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RULE NO. 424(b)(5)
REGISTRATION NO. 33-99612
PROSPECTUS SUPPLEMENT
(To Prospectus Dated December 4, 1995)
$305,580,227
CS First Boston Mortgage Securities Corp.
Depositor
Adjustable Rate Certificates, Series 1996-1
Class A-1 Certificates
The Adjustable Rate Certificates, Series 1996-1 (the "Certificates") will be
comprised of three classes of certificates: Class A-1, Class IO and Class R.
Only the Class A-1 Certificates are offered hereby. The Certificates
evidence 100% of the beneficial ownership interest in a trust fund (the
"Trust Fund") to be created by CS First Boston Mortgage Securities Corp.
(the "Depositor"), the assets of which will consist primarily of (a)
13 classes (or portions of classes) of mortgage pass-through
certificates (the "Mortgage Certificates"), each of which is part of
one of 11 series of mortgage pass-through certificates initially
sold by the Resolution Trust Corporation and acquired by the
Depositor in the secondary market, (b) a Reserve Fund, (c) a
Yield Support Agreement provided by Norwest Corporation and
(d) a Price Maintenance Agreement provided by Norwest
Corporation. The Certificates will be issued pursuant to a
Pooling Trust Agreement (the "Pooling Agreement") among
the Depositor, Norwest Bank Minnesota, National
Association, as Certificate Administrator, The Chase
Manhattan Bank (National Association), as Trustee, and
Norwest Corporation, as Tax Beneficial Holder. See
"Description of the Certificates."
As more fully described herein, interest will accrue on the Class A-1
Certificates during each Interest Accrual Period (as defined herein) in an
amount equal to the lesser of (i) interest at a per annum rate of 0.23% in
excess of the London interbank offered rate for three-month Eurodollar
deposits ("LIBOR"), determined quarterly as set forth herein (the "Class
A-1 Pass-Through Rate"), reduced by the amount of certain prepayment
interest shortfalls and deferred interest as described herein under
"Description of Certificates--Distributions--Interest Distributions"
and (ii) Interest Available Funds (as defined herein). The initial
Class A-1 Pass-Through Rate will be determined with respect to the
level of LIBOR on May 29, 1996. Interest generally will be paid
quarterly on the 28th day of each January, April, July and
October or, if any such day is not a business day, on the
following business day, beginning in July 1996. Each such day
is referred to as a "Distribution Date." See "Summary of
Terms--Distribution Date" and "Description of the
Certificates" herein. A Distribution Date may be
subject to delay under the circumstances described herein under "Description
of the Certificates--Distributions."
Principal payments on the Class A-1 Certificates will be made on each
Distribution Date to the extent funds are available therefor, as described
herein, until the principal balance of the Class A-1 Certificates has been
reduced to zero. See "Description of the Certificates--Distributions--
Principal Distributions."
Payments on the Mortgage Certificates will be unconditionally guaranteed as
to payment of interest and principal to the extent described herein pursuant
to the terms and conditions of a financial guaranty insurance policy (the
"Policy") to be issued by MBIA Insurance Corporation ("MBIA"). Prepayment
interest shortfalls, deferred interest and Relief Act shortfalls
allocated to the Mortgage Certificates will not be covered by the
Policy. The Policy will not cover shortfalls in distributions on the
Certificates other than those caused by delinquencies in respect of
interest or realized losses with respect to the Mortgage
Certificates. See "Risk Factors--Basis Risk" herein. The Policy
will not offset any diminution in the market value of the
Mortgage Certificates. See "Risk Factors--Auction Risk" herein.
LOGO
PROSPECTIVE INVESTORS IN THE CERTIFICATES SHOULD CONSIDER THE FACTORS
DISCUSSED UNDER "RISK FACTORS" IN THIS PROSPECTUS SUPPLEMENT ON PAGE S-19.
(cover continued on next page)
THE CLASS A-1 CERTIFICATES DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF CS
FIRST BOSTON MORTGAGE SECURITIES CORP., THE TRUSTEE, THE CERTIFICATE
ADMINISTRATOR OR ANY OF THEIR AFFILIATES. NEITHER THE CERTIFICATES, THE
MORTGAGE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR (EXCEPT AS
DESCRIBED HEREIN) BY ANY OTHER PARTY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Class A-1 Certificates will be offered by CS First Boston Corporation
("CS First Boston") from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time
of sale. Proceeds to the Depositor from the sale of the Class A-1
Certificates are anticipated to be approximately $305,580,227, plus
accrued interest thereon at the Class A-1 Pass-Through Rate from
April 28, 1996, but before deducting expenses payable by the Depositor,
estimated to be $750,000.
The Class A-1 Certificates are offered by CS First Boston when, as and if
delivered to and accepted by CS First Boston, subject to prior sale,
withdrawal or modification of the offer without notice, the approval of
counsel and other conditions. It is expected that the Class A-1
Certificates
will be delivered only through the same day funds settlement system of The
Depository Trust Company on or about May 31, 1996.
CS First Boston
The date of this Prospectus Supplement is May 28, 1996
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On April 28, 1999 and on each succeeding Distribution Date until
successful, the Trustee will attempt to sell the Mortgage Certificates at
auction for a price which, together with amounts on deposit in the Reserve Fund
and any amounts payable under the Price Maintenance Agreement, is at least equal
to the then-outstanding Principal Balance of the Class A-1 Certificates, plus
interest accrued and unpaid thereon. The proceeds of any such sale of the
Mortgage Certificates, together with funds on deposit in the Reserve Fund and
any amounts payable under the Price Maintenance Agreement (in each case, to the
extent needed), will be used to retire the Class A-1 Certificates. See "Risk
Factors--Auction Risk," "Description of the Certificates--Reserve Fund," "--
Mandatory Auction" and "--Price Maintenance Agreement."
Prospective investors should consider:
The yield on the Class A-1 Certificates will be sensitive to, among other
things, the rate and timing of principal payments on the Mortgage
Certificates (which likely will be different for different Mortgage
Certificates) and the level of LIBOR. See "Yield and Prepayment
Considerations" herein.
As described under "Risk Factors--Basis Risk" and "Yield and Prepayment
Considerations--Basis Risk; LIBOR" herein, under some prepayment and
interest rate scenarios, an investor may not receive all interest
accrued at the Class A-1 Pass-Through Rate on the Class A-1
Certificates with respect to one or more Distribution Dates on such
Distribution Dates, or in certain cases, prior to the retirement of
the Class A-1 Certificates.
There can be no assurances that the Trustee will, on April 28, 1999 or on
any date thereafter, be able to sell the Mortgage Certificates for a
price sufficient (together with amounts on deposit in the Reserve Fund
and any amounts payable under the Price Maintenance Agreement) to
allow the Class A-1 Certificates to be paid in full on or prior to
their Final Scheduled Distribution Date. The Policy will not offset
any diminutions in the market value of the Mortgage Certificates. See
"Risk Factors--Basis Risk" herein.
The description of the Mortgage Certificates and the Mortgage Loans
contained in this Prospectus Supplement is qualified in its entirety by
reference to the actual terms and provisions of the prospectuses and prospectus
supplement or the private placement memorandum related to each of the Mortgage
Certificates (collectively, the "Underlying Disclosure Documents") and the
Pooling and Servicing Agreements relating to each of the Mortgage Certificates
(collectively, the "Underlying Pooling Agreements"). Copies of the Underlying
Disclosure Documents and the Underlying Pooling Agreements are available from CS
First Boston by calling Richard Eimbinder at (212) 909-3574. Investors are urged
to obtain copies of such documents and read this Prospectus Supplement and
Prospectus in conjunction therewith.
The Class A-1 Certificates will be issued only in book-entry form, and
the purchasers thereof will not be entitled to receive definitive certificates
except in the limited circumstances set forth herein. The Class A-1 Certificates
will be registered in the name of Cede & Co., as nominee of The Depository Trust
Company, which will be the "holder" or "Certificateholder" of such Certificates,
as such terms are used herein. See "Description of the Certificates" herein.
The Class A-1 Certificates may not be an appropriate investment for
individual investors. There is currently no secondary market for the Class A-1
Certificates and there can be no assurance that a secondary market will develop
or, if it does develop, that it will provide Certificateholders with liquidity
of investment at any particular time or for the life of the Class A-1
Certificates. CS First Boston intends to act as a market maker in the Class A-1
Certificates, subject to applicable provisions of federal and state securities
laws and other regulatory requirements, but is under no obligation to do so and
any such market making may be discontinued at any time. There can be no
assurance that any investor will be able to sell a Class A-1 Certificate at a
price which is equal to or greater than the price at which such Certificate was
purchased.
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An election will be made to treat the portion of the Trust Fund
consisting of the Mortgage Certificates as a real estate mortgage investment
conduit (the "REMIC") for federal income tax purposes. As described more fully
herein and in the Prospectus, the payments on the Class A-1 Certificates which
are derived from the Mortgage Certificates and the Class IO Certificates will
constitute "regular interests" in the REMIC and the Class R Certificate will
constitute the "residual interest" in the REMIC. See "Summary Information--
Federal Income Tax Status" and "Certain Federal Income Tax Consequences" herein
and "Certain Federal Income Tax Consequences" in the Prospectus.
The Class A-1 Certificates represent one Class of a separate Series of
Certificates, which Class is being offered by the Depositor pursuant to the
Prospectus dated December 4, 1995 accompanying this Prospectus Supplement. The
Prospectus shall not be considered complete without this Prospectus Supplement
and any prospective investor shall not purchase any Certificate offered hereby
unless it shall have received both the Prospectus and this Prospectus
Supplement. The Prospectus contains important information regarding this
offering which is not contained herein, and prospective investors are urged to
read the Prospectus and this Prospectus Supplement in full.
UNTIL AUGUST 26, 1996 ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS
A-1 CERTIFICATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION MAY BE
REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to
the detailed information appearing elsewhere in this Prospectus Supplement
and in the Prospectus. Capitalized terms used herein and not defined shall
have the meaning given in the Prospectus. See "Index of Terms" herein and in
the Prospectus.
Securities Offered
$305,580,227 initial Principal Balance of Adjustable Rate Certificates,
Series 1996-1, Class A-1, evidencing a class of "regular interests" in the
REMIC and the rights to certain amounts from the Reserve Fund.
Other Securities
Adjustable Rate Certificates, Series 1996-1, Class IO, evidencing a class
of "regular interests" in the REMIC, and the Class R Certificate,
evidencing the "residual interest" in the REMIC. The Class IO Certificates
and the Class R Certificate are not offered hereby.
The Class A-1, Class IO and Class R Certificates are referred to
collectively herein as the "Certificates."
Forms of Certificates;
Denominations
The Class A-1 Certificates will be issued as book-entry certificates
through the facilities of The Depository Trust Company. See "Description of
the Certificates--Book-Entry Form" herein. The Class A-1 Certificates will
be issued, maintained and transferred in book-entry form only in minimum
denominations of $1,000 initial principal balance and integral multiples of
$1,000 initial principal balance in excess thereof.
Depositor
CS First Boston Mortgage Securities Corp.
Certificate Administrator
Certain administrative functions with respect to the Certificates will be
performed by Norwest Bank Minnesota, National Association.
Trustee
The Chase Manhattan Bank (National Association).
Cut-off Date
April 28, 1996.
Closing Date
May 31, 1996.
Final Scheduled Distribution
Date
July 28, 2029. The Final Scheduled Distribution Date has been determined to
be the Distribution Date succeeding the latest Final Scheduled Distribution
Date of any Mortgage Certificate.
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The Trust Fund
The Class A-1 Certificates evidence interests in a trust fund (the "Trust
Fund"), the assets of which will consist primarily of (a) 13 classes (or
portions of classes) of mortgage pass-through certificates (the "Mortgage
Certificates"), each of which is part of one of 11 series of mortgage pass-
through certificates initially sold by the Resolution Trust Corporation and
which were acquired by the Depositor in the secondary market, (b) a Reserve
Fund, (c) a Yield Support Agreement provided by Norwest Corporation and (d)
a Price Maintenance Agreement provided by Norwest Corporation. See "--The
Reserve Fund", "--The Yield Support Agreement" and "--The Price Maintenance
Agreement" below. The Trust Fund will be established and the Certificates
will be issued pursuant to a Pooling Trust Agreement (the "Pooling
Agreement"), dated as of May 31, 1996. See "Description of the Class A
Certificates--General" herein.
Distribution Date
Distributions on the Certificates will be made quarterly on the 28th day of
each January, April, July and October, beginning in July 1996, or, if any
such day is not a business day, the following business day. Each such day
on which distributions are made, a "Distribution Date." Any Distribution
Date that occurs on the same day as a distribution date for the Mortgage
Certificates is subject to delay under the circumstances described herein
under "Description of the Certificates--Distributions."
Record Date
The "Record Date" for each Distribution Date will be the close of business
on the last day of the calendar month preceding the month in which such
Distribution Date occurs or, if such last day is not a business day, the
preceding business day.
Distributions on Certificates
Interest Distributions on the Class A-1 Certificates. The amount of
interest payable on the Class A-1 Certificates on each Distribution Date
will be equal to the sum of (x) the lesser of the Optimal Interest Amount
(as defined below) of the Class A-1 Certificates for such Distribution Date
and Interest Available Funds (as defined herein under "Description of the
Certificates--Distributions--Interest Distributions") for such Distribution
Date and (y) the lesser of the Interest Shortfall Amount (as defined below)
of the Class A-1 Certificates and the excess, if any, of the Interest
Available Funds for such Distribution Date over the Optimal Interest Amount
of the Class A-1 Certificates for such Distribution Date.
The "Optimal Interest Amount" for the Class A-1 Certificates on each
Distribution Date will equal the product of (X) a
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fraction, the numerator of which is the number of days elapsed in the
related Interest Accrual Period and the denominator of which is 360, (Y)
the Class A-1 Pass-Through Rate for such Interest Accrual Period and (Z)
the outstanding Principal Balance thereof (subject to reduction in respect
of Deferred Interest, Prepayment Interest Shortfalls and Relief Act
Shortfalls incurred with respect to the Mortgage Loans underlying the
Mortgage Certificates). The "Interest Accrual Period" with respect to each
Distribution Date is the period from the 28th day of the third month
preceding the month in which such Distribution Date occurs through the 27th
day of the month in which such Distribution Date occurs. Interest on the
Certificates will be calculated on the basis of actual days elapsed in a
360-day year.
During each Interest Accrual Period, the Class A-1 Pass-Through Rate will
be 0.23% in excess of the London interbank offered rate quotations for
three-month Eurodollar deposits ("LIBOR") on the second day prior to the
first day of such Interest Accrual Period, or, if such second day is not a
business day, the preceding business day (each, a "Reset Date") or, with
respect to the initial Interest Accrual Period, on May 29, 1996, determined
as described herein under "Description of the Class A Certificates--
Determination of LIBOR."
The "Interest Shortfall Amount" of the Class A-1 Certificates is equal to
the sum of the amounts for all previous Distribution Dates by which the
Optimal Interest Amount of the Class A-1 Certificates exceeded the Interest
Available Funds for such Distribution Dates (to the extent such amounts
have not been paid on subsequent Distribution Dates), together with
interest accrued thereon at the Class A-1 Pass-Through Rate in effect from
time to time.
See "Description of the Certificates--Distributions."
DUE TO THE FACTORS DISCUSSED UNDER "SPECIAL CONSIDERATIONS--BASIS RISK" AND
"YIELD AND PREPAYMENT CONSIDERATIONS--BASIS RISK; LIBOR," INTEREST
AVAILABLE FUNDS MAY NOT ALWAYS BE SUFFICIENT TO PAY THE FULL OPTIMAL
INTEREST AMOUNT WITH RESPECT TO THE CLASS A-1 CERTIFICATES ON EACH
DISTRIBUTION DATE. THE POLICY WILL NOT COVER ANY SUCH DEFICIENCY.
Principal Distributions on the Class A-1 Certificates. Distributions in
respect of principal on the Class A-1 Certificates will be made on each
Distribution Date in an
S - 6
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amount equal to the sum of all amounts distributed in respect of principal
on the Mortgage Certificates during the Collection Period ending on such
Distribution Date. The "Collection Period" with respect to each
Distribution Date is the period commencing on the day after the previous
Distribution Date (or, in the case of the first Collection Period, on April
29, 1996) and ending on such Distribution Date.
Interest Distributions on the Class IO Certificates. The Interest Accrual
Amount for the Class IO Certificates on each Distribution Date will equal
the product of (X) a fraction the numerator of which is the number of days
elapsed in the related Interest Accrual Period and the denominator of which
is 360 and (Y) the Class IO Pass-Through Rate for such Distribution Date
and (Z) the Mortgage Certificate Balance as of the beginning of such
Interest Accrual Period, subject to reduction in respect of Deferred
Interest and Prepayment Interest Shortfalls.
During each Interest Accrual Period the "Class IO Pass-Through Rate" will
be equal to the excess, if any, of (X) the Effective Quarterly Mortgage
Certificate Pass-Through Rate over (Y) the Class A-1 Pass-Through Rate for
such Interest Accrual Period. The "Effective Quarterly Mortgage Certificate
Pass-Through Rate" for each Interest Accrual Period will be equal to the
product of (x) the weighted average of the Weighted Average Mortgage
Certificate Pass-Through Rates for each of the Underlying Series
Distribution Dates that occurs during the Collection Period related to such
Interest Accrual Period (weighted on the basis of the Mortgage Certificate
Balance for each such Underlying Series Distribution Date) (minus 0.10% on
any Distribution Date on which an Extension Premium is payable to MBIA as
described below under "The Policy"), (y) the Mortgage Certificate Factor
and (z) a fraction, the numerator of which is 90 and the denominator of
which is the actual number of days elapsed during such Interest Accrual
Period. The "Weighted Average Mortgage Certificate Pass-Through Rate" with
respect to any Underlying Series Distribution Date will be equal to the
weighted average of the pass-through rates of the Mortgage Certificates
applicable to such Underlying Series Distribution Date, weighted on the
basis of the outstanding principal balances thereof prior to distributions
on such Underlying Series Distribution Date. The Weighted Average Mortgage
Certificate Pass-Through Rate with respect to the Underlying Series
Distribution Date in April 1996 was approximately 7.3%. The "Mortgage
Certificate Factor" for each Interest Accrual Period will be equal to a
fraction, the numerator of
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which is the average of the Mortgage Certificate Balances for each
Underlying Series Distribution Date in the related Collection Period and
the denominator of which is the Mortgage Certificate Balance as of the
first Underlying Series Distribution Date occurring in such Collection
Period (without giving effect to distributions on the Mortgage Certificates
on such date). See "Description of the Certificates--Distributions."
The Policy
The Depositor will obtain in the name of the Trustee a financial guaranty
insurance policy (the "Policy") from MBIA pursuant to which MBIA will
irrevocably and unconditionally guarantee payment with respect to each
Underlying Series Distribution Date to the Trustee for the benefit of the
Class A-1 Certificateholders (i) the sum of (X) the excess of the aggregate
amount due in respect of current interest on the Mortgage Certificates on
such Underlying Series Distribution Date over the amount actually
distributed in respect of current interest on the Mortgage Certificates on
such Underlying Series Distribution Date and (Y) the amount, if any, of the
excess of the Principal Balance of the Class A-1 Certificates (reduced by
principal previously received on the Mortgage Certificates or paid by MBIA
during the Collection Period during which such Underlying Series
Distribution Date occurs over the Aggregate Mortgage Certificate Principal
Balance (as defined herein) for such Underlying Series Distribution Date
(after giving effect to principal balance reductions with respect to the
Mortgage Certificates on such Distribution Date) and (ii) any Preference
Amount relating to the amounts described in clause (i) above, as defined
herein under the heading "Description of the Certificates--The Policy." See
"Description of the Certificates--Distributions--Interest Distributions"
and "--Principal Distributions."
MBIA will be entitled to be reimbursed for the interest portion of any
Guaranty Payment only from any future collections on the Mortgage
Certificates in respect of overdue interest. MBIA will not be entitled to
reimbursement in respect of the principal portion of any Guaranty Payment.
On the Closing Date, MBIA will be paid a one-time premium in connection
with its issuance of the Policy. However, if the Auction (as described
below) does not result in the sale of the Mortgage Certificates and the
retirement of the Class A-1 Certificates on April 28, 1999, MBIA will be
entitled to receive, with respect to each following Distribution Date, the
Extension Premium (as defined herein), payable quarterly with respect to
the Policy. The Extension Premium will be
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paid from Interest Available Funds prior to the payment of interest in
respect of the Class A-1 Certificates and may therefore increase the
likelihood of the occurrence of Interest Shortfall Amounts.
THE POLICY IS INTENDED TO ADDRESS ONLY CREDIT RISK WITH RESPECT TO THE
MORTGAGE CERTIFICATES. NO GUARANTY PAYMENT WILL BE MADE IN RESPECT OF ANY
SHORTFALL IN INTEREST AVAILABLE FUNDS DUE TO THE FACTORS DISCUSSED BELOW
UNDER "RISK FACTORS--BASIS RISK" AND "YIELD AND PREPAYMENT CONSIDERATIONS--
BASIS RISK; LIBOR."
Reserve Fund
On the Closing Date, the Depositor will deposit or cause to be deposited
into an account (the "Reserve Fund") maintained by the Certificate
Administrator the Class IO and Class R Certificates. All distributions on
the Class IO and Class R Certificates will be made to the Certificate
Administrator for deposit into the Reserve Fund. Amounts on deposit in the
Reserve Fund from time to time will be available on each Distribution Date
to be paid to holders of the Class A-1 Certificates to the extent that the
sum of (a) distributions on account of current interest received on the
Mortgage Certificates in the related Collection Period and (b) payments
made by MBIA under the Policy in respect of current interest on the
Mortgage Certificates is insufficient to pay the Optimal Interest Amount of
the Class A-1 Certificates for such date together with any overdue
interest. No assurance can be given that amounts on deposit in the Reserve
Fund from time to time will, together with the balance of Interest
Available Funds on any Distribution Date, be sufficient to allow the
distribution of the full Optimal Interest Amount with respect to the Class
A-1 Certificates on any such Distribution Date or on any future
Distribution Dates. The Reserve Fund will be an asset of the Trust Fund,
but will not be an asset of the REMIC. See "Description of the
Certificates--Reserve Fund" herein.
The Yield Support
Agreement
On the Closing Date, the Trustee will enter into a yield support agreement
(the "Yield Support Agreement") with Norwest Corporation, a Delaware
corporation and the parent of the Certificate Administrator ("Norwest
Corporation" and, in such capacity, the "Yield Support Counterparty").
Pursuant to the terms of the Yield Support Agreement, in the event that
LIBOR on any Reset Date (determined as described herein under "Description
of the Certificates--Determination of LIBOR") exceeds 6.770% (which rate is
equal to the approximate level of LIBOR as expected to be set with respect
to the first Interest
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Accrual Period plus 1.27%) (the "Strike Rate"), the Yield Support
Counterparty will be obligated to pay to the Certificate Administrator, for
the benefit of the holders of the Class A-1 Certificates, on the
Distribution Date related to the Interest Accrual Period following such
Reset Date, an amount equal to one-fourth of the product of (x) the
difference between LIBOR at such Reset Date (determined as described above)
and the Strike Rate and (y) the Principal Balance of the Class A-1
Certificates outstanding prior to distributions on such Distribution Date.
Amounts paid by the Yield Support Counterparty on any Distribution Date
will be paid to the Certificate Administrator for deposit into the Reserve
Fund. No assurance can be given that amounts paid by the Yield Support
Counterparty on any Distribution Date will, together with the balance of
the Interest Available Funds for such Distribution Date, be sufficient to
allow full distributions in respect of interest on the Class A-1
Certificates on such Distribution Date or on any future Distribution Dates.
The Yield Support Agreement will terminate upon the reduction of the
Principal Balance of the Class A-1 Certificates to zero. The Yield Support
Agreement may also be terminated by the Trustee under the circumstances
described herein under "Description of the Certificates--The Yield Support
Agreement--Termination."
Mandatory Auction
Prior to April 28, 1999, the Trustee will cause the Certificate
Administrator to hold auctions (collectively, an "Auction") for the sale,
on April 28, 1999, of (i) the Mortgage Certificates (the "Fixed Rate
Certificates") representing interests in Fixed Rate Mortgage Loans (as
defined below) and (ii) the Mortgage Certificates (the "ARM Certificates")
representing interests in Adjustable Rate Mortgage Loans (as defined
below), in each case following the procedures outlined herein under the
heading "Description of the Certificates--Mandatory Auction." If the sum of
the highest bids obtained for the Fixed Rate Certificates and ARM
Certificates, the amount on deposit in the Reserve Fund and any amount
payable pursuant to the Price Maintenance Agreement is at least equal to
the Class A-1 Retirement Amount (as defined herein), the Trustee will sell
the Fixed Rate and ARM Certificates to the highest bidder and pay the Class
A-1 Retirement Amount to the Class A-1 Certificates on April 28, 1999. The
excess of the proceeds of any such sale over the Class A-1 Retirement
Amount will be distributed to the holder of the Class R Certificate. If no
such sale occurs, the Trustee will continue to hold the Mortgage
Certificates and the Trust Fund will continue to operate
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pursuant to the Pooling Agreement. The auction procedure will be repeated
with respect to each succeeding Distribution Date until a sufficiently high
bid is obtained. Any Distribution Date with respect to which an Auction is
held is referred to herein as an "Auction Date."
If an Auction does not result in the sale of the Mortgage Certificates and
the retirement of the Class A-1 Certificates on April 28, 1999, MBIA will
be entitled to the payment of the Extension Premium. See "--The Policy"
above and "Description of the Certificates--The Policy" herein.
The Price Maintenance
Agreement
On the Closing Date, the Trustee will enter into a price maintenance
agreement (the "Price Maintenance Agreement") with Norwest Corporation.
If the aggregate bid price for the Mortgage Certificates at an Auction,
together with amounts on deposit in the Reserve Fund, is less than the
Class A-1 Retirement Amount, the Price Maintenance Agreement will require
Norwest Corporation to pay to the Trustee the Price Maintenance Payment.
Subject to certain qualifications as set forth under "Description of the
Certificates--The Price Maintenance Agreement" herein, the "Price
Maintenance Payment" with respect to any Auction Date, will be equal to the
excess, if any, of the then outstanding principal balance of the Fixed Rate
Certificates together with accrued and unpaid interest thereon over the sum
of the highest bid price for the Fixed Rate Certificates and the remaining
balance in the Reserve Fund (net of (i) the excess, if any, of the then
outstanding principal balance of the ARM Certificates together with accrued
and unpaid interest thereon over the highest bid price for the ARM
Certificates) and (ii) amounts withdrawn from the Reserve Fund on the
related Distribution Date in respect of an Optimal Interest Amount of the
Class A-1 Certificates as described above under "--Reserve Fund,"). In lieu
of making the Price Maintenance Payment, Norwest Corporation shall have the
option of purchasing the Fixed Rate Certificates at a price equal to the
sum of the highest bid for the Fixed Rate Certificates and the amount of
the Price Maintenance Payment (the "Price Maintenance Purchase Payment").
Optional Repurchase of the
Mortgage Certificates
The beneficial owner of the Class IO Certificates will have the option to
purchase the Mortgage Certificates from the Trust Fund on any Distribution
Date on which the Mortgage Certificate Balance is equal to 5% or less of
the Mortgage Certificate Balance as of the Cut-off Date. See "Description
of the Certificates--Optional Purchase of the Mortgage Certificates"
herein.
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Ratings
It is a condition of the issuance of the Certificates that the Class A-1
Certificates be rated "Aaa" by Moody's Investors Service, Inc. ("Moody's")
and "AAAr" by Standard & Poor's Ratings Services ("S&P" and, collectively
with Moody's, the "Rating Agencies").
