invest in the
Certificates, and certain transactions involved in the operation of the Trust
Estate might be deemed to constitute prohibited transactions under ERISA and
the Code. Neither ERISA nor the Code define the term "plan assets."
The U.S. Department of Labor (the "Department") has issued regulations (the
"Regulations") concerning whether or not an ERISA Plan's assets would be
deemed to include an interest in the underlying assets of an entity (such as a
Trust Estate) for purposes of the reporting and disclosure and general
fiduciary responsibility provisions of ERISA, as well as for the prohibited
transaction provisions of ERISA and the Code, if the ERISA Plan acquires an
"equity interest" (such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
ERISA Plan's assets would be deemed merely to include its interest in the
Certificates instead of being deemed to include an interest in the assets of a
Trust Estate. However, it cannot be predicted in advance nor can there be any
continuing assurance whether such exceptions may be met, because of the
factual nature of certain of the rules set forth in the Regulations. For
example, one of the exceptions in the Regulations states that the underlying
assets of an entity will not be considered "plan assets" if less than 25% of
the value of all classes of equity interests are held by "benefit plan
investors," which term is defined to include ERISA Plans, Non-ERISA Plans and
Exempt Plans and any entity whose assets include "plan assets" by reason of
benefit plan investments in such entity, but this exception is tested
immediately after each acquisition of an equity interest in the entity whether
upon initial issuance or in the secondary market.
Applicability to Non-ERISA Plans
Since Non-ERISA Plans are subject to the prohibited transaction provisions
of the Code, the discussion above with respect to "disqualified persons,"
prohibited transactions, delegation of fiduciary duty and plan assets applies
to Non-ERISA Plans as well as ERISA Plans. However, the administrative
exemptions discussed below are not applicable to Non-ERISA Plans.
Administrative Exemptions
Individual Administrative Exemptions.
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative prohibited transaction exemptions (each, an
"Underwriter's Exemption") which are in some respects broader than Prohibited
Transaction Class Exemption 83-1 (described below). Such exemptions can only
apply to mortgage-backed securities which, among other conditions, are sold in
an offering with respect to which such underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If such an
Underwriter's Exemption might be applicable to a Series of Certificates, the
applicable Prospectus Supplement will refer to such possibility.
Among the conditions that must be satisfied for an Underwriter's Exemption
to apply are the following:
(1) The acquisition of Certificates by an ERISA Plan is on terms
(including the price for the Certificates) that are at least as favorable
to the ERISA Plan as they would be in an arm's length transaction with an
unrelated party.
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(2) The rights and interests evidenced by Certificates acquired by the
ERISA Plan are not subordinated to the rights and interests evidenced by
other Certificates of the Trust Estate.
(3) The Certificates acquired by the ERISA Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from either Standard & Poor's, a division of The McGraw-
Hill Companies ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Duff &
Phelps Credit Rating Co. ("DCR") or Fitch IBCA, Inc. ("Fitch").
(4) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below).
(5) The sum of all payments made to and retained by the underwriter in
connection with the distribution of Certificates represents not more than
reasonable compensation for underwriting the Certificates. The sum of all
payments made to and retained by the Depositor pursuant to the assignment
of the Mortgage Loans to the Trust Estate represents not more than the fair
market value of such Mortgage Loans. The sum of all payments made to and
retained by the Servicer (and any other servicer) represents not more than
reasonable compensation for such person's services under the Pooling and
Servicing Agreement and reimbursement of such person's reasonable expenses
in connection therewith.
(6) The ERISA Plan investing in the Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission
under the Securities Act of 1933, as amended (the "Securities Act").
The Trust Estate must also meet the following requirements:
(i) the assets of the Trust Estate must consist solely of assets of the
type that have been included in other investment pools in the marketplace;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or DCR
for at least one year prior to the ERISA Plan's acquisition of the
Certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA Plan's acquisition of the Certificates.
If the conditions to an Underwriter's Exemption are met, whether or not an
ERISA Plan's assets would be deemed to include an ownership interest in the
Mortgage Loans in a mortgage pool, the acquisition, holding and resale of the
Certificates by ERISA Plans would be exempt from certain of the prohibited
transaction provisions of ERISA and the Code.
Moreover, an Underwriter's Exemption can provide relief from certain self-
dealing/conflict of interest prohibited transactions that may occur if an
ERISA Plan fiduciary causes an ERISA Plan to acquire and hold Certificates in
a Trust Estate in which the fiduciary (or its affiliate) is an obligor on the
Mortgage Loans held in the Trust Estate provided that, among other
requirements: (i) in the case of an acquisition in connection with the initial
issuance of Certificates, at least fifty percent of each class of Certificates
in which ERISA Plans have invested is acquired by persons independent of the
Restricted Group (as defined below) and at least fifty percent of the
aggregate interest in the Trust Estate is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor
with respect to five percent or less of the fair market value of the Mortgage
Loans contained in the Trust Estate; (iii) the ERISA Plan's investment in
Certificates of any Class does not exceed twenty-five percent of all of the
Certificates of that Class outstanding at the time of the acquisition and (iv)
immediately after the acquisition no more than twenty-five percent of the
assets of the ERISA Plan with respect to which such person is a fiduciary are
invested in Certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity.
An Underwriter's Exemption does not apply to ERISA Plans sponsored by the
Depositor, the underwriter specified in the applicable Prospectus Supplement,
the Master Servicer, the Trustee, any Servicer, any insurer
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with respect to the Mortgage Loans, any obligor with respect to Mortgage Loans
included in the Trust Estate constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust Estate, or
any affiliate of such parties (the "Restricted Group").
PTE 83-1
Prohibited Transaction Class Exemption 83-1 for Certain Transactions
Involving Mortgage Pool Investment Trusts ("PTE 83-1") permits 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 ERISA Plans, whether or
not the ERISA Plan's assets would be deemed to include an ownership interest
in the mortgages in such mortgage pools, and whether or not such transactions
would otherwise be prohibited under ERISA or the Code.
The term "mortgage pool pass-through certificate" is defined in PTE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such a certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any
fees retained by the pool sponsor." It appears that, for purposes of PTE 83-1,
the term "mortgage pool pass-through certificate" would include Certificates
issued in a single Class or in multiple Classes that evidence the beneficial
ownership of both a specified percentage of future interest payments (after
permitted deductions) and a specified percentage of future principal payments
on a Trust Estate.
However, it appears that PTE 83-1 does or might not apply to the purchase
and holding of (a) Certificates that evidence the beneficial ownership only of
a specified percentage of future interest payments (after permitted
deductions) on a Trust Estate or only of a specified percentage of future
principal payments on a Trust Estate, (b) Residual Certificates, (c)
Certificates evidencing ownership interests in a Trust Estate which includes
Mortgage Loans secured by multifamily residential properties or shares issued
by cooperative housing corporations, or (d) Certificates which are
subordinated to other Classes of Certificates of such Series. Accordingly,
unless exemptive relief other than PTE 83-1 applies, Plans should not purchase
any such Certificates.
PTE 83-1 sets forth "general conditions" and "specific conditions" to its
applicability. Section II of PTE 83-1 sets forth the following general
conditions to the application of the exemption: (i) the maintenance of a
system of insurance or other protection for the pooled mortgage loans or the
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments; (ii) the existence of a pool trustee who is not an affiliate of the
pool sponsor; and (iii) a requirement that the sum of all payments made to and
retained by the pool sponsor, and all funds inuring to the benefit of the pool
sponsor as a result of the administration of the mortgage pool, must represent
not more than adequate consideration for selling the mortgage loans plus
reasonable compensation for services provided by the pool sponsor to the pool.
The system of insurance or protection referred to in clause (i) above must
provide such protection and indemnification up to an amount not less than the
greater of one percent of the aggregate unpaid principal balance of the pooled
mortgages or the unpaid principal balance of the largest mortgage in the pool.
It should be noted that in promulgating PTE 83-1 (and a predecessor
exemption), the Department did not have under its consideration interests in
pools of the exact nature as some of the Certificates described herein.
Non-ERISA Plans and Exempt Plans
Although Non-ERISA Plans and Exempt Plans are not considered ERISA Plans for
purposes of the above discussion, Non-ERISA Plans are subject to the
prohibited transaction provisions of the Code, and both Non-ERISA Plans and
Exempt Plans may be subject to certain other ERISA-like requirements of
applicable law. Therefore, before purchasing any Certificates by or on behalf
of a Non-ERISA Plan or any Exempt Plan, the prospective purchaser should
exercise special caution and should consult with its legal counsel concerning
the propriety and implications of such investment under the Code or other
applicable law.