The ratings of Moody's and S&P on mortgage securities address the
likelihood of the receipt by the holders thereof of all distributions of
principal and interest to which such holders are entitled. Such ratings do
not address the likelihood of payment of interest to the Class A-1
Certificates in excess of the Effective Quarterly Mortgage Certificate
Pass-Through Rate. There is no assurance that such ratings will continue
for any period of time or that they will not be revised or withdrawn
entirely by such rating agency if, in its judgment, circumstances so
warrant. A revision or withdrawal of such ratings may have an adverse
effect on the market price of the Class A-1 Certificates. A security rating
is not a recommendation to buy, sell or hold securities.
Neither the ratings of S&P nor the ratings of Moody's represent any
assessment of the Mortgage Loan Servicers' ability to repurchase any
Convertible Mortgage Loans that are converted to fixed Mortgage Interest
Rates; S&P has so indicated by appending "r" to its ratings of the Class A-
1 Certificates.
The Depositor has not requested a rating on the Class A-1 Certificates from
any other rating agency, although data with respect to the Mortgage Loans
and Mortgage Certificates may have been provided to other agencies solely
for their informational purposes. There can be no assurance that if a
rating is assigned to the Class A-1 Certificates by any other rating
agency, such rating will be as high as that assigned by Moody's and S&P.
See "Ratings."
Mortgage Certificates
The assets of the REMIC will consist primarily of 11 classes (or a portion
of such classes) of senior mortgage pass-through certificates and two
classes (or portions of classes) of subordinated mortgage pass-through
certificates (collectively, the "Mortgage Certificates"), each of which is
a part of one of 11 separate series of mortgage pass-through certificates
sold by the Resolution Trust Corporation ("RTC") (each an "Underlying
Series"), identified in the following table.
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<PAGE>
UNDERLYING SERIES
SERIES DESIGNATION CLASS OF MORTGAGE CERTIFICATES
- -------------------- ------------------------------
Series 1991-5.... A-1
Series 1991-15... A-3
Series 1992-9.... B-4
Series 1992-10... A-1
Series 1992-11... A-1C
Series 1992-12... A-2D
Series 1992-14... A-3
Series 1992-15... A-2C
Series 1992-16... A-2C
Series 1992-18P.. A-3
Series 1993-3.... A-2B
Series 1993-3.... A-2C
Series 1993-3.... B-7
Each of the Mortgage Certificates evidences an interest in a mortgage pool
(each, an "Underlying Mortgage Pool") previously formed by the RTC.
Payments on each Class of Mortgage Certificates will be made on the 25th
day of each month (or if such day is not a business day, the succeeding
business day) (each, an "Underlying Series Distribution Date") primarily
from amounts received in respect of the mortgage loans that constitute the
corpus of the related Underlying Mortgage Pool (in the aggregate, the
"Mortgage Loans"). Such amounts, together, with any payments under the
Yield Support Agreement, payments from the Reserve Fund and payments under
the terms of the Policy, are the sole source of funds for payments on the
Class A-1 Certificates. As of the Underlying Series Distribution Date
occurring in April 1996, after giving effect to distributions and principal
balance reductions on such date, the Mortgage Certificates had
approximately the characteristics set forth under "The Mortgage
Certificates."
The Mortgage Loans
The Mortgage Loans are contained in 12 separate pools of fixed or
adjustable interest rate, conventional, residential first mortgage loans
having approximately the characteristics set forth in the table entitled
"Selected Mortgage Loan Data" under "Description of the Mortgage Loans."
The interest rates on the Mortgage Loans related to five Mortgage
Certificates (with an aggregate principal balance as of the Cut-off Date of
$466,050,928) (the "Adjustable Rate
S - 13
<PAGE>
Mortgage Loans") are subject to adjustment periodically (as specified in
the related mortgage notes) to a rate equal to the sum (subject to
rounding) of (i) a specified index and (ii) an individual gross margin,
subject to certain limitations. With respect to the Mortgage Loans related
to one of the Mortgage Certificates (with an aggregate principal balance as
of the Cut-off Date of $35,951,510), the index used is the monthly weighted
average cost of funds for member institutions of the Eleventh District of
the Federal Home Loan Bank System, as published by the Federal Home Loan
Bank of San Francisco ("COFI"). Such Mortgage Loans are referred to herein
as "COFI Mortgage Loans." With respect to the Mortgage Loans related to
four of the Mortgage Certificates (with an aggregate principal balance as
of the Cut-off Date of $430,099,418), the index generally used is the
weekly average yield on U.S. Treasury securities adjusted to a constant
maturity ("CMT") of one year, as published by the Federal Reserve Board in
Statistical Release H.15 (519), or a comparable release. Some of the
Mortgage Loans use a CMT yield of two, three or five years or the weekly
auction average (investment) rate on U.S. Treasury Bills with a six-month
maturity ("CBE"). Such Mortgage Loans using CMT or CBE are referred to
herein as "CMT Mortgage Loans." The Mortgage Loans related to the remaining
eight Mortgage Certificates (with an aggregate principal balance as of the
Cut-off Date of $745,067,695) have fixed interest rates. Such Mortgage
Loans having fixed interest rates are referred to herein as "Fixed Rate
Mortgage Loans."
The Adjustable Rate Mortgage Loans are subject to overall maximum interest
rates. Some of the Adjustable Rate Mortgage Loans are also subject to a
minimum interest rate. Some of the Adjustable Rate Mortgage Loans are
subject to negative amortization.
Some of the Adjustable Rate Mortgage Loans have mortgage interest rates
that may be converted to fixed interest rates at the option of the
mortgagor. Upon conversion to a fixed rate, such Mortgage Loans generally
are required to be purchased by the servicer of the Underlying Mortgage
Pool. See "Description of the Mortgage Loans" and "Yield and Prepayment
Considerations."
The Underlying Disclosure Documents do not provide information sufficient
to determine the percentage distribution of Mortgage Loans exhibiting the
various characteristics described herein.
Optional Repurchase of Mortgage Loans. The Underlying
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<PAGE>
Mortgage Pool with respect to each Mortgage Certificate (other than the
Mortgage Pool related to the Series 1992-18P, Class A-3 Certificates) is
generally subject to special termination (a "Special Termination") at such
time as the aggregate outstanding principal balance of all related classes
of Certificates of the related Underlying Series is less than 25% of the
initial related aggregate principal balance thereof. See "The Mortgage
Certificates--Special Termination" herein. In addition, the Mortgage Loan
Servicer, any holder of a related residual certificate or the owner of the
assets pledged to any Underlying Series Reserve Fund (as defined herein),
has the option to repurchase the Mortgage Loans from the related Underlying
Mortgage Pool at such time as the aggregate scheduled principal balance
thereof is reduced to less than 10% of the aggregate principal balance
thereof as of the related Underlying Series Cut-off Date. See "The Mortgage
Certificates--Optional Termination" herein. Any such repurchase may
accelerate the rate at which principal payments are made on the Class A-1
Certificates.
Certain Prepayment and Yield
Considerations
No investment should be made in the Class A-1 Certificates unless an
investor has considered carefully the associated risks of investing in such
Class A-1 Certificates as discussed below and under "Risk Factors" and
"Yield and Prepayment Considerations" herein.
Prepayments and Excess Cash. The rate of principal payments on the Class A-
1 Certificates will be affected by the rate of principal payments on the
Mortgage Loans (including, for this purpose, prepayments, which may include
amounts received by virtue of condemnation, insurance or foreclosure) and
by the application of Excess Cash (as defined herein) to the principal
balance of the Mortgage Certificates. If a Class A-1 Certificate is
purchased at a discount from its initial principal balance by a purchaser
that calculates its anticipated yield to maturity based on an assumed rate
of payment of principal that is faster than that actually experienced on
the Mortgage Loans, other things being equal, the actual yield to maturity
will be lower than that so calculated. Furthermore, if a Certificate is
purchased at a premium by a purchaser that calculates its anticipated yield
to maturity based on an assumed rate of payment of principal that is slower
than that actually experienced on the Mortgage Loans, other things being
equal, the actual yield to maturity will be lower than that so calculated.
Timing of Payments. The timing and amount of payments,
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<PAGE>
including prepayments, on the Mortgage Loans may significantly affect an
investor's yield. In general, the earlier a prepayment of principal on the
Mortgage Loans, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated
by the investor during the period immediately following the issuance of the
Class A-1 Certificates will not be offset by a subsequent like reduction
(or increase) in the rate of principal prepayments.
Basis Risk; LIBOR. The interest rate payable to the Holders of the Class A-
1 Certificates is based on LIBOR. However, the Mortgage Certificates bear
interest at either adjustable rates based on COFI and CMT, at fixed rates,
or, in the case of one Mortgage Certificate, at a rate equal to the
weighted average of the net mortgage interest rates of the related Fixed
Rate Mortgage Loans. LIBOR, COFI and CMT may respond to different economic
and market factors, and there is no necessary correspondence among them.
There can be no assurance that the weighted average of the fixed and
adjustable rates at which interest accrues on the Mortgage Certificates
will equal or exceed the rate at which interest accrues on the Class A-1
Certificates.
In addition, payments on the Class A-1 Certificates are made quarterly
while payments on the Mortgage Certificates are made monthly. Therefore,
the Mortgage Certificate Balance will decline monthly during each Interest
Accrual Period, while the Principal Balance of the Class A-1 Certificates
remains constant throughout each Interest Accrual Period. Therefore, even
if the levels of LIBOR, COFI and CMT are such that the weighted average of
the fixed and adjustable rates at which interest accrues on the Mortgage
Certificates is equal to or greater than the interest rate payable on the
Class A-1 Certificates, the amount of interest paid on the Mortgage
Certificates (together with the interest portion of any Guaranty Payments
made by MBIA under the Policy) during any Collection Period may still not
be sufficient to pay the full Optimal Interest Amount of the Class A-1
Certificates. NO ASSURANCE CAN BE GIVEN THAT AMOUNTS ON DEPOSIT IN THE
RESERVE FUND FROM TIME TO TIME AND PAYMENTS UNDER THE YIELD SUPPORT
AGREEMENT WILL BE SUFFICIENT TO MAKE UP ANY AMOUNT BY WHICH THE INTEREST
BORNE BY THE MORTGAGE CERTIFICATES (WHETHER PAID ON THE MORTGAGE
CERTIFICATES OR PAID AS THE INTEREST PORTION OF A GUARANTY PAYMENT) IS LESS
THAN THE OPTIMAL INTEREST AMOUNT OF THE CLASS A-1 CERTIFICATES. THE POLICY,
WHICH IS ONLY INTENDED TO COVER CREDIT RISK WITH RESPECT TO THE
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<PAGE>
MORTGAGE CERTIFICATES, WILL NOT COVER ANY SUCH DEFICIENCY WITH RESPECT TO
THE CLASS A-1 CERTIFICATES.
Auction Risk. There can be no assurance that the Trustee will, on April 28,
1999 or on any date thereafter, be able to sell the Mortgage Certificates
for a price sufficient (together with amounts on deposit in the Reserve
Fund and the amount payable under the Price Maintenance Agreement, if any)
to allow the Class A-1 Certificates to be paid in full. Therefore, there
can be no assurance that the Class A-1 Certificates will be retired prior
to their Final Scheduled Distribution Date.
See "Risk Factors" and "Yield and Prepayment Considerations" herein for a
fuller discussion of the factors affecting the yield to maturity of the
Class A-1 Certificates.
Liquidity
There is currently no secondary market for the Class A-1 Certificates and
there can be no assurance that a secondary market will develop or, if it
does develop, that it will provide Certificateholders with liquidity of
investment at any particular time or for the life of the Class A-1
Certificates. There is no assurance that any such market, if established,
will continue. Each Certificateholder will receive monthly reports
pertaining to the Class A-1 Certificates and the Mortgage Certificates.
There are a limited number of sources which provide certain information
about mortgage-backed securities in the secondary market; however, there
can be no assurance that any of these sources will provide information
about the Class A-1 Certificates or the Mortgage Certificates. Investors
should consider the effect of limited information on the liquidity of the
Class A-1 Certificates.
Federal Income Tax Status
An election will be made to treat the portion of the Trust Fund consisting
of the Mortgage Certificates as a REMIC for federal income tax purposes.
The payments on the Class A-1 Certificates which are derived from the
Mortgage Certificates, and the Class IO Certificates, will be designated as
regular interests in the REMIC, and the Class R Certificate will be
designated as the residual interest in the REMIC.
An investor in the Class A-1 Certificates will be treated for federal
income tax purposes as purchasing a REMIC regular interest and a
contractual right to receive amounts from the Reserve Fund. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as
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<PAGE>
amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as
amended (the "Code"), or a governmental plan 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"), should
carefully review with its legal advisors whether the purchase or holding of
Class A-1 Certificates could give rise to a transaction prohibited or not
otherwise permissible under ERISA, the Code or Similar Law. See "ERISA
Considerations" in this Prospectus Supplement and in the Prospectus.
Legal Investment
The Class A-1 Certificates will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As such, the Class A-1 Certificates are legal investments for
certain entities to the extent provided in SMMEA. However, there are
regulatory requirements and considerations applicable to regulated
financial institutions and restrictions on the ability of such institutions
to invest in certain types of mortgage related securities. Prospective
purchasers of the Class A-1 Certificates 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
Class A-1 Certificates. See "Legal Investment Considerations" in this
Prospectus Supplement and "Legal Investment" in the Prospectus.
S - 18
<PAGE>
RISK FACTORS
Prospective investors should consider the following factors in
connection with a purchase of the Class A-1 Certificates.
1. Troubled Originators. The Mortgage Loans in each Underlying
Mortgage Pool were originated or purchased by one or more depository
institutions (each a "Depository Institution") for which the Resolution Trust
Corporation ("RTC") was appointed as conservator or receiver or from which
the RTC acquired the Mortgage Loans. Each of such Depository Institutions was
either insolvent and in the process of liquidation or in serious financial
difficulty and being operated under a conservatorship with a significant
likelihood of subsequently being placed in receivership and liquidated. It is
possible that the financial difficulties experienced by certain Depository
Institutions may have adversely affected either or both of (i) the standards
and procedures by which the Mortgage Loans were originated by such Depository
Institutions or, if purchased from another originator, the standards and
procedures by which the Depository Institutions selected such Mortgage Loans
for purchase and reviewed them prior to purchase and (ii) the manner in which
such Mortgage Loans were serviced prior to assumption of servicing
responsibilities by the servicer of the related Mortgage Certificates. The
RTC, usually acting in its capacity as conservator or receiver of a
Depository Institution, made certain representations and warranties regarding
the Mortgage Loans and is obligated to repurchase or replace or provide
indemnification to the Trustee and the holders of the related Underlying
Series with respect to Mortgage Loans as to which there is a breach of such
representations and warranties. The RTC, acting in its corporate capacity
guaranteed the obligations incurred in connection with such representations
and warranties. There can be no assurance, however, that such remedy will
apply to all problems that may arise with respect to a Mortgage Loan by
reason of the financial difficulties experienced by the related Depository
Institution. If there are a large number of Mortgage Loans in any given
Underlying Mortgage Pool which the RTC is obligated to replace or repurchase,
the average life and yield on the related Mortgage Certificates could be
adversely affected.
2. Limited Information; Incomplete Mortgage Files. In preparing
the information regarding the Mortgage Certificates and the Mortgage Loans
contained in this Prospectus Supplement, the Depositor has relied upon
information provided by the RTC in the Underlying Disclosure Documents and on
information as to each such Underlying Series subsequently provided by the
various servicers of the Mortgage Certificates. The Depositor is unable to
verify such information and there can be no assurance of its accuracy or
completeness or the accuracy or completeness of the information presented
herein which is derived from information provided by the RTC and such
servicers. Information available to the RTC and disclosed in the Prospectus
Supplement with respect to an Underlying Mortgage Pool generally was derived
solely from the records of one or more Depository Institutions without
independent review. In many cases, the information available to the RTC
concerning the Depository Institutions did not permit the RTC to determine
fully the origination, credit appraisal and underwriting practices of such
institution or the manner of servicing of the Mortgage Loans. In many
Depository Institutions the mortgage files were incomplete, and did not
contain original notes, appraisal information, or information regarding
whether the mortgaged properties were owner-occupied, whether there had been
modifications, waivers or amendments with respect to such Mortgage Loans or
whether such Mortgage Loans otherwise had terms inconsistent with information
used by the RTC to prepare related disclosure (which disclosure has been
relied on by the Depositor, in preparing this Prospectus Supplement). In
particular, available information did not make it feasible for the RTC to
determine what proportion of the Mortgage Loans were originated using notes
having terms different from those generally described in the Underlying
Disclosure Documents. Thus, investors should be aware that no exact
information can be given as to the limitations on interest payments or the
potential amount of negative amortization on the Mortgage Loans.
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<PAGE>
In addition, the Depositor has no information as to whether the RTC
or any Mortgage Loan Servicer or any Mortgage Loan Trustee has complied with
its obligations under any Underlying Pooling Agreement.
3. Basis Risk. The interest rate payable to the holders of the
Class A-1 Certificates is based on LIBOR. However, the underlying Mortgage
Certificates bear interest either at adjustable rates based on COFI and CMT
(the "Indices"), calculated at various frequencies, at fixed rates or, in the
case of one Mortgage Certificate, at a rate equal to the weighted average of
the net mortgage interest rates of the related Fixed Rate Mortgage Loans.
LIBOR and the Indices respond to different economic and market factors, and
there is not necessarily a correlation between them. Thus, it is possible,
for example, that LIBOR may rise during periods in which the Indices are
stable or are falling or that, even if both LIBOR and the Indices rise during
the same period, LIBOR may rise much more sharply than the Indices. There
can be no assurance that the weighted average of the fixed and adjustable
rates at which interest accrues on the Mortgage Certificates will equal or
exceed the rate at which interest accrues on the Class A-1 Certificates.
In addition, payments on the Class A-1 Certificates are made
quarterly while payments on the Mortgage Certificates are made monthly.
Therefore, the Mortgage Certificate Balance will decline monthly during each
Interest Accrual Period, while the Principal Balance of the Class A-1
Certificates remains constant throughout each Interest Accrual Period.
Therefore, even if the level of LIBOR is such that the weighted average of
the interest rates payable on the Mortgage Certificates is equal to or
greater than the interest rate payable on the Class A-1 Certificates, the
amount of interest paid on the Mortgage Certificates (together with the
interest portion of any Guaranty Payments made by MBIA under the Policy)
during any Collection Period may still not be sufficient to pay the full
Optimal Interest Amount of the Class A-1 Certificates. NO ASSURANCE CAN BE
GIVEN THAT AMOUNTS ON DEPOSIT IN THE RESERVE FUND FROM TIME TO TIME AND
PAYMENTS UNDER THE YIELD SUPPORT AGREEMENT WILL BE SUFFICIENT TO MAKE UP ANY
AMOUNT BY WHICH THE INTEREST BORNE BY THE MORTGAGE CERTIFICATES (WHETHER PAID
ON THE MORTGAGE CERTIFICATES OR PAID AS THE INTEREST PORTION OF A GUARANTY
PAYMENT) IS LESS THAN THE OPTIMAL INTEREST AMOUNT OF THE CLASS A-1
CERTIFICATES ON SUCH DISTRIBUTION DATE OR ANY FUTURE DISTRIBUTION DATES. THE
POLICY, WHICH IS ONLY INTENDED TO COVER CREDIT RISK WITH RESPECT TO THE
MORTGAGE CERTIFICATES, WILL NOT COVER ANY SUCH DEFICIENCY WITH RESPECT TO THE
CLASS A-1 CERTIFICATES.
4. Auction Risk. There can be no assurance that the Trustee will,
on April 28, 1999 or on any Distribution Date thereafter, be able to sell the
Mortgage Certificates for a price sufficient (together with amounts on
deposit in the Reserve Fund and funds payable under the Price Maintenance
Agreement) to allow the Class A-1 Certificates to be paid in full on or prior
to their Final Scheduled Distribution Date. The Price Maintenance Agreement
will only address decreases in the market value of the Fixed Rate
Certificates that are not caused by shortfalls or losses allocated to, or any
downgrade of the rating of, the Mortgage Certificates. Furthermore, while
payments under the Policy are designed to prevent any interruption in
cash flow to the Class A-1 Certificates resulting from any shortfalls or
losses allocated to the Mortgage Certificates, the Policy will not offset any
diminution in the market value of the Mortgage Certificates due to any such
shortfalls or losses or due to any downgrade in the rating of the Mortgage
Certificates.
5. Limited Liquidity. There is currently no secondary market for
the Class A-1 Certificates and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment at any particular time or for
the life of the Class A-1 Certificates. CS First Boston intends to act as a
market maker in the Class A-1 Certificates, subject to applicable provisions
of federal and state securities laws and other regulatory requirements, but
is under no obligation to do so and any such market making may be
discontinued at
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<PAGE>
any time. There can be no assurance that any investor will be able to sell a
Class A-1 Certificate at a price which is equal to or greater than the price
at which such Certificate was purchased.
6. Prepayment and Yield Considerations. The prepayment experience
on the Mortgage Loans, and the rate of realized losses thereon, will affect
the average life of the Class A-1 Certificates. Prepayments on the Mortgage
Loans may be influenced by a variety of economic, geographic, social and
other factors, including the difference between the interest rates on the
Mortgage Loans and prevailing mortgage interest rates. Other factors
affecting prepayment of Mortgage Loans include changes in housing needs, job
transfers, unemployment and servicing decisions. See "Yield and Prepayment
Considerations." In addition, the yield on the Class A-1 Certificates will be
sensitive to, among other things, the level of LIBOR.
7. Calculation of Mortgage Interest Rate. As described herein,
the Adjustable Rate Mortgage Loans generally provide for periodic adjustments
of the mortgage interest rate and the Monthly Payment. The RTC disclosed in
the Underlying Disclosure Documents that, as of the dates of issuance of the
Mortgage Certificates, with respect to certain of such Mortgage Loans the
interest component of the Monthly Payments had been incorrectly calculated
and was lower or higher than it would be if it had been correctly calculated.
The RTC disclosed in the Underlying Disclosure Documents that, to the extent
the RTC determined, based upon limited review, that a Mortgage Loan had been
the subject of incorrect calculations, it would cause such errors to be
corrected. The RTC made a representation in each of the Underlying Pooling
Agreements to the effect that if any such incorrect calculation caused a
Monthly Payment to be greater than it should be, such Monthly Payment would
be corrected by the third Monthly Payment due after the date of issuance of
the related Mortgage Certificate or as promptly thereafter as possible; if
such incorrect calculation caused a Monthly Payment to be less that it should
be, such Monthly Payment would be corrected (to the extent permitted by law)
by the next related adjustment date occurring no more than four months after
the Underlying Series Cut-off Date related to such Mortgage Certificate. The
Depositor has no information as to the amount of Adjustable Rate Mortgage
Loans that have been the subject of incorrect calculations or whether the RTC
complied with such representation and warranty.
8. Co-op Loans. Many of the Underlying Mortgage Pools contain
Mortgage Loans made in connection with a purchase or refinancing of
cooperative apartments. Such loans ("Co-op Loans") are not secured by liens
on real estate. The "owner" of a cooperative apartment does not own the real
estate constituting the apartment, but owns shares of stock in a corporation
which holds title to the building in which the apartment is located, and by
virtue of owning such stock is entitled to a proprietary lease to occupy the
specific apartment (the "Lease"). Thus, a Co-op Loan is a personal loan
secured by a lien on the shares and assignment of the Lease. If the borrower
defaults on a Co-op Loan, the lender's remedies are similar to the remedies
which apply to a foreclosure of a mortgage or deed of trust, in that the
lender can foreclose upon the loan and assume "ownership" of the apartment.
There are certain risks which arise as a result of the cooperative
form of ownership which differentiate Co-op Loans from other types of
Mortgage Loans. For example, the power of the board of directors of most
cooperative corporations to reject a proposed purchaser of a unit owner's
shares (and prevent the sale of an apartment) for any reason (other than
reasons based upon unlawful discrimination), or for no reason, significantly
reduces the universe of potential purchasers in the event of a foreclosure.
Moreover, cooperative apartment owners run a special risk in buildings where
the "sponsor" (i.e., the owner of the unsold shares in the corporation) holds
a significant number of unsold apartments that the sponsor may go into
default on a loan which is secured by a mortgage on the building. In such
event, the unit owners would be forced by special assessment to make the
payments on the delinquent loan or risk losing their apartments in a
foreclosure proceeding brought by the holder of the mortgage on the building.
Not only would the value attributable to the right to occupy a
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particular apartment be adversely affected by the special assessment, but the
foreclosure of a mortgage on the building in which the apartment is located
could result in a total loss of the shareholder's equity in the building (and
a corresponding loss of the lender's security for its Co-op Loan).
9. Geographic Concentration. Each of the Underlying Mortgage
Pools has one or more geographic concentrations (each, a "Concentration") of
Mortgage Loans related to mortgaged properties which are located in
particular states. In general, such Concentrations increase the exposure of
the Mortgage Pool to any adverse economic, regulatory or other developments
that may occur in that location. California as well as certain other regions
have recently experienced natural disasters, including earthquakes and
flooding, which may adversely affect property values. The Depositor has made
no effort to determine whether the mortgaged property relating to any
Mortgage Loan has been affected by any natural disaster. If the value of
mortgaged properties in such geographic areas has declined since the
origination of the related Mortgage Loans, liquidations of such Mortgage
Loans would be more likely to produce realized losses. Furthermore, a general
deterioration in economic conditions in a geographic area may adversely
affect the ability of borrowers in such area to make payments on their
Mortgage Loans.
The following table sets forth the Concentrations by state for each
of the Underlying Mortgage Pools that exceed 10% of the original aggregate
principal balance thereof as of the Underlying Series Cut-off Date. Such
information was derived from the Underlying Disclosure Documents and the
Depositor cannot provide any assurances as to the accuracy or completeness of
such information.
GEOGRAPHIC CONCENTRATION
(GREATER THAN 10% OF PRINCIPAL BALANCE)
<TABLE>
<CAPTION>
PERCENTAGE
AS OF
UNDERLYING
SERIES
SERIES DESIGNATION STATE CUT-OFF DATE
- ------------------ ----- ------------
<S> <C> <C>
Series 1991-5, Class A-1 Florida 33.39
California 18.60
Arizona 16.35
Washington 11.92
Series 1991-15, Class A-3 California 57.87
Arizona 27.63
Series 1992-9, Class B-4 Virginia 16.45
Pennsylvania 14.44
Series 1992-10, Class A-1 California 43.60
Florida 13.34
Texas 12.70
Series 1992-11, Class A-1C Texas 21.83
Florida 10.45
Series 1992-12, Class A-2D Florida 17.20
Michigan 15.55
Series 1992-14, Class A-3 Florida 19.98
Pennsylvania 18.57
California 15.54
Texas 12.76
Series 1992-15, Class A-2C Florida 29.04
Texas 14.73
California 12.85
Series 1992-16, Class A-2C California 98.38
Series 1992-18P, Class A-3 Texas 19.90
Series 1993-3, Class A-2B Ohio 17.19
California 12.16
Florida 10.61
Series 1993-3, Class A-2C Ohio 17.19
California 12.16
Florida 10.61
Series 1993-3, Class B-7 California 20.63
Ohio 10.11
</TABLE>
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Adjustable Rate Certificates, Series 1996-1 will include the
following three classes: the Class A-1 Certificates, the Class IO
Certificates and the Class R Certificates (collectively, the "Certificates").
Only the Class A-1 Certificates are offered hereby.