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Unrelated Business Taxable Income--Residual Certificates
The purchase of a Residual Certificate by an IRA or any employee benefit
plan qualified under Code Section 401(a) and exempt from taxation under Code
Section 501(a), including most varieties of Benefit Plans, may give rise to
"unrelated business taxable income" as described in Code Sections 511 through
515 and 860E. Further, prior to the purchase of Residual Certificates, a
prospective transferee may be required to provide an affidavit to a transferor
that it is not, nor is it purchasing a Residual Certificate on behalf of, a
"Disqualified Organization," which term as defined above includes certain tax-
exempt entities not subject to Code Section 511 such as certain governmental
plans, as discussed above under the caption "Federal Income Tax Consequences--
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual Certificates--
Disqualified Organizations." In addition, prior to the transfer of a Residual
Certificate, the Trustee or the Depositor may require an opinion of counsel to
the effect that the transferee is not a Disqualified Organization and that
such transfer will not subject the Trustee, the Depositor, the Master Servicer
or any Servicer to additional obligations imposed by ERISA or the Code.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that
potential investors who are acting on behalf of a Benefit Plan or any other
employee benefit plan or arrangement consult with their counsel regarding the
consequences under ERISA, the Code or other applicable law of their
acquisition and ownership of Certificates.
The sale of Certificates to a Benefit Plan or any other employee benefit
plan or arrangement is in no respect a representation by the Depositor or the
applicable underwriter that this investment meets all relevant legal
requirements with respect to investments by employee benefit plans generally
or any particular plan or arrangement, or that this investment is appropriate
for employee benefit plans generally or any particular plan or arrangement.
LEGAL INVESTMENT
As will be specified in the applicable Prospectus Supplement, certain
Classes of Certificates will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), so long as (i) they are rated in one of the two highest rating
categories by at least one Rating Agency and (ii) are part of a Series
representing interests in a Trust Estate consisting of Mortgage Loans
originated by certain types of originators specified in SMMEA and secured by
first liens on real estate. As "mortgage related securities," such Classes
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
but not limited to depository institutions, insurance companies and pension
funds) created pursuant to or existing under the laws of the United States or
of any state (including the District of Columbia and Puerto Rico) whose
authorized investments are subject to state regulation, to the same extent
that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cut-off
for such enactments, limiting to varying extents the ability of certain
entities (in particular, insurance companies) to invest in "mortgage related
securities," in most cases by requiring the affected investors to rely solely
upon existing state law, and not SMMEA. Accordingly, the investors affected by
such legislation will be authorized to invest in the Certificates only to the
extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage
related securities without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase mortgage related securities for their own account
without regard to the limitations generally applicable to investment
securities set forth in 12 U.S.C. (S) 24 (Seventh), subject in each case to
such regulations as the applicable federal regulatory authority may prescribe.
In this connection, the Office of the Comptroller of the Currency (the "OCC")
has amended 12 C.F.R.
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Part 1 to authorize national banks to purchase and sell for their own account,
without limitation as to a percentage of the bank's capital and surplus (but
subject to compliance with certain general standards concerning "safety and
soundness" and retention of credit information in 12 C.F.R. (S) 1.5), certain
"Type IV securities," defined in 12 C.F.R. (S) 1.2(1) to include certain
"residential mortgage-related securities." As so defined "residential
mortgage-related security" means, in relevant part, "mortgage related
security" within the meaning of SMMEA. The National Credit Union
Administration ("NCUA") has adopted rules, codified at 12 C.F.R. Part 703
which permit federal credit unions to invest in "mortgage related securities"
under certain limited circumstances, other than stripped mortgage related
securities, residual interests in mortgage related securities and commercial
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the "investment pilot program"
described in 12 C.F.R. (S) 703.140. The OTS has issued Thrift Bulletin 13a
(December 1, 1998), "Management of Interest Rate Risk, Investment Securities,
and Derivative Activities," which thrift institutions subject to the
jurisdiction of the OTS should consider before investing in any Certificates.
All depository institutions considering an investment in the Certificates
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" (the "1998 Policy Statement") of the Federal
Financial Institutions Examination Council ("FFIEC"), which has been adopted
by the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the OTS, effective May 26, 1998, and by the
NCUA, effective October 1, 1998. The 1998 Policy Statement sets forth general
guidelines which depository institutions must follow in managing risks
(including market, credit, liquidity, operational (transaction), and legal
risks) applicable to all securities (including mortgage pass-through
securities and mortgage-derivative products) used for investment purposes.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any of the
Certificates, as certain Series or Classes (in particular, Certificates which
are entitled solely or disproportionately to distributions of principal or
interest) may be deemed unsuitable investments, or may otherwise be
restricted, under such rules, policies or guidelines (in certain instances
irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest-bearing" or "income-paying," and, with regard to any
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
Except as to the status of certain Classes of Certificates as "mortgage
related securities," no representation is made as to the proper
characterization of the Certificates for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Certificates) may adversely
affect the liquidity of the Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their legal advisors in determining
whether and to what extent the 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.