The Certificates evidence 100% of the beneficial ownership interest
in a trust fund (the "Trust Fund"), the assets of which will consist
primarily of (a) 13 classes (or portions of classes) of mortgage pass-through
certificates (the "Mortgage Certificates"), each of which is part of one of
11 series of mortgage pass-through certificates initially sold by the
Resolution Trust Corporation and acquired by the Depositor in the secondary
market, (b) a Reserve Fund, (c) a Yield Support Agreement provided by Norwest
Corporation and (d) a Price Maintenance Agreement provided by Norwest
Corporation. See "--The Reserve Fund", "--The Yield Support Agreement" and "-
-The Price Maintenance Agreement" below. The Trust Fund will be established
and the Certificates will be issued pursuant to a Pooling Trust Agreement
(the "Pooling Agreement"), dated as of May 31, 1996 among the Depositor, the
Certificate Administrator, the Trustee and Norwest Corporation, as tax
beneficial holder.
The Class A-1 Certificates will be issued as book-entry
certificates (the "Book-Entry Certificates") through the facilities of The
Depository Trust Company. See "--Book-Entry Form" below. The Class A-1
Certificates will be issued, maintained and transferred only in minimum
denominations of $1,000 initial principal balance and integral multiples of
$1,000 initial principal balance in excess thereof. The "Record Date" for
distributions on the Class A-1 Certificates is June 30, 1996, with respect to
the initial Distribution Date, and with respect to each subsequent
Distribution Date, the last day of the calendar month immediately preceding
the month in which the applicable Distribution Date occurs or, if such last
day is not a business day, the preceding business day. The undivided
percentage interest (the "Percentage Interest") represented by any Class A-1
Certificate will be equal to the percentage obtained by dividing the initial
Principal Balance of such Class A-1 Certificate by the aggregate initial
Principal Balance of all Class A-1 Certificates.
DISTRIBUTIONS
Distributions on the Certificates will be made quarterly on the
28th day of each January, April, July and October, beginning in July 1996 or,
if any such day is not a business day, the following business day (each such
day on which distributions are made, a "Distribution Date"). Each
Distribution Date as to which a Guaranty Payment is payable under the Policy
may be subject to delay in the event that the Fiscal Agent for MBIA does not
receive a timely Notice (as defined herein) with respect to such Distribution
Date sufficiently in advance of such Distribution Date for MBIA to make a
timely payment of a Guaranty Payment on such Distribution Date (any such
delayed Guaranty Payment, a "Delayed Guaranty Payment")(which may occur
without default of any party if both the Distribution Date and the Underlying
Series Distribution Date occur on the same day). In such an event, no other
party will make an advance or other payment in respect of such Delayed
Guaranty Payment. Under such circumstances, to the extent that the amount on
deposit in the Reserve Fund (net of amounts withdrawn from the Reserve Fund
on the related Distribution Date in respect of the Optimal Interest Amount of
the Class A-1 Certificates as described below under "--Reserve Fund") is not
sufficient to offset the absence of such Guaranty Payment, the Distribution
Date will be postponed by one business day to allow time for MBIA to make
such Guaranty Payment. In the event that the amount on deposit in the Reserve
Fund is sufficient to offset the absence of such Guaranty Payment, funds will
be withdrawn from the Reserve Fund and a full distribution will be made on
such Distribution Date without delay. In such event, the Delayed Guaranty
Payment will be deposited in the Reserve Fund by the Certificate
Administrator when such payment is received.
S - 23
<PAGE>
Distributions to a holder of a Class A-1 Certificate will be made
on each Distribution Date in an amount equal to such holder's Percentage
Interest multiplied by the amount, if any, to be distributed to the Class A-1
Certificates. Distributions will be made on each Distribution Date to holders
of record on the related Record Date, which, unless Definitive Certificates
are issued under the circumstances described below under "--Book Entry Form",
will be Cede & Co. as nominee for DTC.
Interest Distributions. Distributions in respect of interest on
each Class of Certificates (other than the Class R Certificates) on each
Distribution Date will be made only up to the amount of the Interest
Available Funds for such Distribution Date. The amount of interest payable
on the Class A-1 Certificates on each Distribution Date will be equal to the
sum of (x) the lesser of the Optimal Interest Amount of the Class A-1
Certificates for such Distribution Date and Interest Available Funds for such
Distribution Date and (y) the lesser of the Interest Shortfall Amount of the
Class A-1 Certificates and the excess, if any, of the Interest Available
Funds for such Distribution Date over the Optimal Interest Amount of the
Class A-1 Certificates for such Distribution Date.
The "Interest Accrual Period" with respect to each Distribution
Date is the period commencing on the 28th day of the third month preceding
the month in which such Distribution Date occurs and ending on the 27th day
of the month in which such Distribution Date occurs.
The "Optimal Interest Amount" for the Class A-1 Certificates on
each Distribution Date will equal the product of (x) a fraction, the
numerator of which is the number of days elapsed in the related Interest
Accrual Period and the denominator of which is 360, (y) the Class A-1 Pass-
Through Rate for such Interest Accrual Period and (z) the outstanding
Principal Balance thereof (prior to any adjustments thereto on such date),
subject to reduction in respect of Deferred Interest, Relief Act Shortfalls
and Prepayment Interest Shortfalls incurred with respect to the Mortgage
Loans underlying the Mortgage Certificates. During each Interest Accrual
Period, the "Class A-1 Pass-Through Rate" will be 0.23% in excess of the
London interbank offered rate quotations for three-month Eurodollar deposits
(determined as described below under "--Determination of LIBOR") ("LIBOR") on
the second day prior to the first day of such Interest Accrual Period or, if
such second day is not a business day, the preceding business day (each, a
"Reset Date") or, with respect to the initial Interest Accrual Period, on May
29, 1996. The "Interest Shortfall Amount" of the Class A-1 Certificates is
equal to the sum of the amounts for all previous Distribution Dates by which
the Optimal Interest Amount of the Class A-1 Certificates exceeded the
Interest Available Funds for such Distribution Dates (to the extent such
amounts have not been paid on subsequent Distribution Dates), together with
interest accrued thereon at the Class A-1 Pass-Through Rate in effect from
time to time.
"Interest Available Funds" with respect to any Distribution Date
will be equal to the sum of (a) all payments in respect of interest received
by the Certificate Administrator on the Mortgage Certificates during the
related Collection Period (other than any amounts in respect of overdue
interest as to which MBIA has previously made a Guaranty Payment), (b)
interest earned on amounts invested in the Certificate Account, (c) the
amount of the interest portion of any Guaranty Payments made by MBIA under
the Policy during the related Collection Period and (d) all amounts on
deposit in the Reserve Fund (including any payments made by the Yield Support
Counterparty on such Distribution Date under the Yield Support Agreement) (up
to the excess of the Optimal Interest Amount, the Interest Shortfall Amount
of the Class A-1 Certificates and any Extension Premium payable over the sum
of the amounts described in clauses (a), (b) and (c) above). Interest
Available Funds will be distributed on each Distribution Date first to pay
the Optimal Interest Amount of the Class A-1 Certificates and next to pay the
Interest Shortfall Amount of the Class A-1 Certificates. If the Auction does
not result in the sale of the Mortgage Certificates and the retirement of the
Class A-1 Certificates on April 28, 1999, MBIA will be entitled to receive,
with respect to each following Distribution Date, the Extension Premium,
payable quarterly with respect to the Policy. The Extension Premium will be
S - 24
<PAGE>
paid in reduction of Interest Available Funds prior to the payment of
interest in respect of the Class A-1 Certificates and may therefore increase
the likelihood of the occurrence of Interest Shortfall Amounts.
DUE TO THE FACTORS DISCUSSED UNDER "RISK FACTORS--BASIS RISK" AND
"YIELD AND PREPAYMENT CONSIDERATIONS--BASIS RISK; LIBOR," INTEREST AVAILABLE
FUNDS MAY NOT ALWAYS BE SUFFICIENT TO PAY THE FULL OPTIMAL INTEREST AMOUNT
WITH RESPECT TO THE CLASS A-1 CERTIFICATES ON EACH DISTRIBUTION DATE.
The Interest Accrual Amount for the Class IO Certificates on each
Distribution Date will equal (a) the product of (x) a fraction, the numerator
of which is the number of days elapsed in the related Interest Accrual Period
and the denominator of which is 360, (y) the Class IO Pass-Through Rate for
such Distribution Date and (z) the Mortgage Certificate Balance less (b) such
class's allocable share of any Prepayment Interest Shortfalls, Relief Act
Shortfalls and Deferred Interest. The Class R Certificates are not entitled
to distributions in respect of interest and, therefore, have no Interest
Accrual Amount. During each Interest Accrual Period the "Class IO Pass-
Through Rate" will be equal to the excess, if any, of (X) the Effective
Quarterly Mortgage Certificate Pass-Through Rate over (Y) the Class A-1 Pass-
Through Rate for such Interest Accrual Period. The "Effective Quarterly
Mortgage Certificate Pass-Through Rate" for each Interest Accrual Period will
be equal to (i) the product of (x) the weighted average of the Weighted
Average Mortgage Certificate Pass-Through Rates for each of the Underlying
Series Distribution Dates that occurs during the Collection Period related to
such Interest Accrual Period (weighted on the basis of the Mortgage
Certificate Balance for each such Underlying Series Distribution Date) (minus
0.10% on any Distribution Date on which an Extension Premium is payable to
MBIA), (y) the Mortgage Certificate Factor and (z) a fraction, the numerator
of which is 90 and the denominator of which is the actual number of days
elapsed during such Interest Accrual Period. The "Weighted Average Mortgage
Certificate Pass-Through Rate" with respect to any Underlying Series
Distribution Date will be equal to the weighted average of the pass-through
rates of the Mortgage Certificates applicable to such Underlying Series
Distribution Date, weighted on the basis of the outstanding principal
balances of such classes prior to distributions on such Underlying Series
Distribution Date. The Weighted Average Mortgage Certificate Pass-Through
Rate with respect to the Underlying Series Distribution Date in April 1996 is
approximately 7.3%. The "Mortgage Certificate Factor" for each Interest
Accrual Period will be equal to a fraction, the numerator of which is the
average of the Mortgage Certificate Balances for each Underlying Series
Distribution Date in the related Collection Period and the denominator of
which is the Mortgage Certificate Balance as of the first Underlying Series
Distribution Date occurring in such Collection Period (without giving effect
to distributions on the Mortgage Certificates on such date). The "Collection
Period" with respect to a Distribution Date is the period commencing on the
day after the preceding Distribution Date (or, in the case of the first
Collection Period, on April 28, 1996) and ending on such Distribution Date.
Interest on the Certificates will be calculated on the basis of
actual days elapsed in a 360-day year.
Deferred Interest allocated to the Mortgage Certificates on each
Underlying Series Distribution Date occurring during the Collection Period
related to any Distribution Date (as reported on the remittance reports
relating to such Mortgage Certificates) will be allocated between the Class
A-1 Certificates and the Class IO Certificates on the related Distribution
Date, pro rata, based on the Optimal Interest Amount of the Class A-1
Certificates and the Interest Accrual Amount of the Class IO Certificates
(before reduction for such Deferred Interest). See "Description of the
Underlying Mortgage Loans" and "The Mortgage Certificates--Distributions on
the Mortgage Certificates." The amount of Deferred Interest allocated in
reduction of the Optimal Interest Amount of the Class A-1 Certificates will
be added to the Principal Balance of such Class as of such Distribution Date.
The
S - 25
<PAGE>
Policy will not cover any such reduction in the Optimal Interest Amount of
the Class A-1 Certificates in respect of Deferred Interest.
Prepayment Interest Shortfalls allocated to the Mortgage
Certificates on each Underlying Series Distribution Date occurring during the
Collection Period related to any Distribution Date (as reported on the
remittance reports relating to such Mortgage Certificates) will be allocated
between the Class A-1 Certificates and the Class IO Certificates on the
related Distribution Date, pro rata, based on the Optimal Interest Amount of
the Class A-1 Certificates and the Interest Accrual Amount of the Class IO
Certificates (before reduction for such interest shortfall on such
Distribution Date). See "The Mortgage Certificates--Distributions on the
Mortgage Certificates" herein.
The "Principal Balance" of the Class A-1 Certificates as of any
Distribution Date will be equal to the lesser of (x) the original Principal
Balance thereof, reduced by all amounts distributed on such Class on account
of principal, and increased by the amount of Deferred Interest allocated to
the Class A-1 Certificates as described above on all Distribution Dates and
(y) the Mortgage Certificate Balance as of the preceding Distribution Date.
The "Mortgage Certificate Balance" as of any Distribution Date will be equal
to the sum of the certificate principal balances of the Mortgage Certificates
(after giving effect to all distributions and other principal balance
reductions on the Mortgage Certificates and any Deferred Interest added to
the principal balance thereof during the Collection Period ending on such
Distribution Date). Neither the Class IO Certificates nor the Class R
Certificate has any Principal Balance and, therefore, neither is entitled to
distributions in respect of principal.
Determination Of LIBOR. On each Reset Date, the Certificate
Administrator will determine LIBOR for the succeeding Interest Accrual Period
on the basis of the offered LIBOR quotations of the Reference Banks, as such
quotations are provided to the Certificate Administrator as of 11:00 a.m.
(London time) on such Reset Date. As used in this section with respect to a
Reset Date, "business day" means a day on which banks are open for dealing in
foreign currency and exchange in London and New York City; "Reference Banks"
means four leading banks engaged in transactions in Eurodollar deposits in
the International Eurocurrency market (i) with an established place of
business in London, (ii) whose quotations appear on the Reuters Screen LIBO
Page on the Rate Determination Date in question and (iii) which have been
designated as such by the Certificate Administrator and are able and willing
to provide such quotations to the Certificate Administrator on each Reset
Date; and "Reuters Screen LIBO Page" means the display designated as page
"LIBO" on the Reuters Monitor Money Rates Service (or such other page as may
replace the LIBO page on that service for the purpose of displaying London
interbank offered rate quotations or major banks). If any Reference Bank
should be removed from the Reuters Screen LIBO Page or in any other way fails
to meet the qualifications of a Reference Bank, the Certificate Administrator
may, in its sole discretion, designate an alternative Reference Bank.
On each Reset Date, LIBOR for the next Interest Accrual Period will
be established by the Certificate Administrator as follows:
i. If on any Reset Date two or more of the Reference Banks
provide such offered quotations, LIBOR for the next Interest
Accrual Period will be the arithmetic mean of such offered
quotations (rounding such arithmetic mean upwards if necessary
to the nearest whole multiple of 1/16%).
ii. If on any Reset Date only one or none of the Reference Banks
provides such offered quotations, LIBOR for the next Interest
Accrual Period will be the higher of (x) LIBOR as determined
on the previous Reset Date or (y) the Reserve Interest Rate.
The "Reserve Interest Rate" will be the rate per annum which
the Certificate Administrator determines to be either (A) the
arithmetic
S - 26
<PAGE>
mean (rounding such arithmetic mean upwards if necessary to
the nearest whole multiple of 1/16%) of the one-month
Eurodollar lending rate that New York City banks selected by
the Certificate Administrator are quoting, on the relevant
Reset Date, to the principal London offices of at least two
leading banks in the London interbank market or (B) in the
event that the Certificate Administrator can determine no such
arithmetic mean, the lowest one-month Eurodollar lending rate
that the New York City banks selected by the Certificate
Administrator are quoting on such Reset Date to leading
European banks.
iii. If on any Reset Date the Certificate Administrator is required
but is unable to determine the Reserve Interest Rate in the
manner provided in paragraph (ii) above, LIBOR for the next
Interest Accrual Period will be LIBOR as determined on the
Previous Reset Date.
The establishment of LIBOR by the Certificate Administrator and the
Certificate Administrator's subsequent calculation of the rates of interest
applicable to the Class A-1 Certificates for the relevant Interest Accrual
Period (in the absence of manifest error) will be final and binding. The
Class A-1 Pass-Through Rate for any Interest Accrual Period may be obtained
by telephoning the Certificate Administrator at (612) 667-9764.
Historical LIBOR. Listed below are historical values of Three-Month
LIBOR since January 1991:
3 Month LIBOR(1)
Monthly Averages
<TABLE>
<CAPTION>
Year
- ------------------------------------------------------------------
Month 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 5.438% 6.328% 3.250% 3.313% 4.188% 7.125%
February 5.313 6.250 3.750 3.219 4.250 6.891
March 5.493 6.266 3.938 3.266 4.375 6.375
April 5.485 6.188 4.250 3.203 4.078 6.188
May __ 6.063 4.625 3.313 4.078 6.063
June __ 6.000 4.875 3.328 3.953 6.250
July __ 5.891 4.875 3.313 3.453 6.063
August __ 5.907 5.000 3.250 3.516 5.750
September __ 5.993 5.438 3.375 3.281 5.688
October __ 6.008 5.688 3.453 3.625 5.375
November __ 5.907 6.078 3.500 3.891 5.000
December __ 5.657 6.500 3.375 3.453 4.250
</TABLE>
- -------------------
(1) As reported by the Federal National Mortgage Association.
Historical LIBOR experience is not a predictor of future LIBOR
rates, which are influenced by numerous factors, the impact of which cannot
be predicted. The foregoing rates do not purport to be a prediction of the
value of LIBOR on any Reset Date or for the lives of the Class A-1
Certificates.
Principal Distributions. Distributions in respect of principal on
the Class A-1 Certificates will be made on each Distribution Date in an
amount equal to the sum of all amounts
S - 27
<PAGE>
distributed in respect of principal on the Mortgage Certificates during the
Collection Period ending on such Distribution Date and the principal portion
of any Guaranty Payment made by MBIA pursuant to the Policy during such
Collection Period. Principal payments on the Class A-1 Certificates will be
made on each Distribution Date to the extent funds are available therefor
until the Principal Balance of the Class A-1 Certificates has been reduced to
zero.
THE POLICY
The following information has been furnished by MBIA for use
herein.
MBIA, in consideration of the payment of the premiums described
below and subject to the terms of the Policy, unconditionally and irrevocably
guarantees to the holders of the Class A-1 Certificates that an amount equal
to each full and complete Guaranty Payment (as described below) will be
received from MBIA by the Certificate Administrator as designee of the
Trustee for receipt of payments under the Policy, or its successor on behalf
of such holders, for distribution by the Certificate Administrator to each
holder of a Class A-1 Certificate of each such holder's proportionate share
of such Guaranty Payment. MBIA's obligations under the Policy with respect to
a particular Guaranty Payment shall be discharged to the extent funds equal
to the applicable Guaranty Payment are received by the Certificate
Administrator whether or not such funds are properly applied by the
Certificate Administrator or the Trustee. Guaranty Payments shall be made
only at the time set forth in the Policy and no accelerated Guaranty Payments
shall be made regardless of any acceleration of the Class A-1 Certificates or
Mortgage Certificates, unless such acceleration is at the sole option of
MBIA.
The Policy does not cover shortfalls, if any, attributable to the
liability of the Trust Fund, the REMIC or the Trustee for withholding taxes,
if any (including interest and penalties in respect of any such liability),
Deferred Interest or Mortgage Certificate Prepayment Interest Shortfalls.
MBIA will pay any Guaranty Payment that is a Preference Amount on a
Business Day following receipt by the Fiscal Agent (as described below) of
(i) a certified copy of such order requiring the return of a preference
payment, (ii) an opinion of counsel satisfactory to MBIA that such order is
final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by MBIA, irrevocably assigning to MBIA all rights and
claims of the holder of a Class A-1 Certificate relating to or arising under
the Class A-1 Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment and (iv)
appropriate instruments to effect the appointment of MBIA as agent for the
holder of a Class A-1 Certificate in any legal proceeding related to such
preference payment, such instruments being in a form satisfactory to MBIA,
provided that if such documents are received after 12:00 noon New York City
time on such Business Day, they will be deemed to be received on the
following Business Day. Such payments shall be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the holder of a Class A-1 Certificate and not to
any holder of a Class A-1 Certificate directly unless such holder of a Class
A-1 Certificate has returned principal or interest paid on the Class A-1
Certificates to such receiver or trustee in bankruptcy, in which case such
payment shall be disbursed to such holder.
MBIA will pay any other amount payable under the Policy no later
than 12:00 noon New York City time on the later of (i) the Underlying Series
Distribution Date or (ii) the Business Day following receipt in New York, New
York on a Business Day by State Street Bank and Trust Company, N.A., as
Fiscal Agent for MBIA or any successor fiscal agent appointed by MBIA (the
"Fiscal Agent"), of a Notice (as described below); provided that if such
Notice is received after 12:00 noon New York City time on such Business Day,
it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making a claim under the Policy it shall be
deemed not to have been received by the Fiscal Agent for purposes of this
paragraph, and MBIA or the Fiscal Agent, as the case
S - 28
<PAGE>
may be, shall promptly so advise the Certificate Administrator and the
Certificate Administrator may submit an amended Notice.
Guaranty Payments due under the Policy, unless otherwise stated in
such Policy, will be disbursed by the Fiscal Agent to the Certificate
Administrator or the Trustee on behalf of the holders of the Class A-1
Certificates by wire transfer of immediately available funds in the amount of
the Guaranty Payment less, in respect of Guaranty Payments related to
Preference Amounts, any amount held by the Certificate Administrator or the
Trustee for the payment of such Guaranty Payment and legally available
therefor.
The Fiscal Agent is the agent of MBIA only and the Fiscal Agent
shall in no event be liable to the holders of the Class A-1 Certificates for
any acts of the Fiscal Agent or any failure of MBIA to deposit, or cause to
be deposited, sufficient funds to make payments due under the Policy.
As used in the Policy, the following terms shall have the following
meanings:
"Business Day" means any day other than a Saturday, Sunday or a day
on which banking institutions in New York City or in the city in which the
corporate trust office of the Trustee or the corporate trust office of the
Certificate Administrator under the Pooling Agreement is located are
authorized or obligated by law or executive order to close.
"Aggregate Mortgage Certificate Principal Balance" means with
respect to any Underlying Series Distribution Date the sum of the Mortgage
Certificate Principal Balances of all the Mortgage Certificates.
The "Guaranty Payment" with respect to any Underlying Series
Distribution Date will be equal to (i) the sum of (X) the excess of the
aggregate amount due in respect of current interest on the Mortgage Certificates
on such Underlying Series Distribution Date over the amount actually distributed
in respect of current interest on the Mortgage Certificates on such Underlying
series Distribution Date and (Y) the amount, if any, of the excess of the
Principal Balance of the Class A-1 Certificates (reduced by principal previously
received on the Mortgage Certificates or paid by MBIA during the Collection
Period during which such Underlying Series Distribution Date occurs) over the
Aggregate Mortgage Certificate Principal Balance for such Underlying Series
Distribution Date (after giving effect to principal balance reductions with
respect to the Mortgage Certificates on such Underlying Series Distribution Date
and after increasing such amount by the amount of Deferred Interest allocated to
such Mortgage Certificates on such Underlying Series Distribution Date) and (ii)
any Preference Amount.
"Mortgage Certificate Distribution Date Statement" means, with
respect to the Mortgage Certificates, the report provided to holders of such
Mortgage Certificates in connection with each Underlying Series Distribution
Date pursuant to the related Pooling Agreement.
"Mortgage Certificate Prepayment Interest Shortfall" means, with
respect to any Underlying Series Distribution Date and any Mortgage Certificate,
the sum of the amounts of any interest shortfall designated as a "Prepayment
Interest Shortfall" or a "Relief Act Shortfall" allocated to such Mortgage
Certificate on the Mortgage Certificate Distribution Date Statement relating to
each Underlying Series Distribution Date occurring during the related Collection
Period.
"Mortgage Certificate Principal Balance" means, with respect to
each Mortgage Certificate and any Underlying Series Distribution Date, the
principal balance of such Mortgage Certificate as reported on the Mortgage
Certificate Distribution Date Statement relating to such Underlying Series
Distribution Date.
"Notice" means the telephonic or telegraphic notice, promptly
confirmed in writing by telecopy, substantially in the form of Exhibit A
attached to the Policy, the original of which is subsequently delivered by
registered or certified mail, from the Certificate Administrator (as designee
of the Trustee) specifying the Guaranty Payment which shall be due and owing
with respect to the applicable Underlying Series Distribution Date.
"Pooling Agreement" means the Pooling Trust Agreement dated as of
May 31, 1996 among CS First Boston Mortgage Securities Corp. as Depositor,
Norwest Bank Minnesota, National Association, as Certificate Administrator,
The Chase Manhattan Bank (National Association) as Trustee and Norwest
Corporation, as Tax Beneficial Holder.
"Preference Amount" means any amount previously distributed to a
holder of a Class A-1 Certificate, which amount resulted from a distribution
on the Mortgage Certificates that, if not so distributed, would have been
ultimately covered by MBIA pursuant to clause (i) of the definition of
Guaranty Payment, that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with
a final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Policy and not otherwise defined in
the Policy have the respective meanings set forth in the Pooling Agreement as
of the date of execution of the Policy, without giving effect to any
subsequent amendment to or modification of the Agreement unless such
amendment or modification has been approved in writing by MBIA.
S - 29
<PAGE>
Any notice under the Policy or service of process on the Fiscal
Agent of MBIA may be made at the address listed below for the Fiscal Agent of
MBIA or such other address as MBIA shall specify in writing to the
Certificate Administrator.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway,
New York, New York 10006 Attention: Municipal Registrar and Paying Agency,
or such other address as the Fiscal Agent shall specify to the Trustee in
writing.
The Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to
the conflict of laws principles thereof.
The insurance provided by the Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Policy is not cancelable for any reason.
PREMIUM
On the Closing Date, MBIA will be paid a one-time premium in
connection with its issuance of the Policy. However, if the Auction (as
described below) does not result in the sale of the Mortgage Certificates and
the retirement of the Class A-1 Certificates on April 28, 1999, MBIA will be
entitled to receive, with respect to each following Distribution Date, the
Extension Premium, payable quarterly with respect to the Policy. The
"Extension Premium" payable on each such following Distribution Date will be
the sum of the amounts, calculated as of each Underlying Series Distribution
Date occurring in the related Collection Period, equal to the product of
1/12th of 0.10% and the aggregate principal balance of the Mortgage
Certificates on such Underlying Series Distribution Date, in each case prior
to giving effect to distributions in reduction of such principal balances on
such Underlying Series Distribution Date, with respect to each such
Underlying Series Distribution Date. The Extension Premium will be paid from
Interest Available Funds prior to the payment of interest in respect of the
Class A-1 Certificates and may therefore increase the likelihood of the
occurrence of Interest Shortfall Amounts. Premiums on the Policy are not
refundable for any reason including payment, or provision being made for
payment, prior to maturity of the Class A-1 Certificates.
GUARANTY PAYMENT ACCOUNT
All Guaranty Payments received during any Collection Period will be
deposited, pending distribution on the related Distribution Date, in an
account maintained by the Certificate Administrator (the "Guaranty Payment
Account") in the name of the Trustee with a depository institution (which may
be the Certificate Administrator) and in a manner acceptable to each Rating
Agency. Any earnings on investment of amounts in the Guaranty Payment
Account will be for the benefit of MBIA and the amount of any losses on such
account will be deposited in such account by MBIA immediately as incurred.
MBIA INSURANCE CORPORATION
The following information has been supplied by MBIA for inclusion
in this Prospectus Supplement. Accordingly, the Depositor makes no
representation as to the accuracy and completeness of such information.
MBIA, formerly known as Municipal Bond Investors Assurance
Corporation, is the principal operating subsidiary of MBIA, Inc., a New York
Stock Exchange listed company. MBIA, Inc. is not obligated to pay the debts
of or claims against MBIA. MBIA is domiciled in the State of
S - 30
<PAGE>
New York and licensed to do business in all 50 states, the District of
Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern
Mariana Islands, the Virgin Islands of the United States and the Territory of
Guam. MBIA has one European branch in the Republic of France.