PLAN OF DISTRIBUTION
The Certificates are being offered hereby in Series through one or more of
the methods described below. The applicable Prospectus Supplement for each
Series will describe the method of offering being utilized for that Series and
will state the public offering or purchase price of each Class of Certificates
of such Series, or the method by which such price is to be determined, and the
net proceeds to the Depositor from such sale.
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The Certificates will be offered through the following methods from time to
time and offerings may be made concurrently through more than one of these
methods or an offering of a particular Series of Certificates may be made
through a combination of two or more of these methods:
1. By negotiated firm commitment underwriting and public re-offering by
underwriters specified in the applicable Prospectus Supplement;
2. By placements by the Depositor with investors through dealers; and
3. By direct placements by the Depositor with investors.
If underwriters are used in a sale of any Certificates, 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 a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Firm
commitment underwriting and public reoffering by underwriters may be done
through underwriting syndicates or through one or more firms acting alone. The
specific managing underwriter or underwriters, if any, with respect to the
offer and sale of a particular Series of Certificates will be set forth on the
cover of the Prospectus Supplement applicable to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. The underwriters
with respect to a sale of any Class of Certificates will be obligated to
purchase all such Certificates if any are purchased. The Depositor, and, if
specified in the applicable Prospectus Supplement, an affiliate of the
Depositor, will indemnify the applicable underwriters against certain civil
liabilities, including liabilities under the Securities Act.
Banc of America Securities LLC ("Banc of America Securities") is an
affiliate of the Depositor. This Prospectus may be used by Banc of America
Securities, to the extent required, in connection with market making
transactions in Certificates. Banc of America Securities may act as a
principal or agent in such transactions.
The Prospectus Supplement with respect to any Series of Certificates offered
other than through underwriters will contain information regarding the nature
of such offering and any agreements to be entered into between the Depositor
and dealers and/or 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 in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer or sale.
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor or any affiliate thereof may purchase some or all
of one or more Classes of Certificates of such Series from the underwriter or
underwriters at a price specified or described in such Prospectus Supplement.
Such purchaser may thereafter from time to time offer and sell, pursuant to
this Prospectus, some or all of such Certificates so purchased directly,
through one or more underwriters to be designated at the time of the offering
of such Certificates or through dealers acting as agent and/or principal. Such
offering may be restricted in the matter specified in such Prospectus
Supplement. Such transactions may be effected at market prices prevailing at
the time of sale, at negotiated prices or at fixed prices. The underwriters
and dealers participating in such purchaser's offering of such Certificates
may receive compensation in the form of underwriting discounts or commissions
from such purchaser and such dealers may receive commissions from the
investors purchasing such Certificates for whom they may act as agent (which
discounts or commissions will not exceed those customary in those types of
transactions involved). Any dealer that participates in the distribution of
such Certificates may be deemed to be an "underwriter" within the meaning of
the Securities Act, and any commissions and discounts received by such dealer
and any profit on the resale of such Certificates by such dealer might be
deemed to be underwriting discounts and commissions under the Securities Act.
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USE OF PROCEEDS
The net proceeds from the sale of each Series of Certificates will be used
by the Depositor for the purchase of the Mortgage Loans represented by the
Certificates of such Series.
LEGAL MATTERS
Certain legal matters, including the federal income tax consequences to
Certificateholders of an investment in the Certificates of a Series, will be
passed upon for the Depositor by Cadwalader, Wickersham & Taft, New York, New
York or Kennedy Covington Lobdell & Hickman, L.L.P., Charlotte, North
Carolina, as specified in the related Prospectus Supplement.
RATING
It is a condition to the issuance of the Certificates of any Series offered
pursuant to this Prospectus and a Prospectus Supplement that they be rated in
one of the four highest categories by at least one Rating Agency.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning
Rating Agency. Each securities rating should be evaluated independently of any
other rating.
REPORTS TO CERTIFICATEHOLDERS
The Trustee will prepare and forward to the Certificateholders of each
Series statements containing information with respect to principal and
interest payments and the related Trust Estate, as described herein and in the
applicable Prospectus Supplement for such Series. No information contained in
such reports will have been examined or reported upon by an independent public
accountant. See "The Pooling and Servicing Agreement-- Reports to
Certificateholders." In addition, each Servicer for each Series will furnish
to the Trustee an annual statement from a firm of independent public
accountants with respect to the examination of certain documents and records
relating to a random sample of mortgage loans serviced by such Servicer
pursuant to the related Underlying Servicing Agreement and/or other similar
agreements. See "Servicing of the Mortgage Loans--Evidence as to Compliance."
Copies of the statements provided to the Trustee will be furnished to
Certificateholders of each Series upon request addressed to the Trustee.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The SEC allows the Depositor to "incorporate by reference" information it
files with the SEC, which means that the Depositor can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this Prospectus.
Information that the Depositor files later with the SEC will automatically
update the information in this Prospectus. In all cases, you should rely on
the later information rather than on any different information included in
this Prospectus or the accompanying Prospectus Supplement. The Seller
incorporates by reference any future annual, monthly and special SEC reports
filed by or on behalf of the Trust until the termination of the offering of
the Certificates.
As a recipient of this Prospectus, you may request a copy of any document
the Depositor incorporates by reference, except exhibits to the documents
(unless the exhibits are specifically incorporated by reference), at no cost,
by writing or calling the Depositor at 201 North Tryon Street, Charlotte,
North Carolina 28255, Attention: Senior Vice President, telephone number (704)
388-4503.
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WHERE YOU CAN FIND MORE INFORMATION
The Depositor filed a registration statement relating to the Certificates
with the Securities and Exchange Commission ("SEC" or the "Commission"). This
Prospectus is part of the registration statement, but the registration
statement includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549 upon payment of
the prescribed charges, or may be examined free of charge at the Commission's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at Suite 1300, 7 World Trade Center, New
York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. The Commission also maintains a site on the
World Wide Web at "http://www.sec.gov" at which you can view and download
copies of reports, proxy and information statements and other information
filed electronically through the Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system. The Depositor has filed the registration
statement, including all exhibits, through the EDGAR system and therefore such
materials should be available by logging onto the Commission's Web site. The
Commission maintains computer terminals providing access to the EDGAR system
at each of the offices referred to above. Copies of any documents incorporated
to this Prospectus by reference will be provided to each person to whom a
Prospectus is delivered upon written or oral request directed to Bank of
America Mortgage Securities, Inc., 201 North Tryon Street, Charlotte, North
Carolina 28255, Attention: Senior Vice President, telephone number (704) 388-
4503.
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INDEX OF SIGNIFICANT DEFINITIONS
PROSPECTUS
<TABLE>
<S> <C>
1
</TABLE>
<TABLE>
<S> <C>
1986 Act.................................................................... 64
1998 Policy Statement....................................................... 94
A
Accretion Directed Class.................................................... 29
Accrual Certificates........................................................ 26
Accrual Class............................................................... 31
Actuarial Mortgage Loan..................................................... 15
Additional Collateral....................................................... 18
Advances.................................................................... 40
Asset Conservation Act...................................................... 59
B
Balloon Loans............................................................... 18
Balloon Period.............................................................. 18
Banc of America Securities.................................................. 95
Bankruptcy Code............................................................. 55
Bankruptcy Loss............................................................. 27
Bankruptcy Loss Amount...................................................... 28
Beneficial Owner............................................................ 23
Benefit Plans............................................................... 89
Book-Entry Certificates..................................................... 8
Buy-Down Fund............................................................... 18
Buy-Down Loans.............................................................. 18
C
Cash Flow Agreement......................................................... 33
Cede........................................................................ 23
CERCLA...................................................................... 58
Certificate Account......................................................... 37
Certificateholders.......................................................... 22
Certificates................................................................ 6
Class....................................................................... 7
Cleanup Costs............................................................... 58
Closing Date................................................................ 22
Code........................................................................ 9
Commission.................................................................. 97
Companion Class............................................................. 29
Component................................................................... 29
Component Class............................................................. 29
cooperatives................................................................ 14
Counterparty................................................................ 13
Cut-Off Date................................................................ 7
D
DCR......................................................................... 91
Deferred Interest........................................................... 16
Definitive Certificates..................................................... 22
Department.................................................................. 90
</TABLE>
<TABLE>
<S> <C>
Depositor................................................................... 18
Depository.................................................................. 37
Disqualified Organization................................................... 75
Distribution Date........................................................... 7
DTC......................................................................... 8
DTC Participants............................................................ 23
Due Date.................................................................... 15
E
EDGAR....................................................................... 97
electing large partnership.................................................. 75
Eligible Custodial Account.................................................. 37