The tables below present selected financial information of MBIA
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ("SAP") and generally accepted
accounting principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
--------------------
December March
31, 1995 31, 1996
--------------------
(In millions)
(Audited) (Unaudited)
<S> <C> <C>
Admitted Assets $3,814 $3,989
Liabilities 2,540 2,672
Capital and Surplus 1,274 1,317
<CAPTION>
GAAP
--------------------
December March
31, 1995 31, 1996
--------------------
(In millions)
(Audited) (Unaudited)
<S> <C> <C>
Assets $4,463 $4,548
Liabilities 1,937 2,006
Shareholder's Equity 2,526 2,542
</TABLE>
Audited financial statements of MBIA as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995
are included herein as Appendix I. Unaudited financial statements of MBIA
for the three month period ended March 31, 1996, are included herein as
Appendix II. Such financial statements have been prepared on the basis of
GAAP. Copies of MBIA's 1995 year-end audited financial statements prepared
in accordance with statutory accounting practices are available from MBIA.
The address of MBIA is 113 King Street, Armonk, New York 10504.
MBIA does not accept any responsibility for the accuracy or
completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Policy and MBIA set forth under the
headings "--The Policy" and "--MBIA Insurance Corporation" and in Appendices
I and II herein.
Moody's rates the claims paying ability of MBIA "Aaa."
S&P rates the claims paying ability of MBIA "AAA."
Fitch Investors Service, L.P. ("Fitch") rates the claims paying
ability of MBIA "AAA".
Each rating of MBIA should be evaluated independently. The ratings
reflect the respective rating agency's current assessment of the
creditworthiness of MBIA and its ability to pay claims on its policies of
insurance. Any further explanation as to the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Class A-1 Certificates, and such ratings may be subject to revision or
withdrawal at any time by the rating agencies. Any downward revision or
withdrawal of any of the above ratings may have an adverse effect on the
market price of the Class A-1 Certificates. MBIA does not guaranty the
market price of the Class A-1 Certificates nor does it guaranty that the
ratings on the Class A-1 Certificates will not be revised or withdrawn.
S - 31
<PAGE>
RESERVE FUND
The Pooling Agreement will require the Certificate Administrator to
establish a separate trust account, which it will hold for the benefit of the
Trustee on behalf of the holders of the Class A-1 Certificates (the "Reserve
Fund").
On the Closing Date, the Depositor will deposit or cause to be
deposited into the Reserve Fund the Class IO Certificates and the Class R
Certificates. All distributions on the Class IO and Class R Certificates will
be made to the Certificate Administrator for deposit into the Reserve Fund.
In addition, all payments by the Yield Support Counterparty pursuant to the
Yield Support Agreement will be deposited in the Reserve Fund. Amounts on
deposit in the Reserve Fund from time to time will be available on each
Distribution Date to be paid to holders of the Class A-1 Certificates to the
extent that amounts described in clauses (a), (b) and (c) of the definition
of Interest Available Funds are insufficient to pay the Optimal Interest
Amount and Interest Shortfall Amount of the Class A-1 Certificates for such
Distribution Date. The Reserve Fund will be an asset of the Trust Fund, but
will not be an asset of the REMIC. Amounts in the Reserve Fund will be
invested in "eligible investments," as defined in the Pooling Agreement, at
the discretion of the Certificate Administrator, provided each such
investment matures no later than the succeeding Distribution Date.
The Depositor will not have any obligation to make additional
deposits in the Reserve Fund after the Closing Date.
NO ASSURANCE CAN BE GIVEN THAT AMOUNTS ON DEPOSIT IN THE RESERVE
FUND FROM TIME TO TIME WILL, TOGETHER WITH THE BALANCE OF INTEREST AVAILABLE
FUNDS ON ANY DISTRIBUTION DATE, BE SUFFICIENT TO ALLOW THE DISTRIBUTION OF
THE FULL OPTIMAL INTEREST AMOUNT WITH RESPECT TO THE CLASS A-1 CERTIFICATES
ON ANY SUCH DISTRIBUTION DATE OR ON ANY FUTURE DISTRIBUTION DATE.
Due to the factors described under "Risk Factors--Basis Risk" and
"Yield and Prepayment Considerations--Basis Risk; LIBOR," there can be no
assurance that the amount of interest paid on the Mortgage Certificates
during any Collection Period will be sufficient to pay the full Optimal
Interest Amount of the Class A-1 Certificates. Accordingly, the Class IO
Certificates (payments on which, together with payments under the Yield
Support Agreement, are the sole source of payments into the Reserve Fund)
will not be entitled to any payments under certain interest rate scenarios.
See "--Distributions" above. In addition, the Yield Support Counterparty will
not be obligated to make any payments under the Yield Support Agreement
unless LIBOR exceeds the Strike Rate. See "--The Yield Support Agreement"
below. The following table, which was prepared on the basis of the Modeling
Assumptions described below under "Yield and Prepayment Considerations--
Weighted Average Life and Pre-Tax Yield Tables," illustrates the approximate
balances that would be available in the Reserve Fund after any required
distributions to the Class A-1 Certificates on the Distribution Date
following the first possible Auction under the interest rate scenarios (the
"Rate Scenarios") described in the following paragraph and at the various
percentages of CPR indicated. See "Yield and Prepayment Considerations--CPR
Model." Each of the Rate Scenarios set forth below assumes (i) an initial
rate of LIBOR equal to 5.5%, (ii) an initial rate of CMT equal to 5.703%,
(iii) an initial rate of COFI equal to 4.874%, (iv) that the Reinvestment
Rate with respect to each Interest Accrual Period will be 5.0% and (v) the
accepted Auction bid equals par plus accrued interest on the then outstanding
balance of the Mortgage Certificates.
"Rate Scenario I" assumes that, with respect to the Interest
Accrual Period beginning in April 1996, the levels of LIBOR, CMT and
COFI remain constant at their present levels for three years.
"Rate Scenario II" assumes that the level of LIBOR remains constant
at 5.5% for three years and that the level of CMT decreases to
2.703% and the level of COFI decreases to
S - 32
<PAGE>
1.874% with respect to the Interest Accrual Period beginning in April
1996 and that each such index remains constant for three years.
"Rate Scenario III" assumes that the level of LIBOR increases to
6.77% with respect to the Interest Accrual Period beginning in April
1996 and that the levels of CMT and COFI remain constant at their
present levels for three years.
Reserve Fund Balance Available at April 28, 1999/(1)(2)/
<TABLE>
<CAPTION>
PERCENT OF CPR
--------------------------------------------------------------------
12%/(3)/ 12%/(4)/ 18%/(3)/ 18%/(4)/ 24%/(3)/ 24%/(4)/
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate Scenario I 10,377,000 12,755,000 8,204,000 11,405,000 6,652,000 10,102,000
Rate Scenario II 6,578,000 7,811,000 5,435,000 6,886,000 4,535,000 5,982,000
Rate Scenario III 2,608,000 3,565,000 2,333,000 3,126,000 2,021,000 2,731,000
</TABLE>
/(1)/ Distribution Date following first possible Auction.
/(2)/ The projected Principal Balance of the Mortgage Certificates as of
April 28, 1999 under each of the Rate Scenarios and percentages of CPR
assumed in the table is indicated in the table on page S-36. See "Yield and
Prepayment Considerations--CPR Model" and "--Weighted Average Life and Pre-
Tax Yield Tables."
/(3)/ Assumes the Special Termination with respect to each Underlying Series
(other than Series 1992-18P, as to which no Special Termination can occur)
occurs at the earliest possible date (which may not occur prior to April 28,
1999). See "Description of the Mortgage Certificates -- Special
Termination." Also assumes that Optional Termination occurs with respect to
Series 1992-18P on the earliest possible date. See "Description of the
Certificates -- Optional Termination."
/(4)/ Assumes no Special Termination or Optional Termination occurs with
respect to any Underlying Series.
THE YIELD SUPPORT AGREEMENT
General. On the Closing Date, the Trustee, acting on behalf of the
holders of the Class A-1 Certificates, will enter into a yield support
agreement (the "Yield Support Agreement") with Norwest Corporation, a
Delaware corporation and the parent of the Certificate Administrator (in such
capacity, "Yield Support Counterparty," otherwise "Norwest Corporation"). The
Yield Support Agreement will be governed by and construed in accordance with
the laws of the State of New York.
Payment Terms. Pursuant to the terms of the Yield Support
Agreement, in the event that LIBOR on any Reset Date (determined as described
below under "--Determination of LIBOR") exceeds 6.770% (which rate is equal
to the approximate level of LIBOR as expected to be set with respect to the
first Interest Accrual Period plus 1.27%) (the "Strike Rate"), the Yield
Support Counterparty will be obligated to pay to the Certificate
Administrator, for the benefit of the holders of the Class A-1 Certificates,
on the Distribution Date related to the Interest Accrual Period following
such Reset Date, an amount equal to one-fourth of the product of (x) the
difference between LIBOR at such Reset Date (determined as described above)
and the Strike Rate and (y) the Principal Balance of the Class A-1
Certificates outstanding prior to distributions on such Distribution Date.
Amounts paid by the Yield Support Counterparty on any Distribution Date will
be paid to the Certificate Administrator for deposit into the Reserve Fund.
NO ASSURANCE CAN BE GIVEN THAT AMOUNTS PAID BY THE YIELD SUPPORT
COUNTERPARTY ON ANY DISTRIBUTION DATE WILL, TOGETHER WITH THE BALANCE OF THE
INTEREST AVAILABLE FUNDS FOR SUCH DISTRIBUTION DATE, BE SUFFICIENT TO ALLOW
FULL DISTRIBUTIONS IN RESPECT OF INTEREST ON THE CLASS A-1 CERTIFICATES ON
SUCH DISTRIBUTION DATE OR ON ANY FUTURE DISTRIBUTION DATES. THE OBLIGATIONS
OF THE YIELD SUPPORT COUNTERPARTY WITH RESPECT TO THE SECURITIES OFFERED
HEREBY ARE LIMITED TO THOSE
S - 33
<PAGE>
SPECIFICALLY SET FORTH IN THE YIELD SUPPORT AGREEMENT AND ARE SUBJECT TO
CERTAIN CONDITIONS AS DESCRIBED IN THE YIELD SUPPORT AGREEMENT.
Termination. Unless earlier terminated as described below, the
Yield Support Agreement will terminate upon the reduction of the Principal
Balance of the Class A-1 Certificates to zero.
The Trustee will have the right to terminate the Yield Support
Agreement if (a) the outstanding senior unsecured indebtedness rating of the
Yield Support Counterparty is downgraded to or below "BBB+" by S&P, "Baa1" by
Moody's or "BBB+" by Fitch or (b) S&P, Moody's and Fitch discontinue their
rating of the Yield Support Counterparty. If the Trustee elects not to
terminate the Yield Support Agreement, it will have the right to require the
Yield Support Counterparty to post collateral to secure the Yield Support
Counterparty's obligations under the Yield Support Agreement in an amount
equal to the estimated breakage fee, if any, that would be owed by the Yield
Support Counterparty if the Trustee had terminated the Yield Support
Agreement. The amount of the collateral will be "marked-to-market" on each
Reset Date, or more frequently if its value in relation to the breakage fee
declines and the Trustee so requires. The Yield Support Counterparty's
obligation to post collateral will terminate if its ratings are raised to "A-
" by S&P, "A3" by Moody's and "A-" by Fitch.
In addition, the Trustee will have the right to terminate the Yield
Support Agreement if any of the following events occur:
(i) the Yield Support Counterparty fails to make any payment due
under the Yield Support Agreement and such nonpayment
continues for three business days after notice from the
Trustee;
(ii) the Yield Support Counterparty fails to perform or observe its
obligations under such Yield Support Agreement (other than its
obligation to make any payment due under such Yield Support
Agreement or to provide certain notices under the Yield
Support Agreement) and such failure continues for a period of
30 days after notice from the Trustee;
(iii) any representation made by the Yield Support Counterparty
under such Yield Support Agreement proves to have been
incorrect or misleading in any material respect as of the time
it was made or repeated;
(iv) certain events of bankruptcy or insolvency occur with respect
to the Yield Support Counterparty;
(v) the Yield Support Counterparty undertakes certain mergers,
consolidations or transfers of its assets; and
(vi) a change in law occurs after the Closing Date which makes it
unlawful for the Yield Support Counterparty to perform its
obligations in respect of the Yield Support Agreement.
Breakage Fee. If the Yield Support Agreement is terminated by the
Trustee, the market value of the Yield Support Agreement will be established
by the Trustee on the basis of market quotations of the cost to the Trust
Fund of entering into a replacement yield support agreement, in accordance
with the procedures set forth in the Yield Support Agreement (such amount,
the "Yield Support Breakage Fee"). The Yield Support Counterparty will be
required to pay the Trustee, for the benefit of the holders of the Class A-1
Certificates, the amount of any Yield Support Breakage Fee plus the amount of
any payment that became due prior to the date on which the Yield Support
Agreement is
S - 34
<PAGE>
terminated, but remain unpaid, plus interest thereon. Upon any such
termination of the Yield Support Agreement, the Trustee will apply any Yield
Support Breakage Fee paid by the Yield Support Counterparty to the purchase
of a similar yield support agreement from another counterparty.
MANDATORY AUCTION
Prior to April 28, 1999, the Trustee will cause the Certificate
Administrator, to hold auctions following the procedures outlined below
(collectively, an "Auction") for the sale, on April 28, 1999, of (i) the
Fixed Rate Certificates and (ii) the ARM Certificates.
If the sum of the highest bids obtained for the Fixed Rate
Certificates and the ARM Certificates, the amount on deposit in the Reserve
Fund and any amount payable pursuant to the Price Maintenance Agreement, is
at least equal to the Class A-1 Retirement Amount, the Trustee will sell the
Mortgage Certificates and pay the Class A-1 Retirement Amount to the Class A-
1 Certificates on April 28, 1999. The excess of the proceeds of any such
sale over the Class A-1 Retirement Amount will be distributed to the holder
of the Class R Certificates. If no such sale occurs, the Trustee will
continue to hold the Mortgage Certificates and the Trust Fund will continue
to operate pursuant to the Pooling Agreement. The auction procedure will be
repeated with respect to each succeeding Distribution Date until a
sufficiently high bid is obtained. Each Distribution Date beginning with the
Distribution Date in April 1999 until the Distribution Date on which the
Class A-1 Certificates are retired is referred to herein as an "Auction
Date."
The "Class A-1 Retirement Amount" will generally be the then
outstanding Principal Balance of the Class A-1 Certificates, together with
interest at the then-applicable Class A-1 Pass-Through Rate on such Principal
Balance for the Interest Accrual Period relating to such Distribution Date
together with any unpaid Interest Shortfall of the Class A-1 Certificates.
If, following distributions on the Class A-1 Certificates on the Distribution
Date preceding any Auction Date, there is an unpaid Interest Shortfall for
the Class A-1 Certificates, the Certificate Administrator will solicit the
vote of all holders of the Class A-1 Certificates (utilizing the procedures
established by DTC for any such solicitation) to determine whether the
majority of such holders wish to require the Class A-1 Retirement Amount to
include the amount of such Interest Shortfall. If holders representing 51% of
the Voting Interests of all Class A-1 Certificates vote to exclude such
Interest Shortfalls from the Class A-1 Retirement Amount, then the Class A-1
Retirement Amount for the succeeding Auction Date will be equal the sum of
(i) the then-outstanding Principal Balance of the Class A-1 Certificates,
together with interest at the then-applicable Class A-1 Pass-Through Rate on
such Principal Balance for the Interest Accrual Period relating to such
Distribution Date and (ii) only to the extent that proceeds of any sale
pursuant to such Auction are in excess of the amount described in clause (i),
the amount of such excess (up to the amount of any unpaid Interest Shortfall
of the Class A-1 Certificates).
In connection with each Auction, the Certificate Administrator
will, prior to each Auction Date, solicit bids for the sale of the then-
outstanding Fixed Rate Certificates and ARM Certificates on such Auction
Date. Bids will be solicited by notice to broker-dealers who commonly make a
market in securities similar to the Fixed Rate Certificates or ARM
Certificates (as the case may be) and from such other parties as the
Certificate Administrator may determine. Bids will be accepted for all the
Fixed Rate Certificates or ARM Certificates ("All or Nothing Bids") as well
as for one or more of the Fixed Rate Certificates or ARM Certificates on an
individual basis ("Line Item Bids"). If two or more identical All or Nothing
Bids are received or two or more identical Line Item Bids are received for
the same Mortgage Certificates, the Certificate Administrator will solicit
and resolicit new bids from all participating bidders until only one All or
Nothing Bid and/or only one Line Item Bid for each Mortgage Certificate
remains or the remaining bidders decline to resubmit bids. The Trustee will
accept the highest bid or bids, provided such bid, or the sum of such bids,
meets the requirements of the second preceding paragraph. The highest bid
for each of the Fixed Rate Certificates and the ARM
S - 35
<PAGE>
Certificates shall be the greater of the sum of the highest Line Item Bid for
each of the Fixed Rate Certificates or ARM Certificates (including a bid of
$0 for each Mortgage Certificate as to which no Line Item Bid was received)
and the highest All or Nothing Bid for the Fixed Rate Certificates or ARM
Certificates, respectively. The winning bidders at an Auction will be
required to agree in writing that, to the extent that there exist Unpaid
Interest Shortfalls or other overdue amounts with respect to the Mortgage
Certificates that they purchase, they will forward amounts received by them
in respect of such Unpaid Interest Shortfalls or overdue amounts to MBIA (up
to the amount of any unreimbursed Guaranty Payments in respect of interest
related to such Mortgage Certificates).
Neither the Certificate Administrator nor any affiliate thereof may
purchase any Mortgage Certificates pursuant to the Auction (other than
pursuant to the Price Maintenance Agreement, as described below).
There can be no assurance that the Trustee will, on April 28, 1999
or on any date thereafter, be able to sell the Mortgage Certificates for a
price equal to or greater than the Class A-1 Retirement Amount. See "--
Reserve Fund" above for an illustration, based on certain assumptions, of the
balance that would be available in the Reserve Fund as of April 28, 1999
under the various scenarios noted and see "--Price Maintenance Agreement"
below.
The following table, which was prepared on the basis of the
Modeling Assumptions described below under "Yield And Prepayment
Considerations -- Weighted Average Life and Pre-Tax Yield Tables,"
illustrates the approximate aggregate outstanding principal balances of the
Mortgage Certificates and ARM Certificates after any required distributions
on the Underlying Series Distribution Date immediately preceding the
Distribution Date following the first possible Auction under the Rate
Scenarios and percentages of CPR indicated.
<TABLE>
<CAPTION>
PRINCIPAL BALANCES OF MORTGAGE CERTIFICATES REMAINING AS OF APRIL 28, 1999
---------------------------------------------------------------------------------------------------------------
12%/(1)/ 12%/(2)/ 18%/(1)/ 18%/(2)/ 24%/(1)/ 24%/(2)/
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Rate Scenario I Mortgage Certificate
Principal Balance $27,461,000 $159,249,000 $21,819,000 $114,797,000 $17,371,000 $76,492,000
ARM Principal Balance 26,968,000 70,690,000 21,819,000 60,168,000 17,371,000 51,074,000
Rate Scenario II Mortgage Certificate
Principal Balance 27,028,000 158,521,000 21,469,000 114,262,000 17,093,000 76,130,000
ARM Principal Balance 26,536,000 70,459,000 21,469,000 60,094,000 17,093,000 51,140,000
Rate Scenario III Mortgage Certificate
Principal Balance 27,461,000 159,249,000 21,819,000 114,797,000 17,371,000 76,492,000
ARM Principal Balance 26,968,000 70,690,000 21,819,000 60,168,000 17,371,000 51,074,000
</TABLE>
/(1)/ Assumes the Special Termination with respect to each Underlying Series
(other than Series 1992-18P, as to which no Special Termination can occur)
occurs at the earliest possible date (which may not occur prior to April 28,
1999). See "Description of the Mortgage Certificates -- Special
Termination." Also assumes that Optional Termination occurs with respect to
Series 1992-18P on the earliest possible date. See "Description of the
Certificates -- Optional Termination."
/(2) /Assumes no Special Termination or Optional Termination occurs with
respect to any Underlying Series.
THE PRICE MAINTENANCE AGREEMENT
General. On the Closing Date, the Trustee, acting on behalf of the
holders of the Class A-1 Certificates, will enter into a price maintenance
agreement (the "Price Maintenance Agreement") with Norwest Corporation (in
such capacity, the "Price Maintenance Counterparty"). The Price Maintenance
Agreement will be governed by and construed in accordance with the laws of
the State of New York.
S - 36
<PAGE>
Payment Terms. If the aggregate bid price for the Mortgage
Certificates at an Auction, together with amounts on deposit in the Reserve
Fund, is less than the Class A-1 Retirement Amount, the Price Maintenance
Agreement will require the Price Maintenance Counterparty to pay to the
Trustee the Price Maintenance Payment (provided that the amount of such Price
Maintenance Payment, together with the Auction proceeds and Reserve Fund
Balance, is equal to the Class A-1 Retirement Amount). Subject to the
limitation set forth below, the "Price Maintenance Payment" with respect to
any Auction Date, will be equal to the excess, if any, of the then
outstanding principal balance of the Fixed Rate Certificates together with
accrued and unpaid interest thereon over the sum of the highest bid for the
Fixed Rate Certificates and the remaining balance in the Reserve Fund (net of
(i) the excess, if any, of the then outstanding principal balance of the ARM
Certificates together with accrued and unpaid interest thereon over the
highest bid price for the ARM Certificates and (ii) amounts withdrawn from
the Reserve Fund on the related Distribution Date in respect of the Optimal
Interest Amount of the Class A-1 Certificates as described above under "--
Reserve Fund"). Rather than making the Price Maintenance Payment, the Price
Maintenance Counterparty shall have the option of purchasing the Fixed Rate
Certificates at a price equal to the sum of the highest bid for the Fixed
Rate Certificates and the amount of the Price Maintenance Payment (the "Price
Maintenance Purchase Payment").
The Price Maintenance Agreement is only designed to address
decreases in the market value of the Fixed Rate Certificates that are not
caused by any shortfalls or losses allocated to, or any downgrade of the
rating of, any Fixed Rate Certificate (as to any Fixed Rate Certificate, a
"Credit Event"). In the event of an occurrence of a Credit Event with
respect to any Fixed Rate Certificate, if the highest bid received for the
Fixed Rate Certificates is less than the sum of the outstanding principal
balance of the Fixed Rate Certificates and the remaining balance in the
Reserve Fund (net of the excess, if any, of the then outstanding principal
balance of the ARM Certificates together with accrued and unpaid interest
thereon over the highest bid price for the ARM Certificates), the Certificate
Administrator shall hold an Auction for the Fixed Rate Certificates other
than those as to which a Credit Event has occurred. The Certificate
Administrator shall also determine the market value of a residential mortgage
pass-through certificate (a "Comparable Certificate") comparable to each
Fixed Rate Certificate as to which a Credit Event has occurred, but for the
occurrence of the Credit Event. The Price Maintenance Payment due with
respect to any such Auction Date will be equal to the excess, if any, of (i)
the then outstanding aggregate principal balance of the Fixed Rate
Certificates together with accrued and unpaid interest thereon over (ii) the
sum of (X) the highest bid for the Fixed Rate Certificates, other than those
as to which a Credit Event has occurred, (Y) the market value of each
Comparable Certificate and (Z) the remaining balance in the Reserve Fund (net
of the excess, if any, of the then outstanding principal balance of the ARM
Certificates together with accrued and unpaid interest thereon over the
highest bid price for the ARM Certificates).
Termination. Unless earlier terminated as described below, the
Price Maintenance Agreement will terminate upon the reduction of the
Principal Balance of the Class A-1 Certificates to zero.
The Trustee will have the right to terminate the Price Maintenance
Agreement if (a) the outstanding senior unsecured indebtedness rating of the
Price Maintenance Counterparty is downgraded to or below "BBB+" by S&P,
"Baa1" by Moody's or "BBB+" by Fitch or (b) S&P, Moody's and Fitch
discontinue their rating of the Price Maintenance Counterparty. If the
Trustee elects not to terminate the Price Maintenance Agreement, it will have
the right to require the Price Maintenance Counterparty to post collateral to
secure the Price Maintenance Counterparty's obligations under the Price
Maintenance Agreement in an amount equal to the estimated breakage fee, if
any, that would be owed by the Price Maintenance Counterparty if the Trustee
had terminated the Price Maintenance Agreement. The amount of the collateral
will be "marked-to-market" on each Distribution Date, or more frequently if
its value in relation to the breakage fee declines and the Trustee so
requires. The Price Maintenance Counterparty's obligation to post collateral
will terminate if its ratings are raised to "A-" by S&P, "A3" by Moody's and
"A-" by Fitch.
S - 37
<PAGE>
In addition, the Trustee will have the right to terminate the Price
Maintenance Agreement if any of the following events occur:
(i) the Price Maintenance Counterparty fails to make any payment
due under the Price Maintenance Agreement and such nonpayment
continues for three business days after notice from the
Trustee;
(ii) the Price Maintenance Counterparty fails to perform or observe
its obligations under such Price Maintenance Agreement (other
than its obligation to make any payment due under such Price
Maintenance Agreement or to provide certain notices under the
Price Maintenance Agreement) and such failure continues for a
period of 30 days after notice from the Trustee;
(iii) any representation made by the Price Maintenance Counterparty
under such Price Maintenance Agreement proves to have been
incorrect or misleading in any material respect as of the time
it was made or repeated;
(iv) certain events of bankruptcy or insolvency occur with respect
to the Price Maintenance Counterparty;
(v) the Price Maintenance Counterparty undertakes certain mergers,
consolidations or transfers of its assets; and
(vi) a change in law occurs after the Closing Date which makes it
unlawful for the Price Maintenance Counterparty to perform its
obligations in respect of the Price Maintenance Agreement.
Breakage Fee. If the Price Maintenance Agreement is terminated by
the Trustee, the market value of the Price Maintenance Agreement will be
established by the Trustee on the basis of market quotations of the cost to
the Trust Fund of entering into a replacement price maintenance agreement, in
accordance with the procedures set forth in the Price Maintenance Agreement
(such amount, the "Price Maintenance Breakage Fee"). The Price Maintenance
Counterparty will be required to pay the Trustee, for the benefit of the
holders of the Class A-1 Certificates, the amount of any Price Maintenance
Breakage Fee plus the amount of any payment that became due prior to the date
on which the Price Maintenance Agreement is terminated, but remain unpaid,
plus interest thereon. Upon any such termination of the Price Maintenance
Agreement, the Trustee will apply any Price Maintenance Breakage Fee paid by
the Price Maintenance Counterparty to the purchase of a similar price
maintenance agreement from another counterparty.
NORWEST CORPORATION
Norwest Corporation will act as the Yield Support Counterparty and
the Price Maintenance Counterparty.
As of December 31, 1995, the end of its most recent fiscal year for
which audited figures are available, Norwest Corporation and its subsidiaries
had, on a consolidated basis, total assets of approximately $72.1 billion,
total liabilities of approximately $66.8 billion, and stockholders' equity of
approximately $5.3 billion.
Norwest Corporation's outstanding senior unsecured indebtedness has
been rated Aa3 by Moody's, AA- by S&P, and AA+ by Fitch.
S - 38
<PAGE>
Copies of Norwest Corporation's annual reports are available from
Norwest Corporation by contacting Laurel A. Holschuh, Secretary, at (612)
667-8655.
The above information was provided by Norwest Corporation. No
other information contained herein (including but not limited to the
statements concerning the Yield Support Agreement and the Price Maintenance
Agreement and the rights under the Yield Support Agreement and the Price
Maintenance Agreement of the holders of the securities offered hereby) has
been provided by Norwest Corporation.
OPTIONAL PURCHASE OF THE MORTGAGE CERTIFICATES
The beneficial owner of the Class IO Certificates will have the
option, but not the obligation, to purchase the Mortgage Certificates from
the Trust Fund on any Distribution Date on which the Mortgage Certificate
Balance is equal to 5% or less of the Mortgage Certificate Balance as of the
Cut-off Date at a price equal to the aggregate outstanding principal balance
of the Mortgage Certificates together with all accrued interest thereon
through the following Distribution Date.
DENOMINATIONS
The Class A-1 Certificates will be issued in minimum denominations
of $1,000 initial principal balance and integral multiples of $1,000 initial
principal balance in excess thereof, except for one Class A-1 certificate
which may be issued in any denomination in excess of a Single Certificate.
BOOK-ENTRY FORM
The Class A-1 Certificates initially will be represented by one
physical certificate 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 the Class A-1 Certificates (a "Beneficial Owner") will be entitled to
receive a Class A-1 Certificate in certificated form (a "Definitive
Certificate") representing such person's interest in the Class A-1
Certificates, 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 refer to
actions taken by DTC upon instructions from its DTC Participants (as defined
below), and all references herein to distributions, notices, reports and
statements to Certificateholders or holders shall refer to distributions,
notices, reports and statements to DTC or Cede, as the registered holder of
the Class A-1 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 UCC 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
(including CS First Boston), 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 Class A-1
transfers of Class A-1 Certificates among DTC Participants on whose behalf it
acts with respect to the Class A-1 Certificates and to receive and transmit
distributions of principal of and interest on the Class A-1 Certificates. DTC
Participants and
S - 39
<PAGE>
Indirect DTC Participants with which Beneficial Owners have accounts with
respect to the Class A-1 Certificates similarly are required to make Class A-
1 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, Class A-1 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 Certificate
Administrator, or a paying agent on behalf of the Certificate Administrator,
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, the Certificate Administrator or any paying agent as
Certificateholders, as such term is used in the Pooling 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 Class A-1 Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect
to such Class A-1 Certificates, may be limited due to the lack of a physical
certificate for such Class A-1 Certificates. In addition, under a Class A-1
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Certificate Administrator, or a
paying agent on behalf of the Certificate Administrator, 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 Agreement only
at the direction of one or more DTC Participants to whose accounts with DTC
the Class A-1 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 Class A-1 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 Class A-1 Certificates
evidence such voting interests authorize divergent action.
Neither the Depositor, the Certificate Administrator nor 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 Class
A-1 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 Class A-1 Certificates are registered,
the ability of the Beneficial Owners of such Class A-1 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 Class A-1 Certificates may be impaired.
The Class A-1 Certificates will be converted to Definitive
Certificates and re-issued to Beneficial Owners or their nominees, rather
than to DTC or its nominee, only if (i) the Certificate Administrator is
advised that DTC is no longer willing or able to discharge properly its
responsibilities as depository with respect to the Class A-1 Certificates and
the Certificate Administrator is unable to locate a qualified successor, (ii)
the Certificate Administrator, at its option, elects to terminate the book-
entry system through DTC or (iii) after the occurrence of a dismissal or
resignation of the Certificate Administrator under the Pooling Agreement,
Beneficial Owners representing not less than 51% of the voting interests of
the outstanding Class A-1 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.
S - 40
<PAGE>
Upon the occurrence of any event described in the immediately
preceding paragraph, the Certificate Administrator (or, if the Certificate
Administrator has been dismissed, 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 Class A-1 Certificates and receipt of instructions for re-registration,
the Certificate Administrator will reissue the Class A-1 Certificates as
Definitive Certificates to Beneficial Owners.
TERMINATION
The Trust Fund will terminate upon the earlier of (a) the
distribution to holders of the Certificates of all amounts required to be
distributed to them pursuant to the Pooling Agreement and (b) the termination
of the Pooling Agreement.
CERTIFICATE ACCOUNT
All payments and collections in respect of the Mortgage
Certificates will be deposited in an account maintained by the Certificate
Administrator (the "Certificate Account") in the name of the Trustee with a
depository institution (which may be the Certificate Administrator) and in a
manner acceptable to each Rating Agency. See "Description of the
Certificates--Payments on the Mortgage Loans" and "--Collection of Payments
on Mortgage Certificates" in the Prospectus.
Any earnings on investment of amounts in the Certificate Account
will be available for distribution to the holders of the Certificates as
Interest Available Funds. The rate at which such funds are invested from time
to time is referred to herein as the "Reinvestment Rate."
ACTIONS IN RESPECT OF THE MORTGAGE CERTIFICATES
If at any time the Trustee, as the Mortgage Certificateholder, is
requested in such capacity to take any action or to give any consent,
approval or waiver, including without limitation in connection with an
amendment of an Underlying Pooling Agreement or if an event of default occurs
under an Underlying Pooling Agreement with respect to the Mortgage Loan
Servicer or the Mortgage Loan Trustee thereunder, the Pooling Agreement
provides that the Trustee, in its capacity as certificateholder, may take
action in connection with the enforcement of any rights and remedies
available to it in such capacity with respect thereto, will promptly notify
all of the holders of the Certificates and will act only in accordance with
written directions of holders of the Certificates evidencing in excess of 50%
of the Voting Rights.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of the Certificates evidencing a specified percentage of all
undivided interests in the Trust Fund may be taken by holders of the
Certificates entitled in the aggregate to such percentage of the Voting
Rights. At any time that any Certificates are outstanding, the "Voting
Rights" under the Pooling Agreement will be allocated 1% to the Class R
Certificate, 1% to the Class IO Certificate and the remainder to the Class A-
1 Certificate. Unless a failure of MBIA to make a required payment under the
Policy is continuing or certain bankruptcy related events specified in the
Pooling Agreement have occurred, MBIA will have the right to exercise the
Voting Rights of the Class A-1 Certificates (other than in respect of a vote
by the holders of the Class A-1 Certificates to reduce the Class A-1
Retirement Amount as described under "--Mandatory Auction" above).
S - 41
<PAGE>
CERTIFICATE ADMINISTRATOR
Norwest Bank Minnesota, National Association ("Norwest") will act
as Certificate Administrator. Norwest is a national banking association which
is a wholly owned subsidiary of the Yield Support Counterparty. Norwest
engages in general commercial banking and trust business, offering a
comprehensive range of corporate, commercial, correspondent and individual
banking services, both domestic and international, as well as a wide range of
trust and custodial services.
TRUSTEE
The Chase Manhattan Bank (National Association) ("Chase") will act
as the Trustee. Chase is a national banking association which is a wholly-
owned subsidiary of The Chase Manhattan Corporation. Chase provides a
comprehensive range of trust, custody, information and other financial
services, including trust services through its Institutional Trust Group
("ITG"). The ITG has been providing global corporate trust services for over
100 years. The ITG is supported by 370 employees located in New York, Los
Angeles, London, Luxembourg and Hong Kong. Chase acts as trustee, paying
agent and registrar on over 8,300 issues for 2,300 issuers representing more
than a trillion dollars principal amount issued in the U.S. and Euromarkets.
S - 42
<PAGE>
THE MORTGAGE CERTIFICATES
GENERAL
The description of the Mortgage Certificates contained in this
Prospectus Supplement is a general summary of certain characteristics of the
Mortgage Certificates and does not purport to be complete. Such description
is subject to, and is qualified in its entirety by reference to, the actual
terms and provisions of the prospectus and prospectus supplement or private
placement memorandum related to each of the Mortgage Certificates
(collectively, the "Underlying Disclosure Documents") and the Pooling and
Servicing Agreement relating to each of the Mortgage Certificates
(collectively, the "Underlying Pooling Agreements"). Copies of the Underlying
Disclosure Documents and the Underlying Pooling Agreements are available from
CS First Boston by calling Richard Eimbinder at (212) 909-3574. Investors are
urged to obtain copies of such documents and read this Prospectus Supplement
in conjunction therewith.
The assets of the REMIC will consist primarily of 13 classes (or
portions of classes) of senior and subordinated mortgage pass-through
certificates (the "Mortgage Certificates"), each of which is a part of one of
11 separate series of mortgage pass-through certificates (each an "Underlying
Series"). On the Closing Date the Depositor will deposit an amount equal to
the aggregate distribution on the Mortgage Certificates on the Underlying
Series Distribution Date occurring in May 1996 into the Certificate Account.
Each of the Mortgage Certificates was issued pursuant to a separate
Underlying Pooling Agreement, generally dated as of the first day of the
month of initial issuance of the related Underlying Series (as to each, the
"Underlying Series Cut-off Date"), generally among the RTC, the servicer or
master servicer of the related Mortgage Loans (each, a "Mortgage Loan
Servicer") and the trustee of the related Mortgage Certificates (each, a
"Mortgage Loan Trustee").
Certain characteristics of the Mortgage Certificates are described
below. Certain of the information with respect to the Mortgage Certificates
has been derived from the Underlying Disclosure Documents relating to such
Mortgage Certificates and from publicly available data and other data
available to the Depositor with respect thereto. IT SHOULD BE NOTED THAT
THERE MAY HAVE BEEN MATERIAL CHANGES IN FACTS AND CIRCUMSTANCES SINCE THE
DATES SUCH DOCUMENTS WERE PREPARED, INCLUDING, BUT NOT LIMITED TO, CHANGES IN
PREPAYMENT SPEEDS AND PREVAILING INTEREST RATES AND OTHER ECONOMIC FACTORS,
WHICH MAY LIMIT THE USEFULNESS OF, AND BE DIRECTLY CONTRARY TO THE
ASSUMPTIONS USED IN PREPARING, THE INFORMATION SET FORTH IN SUCH DOCUMENTS.
The Mortgage Certificates were each issued on the dates set forth
in the following table for each such Mortgage Certificate. Twelve of the 13
Mortgage Certificates were issued in offerings registered by the RTC under
the Securities Act of 1933, as amended (the "Securities Act"); one of the
Mortgage Certificates (the "Private Certificate") was issued in a private
placement to institutional investors. The Private Certificate was purchased
by the Mortgage Certificate Seller or an affiliate contemporaneously with its
issuance.
S - 43
<PAGE>
Mortgage Certificates Date of Issuance
------------------
Series 1991-5, Class A-1.... August 29, 1991
Series 1991-15, Class A-3... November 26, 1991
Series 1992-9, Class B-4.... August 27, 1992
Series 1992-10, Class A-1... August 31, 1992
Series 1992-11, Class A-1C.. September 29, 1992
Series 1992-12, Class A-2D.. September 29, 1992
Series 1992-14, Class A-3... September 29, 1992
Series 1992-15, Class A-2C.. October 29, 1992
Series 1992-16, Class A-2C.. November 24, 1992
Series 1992-18P, Class A-3.. December 30, 1992
Series 1993-3, Class A-2B... February 26, 1993
Series 1993-3, Class A-2C... February 26, 1993
Series 1993-3, Class B-7.... February 26, 1993
Each Underlying Series consists of multiple classes of mortgage
pass-through certificates representing interests in separate trusts (each, an
"Underlying Trust Fund"), previously formed by the RTC, each such Underlying
Trust Fund consisting, in part, of a mortgage pool or multiple mortgage
pools. Each of the Mortgage Certificates evidences a senior interest, except
for the Series 1992-9, Class B-4 Certificates and the Series 1993-3, Class B-
7 Certificates (the "Subordinated Mortgage Certificates") which represent a
subordinate interest, in a separate mortgage pool (each, an "Underlying
Mortgage Pool"), which is part of one of the Underlying Trust Funds,
consisting primarily of conventional, one-to four-family, residential first
mortgage loans (the "Mortgage Loans"), sold by the RTC to the related
Mortgage Loan Trustee for the benefit of holders of the certificates of the
related Underlying Series. The Mortgage Certificates representing interests
in Fixed Rate Mortgage Loans are referred to herein as "Fixed Rate
Certificates" (although, as described below under "--Interest Distributions,"
one class of Fixed Rate Certificates bears interest at a variable rate equal
to the weighted average, from time to time, of the net Mortgage Interest
Rates of the underlying Fixed Rate Mortgage Loans) and the Mortgage
Certificates representing interests in Adjustable Rate Mortgage Loans are
referred to herein as "ARM Certificates." The Underlying Series relating to
seven of the Mortgage Certificates (which have an aggregate Mortgage
Certificate Principal Amount of $199,459,826) included, as of the Underlying
Series Cut-off Date, at least one class of certificates (as to each
Underlying Series, the "Related Subordinated Certificates") which represents
an interest in the same Underlying Mortgage Pool as such class of Mortgage
Certificates and which is subordinated to such class of Mortgage
Certificates. The Underlying Series with respect to each Subordinated
Mortgage Certificate includes one class of certificates (as to each
Subordinated Mortgage Certificate, its "Related Senior Certificate") which
represents an interest in the same Underlying Mortgage Pool as such class of
Subordinated Mortgage Certificates and which is senior to such class of
Mortgage Certificates. The Underlying Series relating to four of the
Mortgage Certificates (which have an aggregate Mortgage Certificate Principal
Amount of $102,910,542) (the "Whole Pool Mortgage Certificates") include no
other classes which represent an interest in the same Underlying Mortgage
Pool as such class of Mortgage Certificates and which are either senior or
subordinate to such class of Mortgage Certificates.
Each of the Mortgage Certificates has been assigned the ratings set
forth in the following table by the rating agencies identified therein:
S - 44
<PAGE>
Mortgage Certificates Moody's S&P Fitch
- -------------------------------- ------- ---- -----
Series 1991-5, Class A-1..... Aa2 AAr AA
Series 1991-15, Class A-3.... Aa2 AAr nr
Series 1992-9, Class B-4..... Aa2 AAr nr
Series 1992-10, Class A-1.... nr AA AA
Series 1992-11, Class A-1C.. nr AAAr AAA
Series 1992-12, Class A-2D... Aaa nr AAA
Series 1992-14, Class A-3.... nr AAAr AAA
Series 1992-15, Class A-2C... nr AAAr AAA
Series 1992-16, Class A-2C... nr AAAr AAA
Series 1992-18P, Class A-3... nr AAAr AAA
Series 1993-3, Class A-2B.... Aaa AAAr nr
Series 1993-3, Class A-2C.... Aaa AAAr nr
Series 1993-3, Class B-7..... Aa2 AAr nr
------
nr = not rated
Neither the S&P nor the Moody's ratings of the ARM Certificates
represent any assessment of the related Mortgage Loan Servicer's ability to
repurchase any Convertible Mortgage Loans that are converted to fixed
Mortgage Interest Rates; S&P has so indicated by appending "r" to its ratings
of the Underlying Series. See "Description of the Mortgage Loans--Convertible
Mortgage Loans."
The following table sets forth expected approximate characteristics
of the Mortgage Certificates based on remittance reports received with
respect to the Underlying Series Distribution Dates occurring in April 1996.
S - 45
<PAGE>
SUMMARY DESCRIPTION OF THE MORTGAGE CERTIFICATES
(Based on the April 1996 Remittance Reports)
<TABLE>
<CAPTION>
Percent Interest
of Class Current Mortgage
Represented by Mortgage Certificate
Original Mortgage Current Certificate Pass-Thru
ARM Predominant Class Certificate in Class Balance Rate as of the
Certificates Class Index (1) Balance Trust Fund Balance in Trust Fund Cut-off Date
- ------------ ----- ----------- ----------- ---------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series 1991-5 A-1 1 year CMT 183,766,091 50.88% 55,258,879 28,115,661 7.79
Series 1992-9 B-4 1 year CMT 23,675,000 79.73% 16,864,099 13,444,979 7.56
Series 1993-3 B-7 1 year CMT 25,379,000 40.90% 25,389,945 10,383,476 7.97
Series 1991-15 A-3 COFI 113,127,000 34.47% 31,729,883 10,938,727 6.20
Series 1992-18P A-3 1 year CMT 110,251,000 72.79% 58,013,447 42,227,618 7.66
Totals/Weighted Average 456,198,091 105,110,461 7.56(2)
<CAPTION>
Fixed Rate
Certificates
- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series 1992-10 A-1 N/A 92,678,000 3.47% 29,122,332 1,009,940 8.32(3)
Series 1992-11 A-1C N/A 81,253,000 90.77% 81,253,000 73,753,000 7.00
Series 1992-12 A-2D N/A 40,245,000 43.27% 40,245,070 17,415,030 7.50
Series 1992-14 A-3 N/A 173,849,000 88.50% 55,069,593 48,734,257 7.00
Series 1992-15 A-2C N/A 44,861,000 73.25% 44,861,000 32,861,000 7.50
Series 1992-16 A-2C N/A 17,973,000 55.64% 6,826,168 3,798,013 7.75
Series 1993-3 A-2B N/A 67,660,000 8.50% 47,226,982 4,013,526 7.25
Series 1993-3 A-2C N/A 38,885,000 48.57% 38,885,000 18,885,000 7.25
Totals/Weighted Average 557,404,000 200,469,766 7.17(2)
</TABLE>
(1) The index indicated as the Predominant Index is applicable to at least
80% of the Underlying Mortgage Pool, as of the Underlying Series Cut-off
Date as reported in the Underlying Disclosure Documents.
(2) Based on current Mortgage Certificate Balance in the trust fund.
(3) Series 1992-10, Class A-1 pays the weighted average of the net Mortgage
Interest Rates of the underlying Fixed Rate Mortgage Loans. Hence its
coupon can vary from month to month due to the coupon dispersion of the
collateral.
DISTRIBUTIONS ON THE MORTGAGE CERTIFICATES
The following is a discussion of the characteristics of the
Mortgage Certificates in general. The precise characteristics of specific
Mortgage Certificates may vary from the general descriptions set forth below.
There are substantial variations among the Underlying Pooling Agreements for
the various Underlying Series. The following discussion does not purport to
describe with specificity the terms of any specific Underlying Pooling
Agreement, but is instead a general description of the major structural terms
of the Mortgage Certificates, with certain major variations from the general
descriptions with respect to certain Mortgage Certificates or groups of
Mortgage Certificates noted. Investors are urged to obtain the Underlying
Pooling Agreements and the Underlying Disclosure Documents from CS First
Boston and read such agreements in conjunction with this Prospectus
Supplement.
Distributions of interest and in reduction of principal balance of
the Mortgage Certificates are made on the 25th day of each month or, if such
25th day is not a business day, on the succeeding business day (each, an
"Underlying Series Distribution Date").
In general, for each Underlying Mortgage Pool, the related class of
Mortgage Certificates evidences, in the aggregate, the right to receive
certain principal payments on the Mortgage Loans in such Underlying Mortgage
Pool as described below under "--Principal Distributions," the right to
receive the interest payments on such Mortgage Loans at the applicable
Mortgage Certificate Pass-Through Rate and, in some cases as discussed below,
the right to receive Excess Cash attributable to such Mortgage Loans, in each
case until the related Mortgage Certificate Principal Amounts have been
reduced to zero.
S - 46
<PAGE>
Distributions on each Mortgage Certificate (other than
distributions in respect of Excess Cash) will generally be made from the
Mortgage Pool Available Distribution Amount. For each Underlying Mortgage
Pool, the related "Mortgage Pool Available Distribution Amount" with respect
to any Underlying Series Distribution Date will equal the sum of: (i) all
previously undistributed amounts received before the related Determination
Date with respect to the Mortgage Loans in such Mortgage Pool and (ii) all
Advances made by the Mortgage Loan Servicer or the Mortgage Loan Trustee (or
amounts withdrawn from the related Reserve Fund in respect of delinquent
mortgage loan payments), and any other payments required to be made by the
Mortgage Loan Servicer with respect to such Underlying Series Distribution
Date, less (x) the portion of the related servicing fee payable to the
related Mortgage Loan Servicer and (y) all other amounts which are due or
reimbursable to the Mortgage Loan Servicer with respect to such Mortgage
Loans; provided, however, that the Mortgage Pool Available Distribution
Amount with respect to any Underlying Series Distribution Date shall not
include:
(a) Monthly Payments due on the related Mortgage Loans on a date
subsequent to the related Due Period;
(b) principal prepayments received after the related Prepayment
Period (together with any interest payments received with such prepayments to
the extent that they represent the payment of interest accrued on the
Mortgage Loans in the related Mortgage Pool for the period subsequent to the
related Prepayment Period); and
(c) liquidation proceeds, insurance proceeds and proceeds of the
sale of any Mortgage Loans in the related Mortgage Pool received after the
related Prepayment Period.
Except as set forth in the following sentence, the due period (the
"Due Period") relating to each Underlying Series Distribution Date and each
Underlying Series commences on the second day of the month preceding the
month in which such Underlying Series Distribution Date occurs and ends on
the Due Date in the month of such Underlying Series Distribution Date. The
Due Period for the Underlying Series relating to one Mortgage Certificate
(which has a Mortgage Certificate Principal Amount as of the Cut-off Date of
$42,227,618) commences on the second day of the second month preceding the
month in which each Underlying Series Distribution Date occurs and ends on
the first day of the month preceding the month in which such Underlying
Series Distribution Date occurs. The due date (the "Due Date") for any
Mortgage Loan is the date in each month on which its Monthly Payment is due.
Generally, for such Underlying Series Distribution Date, the prepayment
period (the "Prepayment Period") is the calendar month preceding the month in
which such Underlying Series Distribution Date occurs. With respect to
certain Mortgage Loans, however, the Prepayment Period with respect to each
Underlying Series Distribution Date is the period beginning on the
Determination Date in the month preceding the month in which such Underlying
Series Distribution Date occurs and ending on the day preceding the
Determination Date in the month in which such Underlying Series Distribution
Date occurs. The Determination Date for each Underlying Series is generally
the 15th day or 10th day (or if such day is not a business day, the preceding
business day) of the month in which the related Underlying Series
Distribution Date occurs.
INTEREST DISTRIBUTIONS
The "Mortgage Certificate Interest Distribution Amount" for any
class of Mortgage Certificates on any Underlying Series Distribution Date is
generally the amount of interest accrued during the preceding Mortgage
Certificate Interest Accrual Period for such class at the related Mortgage
Certificate Pass-Through Rate on the Mortgage Certificate Principal Amount of
such class immediately preceding such Underlying Series Distribution Date,
less any allocable Prepayment Interest Shortfall and allocable Deferred
Interest, each as described below. Except as set forth in the
S - 47
<PAGE>
following sentence, the "Mortgage Certificate Interest Accrual Period" for
any Underlying Series Distribution Date is generally the preceding calendar
month. The Mortgage Certificate Interest Accrual Period with respect to one
Mortgage Certificate and each Underlying Series Distribution Date is the
second calendar month preceding the month in which such Underlying Series
Distribution Date occurs. Interest on the Mortgage Certificates is calculated
on the basis of a 360-day year assumed to consist of twelve 30-day months.
Ten of the Mortgage Certificates (which have an aggregate Mortgage
Certificate Principal Amount as of the Cut-off Date of $238,421,000) will
also be entitled, to the extent funds are available therefor, to any Mortgage
Certificate Unpaid Interest Shortfalls existing with respect to each
Underlying Series Distribution Date. A "Mortgage Certificate Unpaid Interest
Shortfall" with respect to any such Mortgage Certificate is the amount, if
any, of the excess of the amount of interest accrued during all preceding
Mortgage Certificate Interest Accrual Periods over the actual distributions
of interest on all preceding Underlying Series Distribution Dates on such
Mortgage Certificate.
The "Mortgage Certificate Principal Amount" with respect to any
Mortgage Certificate and any Underlying Series Distribution Date is equal to
the initial principal amount of such Mortgage Certificate plus (x) any
Deferred Interest allocated to such Mortgage Certificate and less (y) the
amount of any principal distributions previously made on such Mortgage
Certificate.
Seven of the Mortgage Certificates (which have an aggregate
Mortgage Certificate Principal Amount as of the Cut-off Date of $199,459,826)
represent interests in Fixed Rate Mortgage Loans and have fixed Mortgage
Certificate Pass-Through Rates. The Mortgage Certificate Pass-Through Rate
of each such Mortgage Certificate is set forth in the following table:
MORTGAGE
CERTIFICATE PASS-
MORTGAGE CERTIFICATES THROUGH RATE
-------------------------- -----------------
Series 1992-11, Class A-1C 7.00
Series 1992-12, Class A-2D 7.50
Series 1992-14, Class A-3 7.00
Series 1992-15, Class A-2C 7.50
Series 1992-16, Class A-2C 7.75
Series 1993-03, Class A-2B 7.25
Series 1993-03, Class A-2C 7.25
One Mortgage Certificate (which has an aggregate Mortgage
Certificate Principal Amount as of the Cut-off Date of $1,009,940) represents
an interest in Fixed Rate Mortgage Loans and has a variable Mortgage
Certificate Pass-Through Rate equal, with respect to each Underlying Series
Distribution Date, to the weighted average of the net Mortgage Interest Rates
of the underlying Fixed Rate Mortgage Loans as in effect prior to the Due
Date in the Due Period immediately preceding the related Underlying Series
Distribution Date. The Mortgage Certificate Pass-Through Rate of such
Mortgage Certificate with respect to the Underlying Series Distribution Date
occurring in April 1996 was 8.32%.
Five of the Mortgage Certificates (which have an aggregate Mortgage
Certificate Principal Amount as of the Cut-off Date of $105,110,461)
represent interests in Adjustable Rate Mortgage Loans and have variable
Mortgage Certificate Pass-Through Rates equal, with respect to each
Underlying Series Distribution Date, to the weighted average of the Mortgage
Interest Rates on each of the Mortgage Loans in the related Mortgage Pool as
in effect prior to the Due Date in the Due Period immediately preceding the
related Underlying Series Distribution Date minus the excess rate, if
S - 48
<PAGE>
any, set forth for such class in the succeeding table (each such amount, the
"Excess Rate") and minus the weighted average servicing fee for the related
Underlying Mortgage Pool. The Excess Rate with respect to each Mortgage
Certificate generally represents amounts to be distributed as Excess Cash.
EXCESS RATES
Mortgage Certificates Excess Rates
--------------------------- --------------------
Series 1991-5, Class A-1...... 0.775% (1)
Series 1991-15, Class A-3..... (2)
Series 1992-9, Class B-4....... 0.596%
Series 1992-18P, Class A-3..... 0.0%
Series 1993-3, Class B-7....... 0.0%
------
(1) Includes both Excess Rate and weighted average servicing fee.
(2) The Excess Rate on the Series 1991-15, Class A-3 Certificate equals the
weighted average of the excess, if any, of a fixed percentage set forth in
the related mortgage notes over the sum of the servicing fee and 1.005%.
If either (x) an adjustment to the Mortgage Interest Rate of an
Adjustable Rate Mortgage Loan on any interest adjustment date without a
simultaneous adjustment of the Monthly Payment or (y) the limitation on
adjustments to Monthly Payments due to a Payment Adjustment Cap or the
graduated Monthly Payments of certain graduated payment mortgage loans
("GPM") causes the amount of interest accrued on the principal balance of an
Adjustable Rate Mortgage Loan during any period to exceed the related Monthly
Payment, the payment of such excess interest ("Deferred Interest") may be
deferred and the amount thereof added to the principal balance of such
Mortgage Loan. To the extent any Deferred Interest is added to the principal
balance of the Mortgage Loans in any Mortgage Pool, an allocable portion of
such Deferred Interest will reduce the interest payable to, and will be added
to the Mortgage Certificate Principal Amount of, the related Mortgage
Certificates (such allocable portion based upon the proportion that the
interest payable on such class of Mortgage Certificates bears to the total
amount of interest payable on all classes of certificates related to such
Mortgage Pool).
The "Monthly Payment" is, with respect to any Mortgage Loan and any
month, the scheduled Monthly Payment of principal and interest, excluding any
Balloon Payment, on such Mortgage Loan which is either payable by a borrower
in such month under the related note, or in the case of Mortgage Loans which
have been discharged and the related mortgaged property is held as part of
the Underlying Trust Fund ("REO Property"), would otherwise have been payable
under the note relating to such REO Property. A "Balloon Payment" is the
final scheduled payment of principal and interest on a Balloon Mortgage Loan.