Eligible Investments........................................................ 38
ERISA....................................................................... 89
ERISA Plans................................................................. 89
Escrow Account.............................................................. 41
Excess Bankruptcy Losses.................................................... 28
Excess Fraud Losses......................................................... 28
Excess Special Hazard Losses................................................ 28
Exempt Plans................................................................ 89
F
FASIT....................................................................... 63
FDIC........................................................................ 37
FFIEC....................................................................... 94
FHLBB....................................................................... 60
FHLMC....................................................................... 36
Fitch....................................................................... 91
Fixed Rate Class............................................................ 31
Fixed Retained Yield........................................................ 26
Floating Rate Class......................................................... 31
FNMA........................................................................ 36
foreign persons............................................................. 88
Fraud Loss.................................................................. 27
Fraud Loss Amount........................................................... 28
G
Garn Act.................................................................... 60
Graduated Pay Mortgage Loans................................................ 17
Growing Equity Mortgage Loans............................................... 17
I
Indirect DTC Participants................................................... 23
Insolvency Laws............................................................. 13
Interest Only Class......................................................... 31
Inverse Floating Rate Class................................................. 31
IRA......................................................................... 89
</TABLE>
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<TABLE>
<S> <C>
L
Limited or Reduced Documentation Guidelines................................. 19
Liquidation Proceeds........................................................ 38
Loan-to-Value Ratio......................................................... 20
Lockout Class............................................................... 29
M
Mark to Market Regulations.................................................. 77
Master Servicer............................................................. 6
Master Servicer Custodial Account........................................... 37
Master Servicing Fee........................................................ 26
MERS........................................................................ 47
Moody's..................................................................... 91
Mortgage Interest Rate...................................................... 26
Mortgage Loans.............................................................. 14
Mortgage Notes.............................................................. 14
Mortgaged Properties........................................................ 14
Mortgages................................................................... 14
N
NCUA........................................................................ 94
Net 5 Loans................................................................. 16
Net Foreclosure Profits..................................................... 26
Net Mortgage Interest Rate.................................................. 26
New Regulations............................................................. 80
Non-ERISA Plans............................................................. 89
Non-Pro Rata Certificate.................................................... 65
Non-U.S. Person............................................................. 80
Note Margin................................................................. 16
Notional Amount Class....................................................... 29
O
OCC......................................................................... 93
OID Regulations............................................................. 65
original issue discount..................................................... 65
Other Advances.............................................................. 40
OTS......................................................................... 60
P
PAC......................................................................... 29
PAC I....................................................................... 30
PAC II...................................................................... 30
Partial Liquidation Proceeds................................................ 25
Pass-Through Class.......................................................... 29
Pass-Through Entity......................................................... 75
Pass-Through Rate........................................................... 7
Paying Agent................................................................ 39
PCBs........................................................................ 58
Percentage Interest......................................................... 25
Periodic Advances........................................................... 8
Planned Amortization Class.................................................. 29
</TABLE>
<TABLE>
<S> <C>
Pledged Asset Mortgage Loans................................................ 18
Pool Distribution Amount.................................................... 25
Pooling and Servicing Agreement............................................. 22
Prepayment Assumption....................................................... 66
Principal Only Class........................................................ 31
PTE 83-1.................................................................... 92
R
Rating Agency............................................................... 9
Ratio Strip Class........................................................... 30
RCRA........................................................................ 58
Record Date................................................................. 7
Regular Certificateholder................................................... 64
Regular Certificates........................................................ 22
Regulations................................................................. 90
Relief Act.................................................................. 57
REMIC....................................................................... 62
REMIC Certificates.......................................................... 62
REMIC Pool.................................................................. 62
REMIC Regulations........................................................... 61
Remittance Date............................................................. 37
Removed Mortgage Loan....................................................... 47
Reserve Fund................................................................ 32
Residual Certificates....................................................... 22
Residual Holders............................................................ 71
Restricted Group............................................................ 92
Rules....................................................................... 23
S
S&P......................................................................... 91
Sale Agreement.............................................................. 46
SBJPA of 1996............................................................... 63