When a borrower makes a full or partial prepayment of a Mortgage
Loan between Due Dates, the borrower pays interest on the amount prepaid only
from the last scheduled Due Date to the date of prepayment. In order to
mitigate any shortfall in interest resulting from such prepayments prior to a
scheduled Due Date, subject to certain limitations in the Underlying Pooling
Agreements, the portion of the servicing fee payable to the Mortgage Loan
Servicer (less a portion thereof reserved for payment of certain fees and
expenses) will be reduced by the amount necessary to provide the interest
payable on the related Mortgage Loans for the entire Prepayment Period in
which the prepayments occurred, adjusted to the Mortgage Interest Rate less
the applicable servicing fee. To the extent that reductions in the portion of
the servicing fee payable to the related Mortgage Loan Servicer are
insufficient to offset such interest shortfalls, the amount of such
insufficiency (a "Prepayment Interest
S - 49
<PAGE>
Shortfall"), will be allocated to the classes of Mortgage Certificates in
proportion to the interest accrued thereon. The servicing fees payable to any
Mortgage Loan Servicer with respect to certain Underlying Series will be
available to offset interest shortfalls relating to mortgage pools other than
the Underlying Mortgage Pools, and to the extent that such shortfalls occur
with respect to more than one mortgage pool relating to any such Underlying
Series on an Underlying Series Distribution Date, such servicing fee will be
allocated to offset such interest shortfalls pro rata based on the amounts of
the interest shortfalls in each mortgage pool.
Under the terms of the Relief Act, a borrower who enters military
service after the origination of such borrower's Mortgage Loan 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. Any interest shortfalls ("Relief Act Shortfalls")
resulting from the application of the Soldiers' and Sailors' Civil Relief Act
of 1940, as amended (the "Relief Act"), will generally be allocated to the
classes of Mortgage Certificates in the same manner as Prepayment Interest
Shortfalls. The Policy will not cover any Relief Act Shortfalls.
PRINCIPAL DISTRIBUTIONS
The "Pool Principal Distribution Amount" for each Underlying
Mortgage Pool on any Underlying Series Distribution Date generally equals the
sum of (i) the principal component of all scheduled Monthly Payments due on
each Mortgage Loan in such Underlying Mortgage Pool in the preceding Due
Period (the "Scheduled Principal Distribution Amount"), (ii) the principal
component of each Balloon Payment received on any Balloon Mortgage Loan in
such Underlying Mortgage Pool during the related Due Period, (iii) the
scheduled principal balance of each Mortgage Loan in such Underlying Mortgage
Pool that either was sold or became a liquidated mortgage loan during the
related Prepayment Period and (iv) all full or partial principal prepayments
received on each Mortgage Loan in such Underlying Mortgage Pool during the
related Prepayment Period.
Distributions in reduction of the Mortgage Certificate Principal
Amounts of seven of the Mortgage Certificates (which have an aggregate
Mortgage Certificate Principal Amount as of the Cut-off Date of $138,837,741)
on each Underlying Series Distribution Date are generally required to be made
(subject to the availability of funds) in an aggregate amount equal to the
Pool Principal Distribution Amount for the related Underlying Mortgage Pool
on such Underlying Series Distribution Date.
With respect to the remaining six Mortgage Certificates (the "Non-
Current Pay Certificates"), the Pool Principal Distribution Amount will be
allocated on each Underlying Series Distribution Date to one or more other
classes of certificates (the "Prior Classes") related to the same Mortgage
Pools as such Non-Current Pay Certificates, until the principal amounts of
such Prior Classes are reduced to zero prior to the allocation of any
principal to such Non-Current Pay Certificates. The following table sets
forth with respect to each Non-Current Pay Certificate the principal amount
of the related Prior Classes that must be reduced to zero prior to any
principal being paid in respect of such Non-Current Pay Certificate:
<TABLE>
<CAPTION>
Non-Current Pay Certificate Principal Amount of Prior Classes
<S> <C>
Series 1992-9, Class B-4 $123,584,108
Series 1992-11, Class A-1C $ 35,344,071
Series 1992-12, Class A-2D $ 81,746,910
Series 1992-15, Class A-2C $ 11,350,094
Series 1993-3, Class A-2C $ 47,226,982
Series 1993-3, Class B-7 $142,418,868
</TABLE>
S - 50
<PAGE>
EXCESS CASH
The "Excess Cash" in respect of any Underlying Mortgage Pool (other
than as described in the following sentence) for any Underlying Series
Distribution Date is generally the excess, if any, of the Mortgage Pool
Available Distribution Amount together with amounts withdrawn from the
related Underlying Series Reserve Fund in respect of realized losses for such
Underlying Mortgage Pool over the sum of (1) the Mortgage Certificate
Interest Distribution Amount for the related class of Mortgage Certificates
and the Related Subordinated Certificates and (2) the amounts set forth in
clauses (i) through (iv) of the definition of Pool Principal Distribution
Amount, as set forth above. The Underlying Pooling Agreements related to the
Series 1991-5, Class A-1 Certificates and Series 1991-15, Class A-3
Certificates do not specifically allocate Excess Cash.
The Underlying Pooling Agreements generally provide that Excess
Cash will be distributed to one or more classes of certificates relating to
such Underlying Series other than the Mortgage Certificates (as described in
greater detail in the related Underlying Disclosure Documents), in some cases
in respect of interest, in some cases in respect of losses and other
shortfalls and in some cases as payments in reduction of principal amount in
excess of the amount of principal received in respect of the related mortgage
loans, prior to being distributed in reduction of the Mortgage Certificate
Principal Amount of the related Mortgage Certificates. Classes of Mortgage
Certificates may also receive amounts in respect of Excess Cash with respect
to one or more mortgage pools contained in the same Underlying Trust Funds in
addition to Excess Cash from the related Underlying Mortgage Pool.
UNDERLYING SERIES RESERVE FUNDS
To increase the likelihood of full distributions of interest and
principal to holders of the certificates issued in each Underlying Series,
the RTC established with various collateral agents one or more reserve funds
with respect to each Underlying Series. The reserve funds relating to each
Underlying Series that are available to cover realized losses and, in some
cases, other shortfalls (such realized losses and other covered shortfalls,
"Covered Amounts") on the related Underlying Mortgage Pools are each referred
to herein as the "Underlying Series Reserve Fund" with respect to each
Underlying Series. Each Underlying Series Reserve Fund originally consisted
of an initial deposit by the RTC of securities, cash or other property (the
"Initial Deposits") equal in value to the amounts set forth in the following
table under the heading "Original Reserve Fund Balance". The current values
of the securities, cash and other property contained in each of the
Underlying Series Reserve Funds, as reported by the Mortgage Loan Servicers,
is set forth in the following table under the heading "Current Reserve Fund
Balance." Such Underlying Series Reserve Funds were established pursuant to
collateral security agreements (each, a "Collateral Security Agreement")
generally among the RTC, the related Mortgage Loan Trustee and a collateral
agent. The amounts held in each Underlying Series Reserve Fund are required
to be invested, at the direction of the RTC, in certain permitted investments
acceptable to the related rating agencies. The earnings, if any, resulting
from the investment of amounts held in the Underlying Series Reserve Funds
are remitted to the RTC.
Amounts on deposit in the related Underlying Series Reserve Funds
are used to offset Covered Amounts relating to each Underlying Mortgage Pool
prior to the allocation of such amounts to the Related Subordinated
Certificates or the Subordinated Mortgage Certificates. Each of the
Underlying Series Reserve Funds is available to cover not only Covered
Amounts relating to the related Underlying Mortgage Pools, but also other
mortgage pools contained in the same Underlying Trust Funds. The aggregate
outstanding principal balances of all mortgage loans (including mortgage
loans not contained in the Underlying Mortgage Pools) as to which Covered
Amounts will be covered by each of the Underlying Series Reserve Funds is set
forth in the following table under the heading "Balance of All Mortgage Loans
Covered."
S - 51
<PAGE>
UNDERLYING SERIES RESERVE FUNDS
(based on Remittance Reports)
<TABLE>
<CAPTION>
Original Current Balance of Current Reserve
Reserve Reserve All Mortgage Fund Balance as
Fund Fund Loans % of all Covered
Mortgage Certificates Balance Balance(1) Covered(1)(2) Mortgage Loans
- -------------------------------- ----------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Series 1991-5, Class A-1..... $19,296,490 $17,198,615 $ 55,261,886 31.12%
Series 1991-15, Class A-3.... 45,177,381 38,499,320 120,650,005 31.91%
Series 1992-9, Class B-4..... 66,291,987 55,897,302 228,754,368 24.44%
Series 1992-10, Class A-1.... 6,487,490 6,335,468 29,663,815 21.36%
Series 1992-11, Class A-1C.. 26,093,586 7,139,160 146,854,629 4.86%
Series 1992-12, Class A-2D... 36,312,949 33,938,306 166,877,121 20.34%
Series 1992-14, Class A-3.... 15,958,889 15,605,274 75,943,311 20.55%
Series 1992-15, Class A-2C... 27,226,597 13,072,908 113,792,195 11.49%
Series 1992-16, Class A-2C... 24,148,784 3,316,742 81,450,955 4.07%
Series 1992-18P, Class A-3... 23,528,488 23,343,356 155,353,748 15.03%
Series 1993-3, Class A-2B.... 35,813,632 18,124,158 173,687,764 10.43%
Series 1993-3, Class A-2C.... 35,813,632 18,124,158 173,687,764 10.43%
Series 1993-3, Class B-7..... 73,236,264 56,045,536 351,962,946 15.92%
</TABLE>
- -----------------
(1) As of the Underlying Series Distribution Date for April 1996.
(2) Includes, in some cases, mortgage loans not contained in Underlying
Mortgage Pools.
The Mortgage Loan Trustee with respect to each Underlying Series
will generally be required to effect a transfer of funds in the related
Underlying Series Reserve Fund, to the extent available, on each Underlying
Series Distribution Date in an amount equal to any realized losses sustained
with respect to Mortgage Loans in the related Mortgage Pools in the related
Prepayment Period. With respect to the Underlying Series as to which the
related Mortgage Loan Servicers are not required to make Advances (as
described under "--Advances" below), the Mortgage Loan Trustee will also be
required to effect a transfer of funds from the related Underlying Series
Reserve Funds in the amount of any delinquent monthly payments or assumed
scheduled payments with respect to the Mortgage Loans in the related Mortgage
Pool in the related Prepayment Period. Any amount so withdrawn will be
distributed to the related classes of certificates together with the related
Mortgage Pool Available Funds.
If the funds available in any Underlying Series Reserve Fund on any
Underlying Series Distribution Date are insufficient to pay the full amounts
due with respect to all related classes of Certificates on such Underlying
Series Distribution Date, such funds will be paid to the holders of the
Mortgage Certificates (other than the Subordinated Certificates) and the
senior certificates related to the other mortgage pools covered by such
Underlying Series Reserve Fund in proportion to the respective shortfalls of
each such class that would be caused by the insufficiency of amounts
available absent a transfer of funds from such Underlying Series Reserve
Fund. Upon the depletion of the Underlying Series Reserve Funds related to
any class of Subordinated Certificates or Whole Pool Certificates, such class
will suffer all losses and shortfalls with respect to the related Mortgage
Pools (other than any losses or shortfalls covered by any
Overcollateralization, as discussed below under "--Subordination").
None of the Underlying Series Reserve Funds has been allocated on a
pro rata basis among the related mortgage pools. Rather, distributions from
each Underlying Series Reserve Fund, to the extent of funds available
therein, will be made without regard to the order, frequency or magnitude of
the losses and other shortfalls on mortgage loans in each covered mortgage
pool. Disproportionate losses or delinquencies in the mortgage pools covered
by the Underlying Series Reserve Funds that are not Underlying Mortgage Pools
could deplete the coverage provided for the Mortgage Certificates by such
Underlying Series Reserve Funds. Consequently, an Underlying Series Reserve
Fund may be unavailable on an Underlying Series Distribution Date to offset
Covered Amounts with respect to a
S - 52
<PAGE>
class of Mortgage Certificates even though the amount of the losses and other
shortfalls experienced by the related Underlying Mortgage Pool may have been
proportionately less than that experienced by the other covered mortgage
pools.
The terms of each Collateral Security Agreement require the related
collateral agent to release funds in the related Underlying Series Reserve
Funds to the RTC under certain circumstances related to the delinquency and
loss experience of the related mortgage loans if the balance on deposit in
such Underlying Series Reserve Funds exceeds the "Reserve Fund Requirement"
as such term is variously defined in the related Collateral Security
Agreements and described in the related Underlying Disclosure Documents.
Each Collateral Security Agreement provides that, with the approval
of the related rating agencies, and at the option of the RTC, the related
Underlying Series Reserve Fund can be replaced, in whole or in part, with a
form of credit enhancement that is, or is invested in securities or
obligations, which are backed by the full faith and credit of the United
States of America.
SUBORDINATION
After the coverage provided to each of the Mortgage Certificates by
the related Underlying Reserve Funds has been depleted, additional coverage
against losses and other shortfalls on the related Mortgage Loans will be
provided to each class of Mortgage Certificates as to which there exists a
class or classes of Related Subordinated Certificates, by the subordination
of such class or classes of Related Subordinated Certificates. After the
coverage provided to the Subordinated Mortgage Certificates and the Whole
Pool Mortgage Certificates by the related Underlying Series Reserve Funds has
been depleted, the Subordinated Mortgage Certificates and the Whole Pool
Mortgage Certificates will suffer all losses and other shortfalls on the
related Mortgage Loans. In general, the protection afforded to the Mortgage
Certificates (other than the Subordinated Mortgage Certificates and the Whole
Pool Mortgage Certificates) by the subordination of any Related Subordinated
Certificates will be effected in two ways: (i) by the preferential right of
the Mortgage Certificates to receive distributions on any Underlying Series
Distribution Date after the depletion of the related Underlying Series
Reserve Fund and (ii) by the allocation of losses on the related Mortgage
Loans first to such Related Subordinated Certificates until the principal
balances thereof have been reduced to zero prior to the allocation of any
such losses to the Mortgage Certificates. Each class of Subordinated
Mortgage Certificates will provide protection to its class of Related Senior
Certificates in the same manner. In addition, because of the application of
Excess Cash to reduce the Mortgage Certificate Principal Balance of certain
classes of Mortgage Certificates and because of the application of Excess
Cash to reduce the principal balance of certain classes of Related
Subordinated Certificates and Related Senior Certificates, the aggregate
principal balance of the Mortgage Loans in certain of the Underlying Mortgage
Pools exceeds the sum of the principal balances of the Mortgage Certificates
and Related Subordinated Certificates related thereto. Such excess is
hereinafter referred to as "Overcollateralization." Such
Overcollateralization provides additional credit support to the holders of
the related classes of Mortgage Certificates. The following table indicates
the current aggregate principal balance of the class or classes of Related
Subordinated Certificates, if any, for each class of Mortgage Certificates,
the percentage of the aggregate principal balance of the Mortgage Loans
contained in the related Underlying Trust Fund represented thereby, the
amount of Overcollateralization with respect to each Underlying Mortgage Pool
and the percentage of the aggregate principal balance of the Mortgage Loans
contained in the related Underlying Trust Fund represented thereby.
S - 53
<PAGE>
BALANCES OF RELATED SUBORDINATED CERTIFICATES
(based on April 1996 Remittance Reports)
<TABLE>
<CAPTION>
Current Aggregate
Principal Balance Percentage Percentage of
of Related of Related Related
Subordinated Underlying Overcollat- Underlying
Mortgage Certificates Certificates Mortgage Pool eralization Mortgage Pool
- -------------------------------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Series 1991-5, Class A-1..... N/A 0.00% $ 0 0.00%
Series 1991-15, Class A-3.... N/A 0.00% 4,221,628 11.74%
Series 1992-9, Class B-4..... N/A 0.00% 6,814,594 4.63%
Series 1992-10, Class A-1.... N/A 0.00% 541,483 1.83%
Series 1992-11, Class A-1C.. $12,597,000 8.58% 17,660,558 12.03%
Series 1992-12, Class A-2D... 0 0.00% 33,304,829 21.45%
Series 1992-14, Class A-3.... 0 0.00% 7,566,420 12.08%
Series 1992-15, Class A-2C... 7,362,000 10.03% 9,797,686 13.35%
Series 1992-16, Class A-2C... 16,187,000 43.97% 13,801,199 37.49%
Series 1992-18P, Class A-3... N/A 0.00% 872 0.00%
Series 1993-3, Class A-2B.... 23,513,000 19.56% 10,590,658 8.81%
Series 1993-3, Class A-2C.... 23,513,000 19.56% 10,590,658 8.81%
Series 1993-3, Class B-7..... N/A 0.00% 1,751,600 1.03%
</TABLE>
SPECIAL TERMINATION
With respect to each Underlying Series, other than Series 1992-18P,
subject to the limitations imposed by the related Underlying Pooling
Agreement, by no later than the tenth business day after the first Underlying
Series Distribution Date on which the aggregate outstanding principal balance
of all related classes of certificates is less than 25% of the initial
related aggregate principal balance of such certificates, the related
Mortgage Loan Trustee will solicit bids for the related mortgage loans
(including the Mortgage Loans contained in the related Underlying Mortgage
Pools) and any other property remaining in the related Trust Fund. The
related Mortgage Loan Trustee, however, will not accept any bid for such
mortgage loans and other property unless certain minimum requirements are
met, including that the proceeds distributable as a result of such sale would
be at least equal to 100% of the then outstanding aggregate principal balance
of all related classes of certificates plus accrued interest thereon through
the applicable Interest Accrual Period. The sale of the mortgage loans and
any other property in any Underlying Trust Fund must be for an amount no less
than fair market value. If the proceeds from a proposed sale of any mortgage
loans and any other property remaining in any Underlying Trust Fund would be
insufficient to satisfy the requirements of the two preceding sentences, the
related Mortgage Loan Trustee will continue to solicit bids as described
above from time to time as it deems appropriate, until a bid satisfying the
requirements of the two preceding sentences is received. The proceeds of such
sale will be treated as a prepayment of the mortgage loans for purposes of
distributions to Certificateholders. Any such sale will effect a termination
(a "Special Termination") of the related Underlying Trust Fund and an early
retirement of the related certificates (including the related Mortgage
Certificates). Any resulting distribution on a class of Mortgage Certificates
will increase the amount distributable on the Class A-1 Certificates in
respect of principal and will result in a shortening in the weighted average
life thereof. There can be no assurance as to the timing of Special
Terminations with respect to the Mortgage Certificates. Such terminations
could occur for none, for only some, or for all of the Mortgage Certificates
(other than the Series 1992-18P, Class A-3 Certificates), and any such
terminations could occur prior to the April 28, 1999 Distribution Date on the
Class A-1 Certificates.
S - 54
<PAGE>
OPTIONAL TERMINATION
With respect to each Underlying Series, any of the related Mortgage
Loan Servicers, any holder of a related residual certificate or the owner of
the assets pledged to any reserve fund (including the related Underlying
Series Reserve Fund) may effect an early termination (an "Optional
Termination") of the related trust on any Underlying Series Distribution Date
after the date on which the aggregate scheduled principal balance of the
related mortgage loans is reduced to less than 10% of the aggregate scheduled
principal balance as of the related Underlying Series Cut-off Date, by
purchasing all such mortgage loans at a purchase price, payable in cash,
equal to 100% of the aggregate unpaid principal balance of such mortgage
loans plus one month's interest thereon at the applicable mortgage interest
rate. The proceeds of such sale will be treated as a prepayment of the
mortgage loans for purposes of distributions to certificateholders. Any such
sale will effect a termination of the related Underlying Trust Fund and an
early retirement of the related Certificates (including the related Mortgage
Certificates). Any resulting distribution on a class of Mortgage Certificates
will increase the amount distributable on the Class A-1 Certificates in
respect of principal and will result in a shortening in the weighted average
life thereof. Such terminations could occur for none, for only some, or for
all of the Mortgage Certificates, and any such terminations could occur prior
to the April 28, 1999 Distribution Date on the Class A-1 Certificates.
ASSIGNMENT OF MORTGAGE LOANS AND WARRANTIES
At the time of issuance of each Underlying Series, the RTC caused
the mortgage loans in the related Underlying Trust Fund to be assigned to the
related Mortgage Loan Trustee, together with all principal and interest due
on or with respect to such mortgage loans, other than principal and interest
due on or before the related Underlying Series Cut-off Date. The Depositor
has no information as to whether the RTC has complied with its obligations
under any Underlying Pooling Agreement.
In addition, the RTC was required to deliver to the related
Mortgage Loan Trustee, as to each related mortgage loan (to the extent such
documents were available to the RTC), (i) the related mortgage note, endorsed
to the order of, or assigned to, the related Mortgage Loan Trustee without
recourse; (ii) a mortgage and mortgage assignment meeting the requirements of
the related Underlying Pooling Agreement; (iii) a lender's title insurance
policy or attorney's opinion of title issued as of the date of origination of
the mortgage loan, or an officer's certificate to the effect that such policy
or opinion was issued on such date and remains in full force and effect; (iv)
any insurance policies covering the mortgaged property, including the primary
mortgage insurance policy, to the extent required or an officer's certificate
to the effect that such policies remain in full force and effect; and (v)
such other documents as may be described in the related Underlying Pooling
Agreement (such documents collectively, the "Mortgage Loan File"). The
applicable Mortgage Loan Trustee is required to hold such documents for each
Underlying Series in trust for the benefit of all certificateholders of such
Underlying Series. In a substantial number of cases, some or all of the
documents described above were not delivered by the RTC to the related
Mortgage Loan Trustees as of the closing dates for the related Underlying
Series.
In the related Underlying Pooling Agreement for each Underlying
Series, the RTC represented and warranted, among other things, that: (i) the
information set forth in the schedule of Mortgage Loans appearing as an
exhibit to the related Underlying Pooling Agreement was correct in all
material respects; (ii) immediately prior to the sale and assignment of the
related mortgage loans to the applicable Mortgage Loan Trustee, the RTC had
good title to each mortgage loan; (iii) each mortgage loan, other than any
co-op loan, was covered by a title insurance policy or an attorney's opinion
of title and each such policy was in full force and effect; (iv) to the best
of the RTC's knowledge, each mortgaged property was free of material damage
and in good repair; (v) as of the date of issuance of the related
certificates, each mortgage constituted a valid first lien on the related
mortgaged property
S - 55
<PAGE>
(subject only to (a) the lien of current real property taxes and assessments,
(b) covenants, conditions, and restrictions, rights of way, easements, and
other matters of public record as of the date of the recording of such
mortgage, such exceptions appearing of record and either being acceptable to
mortgage lending institutions generally or specifically referred to in the
related title insurance policy and which do not adversely affect the value of
the mortgaged property and (c) other matters to which like properties are
commonly subject that do not materially interfere with the benefits of the
security intended to be provided by the Mortgage); and (vi) as of the date of
initial issuance of the related certificates, there were no delinquent taxes,
assessments or other outstanding charges affecting the mortgaged properties.
In addition, the RTC represented and warranted in each related Underlying
Pooling Agreement, among other things, that, as of the date of the initial
issuance of the related certificates, all Monthly Payments due on or prior to
a date which was not longer, with respect to any Underlying Series, than four
months prior to the related Underlying Series Cut-off Date had been made. The
sole remedy for any breach of the RTC's representations and warranties
contained in each related Underlying Pooling Agreement or for defects in
mortgage loan documents is the obligation of the RTC to indemnify the related
Underlying Trust Fund for losses realized on mortgage loans as to which such
breaches or defects occur if there is a connection between such losses and
such breaches or defects. Subject to certain exceptions as set forth in the
Underlying Disclosure Documents, the RTC acting in its corporate capacity
will guarantee such obligation of the Seller. The proceeds of any such
repurchase or indemnification will be passed through to related
certificateholders as liquidation proceeds.
PAYMENTS ON MORTGAGE LOANS; UNDERLYING SERIES CERTIFICATE ACCOUNT
The Underlying Pooling Agreement for each Underlying Series
requires the related Mortgage Loan Servicer to maintain a custodial account
or accounts (the "Underlying Series Certificate Account") in the name of the
related Mortgage Loan Trustee for the benefit of the related
certificateholders. The amount at any time credited to the Underlying Series
Certificate Account is required to be fully insured to the maximum coverage
possible or be invested in permitted investments (as defined in the
Underlying Disclosure Documents) that mature, or are subject to withdrawal or
redemption, on or before the business day preceding the next succeeding
Underlying Series Distribution Date. The income from permitted investments of
funds in the Underlying Series Certificate Account is generally paid to the
related Mortgage Loan Servicer, and the risk of loss of funds in the
Underlying Series Certificate Account resulting from such investments will be
borne by the related Mortgage Loan Servicer. The amount of each such loss
will be required to be deposited by the related Mortgage Loan Servicer in the
Underlying Series Certificate Account immediately as realized.
The Mortgage Loan Servicers are required to deposit in the related
Certificate Accounts amounts representing the following collections and
payments (other than in respect of principal of or interest on the related
mortgage loans due on or before the Underlying Series Cut-off Date): (i) all
installments of principal and interest on the applicable mortgage loans and
any principal and/or interest required to be advanced by the related Mortgage
Loan Servicer that was due on the applicable Due Date net of servicing fees
due the related Mortgage Loan Servicer and certain other amounts specified in
the applicable Underlying Pooling Agreement; (ii) all amounts received in
respect of such mortgage loans representing late payments of principal and
interest to the extent such amounts were not previously advanced by the
related Mortgage Loan Servicer with respect to such mortgage loans, net of
servicing fees due the related Mortgage Loan Servicer; (iii) all principal
prepayments (whether full or partial) on such mortgage loans received; and
(iv) any amounts received by the related Mortgage Loan Servicer as insurance
proceeds (to the extent not applied to the repair or restoration of the
Mortgaged Property) or liquidation proceeds.
S - 56
<PAGE>
COLLECTION AND OTHER SERVICING PROCEDURES
The Mortgage Loan Servicers are required to make reasonable efforts
to collect all payments called for under the mortgage loans and are required,
consistent with the Underlying Pooling Agreements and any applicable
insurance policies, to follow such collection procedures as each deems
necessary or desirable. Consistent with the above, each Mortgage Loan
Servicer may, in its discretion, waive any prepayment, late payment or
assumption charge or penalty interest in connection with prepayment, late
payment or assumption of a mortgage loan or extend the due dates for payments
due on a mortgage note, provided that insurance coverage for such mortgage
loan will not be adversely affected.
ADVANCES
With respect to eight classes of Mortgage Certificates (which have
an aggregate Mortgage Certificate Principal Amount as of the Cut-off Date of
$106,994,412), the Mortgage Loan Servicers are required under the related
Underlying Pooling Agreement to advance prior to each Underlying Series
Distribution Date, from their own funds or from funds held in the related
Underlying Series Certificate Accounts for distribution on a future
Underlying Series Distribution Date, scheduled installments of principal and
interest due on a mortgage loan on the preceding Due Date and not collected
by such Mortgage Loan Servicer from the related borrower (any such advance,
an "Advance"). Each such Mortgage Loan Servicer will be obligated to make
such an advance to the extent that such Advances are, in its judgment,
reasonably recoverable from future payments and collections on the Mortgage
Loan out of insurance proceeds, liquidation proceeds or otherwise. Any
advance previously made by such Mortgage Loan Servicer is reimbursable to
such Mortgage Loan Servicer from funds in the Certificate Account to the
extent that such Mortgage Loan Servicer determines that such advance is not
ultimately recoverable from insurance proceeds, liquidation proceeds or
otherwise. With respect to each Mortgage Certificate, the related Mortgage
Loan Trustee will generally be obligated to make any required Advance if the
Mortgage Loan Servicer fails in its obligation to do so, to the extent
provided in the related Underlying Pooling Agreement.
With respect to the remaining five classes of Mortgage
Certificates, neither the related Mortgage Loan Servicer nor the related
Mortgage Loan Trustee will be required to make Advances. The amount of any
delinquent Monthly Payments with respect to related Mortgage Loans is instead
withdrawn from the related Underlying Reserve Fund, to the extent funds are
available therefor, in order to make full distributions on the related
Mortgage Certificates and Related Subordinated Certificates or Related Senior
Certificates.
MORTGAGE LOAN TRUSTEE AND COLLATERAL AGENT
With respect to eleven of the Mortgage Certificates, the Mortgage
Loan Trustee and Collateral Agent is Bankers Trust Company of California,
N.A., a national banking association organized and existing under the laws of
the United States of America with an office at 3 Park Plaza, Irvine,
California 92714. With respect to the two remaining Mortgage Certificates,
the Mortgage Loan Trustee and Collateral Agent is State Street Bank and Trust
Company, a banking corporation organized and existing under the laws of the
Commonwealth of Massachusetts with an office at 225 Franklin Street, Boston,
Massachusetts 02110.
S - 57
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
As of the Cut-off Date, the classes related to the Mortgage
Certificates represented approximately $530,745,398 of the beneficial
interest in 12 separate Underlying Mortgage Pools which, in turn, were
comprised of mortgage loans having an aggregate principal balance as of such
date of approximately $1,090,902,984. The Mortgage Loans in each Underlying
Mortgage Pool are conventional, one-to-four family residential first mortgage
loans having approximately the characteristics set forth in the table below.
The Mortgage Loans related to eight of the Mortgage Certificates (which have
an aggregate Mortgage Certificate Principal Amount of $200,469,766) bear
interest at fixed rates (the "Fixed Rate Mortgage Loans"). The Mortgage
Loans related to the remaining five Mortgage Certificates (which have an
aggregate Mortgage Certificate Principal Amount of $105,110,461) bear
interest at rates that adjust based on an Index, as described below under "--
Interest Rate Adjustments" (the "Adjustable Rate Mortgage Loans"). The rate
at which a Mortgage Loan accrues interest is referred to herein as its
"Mortgage Interest Rate." The related mortgaged properties include owner-
occupied, vacation and investor-owned properties, condominiums, cooperatives,
and units in Planned Unit Developments. With respect to some of the Mortgage
Loans, the type of the related mortgaged property was unknown as of the date
of issuance of the related Mortgage Certificates. Investors are urged to
review the information concerning the Mortgage Loans set forth in each of the
Underlying Disclosure Documents. Such information may not have been accurate
when prepared (See "Risk Factors--Troubled Originators" and "--Limited
Information; Incomplete Mortgage Files" herein). The information regarding
the Mortgage Loans set forth herein (including in the tables below) is based
on information contained in the Underlying Disclosure Documents and on other
information made available in connection with the issuance of each of the
Mortgage Certificates. In addition, the information contained in the assumed
Mortgage Certificate Characteristics table is derived from information made
available in connection with the issuance of each of the Mortgage
Certificates. It should be noted that there may have been material changes in
facts and circumstances since the date such documents and information were
prepared, including, but not limited to, prevailing interest rates and other
economic factors, which may limit the usefulness of, and even be directly
contrary to the assumptions used in preparing such information and documents.
In addition, the Underlying Disclosure Documents do not provide information
sufficient to determine the percentage distribution of Mortgage Loans
exhibiting many of the characteristics described herein. Neither the
Depositor nor the Certificate Administrator can provide any assurances as to
the accuracy or completeness of such information.
S - 58
<PAGE>
SELECTED MORTGAGE LOAN DATA
(based on April 1996 Remittance Reports)
<TABLE>
<CAPTION>
Weighted Average
Current Aggregate Mortgage Interest
Mortgage Loan Rate as of the
ARM Certificate Principal Balance Cut-off Date
- ----------------------------- ----------------- -----------------
<S> <C> <C>
Series 1991-5, Class A-1 $ 55,261,886 8.566
Series 1992-9, Class B-4 147,262,802 8.535
Series 1993-3, Class B-7 169,560,412 8.348
Series 1991-15, Class A-3 35,951,510 7.791
Series 1992-18P, Class A-3 58,014,318 8.443
<CAPTION>
Weighted Average
Current Aggregate Mortgage Interest
Mortgage Loan Rate as of the
Fixed Rate Certificates Principal Balance Cut-off Date
- ----------------------------- ----------------- -----------------
<S> <C> <C>
Series 1992-10, Class A-1 $ 29,663,815 9.053
Series 1992-11, Class A-1C 146,854,629 9.223
Series 1992-12, Class A-2D 155,296,810 9.562
Series 1992-14, Class A-3 62,636,013 9.264
Series 1922-15, Class A-2C 73,370,781 9.265
Series 1992-16, Class A-2C 36,814,367 9.040
Series 1993-3, Class A-2B 120,215,640 8.979
Series 1993-3, Class A-2C 120,215,640 8.979
</TABLE>
Adjustable Rate Mortgage Loans; Interest Rate Adjustments. Each
Adjustable Rate Mortgage Loan bears interest at a rate that adjusts
periodically, in accordance with the terms of the related mortgage note, to a
rate equal to the then-current Index (as defined herein) plus the applicable
fixed percentage specified in the related mortgage note (the "Gross Margin").
Adjustable Rate Mortgage Loans for which COFI (as defined herein) is the
Index are referred to herein as "COFI Mortgage Loans." Adjustable Rate
Mortgage Loans for which CMT (as defined herein) is the Index are referred to
herein as "CMT Mortgage Loans." The Mortgage Interest Rate for each
Adjustable Rate Mortgage Loan generally began to adjust on the first day of
the month prior to the first six-month or one-year anniversary of its first
payment date and then monthly, semi-annually or annually thereafter (each a
"Rate Adjustment Date"). The interest rate on all of the COFI Mortgage Loans
adjusts monthly. Each Fixed Rate Mortgage Loan bears interest at a constant
rate.
The majority of the Adjustable Rate Mortgage Loans are subject to
an overall maximum interest rate (the "Lifetime Cap"). For the COFI Mortgage
Loans which are subject to a Lifetime Cap, as of the Underlying Series Cut-
off Date for each Underlying Series, the Lifetime Cap ranged from 12.00% to
20.00% and the weighted average Lifetime Cap for such Mortgage Loans was
13.91%. For the CMT Mortgage Loans which are subject to a Lifetime Cap, as of
the Underlying Series Cut-off Date for each Underlying Series, the Lifetime
Cap ranged from 8.00% to 21.80% and the weighted average Lifetime Cap for
such Mortgage Loans ranged from 13.83% to 14.88%. Some of the Mortgage Loans
are subject to minimum interest rates. In addition to the Lifetime Cap, many
of the Mortgage Loans are also subject to periodic maximum interest rates
(the "Periodic Cap"). The Periodic Cap for such Mortgage Loans generally
ranges from 1% to 2%.
S - 59
<PAGE>
Effective with the first payment due on an Adjustable Rate Mortgage
Loan after the related Rate Adjustment Date, the monthly principal and
interest payment generally will be adjusted to an amount that will fully
amortize the then-outstanding principal balance of such Adjustable Rate
Mortgage Loan over its remaining term to stated maturity and that will be
sufficient to pay interest at the adjusted Mortgage Interest Rate. Therefore,
any partial prepayments may reduce the weighted average life of an Adjustable
Rate Mortgage Loan but will not (except for partial prepayments made in the
final year of the original term of such Adjustable Rate Mortgage Loan) cause
the final payment on such Mortgage Loan to occur prior to its stated
maturity. An increase in the Mortgage Interest Rate on a Mortgage Loan will
result in a larger portion of each higher Monthly Payment being allocated to
interest and a smaller portion being allocated to principal.
COFI AND CMT
The "Index" with respect to each COFI Mortgage Loan is the monthly
weighted average cost of funds for member institutions in the Eleventh
District of the Federal Home Loan Bank System, as published by the Federal
Home Loan Bank of San Francisco ("COFI"). The Index with respect to each CMT
Mortgage Loan generally is either (a) the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity ("CMT") of one year, as
published by the Federal Reserve Board in Statistical Release H.15 (519) or
any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency and made
available to the servicer as of a date which is a number of days prior to
each Rate Adjustment Date for such Mortgage Loan. Some of the Mortgage Loans
use a CMT index based on a 2, 3 or 5 year maturity or the weekly auction
average (investment) rate on U.S. Treasury Bills with a six-month maturity
("CBE"). In general, should the applicable Index not be published or become
otherwise unavailable, the servicer of the Mortgage Loan will select a
comparable alternative index over which it has no control and which is
readily verifiable.
The monthly averages of COFI and CMT in the tables below are not
necessarily indicative of COFI or CMT on any given date in the relevant month
since significant week-to-week fluctuations in any such Index may occur in
any month as well as over longer periods. In addition, such monthly averages
do not purport to be a prediction of the value of COFI or CMT on any Rate
Adjustment Date or for the lives of the Mortgage Loans.
COFI. The following table sets forth COFI for each of the last
seven calendar years or portions thereof, based on information reported by
The Federal Home Loan Bank of San Francisco ("FHLBSF").
S - 60
<PAGE>
MONTHLY COFI
<TABLE>
<CAPTION>
Year
----------------------------------------------
Month(1) 1996 1995 1994 1993 1992 1991 1990
- -------- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
January.... 5.03% 4.75% 3.71% 4.36% 6.00% 7.86% 8.37%
February... 4.98 4.93 3.69 4.33 5.80 7.85 8.40
March...... 4.87 5.01 3.63 4.25 5.61 7.65 8.26
April...... __ 5.06 3.67 4.17 5.43 7.50 8.21
May........ __ 5.14 3.73 4.10 5.29 7.33 8.17
June....... __ 5.18 3.80 4.05 5.26 7.16 8.09
July....... __ 5.14 3.86 4.00 5.07 7.00 8.11
August..... __ 5.13 3.95 3.96 4.87 6.85 8.08
September.. __ 5.11 4.04 3.88 4.81 6.71 8.09
October.... __ 5.12 4.19 3.82 4.60 6.57 8.05
November... __ 5.12 4.37 3.82 4.51 6.41 8.04
December... __ 5.06 4.59 3.88 4.43 6.25 7.96
</TABLE>
- -------------------
(1) COFI reflects the weighted average cost of funds of the members
of the Eleventh District for the month indicated. It is usually announced by
the FHLBSF on the last working day of the month following the month in which
the cost of funds was incurred.
The FHLBSF publishes COFI in its monthly Information Bulletin. Any
individual may request regular receipt by mail of Information Bulletins by
writing the Federal Home Loan Bank of San Francisco's Marketing Department,
P.O. Box 7948, San Francisco, California 94120, or by calling (415) 616-2610.
COFI may also be obtained by calling the FHLBSF at (415) 616-2600.
COFI is designed to represent the monthly weighted average cost of
funds for savings institutions in Arizona, California and Nevada that are
member institutions of the Eleventh Federal Home Loan Bank District (the
"Eleventh District"). COFI for a particular month reflects the interest costs
paid on all types of funds held by Eleventh District member institutions and
is calculated by dividing the cost of funds by the average of the total
amount of those funds outstanding at the end of that month and of the prior
month and annualizing and adjusting the result to reflect the actual number
of days in the particular month. If necessary, before these calculations are
made, the component figures are adjusted by the FHLBSF to neutralize the
effect of events such as member institutions leaving the Eleventh District or
acquiring funds held at the end of the relevant month. The major components
of funds of Eleventh District member institutions are: (i) savings deposits,
(ii) time deposits, (iii) FHLBSF advances, (iv) repurchase agreements and (v)
all other borrowings. Because the component funds represent a variety of
maturities whose costs may react in different ways to changing conditions,
COFI does not necessarily reflect any particular current market rate.
A number of factors affect the performance of COFI, which may cause
it to move in a manner different from indices tied to specific interest
rates, such as United States Treasury Bills or LIBOR. Because the liabilities
upon which COFI is based were issued at various times under various market
conditions and with various maturities, COFI may not necessarily reflect the
prevailing market interest rates on new liabilities of similar maturities.
Moreover, as stated above, COFI is designated to represent the average cost
of funds for Eleventh District savings institutions for the month prior to
the month in which it is due to be published. Additionally, COFI may not
necessarily move in the same direction as market interest rates at all times,
since as longer term deposits or borrowings mature and are renewed at
prevailing market interest rates, COFI is influenced by the differential
between the prior and the new rates on those deposits or borrowings. In
addition, movements of COFI, as compared to
S - 61
<PAGE>
other indices tied to specific interest rates, may be affected by changes
instituted by the FHLBSF in the method used to calculate COFI.
CMT. The following table sets forth the monthly averages of CMT
for each of the last seven calendar years or portions thereof, based on
information published in the Federal Reserve Board in Statistical Release
H.15 (519):
MONTHLY AVERAGES OF CMT
<TABLE>
<CAPTION>
Year
-----------------------------------------------
Month 1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
January.... 5.09% 7.05% 3.54% 3.50% 4.15% 6.64% 7.92%
February... 4.94 6.70 3.87 3.39 4.29 6.27 8.11
March...... 5.34 6.43 4.32 3.33 4.63 6.40 8.35
April...... 5.54 6.27 4.82 3.24 4.30 6.24 8.40
May........ __ 6.00 5.31 3.36 4.19 6.13 8.32
June....... __ 5.64 5.27 3.54 4.17 6.36 8.10
July....... __ 5.59 5.48 3.47 3.60 6.31 7.94
August..... __ 5.75 5.56 3.44 3.47 5.78 7.78
September.. __ 5.62 5.76 3.36 3.18 5.57 7.76
October.... __ 5.59 6.11 3.39 3.30 5.33 7.55
November... __ 5.43 6.54 3.58 3.68 4.89 7.31
December... __ 5.31 7.14 3.61 3.71 4.38 7.05
</TABLE>
Convertible Mortgage Loans. Under the terms of certain of the
Adjustable Rate Mortgage Loans, the borrower has the option at certain times
and under certain conditions to convert the Mortgage Interest Rate to a fixed
rate from a variable rate based on the applicable Index (each such loan, a
"Convertible Mortgage Loan"). The option to convert to a fixed Mortgage
Interest Rate may be exercised by the borrower on the date or dates specified
in the related note. The borrower's option to convert to a fixed Mortgage
Interest Rate may have expired with respect to certain of the Convertible
Mortgage Loans. The conversion option typically may not be exercised if the
borrower is in default under the terms of the related note or mortgage. In
most cases, the Convertible Mortgage Loan may be converted to a fixed
interest rate loan with a Mortgage Interest Rate based upon FNMA's or FHLMC's
required net yield for the purchase of 15-year (for Adjustable Rate Mortgage
Loans with original repayment terms of 15 years or less) or 30-year (for
Adjustable Rate Mortgage Loans with original repayment terms of greater than
15 years) fixed-rate mortgage loans, under 30-day or 60-day mandatory
delivery commitments. In either case, the fixed interest rate will be
computed by adding a specified margin to the applicable FNMA quotation or the
applicable FHLMC quotation. Upon conversion, the Monthly Payments of
principal and interest generally will be adjusted to provide for fully
amortizing, level Monthly Payments until maturity.
The Underlying Pooling Agreements applicable to the Adjustable Rate
Mortgage Loans provide that the Mortgage Loan Servicers will be obligated to
purchase any Adjustable Rate Mortgage Loan as to which the borrower exercises
the right to convert to a fixed Mortgage Interest Rate for a price equal to
100% of the unpaid principal balance of such Adjustable Rate Mortgage Loan
plus unpaid accrued interest at the applicable Mortgage Interest Rate. The
Mortgage Loan Servicer's purchase obligation is not insured or guaranteed by
any person. The proceeds of any such purchased converted Mortgage Loan will
be treated as a prepayment and will be passed through to the Trustee, as
holder of the related Mortgage Certificates. A converted Mortgage Loan
bearing a fixed Mortgage Interest Rate will remain in the Mortgage Pool until
purchased or repaid. Any failure to purchase a
S - 62
<PAGE>
converted Mortgage Loan would cause the related Underlying Mortgage Pool to
include both fixed rate and adjustable rate Mortgage Loans.
Balloon Mortgage Loans. Certain of the Mortgage Loans are Balloon
Mortgage Loans. A "Balloon Mortgage Loan" is a Mortgage Loan that provided on
the date of origination for amortization on the basis of an amortization
schedule extending beyond its stated maturity with a disproportionate Monthly
Payment due on its stated maturity date equal to the remaining principal
balance of such Mortgage Loan. The ability of a borrower to repay such a
Balloon Mortgage Loan upon the maturity thereof frequently will depend on the
borrower's ability to refinance such Balloon Mortgage Loan, which in turn
will depend on a variety of factors, including the prevailing level of
Mortgage interest rates.
Negative Amortization Mortgage Loans. The Monthly Payment on an
Adjustable Rate Mortgage Loan is adjusted after an initial period and at
periodic intervals thereafter, all as specified in the related note (each, a
"Payment Change Date"), generally to an amount that would fully amortize the
remaining principal balance of the Mortgage Loan over its remaining
amortization term on a level-debt service basis, at the Mortgage Interest
Rate in effect on the related Payment Change Date. However, with respect to
certain of the Adjustable Rate Mortgage Loans, increases in the Monthly
Payment may be limited by the terms of the related note (the "Payment
Adjustment Cap"), which generally provides that no Monthly Payment may
increase by more than a percentage, specified in the related note, above the
Monthly Payment in effect during the preceding period. With respect to
certain of the Mortgage Loans, application of the Payment Adjustment Cap will
be at the option of the borrower.
In addition, with respect to the COFI Mortgage Loans, as to which
interest rates adjust monthly, because the rate at which interest accrues
changes more frequently than payments adjust and because adjustment of
Monthly Payments on such Mortgage Loans may be subject to the various
limitations described above, the amount of interest accruing on the remaining
principal balance of such a Mortgage Loan at the applicable Mortgage Interest
Rate may exceed the amount of the interest portion of the Monthly Payment.
The resulting shortfall in the interest portion of the related Monthly
Payment will be added to the unpaid principal balance of the related Mortgage
Loan in the month during which any such shortfall occurs as "Deferred
Interest," resulting in negative amortization of the Mortgage Loan. With
respect to such Mortgage Loans negative amortization is generally limited,
however, such that the principal balance of the Mortgage Loan cannot
generally exceed the percentage of its original principal balance specified
in the applicable note. If the calculated Monthly Payment would result in
negative amortization exceeding the limit specified in the related note, the
borrower generally is required to pay as the Monthly Payment until the next
Payment Change Date an amount that would fully amortize the remaining
principal balance of the Mortgage Loan over its remaining amortization term
on a level-debt service basis without regard to any limitations. As a result
of such negative amortization, the final payment at the end of the term of
the related Mortgage Loan may be larger than previous Monthly Payments under
such Mortgage Loan.
Non-Monthly Payment Loans. Certain of the Mortgage Loans may
provide for payments of principal at biweekly, quarterly, semiannual or
annual intervals, rather than at monthly intervals.
Graduated Payment Mortgage Loans. Certain of the Mortgage Loans
may provide for an initial period of Monthly Payments in an amount that would
be insufficient to fully amortize the principal balance of the Mortgage Loan
over its stated term, and that may be insufficient to pay accrued interest,
followed by scheduled increasing Monthly Payments prior to a date specified
in the related note. To the extent the amount of interest accruing on the
principal balance of such a Mortgage Loan at
S - 63
<PAGE>
the applicable Mortgage Interest Rate exceeds the Monthly Payment, such
excess will be added to the unpaid principal balance of the related Mortgage
Loan, resulting in negative amortization.
Growing Equity Mortgage Loans. Certain of the Fixed Rate Mortgage
Loans may provide for an initial period of Monthly Payments which are
calculated on the basis of an amortization schedule extending beyond the
stated maturity of the note, followed by scheduled increasing Monthly
Payments. Certain other Fixed Rate Mortgage Loans may provide for payments of
interest, but not of principal, for a period of years specified in the
related note, followed by several periods of scheduled increasing Monthly
Payments of principal and interest.
Step-Up Mortgage Loans. Certain of the Mortgage Loans may provide
that the related Mortgage Interest Rates will increase to a specified rate
over time, as specified in the related note.
FHA Loans and VA Loans. Certain of the Mortgage Loans may be FHA
Loans or VA Loans, as those terms are defined in the Prospectus. See "The
Trust Fund--The Mortgage Pools" in the Prospectus.
MORTGAGE LOAN DELINQUENCY STATUS
The following table summarizes the monthly delinquency, foreclosure
and REO information for the Mortgage Loans contained in each of the
Underlying Mortgage Pools for April 1996. The information in the following
table has been prepared by the Depositor solely on the basis of the
remittance reports provided by the Mortgage Loan Trustees, and the Depositor
makes no representations as to its accuracy. Investors should consider the
risk that any of the delinquent Mortgage Loans may become defaulted loans and
subsequently liquidated loans, and that realized losses on such Mortgage
Loans may be allocated to the Mortgage Certificates. Defaults by mortgagors
on the Mortgage Loans may result in the failure of Mortgage Certificates on a
given Underlying Series Distribution Date to receive full payments in respect
of interest or principal.
DELINQUENCY STATUS
(based on April 1996 Remittance Reports)
Delinquencies As Percent of Pool Balance
<TABLE>
<CAPTION>
APRIL 1996
-----------
30 DAYS 60 DAYS 90+ DAYS FORECLOSURE REO (2)
----------- -------- --------- ------------ -------
<S> <C> <C> <C> <C> <C>
ARM CERTIFICATES
Series 1991-5, Class A-1 2.12% 0.92% 0.45% 1.70% 0.58%
Series 1992-9, Class B-4 1.82% 0.27% 0.37% 4.81% 1.24%
Series 1993-3, Class B-7 3.08% 0.48% 0.80% 1.02% 0.90%
Series 1991-15, Class A-3 (1) 4.32% 0.84% 4.78% 4.01% 1.90%
Series 1992-18P, Class A-3 2.93% 1.45% 1.56% 1.64% NA
FIXED RATE CERTIFICATES
Series 1992-10, Class A-1 4.78% 0.16% 0.00% 0.87% 1.12%
Series 1992-11, Class A-1C 2.58% 0.41% 1.84% 1.52% NA
Series 1992-12, Class A-2D 1.49% 0.43% 0.15% 1.22% 0.82%
Series 1992-14, Class A-3 3.15% 0.31% 0.07% 1.99% 0.36%
Series 1992-15, Class A-2C 4.67% 1.49% 1.63% 2.93% NA
Series 1992-16, Class A-2C 1.20% 0.49% 1.80% 5.47% 1.29%
Series 1993-3, Class A-2B 2.36% 0.95% 1.59% 2.64% 0.15%
Series 1993-3, Class A-2C 2.36% 0.95% 1.59% 2.64% 0.15%
</TABLE>
- --------------------
(1) Reflects the average delinquencies as a percent of the Pool Balance of
Mortgage Loans in the related Mortgage Pool and mortgage loans in all
other mortgage pools in the same underlying Trust Fund.
(2) NA = Not available.
S - 64
<PAGE>
YIELD AND PREPAYMENT CONSIDERATIONS
Prepayments and Excess Cash. The rate of principal payments on the
Class A-1 Certificates will be affected by the rate of principal payments on
the Mortgage Loans (including, for this purpose, prepayments, which may
include amounts received by virtue of condemnation, insurance or foreclosure
and payments made under the Policy in respect of principal) and by the
application of Excess Cash to the principal balance of the Mortgage
Certificates.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall significantly below the interest rates on the
Mortgage Loans, the Mortgage Loans are likely to be subject to higher
prepayments than if prevailing rates remain at or above the interest rates on
such Mortgage Loans. Conversely, if prevailing interest rates rise above the
interest rates on such Mortgage Loans, the rate of prepayments would be
expected to decrease. Other factors affecting prepayment of the Mortgage
Loans include changes in borrowers' housing needs, job transfers,
unemployment, borrowers' net equity in the mortgaged properties and servicing
decisions.
The rate of payments (including prepayments) on pools of mortgage
loans is influenced by a variety of economic, geographic, social and other
factors. The Depositor is not aware of any publicly available statistics
that set forth principal prepayment experience or prepayment forecasts of
mortgage loans similar to the Mortgage Loans over an extended period of time.
The prepayment experience of the Mortgage Certificates is insufficient to
draw any conclusions with respect to the expected prepayment rates of the
Mortgage Loans. If prevailing rates for mortgage loans fall significantly
below the then-current interest rates on the Mortgage Loans, the rate of
prepayment (including the rate of conversion of any Convertible Mortgage
Loans to fixed interest rate loans) would generally be expected to increase.
For example, with respect to the Adjustable Rate Mortgage Loans, if
prevailing interest rates fall significantly, such Mortgage Loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their ARMs to "lock in"
a lower fixed interest rate. Conversely, if interest rates rise
significantly above the interest rates on the Mortgage Loans, the rate of
prepayment on the Mortgage Loans would generally be expected to decrease. No
assurances can be given as to the rate of prepayments on the Mortgage Loans
in stable or changing interest rate environments.
Excess Cash related to each of the Underlying Mortgage Pools (and
other mortgage pools that are part of the Underlying Trust Funds) will be
allocated in reduction of the Mortgage Certificate Principal Balances of the
Certificates in various ways. See "The Mortgage Certificates--Principal
Distributions." The allocation of Excess Cash in reduction of the Underlying
Certificate Principal Balances of the Mortgage Certificates is not expected
to have a significant effect on the weighted average lives of the Class A-1
Certificates.
If a Class A-1 Certificate is purchased at a discount from its
initial principal amount by a purchaser that calculates its anticipated yield
to maturity based on an assumed rate of payment of principal that is faster
than that actually experienced on the Mortgage Loans, other things being
equal, the actual yield to maturity will be lower than that so calculated.
Similarly, if a Certificate is purchased at a premium by a purchaser that
calculates its anticipated yield to maturity based on an assumed rate of
payment of principal that is slower than that actually experienced on the
Mortgage Loans, other things being equal, the actual yield to maturity will
be lower than that so calculated.
Timing of Payments. The timing of changes in the rate of
prepayments on the Mortgage Loans may significantly affect an investor's
actual yield to maturity, even if the average rate of principal payments is
consistent with an investor's expectations. In general, the earlier a
prepayment of principal of the Mortgage Loans, the greater the effect on an
investor's yield to maturity. The effect
S - 65
<PAGE>
on an 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 Certificates may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
Basis Risk; LIBOR. The Class A-1 Pass-Through Rate is based on
LIBOR. However, the Mortgage Loans underlying the Mortgage Certificates bear
interest either at adjustable rates based on COFI and CMT (the "Indices"),
calculated at various frequencies, or at fixed rates. LIBOR and the Indices
may respond to different economic and market factors, and there is not
necessarily a correlation between them. Thus, it is possible, for example,
that LIBOR may rise during periods in which the Indices are stable or are
falling, or that even if both LIBOR and the Indices rise during the same
period, LIBOR may rise much more rapidly and sharply than the Indices. In
addition, even if LIBOR and the Indices move in tandem, the interest rates on
the Adjustable Rate Mortgage Loans adjust periodically (generally, semi-
annually or annually) while the Class A-1 Pass-Through Rate for each Interest
Accrual Period will be based on LIBOR as of the Reset Date preceding such
Interest Accrual Period. Consequently, there can be no assurance that the
weighted average of the fixed and adjustable rates at which interest accrues
on the Mortgage Certificates will equal or exceed the rate at which interest
accrues on the Class A-1 Certificates.
Furthermore, payments on the Class A-1 Certificates are made
quarterly while payments on the Mortgage Certificates are made monthly.
Therefore, the Mortgage Certificate Balance will decline monthly during each
Interest Accrual Period, while the Principal Balance of the Class A-1
Certificates remains constant throughout each Interest Accrual Period.
Therefore, even if the level of LIBOR is such that the weighted average of
the interest rates payable on the Mortgage Certificates is equal to or
greater than the interest rate payable on the Class A-1 Certificates, the
amount of interest paid on the Mortgage Certificates during any Collection
Period may still not be sufficient to pay the full Optimal Interest Amount of
the Class A-1 Certificates.