Scheduled Amortization Class................................................ 30
Scheduled Principal Balance................................................. 48
SEC......................................................................... 97
Securities Act.............................................................. 91
Seller...................................................................... 14
Senior Certificates......................................................... 7
Senior Class................................................................ 30
Sequential Pay Class........................................................ 30
Series...................................................................... 6
Servicer.................................................................... 6
Servicer Custodial Account.................................................. 37
Servicing Fee............................................................... 26
Simple Interest Mortgage Loan............................................... 15
SMMEA....................................................................... 93
Special Hazard Loss......................................................... 27
Special Hazard Loss Amount.................................................. 28
Standard Hazard Insurance Policy............................................ 43
Startup Day................................................................. 63
</TABLE>
99
<PAGE>
<TABLE>
<S> <C>
Step Coupon Class........................................................... 31
Stripped Certificateholder.................................................. 86
Stripped Certificates....................................................... 85
Subordinated Certificates................................................... 7
Subordinated Class.......................................................... 30
Subsidy Account............................................................. 17
Subsidy Loans............................................................... 17
Subsidy Payments............................................................ 17
Superliens.................................................................. 58
T
TAC......................................................................... 30
Targeted Amortization Class................................................. 30
Texas Home Equity Laws...................................................... 57
Tiered Payment Mortgage Loans............................................... 17
TILA Amendment.............................................................. 56
Title V..................................................................... 61
Treasury Regulations........................................................ 47
Trust....................................................................... 6
</TABLE>
<TABLE>
<S> <C>
Trust Estate................................................................ 6
Trustee..................................................................... 51
Trustee Fee................................................................. 26
U
UCC......................................................................... 54
Underlying Servicing Agreement.............................................. 6
Underwriter's Exemption..................................................... 90
U.S. Person................................................................. 76
UST......................................................................... 58
V
Variable Rate Class......................................................... 31
Voting Interests............................................................ 49
W
Window Period............................................................... 60
Window Period Loans......................................................... 60
Window Period States........................................................ 60
</TABLE>
100
<PAGE>
Bank of America Mortgage Securities, Inc.
Depositor
$
(Approximate)
Mortgage Pass-Through Certificates, Series 199
------------------
PROSPECTUS SUPPLEMENT
------------------
[UNDERWRITERS]
You should rely only on the information contained or
incorporated by reference in this Prospectus Supplement and
the accompanying Prospectus. No one has been authorized to
provide you with different information.
The Offered Certificates are not being offered in any state
where the offer is not permitted.
The Depositor does not claim the accuracy of the information
in this Prospectus Supplement and the accompanying Prospectus
as of any date other than the dates stated on their respective
covers.
Dealers will deliver a Prospectus Supplement and Prospectus
when acting as underwriters of the Offered Certificates and
with respect to their unsold allotments or subscriptions. In
addition, all dealers selling the Offered Certificates will
deliver a Prospectus Supplement and Prospectus until ninety
days following the date of this Prospectus Supplement.
, 19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses except for the
registration fees are estimated.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $1,320,000
Legal Fees and Expenses....................................... $ 750,000
Accounting Fees and Expenses.................................. $ 250,000
Trustee's Fees and Expenses (including counsel fees).......... $ 100,000
Printing and Engraving Fees................................... $ 200,000
Rating Agency Fees............................................ $1,500,000
Miscellaneous................................................. $ 100,000
----------
Total..................................................... $4,270,000
==========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any persons, including officers and directors, who
are made, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was an officer
or director of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation
or enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests and, for criminal proceedings, had no reasonable cause to believe
that his conduct was illegal. A Delaware corporation may indemnify officers
and directors in an action by or in the right of the corporation under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director actually and
reasonably incurred.
The By-laws of Bank of America Mortgage Securities, Inc. provide for
indemnification of officers and directors to the full extent permitted by the
Delaware General Corporation Law.
The Pooling and Servicing Agreement for each Series of Certificates will
provide either that the Registrant and the partners, directors, officers,
employees and agents of the Registrant, or that the Master Servicer or any
Servicer and the partners, directors, officers, employees and agents of the
Master Servicer, or any Servicer will be entitled to indemnification by the
Trust Estate and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Pooling and
Servicing Agreement or the Certificates, other than any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross
negligence in the performance of his or its duties thereunder or by reason of
reckless disregard of his or its obligations and duties thereunder.
The directors and officers of the Registrant are covered by a directors' and
officers' liability insurance policy maintained by Bank of America Corporation
for the benefit of all of its subsidiaries.
II-1
<PAGE>
Any underwriters who execute an Underwriting Agreement in the form
incorporated by reference as Exhibit 1.1 hereto will agree to indemnify the
Registrant's directors and its officers who signed this Registration Statement
against certain liabilities which might arise under the Securities Act of 1933
from certain information furnished to the Registrant by or on behalf of such
indemnifying party.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement incorporated by reference from
Exhibit 1.1 to the Registration Statement on Form S-3 (File No. 333-
67267).
3.1 Certificate of Amendment of BA Mortgage Securities, Inc.,
Certificate of Amendment of BankAmerica Mortgage Securities, Inc.
and Certificate of Incorporation of BankAmerica Mortgage Securities,
Inc. incorporated by reference from Exhibit 3.1 to the Registration
Statement on Form S-3 (File No. 333-67267).
4.1 Form of Pooling and Servicing Agreement incorporated by reference
from Exhibit 4.1 to the Registration Statement on Form S-3 (File No.
333-67267).
5.1 Opinion of Cadwalader, Wickersham & Taft with respect to certain
matters involving the Certificates.*
5.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. with respect
to certain matters involving the Certificates.*
8.1 Opinion of Cadwalader, Wickersham & Taft as to tax matters.*
8.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P. as to tax
matters.*
23.1 Consent of Cadwalader, Wickersham & Taft (included as part of
Exhibits 5.1 and 8.1).*
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P. (included as
part of Exhibits 5.2 and 8.2).*
24.1 Power of Attorney (contained on page II-4 of this Registration
Statement).
</TABLE>
- --------
*Previously filed.
Item 17. Undertakings.
(a) Undertaking pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE>
(b) Undertaking in connection with incorporation by reference of certain
filings under the Securities Exchange Act of 1934.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the Registration
Statement shall be deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Undertaking in respect of indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (including the requirement that the
securities be rated investment grade at the time of sale) and has duly caused
this Pre-Effective Amendment No. 1 to Form S-3 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Charlotte, State of North Carolina on December 8, 1999.
Bank of America Mortgage Securities,
Inc.
/s/ Andrew D. Woodward, Jr.
By: __________________________________
Name: Andrew D. Woodward, Jr.
Title: President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Andrew D. Woodward, Jr., Daniel Hellams, Juliana
Johnson, Denise Sawyer and Frederick Wark, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for and in his name, place and stead, in any and all capacities
to sign any or all amendments (including post-effective amendments) to this
Pre-Effective Amendment No. 1 to Form S-3 Registration Statement and any or all
other documents in connection therewith, and to file the same, with all
exhibits thereto, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as might or could be done in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or their substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Pre-Effective Amendment No. 1 to Form S-3 Registration Statement has been
signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
/s/ Andrew D. Woodward, Jr. President, Chief December 8,
- ------------------------------------ Executive Officer 1999
Andrew D. Woodward, Jr. and Director
/s/ Denise Sawyer Treasurer, Chief December 8,
- ------------------------------------ Financial Officer 1999
Denise Sawyer and Chief Accounting
Officer
/s/ Daniel Hellams Director December 8,
- ------------------------------------ 1999
Daniel Hellams
/s/ Juliana Johnson Director December 8,
- ------------------------------------ 1999
Juliana Johnson
/s/ Frederick Wark Director December 8,
- ------------------------------------ 1999
Frederick Wark
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement incorporated by
reference from Exhibit 1.1 to the Registration
Statement on Form S-3 (File No. 333-67267)
3.1 Certificate of Amendment of BA Mortgage Securities,
Inc., Certificate of Amendment of BankAmerica Mortgage
Securities, Inc. and Certificate of Incorporation of
BankAmerica Mortgage Securities, Inc. incorporated by
reference from Exhibit 3.1 to the Registration
Statement on Form S-3 (File No. 333-67267)
4.1 Form of Pooling and Servicing Agreement incorporated by
reference from Exhibit 4.1 to the Registration
Statement on Form S-3 (File No. 333-67267)
5.1 Opinion of Cadwalader, Wickersham & Taft with respect
to certain matters involving the Certificates.*
5.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P.
with respect to certain matters involving the
Certificates.*
8.1 Opinion of Cadwalader, Wickersham & Taft as to tax
matters.*
8.2 Opinion of Kennedy Covington Lobdell & Hickman, L.L.P.
as to tax matters.*
23.1 Consent of Cadwalader, Wickersham & Taft (included as
part of Exhibit 5.1 and 8.1).*
23.2 Consent of Kennedy Covington Lobdell & Hickman, L.L.P.
(included as part of Exhibits 5.2 and 8.2).*
24.1 Power of Attorney (contained on page II-4 of this
Registration Statement).
</TABLE>
- --------
* Previously filed.