There can be no assurance that funds available in the Reserve Fund
and payments under the Yield Support Agreement will be sufficient to make up
any amount by which the interest collected on the Mortgage Certificates is
less than the Optimal Interest Amount of the Class A-1 Certificates on such
Distribution Date or any future Distribution Dates. The Policy, which is
only intended to cover credit risk with respect to the Mortgage Certificates,
will not cover any such deficiency with respect to the Class A-1
Certificates.
Mortgage Certificates. The Trust Fund contains Mortgage
Certificates which were issued at different times, are backed by different
pools of Mortgage Loans, have different allocations of principal and interest
and payment priorities among various classes, and may perform differently in
various interest and prepayment rate environments. The performance
characteristics of the Class A-1 Certificates will reflect a combination of
the performance characteristics of the various Mortgage Certificates. As a
result, it will be difficult to predict the likely yield and payment
experience of the Class A-1 Certificates.
Special Terminations. Each of the Underlying Mortgage Pools is
subject to termination as described under "Description of the Mortgage
Certificates--Special Termination." Any such termination may have the effect
of decreasing the weighted average life of the Class A-1 Certificates.
Auction Risk. There can be no assurance that the Trustee will, on
April 28, 1999 or on any date thereafter, be able to sell the Mortgage
Certificates for a price sufficient (together with amounts on deposit in the
Reserve Fund and funds payable under the Price Maintenance Agreement) to
allow the Class A-1 Certificates to be paid in full on or prior to their
Final Scheduled Distribution Date. The Price Maintenance Agreement will only
address decreases in the market value of the Fixed Rate Certificates that are
not caused by shortfalls or losses allocated to, or any downgrade of the
rating of, the Mortgaged Certificates. Furthermore, while payments under the
Policy are designed to prevent
S - 66
<PAGE>
any interruption in cashflow to the Class A-1 Certificates resulting from any
shortfalls or losses allocated to the Mortgage Certificates, the Policy will
not offset any diminution in the market value of the Mortgage Certificates
due to any such shortfalls or losses or due to any downgrade in the rating of
the Mortgage Certificates.
Convertible Mortgage Loans. As discussed above under "Description
of the Mortgage Loans," borrowers under certain of the Adjustable Rate
Mortgage Loans have the option to convert their Mortgage Loan to a fixed rate
loan. As previously discussed, the related Mortgage Loan Servicers are
obligated to purchase any such converted mortgage loans. Unless and until
such a purchase is effected, a converted mortgage loan will stay in the
Underlying Mortgage Pool and the Mortgage Interest Rate will be fixed rather
than based on an Index. The yield on the Class A-1 Certificates may thus be
adversely affected. In addition, the purchase of a Converted Mortgage Loan
may affect the rate of principal payments on the Class A-1 Certificates and,
as a result, the yield on such Certificates.
WEIGHTED AVERAGE LIVES
The weighted average life of a security refers to the average
amount of time that will elapse from the date of its issuance until each
dollar of principal of such security will be distributed to the investor. The
weighted average life of a Class A-1 Certificate is determined by (i)
multiplying the amount of each distribution of principal by the number of
years from the date of issuance (assumed to be May 31, 1996) to the related
Distribution Dates, (ii) adding the results and (iii) dividing the sum by the
aggregate principal payments on the Class A-1 Certificates. The weighted
average life of the Class A-1 Certificates will be influenced by, among other
factors, the rate at which principal is paid on the Mortgage Loans.
CPR MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment model. The model used in this Prospectus Supplement, known as a
conditional or a constant prepayment rate ("CPR"), represents an assumed
constant rate of prepayment each month, expressed as an annual rate, relative
to the outstanding principal balance of the Mortgage Loans at the beginning
of each period. CPR 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.
WEIGHTED AVERAGE LIFE AND PRE-TAX YIELD TABLES
For each of the following tables it was assumed (the "Modeling
Assumptions") that, among other things, (i) the Mortgage Loans underlying
each of the Mortgage Certificates have, on a weighted average basis, the
characteristics set forth in the table following this paragraph; (ii)
generally, each Mortgage Loan underlying each ARM Certificate has a Mortgage
Interest Rate as of the Cut-off Date equivalent to the weighted average
Mortgage Interest Rate of such Mortgage Loans, as reported in the applicable
Remittance Report prepared by the Mortgage Loan Servicers; (iii) the mortgage
loans contained in each of the mortgage pools related to each of the
Underlying Series have the same weighted average characteristics, except as
described in (ii) above, that such mortgage loans had on the related
Underlying Series Cut-off Date, except with respect to interest rate
adjustments, payment adjustments and maturities which have been adjusted for
the number of months from the underlying Series Cut-off Date to the Cut-off
Date, as to such Mortgage Loans the assumption was made that all such
mortgage loans prepay on a pro rata basis; (iv) scheduled monthly payments of
principal and interest on the Mortgage Loans will be timely received on the
first day of each month (with no
S - 67
<PAGE>
defaults); (v) principal prepayments on the Mortgage Loans will be received
on the last day of each month at the percentages of CPR indicated; (vi) all
amounts due with respect to the Mortgage Loans are applied to the payment of
the Mortgage Certificates on the 25th of the month as described in the
applicable Underlying Disclosure Documents; (vii) Deferred Interest with
respect to any Mortgage Loan is allocated to the related Certificates then
entitled to principal distributions, does not separately reduce the accrued
interest for such related Certificates and is not allocated to the Class A-1
or IO Certificates; (viii) for the first Interest Accrual Period, the Class
A-1 Pass-Through Rate is 5.73%; (ix) each quarterly distribution on the
Class A-1 Certificates is made on the 28th day of the relevant month,
commencing on July 28, 1996; (x) the Class A-1 Certificates are purchased on
May 31, 1996 at a price equal to 100% of their initial Principal Balance plus
33 days of accrued interest thereon; (xi) no Adjustable Rate Mortgage Loan is
converted to a fixed rate of interest; (xii) no Adjustable Rate Mortgage Loan
is a Graduated Payment Mortgage Loan; (xiii) any Adjustable Rate Mortgage
Loan which bears interest based on an index other than COFI is assumed to be
based on CMT; and (xiv) there are no Relief Act Shortfalls.
S - 68
<PAGE>
WEIGHTED AVERAGE CHARACTERISTICS OF ASSUMED MORTGAGE LOANS AND RELATED MORTGAGE
CERTIFICATES
(AS OF THE CUT OFF DATE)
<TABLE>
<CAPTION>
Mortgage Servicing Months Months
Interest Gross Fee Plus Net Seasoning Remaining Until Next Until Next
ARM CERTIFICATES Index Rate Margin Excess Rate Margin (yrs) Term(yrs) Rate Adjust Pay Adjust
- ---------------- ----- -------- ------ ----------- ------ --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series 1991-5, Class A-1 1 Year CMT 8.567 2.781 0.775 2.006 8.8 20.8 6 6
Series 1992-9, Class B-4 1 Year CMT 8.535 2.721 0.971 1.750 3.7 21.1 4 4
Series 1993-3, Class B-7 1 Year CMT 8.348 2.627 0.375 2.252 9.4 19.8 7 7
Series 1991-15, Class A-3 COFI 7.788 2.584 1.579 1.005 8.3 21.3 7 7
Series 1992-18P, Class A-3 1 Year CMT 8.443 2.730 0.840 1.890 3.3 20.4 9 9
<CAPTION>
Periodic Lifetime
ARM CERTIFICATES Cap Net Cap
- ---------------- -------- --------
<S> <C> <C>
Series 1991-5, Class A-1 1.998 13.098
Series 1992-9, Class B-4 2.000 13.429
Series 1993-3, Class B-7 2.000 14.505
Series 1991-15, Class A-3 1.930 12.331
Series 1992-18P, Class A-3 1.790 13.510
<CAPTION>
Mortgage
Interest Servicing Seasoning Remaining
FIXED RATE CERTIFICATES Rate Fee (yrs) Term(yrs)
- ----------------------- -------- --------- --------- ---------
<S> <C> <C> <C> <C>
Series 1992-10, Class A-1 9.053 .755 17.1 11.9
Series 1992-11, Class A-1C 9.223 .669 14.5 13.5
Series 1992-12, Class A-2D 9.562 .340 10.3 14.7
Series 1992-14, Class A-3 9.264 .635 16.0 12.0
Series 1922-15, Class A-2C 9.265 .578 9.9 15.5
Series 1992-16, Class A-2C 9.040 .110 6.3 12.9
Series 1993-3, Class A-2B 8.979 .250 11.4 15.1
Series 1993-3, Class A-2C 8.979 .250 11.4 15.1
</TABLE>
S - 69
<PAGE>
Based on the Modeling Assumptions and the further assumptions that
(i) LIBOR with respect to each Interest Accrual Period is equal to 5.5%, (ii)
CMT with respect to each Interest Accrual Period is equal to 5.703%, (iii)
COFI with respect to each Interest Accrual Period is equal to 4.874% and (iv)
the Reinvestment Rate with respect to each Interest Accrual Period is equal
to 5.0%, the following table indicates the percentages of the initial
Principal Balance of the Class A-1 Certificates that would be outstanding
under Termination Scenario III as described below after each of the dates
shown at various constant percentages of CPR. Such tables also indicate,
based on such assumptions, the weighted average life of the Class A-1
Certificates under each of the following four scenarios (the "Termination
Scenarios") concerning the Auction and Special Terminations of the Underlying
Series. See "Description of the Certificates--Mandatory Auction" and "The
Mortgage Certificates--Special Termination."
"Termination Scenario I" assumes that the Auction that occurs in
April 1999 is successful and the Class A-1 Certificates are retired on
April 28, 1999 and that Special Terminations or Optional Terminations do
not occur with respect to any of the Underlying Series prior to April
28, 1999.
"Termination Scenario II" assumes that the Auction that occurs in
April 1999 is successful and the Class A-1 Certificates are retired on
April 28, 1999 and that Special Terminations occur with respect to each
Underlying Series as to which a Special Termination is possible prior to
April 28, 1999 with respect to each of the Underlying Series on the
dates on which the aggregate outstanding principal balance of all
related classes of certificates is reduced to 25% or less of their
original aggregate principal balances. The scenario also assumes that
Optional Termination occurs with respect to the Series 1992-18P, Class
A-3 Certificates on the earliest possible date.
"Termination Scenario III" assumes that the Auctions that occur in
April 1999 and thereafter are not successful and that Special
Terminations or Optional Terminations do not occur with respect to any
of the Underlying Series.
"Termination Scenario IV" assumes that the Auctions that occur in
April 1999 and thereafter are not successful and that Special
Terminations occur with respect to each of the Underlying Series as to
which a Special Termination is possible on the dates on which the
aggregate outstanding principal balance of all related classes of
certificates are reduced to 25% or less of their original aggregate
principal balances. The scenario also assumes that Optional Termination
occurs with respect to the Series 1992-18P, Class A-3 Certificates on
the earliest possible date.
S - 70
<PAGE>
PERCENT OF ORIGINAL PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-1
CPR Prepayment Assumption
----------------------------------
DISTRIBUTION DATE 0% 6% 12% 18% 24% 30%
- ----------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100
April 28, 1997 96 93 89 84 78 71
April 28, 1998 92 83 71 60 48 38
April 28, 1999 85 68 52 38 25 16
April 28, 2000 74 53 34 20 13 11
April 28, 2001 63 38 19 13 10 5
April 28, 2002 50 24 14 10 5 1
April 28, 2003 38 17 12 7 1 1
April 28, 2004 27 15 10 2 1 0
April 28, 2005 22 14 6 1 1 0
April 28, 2006 21 12 2 1 0 0
April 28, 2007 20 10 2 1 0 0
April 28, 2008 17 5 1 1 0 0
April 28, 2009 14 2 1 0 0 0
April 28, 2010 11 2 1 0 0 0
April 28, 2011 6 2 1 0 0 0
April 28, 2012 4 1 0 0 0 0
April 28, 2013 3 1 0 0 0 0
April 28, 2014 2 1 0 0 0 0
April 28, 2015 2 1 0 0 0 0
April 28, 2016 1 0 0 0 0 0
April 28, 2017 0 0 0 0 0 0
April 28, 2018 0 0 0 0 0 0
April 28, 2019 0 0 0 0 0 0
April 28, 2020 and thereafter 0 0 0 0 0 0
Weighted Average Life(1)
Termination Scenario I 2.7 2.5 2.3 2.1 1.9 1.7
Termination Scenario II 2.7 2.4 2.0 1.5 1.2 1.0
Termination Scenario III 7.0 4.9 3.7 2.9 2.4 2.0
Termination Scenario IV 5.7 3.4 2.3 1.7 1.3 1.1
</TABLE>
/(1)/ The weighted average life of a Class A-1 Certificate is determined by
(i) multiplying the principal payment on the Class A-1 Certificates by the
number of years from the date of issuance of the Class A-1 Certificate to the
related Distribution Date, (ii) adding the results and (iii) dividing the sum
by the aggregate principal payments on the Class A-1 Certificates.
The following tables set forth, based upon the Modeling
Assumptions, and assuming the constant rate of CPR indicated in the heading
for each table, the pre-tax yield to maturity, on a corporate bond equivalent
basis, of the Class A-1 Certificates as of April 28, 1999 (on which date the
Mortgage Certificates are assumed to have been sold pursuant to the Auction.)
RATE SCENARIO III ASSUMES THAT THE LEVEL OF LIBOR RISES SIGNIFICANTLY ABOVE
CURRENT LEVELS. THE ACTUAL YIELD TO AN INVESTOR WILL BE SIGNIFICANTLY LOWER
IF THE ACTUAL LEVEL OF LIBOR FALLS, REMAINS CONSTANT OR RISES LESS THAN THE
AMOUNT ASSUMED IN RATE SCENARIO III. NO PREDICTION CAN BE MADE AS TO THE
ACTUAL LEVEL OF ANY SUCH INDEX AT ANY FUTURE DATE.
S - 71
<PAGE>
Pre-Tax Yield to Assumed Auction (April 28, 1999)
under Rate Scenario I/(1)/
Percent of CPR
12% 18% 24%
--- --- ---
Pre-tax Yield 5.8 5.8 5.8
Pre-Tax Yield to Assumed Auction (April 28, 1999)
under Rate Scenario II/(1)/
Percent of CPR
12% 18% 24%
--- --- ---
Pre-tax Yield 5.8 5.8 5.8
Pre-Tax Yield to Assumed Auction (April 28, 1999)
under Rate Scenario III/(1)/
Percent of CPR
12% 18% 24%
--- --- ---
Pre-tax Yield 7.1 7.0 7.0
/(1)/ Assumes that Special Terminations or Optional Terminations do not occur
with respect to any of the Underlying Series prior to April 28, 1999.
The yields set forth in the above table were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Class A-1 Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price of the Class A-1 Certificates indicated in the
Modeling Assumption above and converting such monthly rates to corporate bond
equivalent rates. Such calculation does not take into account variations that
may occur in the interest rates at which investors may be able to reinvest
funds received by them as payments of principal of and interest on the Class
A-1 Certificates and consequently does not purport to reflect the return of
any investment in the Class A-1 Certificates when such reinvestment rates are
considered.
ACTUAL EXPERIENCE WILL VARY FROM ASSUMPTIONS
Discrepancies will exist between the characteristics of the actual
Mortgage Certificates and the underlying Mortgage Loans and the
characteristics assumed therefor in preparing the tables contained herein. To
the extent that the Mortgage Certificates and Mortgage Loans have
characteristics which differ from those assumed in preparing the tables, the
Class A-1 Certificates may mature earlier or later than indicated by the
tables and the weighted average lives and pre-tax yields may also differ. In
addition, it is unlikely that the Mortgage Loans will prepay at any constant
rate or at the same rate, or that LIBOR will remain constant at any level.
The timing of changes in the rate of prepayment and level of LIBOR may
significantly affect the yield realized by a holder of the Class A-1
Certificates.
S - 72
<PAGE>
THE MORTGAGE LOAN SERVICERS
The names of the Mortgage Loan Servicers related to each of the
Mortgage Certificates are set forth in the following table:
MORTGAGE LOAN SERVICERS
Mortgage Certificates Mortgage Loan Servicer
--------------------- ----------------------
Series 1991-5, Class A-1 PNC Mortgage Corporation of America
Series 1991-15, Class A-3 Norwest Bank Minnesota, National Association
Series 1992-9, Class B-4 First Nationwide Mortgage Corp.
Series 1992-10, Class A-1 Norwest Bank Minnesota, National Association
Series 1992-11, Class A-1C First Nationwide Mortgage Corp.
Series 1992-12, Class A-2D GMAC Mortgage Corporation of Iowa
Series 1992-14, Class A-3 Norwest Bank Minnesota, National Association
Series 1992-15, Class A-2C First Nationwide Mortgage Corp.
Series 1992-16, Class A-2C Boatmen's National Mortgage Inc.
Series 1992-18P, Class A-3 First Nationwide Mortgage Corp.
Series 1993-3, Class A-2B Boatmen's National Mortgage Inc.
Series 1993-3, Class A-2C Boatmen's National Mortgage Inc.
Series 1993-3, Class B-7 Boatmen's National Mortgage Inc.
The preceding information with respect to the Mortgage Loan
Servicers was derived by the Depositor from publicly available information
which the Depositor believes to be reliable. However, the Depositor makes no
representations with respect thereto and assumes no responsibility for the
accuracy or completeness thereof.
THE RESOLUTION TRUST CORPORATION
The Resolution Trust Corporation (the "RTC") is an instrumentality
of the United States organized as a government corporation. The RTC was
established on August 9, 1989, by the enactment of the Financial Institutions
Reform, Recovery, and Enforcement Act of 1989 (as amended from time to time,
"FIRREA") for the purpose of managing and resolving all cases involving
depository institutions formerly insured by the Federal Savings and Loan
Insurance Corporation and for which a conservator or receiver was appointed
under federal law at any time from January 1, 1989 to September 30, 1993. The
principal office of the RTC is located at 801 17th Street, N.W., Washington,
D.C. 20429.
The RTC has been appointed as conservator or receiver with respect
to a large number of depository institutions, including each of the
Depository Institutions from one or more of which the Mortgage Loans in each
Underlying Pool was acquired.
The RTC is scheduled to terminate on December 31, 1996, and by
operation of law the FDIC will succeed the RTC as conservator or receiver of
any institutions for which the RTC is then acting in such capacity. FIRREA
provides that, at the time of such termination, all assets and liabilities of
the RTC will be transferred to the FSLIC Resolution Fund (the "FRF"). FIRREA
created the FRF as a separate fund to be managed by the FDIC, and transferred
to the FRF all assets and liabilities of the former Federal Savings and Loan
Insurance Corporation. FIRREA provides that, if certain other specified funds
are insufficient to satisfy the liabilities of the FRF, the Secretary of the
Treasury shall pay to the FRF such amounts as may be necessary for FRF
purposes.
S - 73
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General. An election will be made to treat the portion of the
Trust Fund consisting of the Mortgage Certificates as a REMIC for federal
income tax purposes. The payments on the Class A-1 Certificates which are
derived from the Mortgage Certificates, and the Class IO Certificates, will
be designated as regular interests in the REMIC, and the Class R Certificate
will be designated as the residual interest in the REMIC.
A purchaser of the Class A-1 Certificates will be treated for tax
purposes as purchasing a REMIC regular interest and a contractual right to
receive amounts from the Reserve Fund. Under general tax principles, a
purchaser of more than one asset must allocate its purchase price between the
assets based on their relative fair market values on the date of purchase. An
investor that disposes of its Class A-1 Certificates must make a similar
allocation of its amount realized.
The Certificate Administrator intends to treat the value of the
contractual right to receive payments from the Reserve Fund as de minimis.
Consequently, the Certificate Administrator intends to report assuming that
the entire purchase price for the Class A-1 Certificates is allocated to the
REMIC regular interest. An investor in the Class A-1 Certificates that
accounts for its investment using this method of allocation would report
amounts with respect to the Reserve Fund as income when received or accrued,
in accordance with such investor's regular method of tax accounting.
The Internal Revenue Service may contend, however, that a portion
of the purchase price paid by an investor in the Class A-1 Certificates
should be allocated to the investor's rights with respect to the Reserve
Fund. Under this approach, the investor would allocate a lesser amount of its
purchase price to the REMIC regular interest than described in the preceding
paragraph, which may result in the creation of, or a greater amount of,
original issue discount or market discount with respect to the REMIC regular
interest. The proper method of recovery of the investor's purchase price
allocated to its contractual rights with respect to the Reserve Fund is not
clear. Although not free from doubt, the contractual arrangement relating to
the Reserve Fund should constitute a "notional principal contract" for
federal income tax purposes. Investors should consult their own tax advisors
regarding an investment in the Class A-1 Certificates, in particular with
respect to the recovery of any purchase price allocated to such notional
principal contract.
Status of Class A-1 Certificates. The investment status of that
portion of the Class A-1 Certificates that constitutes a REMIC regular
interest is described in the Prospectus under "Certain Federal Income Tax
Consequences--REMIC Trust Funds--Characterization of Investments in REMIC
Certificates." The interest of an investor in the Class A-1 Certificates
relating to the Reserve Fund would not constitute:
. a "real estate asset" under Section 856(c)(5)(A) of the Internal
Revenue Code (the "Code") if held by a real estate investment
trust;
. a "qualified mortgage" under Code Section 860G(a)(3) or a
"permitted investment" under Code Section 860G(a)(5) if
held by a REMIC; or
. an asset described in Code Section 7701(a)(19)(C) if held by a
thrift.
Income received from the Reserve Fund will not constitute income described in
Code Section 856(c)(3)(B) for a real estate investment trust.
Taxation of REMIC Regular Interest. The portion of the Class A-1
Certificates which constitutes a REMIC regular interest generally will be
treated as a newly originated debt instrument for federal income tax
purposes. The REMIC regular interest bears interest at the Class A-1 Pass-
Through
S - 74
<PAGE>
Rate, subject to a maximum rate equal to the rate specified in clause (x) of
the definition of the Class IO Pass-Through Rate. Beneficial Owners of the
Class A-1 Certificates will be required to report income with respect to such
REMIC regular interest in accordance with the accrual method of accounting.
The Prepayment Assumption (as defined in the Prospectus) that the Certificate
Administrator intends to use in determining the rate of accrual of original
issue discount or premium is 18% CPR. No representation is made as to the
actual rate at which prepayments will occur.
Taxation of Foreign Investors. To the extent the contractual
arrangement relating to the Reserve Fund constitutes a notional principal
contract, income or gain thereon will not be subject to U.S. withholding tax.
See "Certain Federal Income Tax Consequences--General" and "--REMIC
Trust Funds" in the Prospectus.
S - 75
<PAGE>
ERISA CONSIDERATIONS
The Department of Labor has granted to CS First Boston an
individual administrative exemption Prohibited Transaction Exemption 89-90,
54 Fed. Reg. 42597 (Oct. 17, 1989) (the "Exemption"), from certain of the
prohibited transaction rules of ERISA and certain related excise taxes
imposed by the Code with regard to the initial purchase, the holding and the
subsequent resale by ERISA Plans of certificates in pass-through trusts that
meet the conditions and requirements of the Exemption. The Exemption should
apply to the liquidation, holding, and resale of the Class A-1 Certificates
by an ERISA Plan, provided that specified conditions (certain of which are
described below) are met.
Among the conditions which must be satisfied for the Exemption to
apply to the acquisition by an ERISA Plan of the Class A-1 Certificates are
the following: (1) the acquisition of the Certificates by an ERISA Plan is on
terms (including the price for such 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; (2) the rights and interests evidenced by the
Certificates acquired by the ERISA Plan are not subordinated to the rights
and interests evidenced by other certificates of the Trust; (3) the
Certificates acquired by the ERISA Plan have received a rating at the time of
such acquisition that is in one of the three highest generic rating
categories from any of S&P, Fitch, Duff & Phelps Credit Rating Co. or
Moody's; (4) the sum of all payments made to CS First Boston in connection
with the distribution of the Class A-1 Certificates represents not more than
reasonable compensation for underwriting such Certificates; and (5) the sum
of all payments made to and retained by the Certificate Administrator
represents not more than reasonable compensation for the Certificate
Administrator's services under the Pooling Agreement and reimbursement of the
Certificate Administrator's reasonable expenses in connection therewith.
In addition, it is a condition that the ERISA Plan investing in the
Class A-1 Certificates be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act.
The Exemption does not apply to the acquisition and holding of
Class A-1 Certificates by ERISA Plans sponsored by the Issuer, CS First
Boston, the Trustee, the Certificate Administrator, or any affiliate of such
parties. Moreover, the Exemption provides relief from certain self-
dealing/conflict of interest prohibited transactions, only if, among other
requirements (i) an ERISA Plan's investment in the Class A-1 Certificates
does not exceed 25% of all of that Class outstanding at the time of the
acquisition and (ii) immediately after the acquisition, no more than 25% of
the assets of an ERISA Plan with respect to which the person who has
discretionary authority or renders advice are invested in certificates
representing an interest in a trust containing assets sold or serviced by the
same person.
USE OF PROCEEDS
The proceeds from the sale of the Class A-1 Certificates (net of
expenses incurred in connection with the issuance of the Class A-1
Certificates) will be used by the Depositor to purchase the Mortgage
Certificates.
S - 76
<PAGE>
LEGAL INVESTMENT CONSIDERATIONS
The Class A-1 Certificates will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. As such, the Class A-1 Certificates will constitute legal
investments for certain entities to the extent provided in SMMEA. However,
institutions subject to the jurisdiction of the Office of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the
National Credit Union Administration or other federal or state banking,
insurance or other regulatory authorities should review applicable rules,
policies and guidelines of such authorities before purchasing any of the
Class A-1 Certificates, as such Certificates may be deemed to be unsuitable
investments, or may otherwise be restricted, under one or more of these
rules, policies and guidelines (in certain cases irrespective of SMMEA). It
should also be noted that certain states have enacted legislation limiting to
varying extent the ability of certain entities (in particular insurance
companies) to invest in "mortgage related securities." The appropriate
characterization of the Class A-1 Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions
to purchase Class A-1 Certificates, may be subject to significant
interpretive uncertainties. Investors should consult with their own legal
advisors in determining whether and to what extent the Class A-1 Certificates
constitute legal investments for such investors. See "Legal Investment" in
the Prospectus.
METHOD OF DISTRIBUTION
CS First Boston proposes to place the Class A-1 Certificates from
time to time in one or more negotiated transactions, or otherwise, at varying
prices to be determined in each case, at the time of sale. The Class A-1
Certificates are offered subject to prior sale and acceptance and to certain
other conditions.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and CS
First Boston by Cadwalader, Wickersham & Taft, New York, New York and for the
Certificate Insurer by Kutak Rock, Omaha, Nebraska.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1995 and December 31, 1994, and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1995,
included in this Prospectus Supplement as Appendix I, have been included
herein, in reliance on the report of Coopers & Lybrand, L.L.P., independent
accountants, given on the authority of that firm as experts in auditing and
accounting.
RATINGS
It is a condition to the issuance of the Class A-1 Certificates
that such Certificates be rated "Aaa" by Moody's and "AAAr" by S&P.
The ratings of Moody's and S&P on mortgage pass-through
certificates address the likelihood of the receipt by holders hereof of all
distributions of principal and interest to which such holders are entitled.
The Ratings do not address the likelihood of payment of Interest Available
Funds
S - 77
<PAGE>
to the Class A-1 Certificates in excess of the Effective Quarterly Mortgage
Certificate Pass-Through Rate. There is no assurance that such ratings will
continue for any period of time or that they will not be revised or withdrawn
entirely by such rating agency if, in its judgment, circumstances so warrant.
A revision or withdrawal of such ratings may have an adverse effect on the
market price of the Class A-1 Certificates. A security rating is not a
recommendation to buy, sell or hold securities.
Moody's and S&P's rating opinions address the structural, legal and
issuer aspects associated with the certificates, including the nature of the
underlying mortgage assets and the credit quality of the credit support
provider, if any. Moody's and S&P'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 the timing of such
prepayments may adversely affect an investor's anticipated yield.
Neither ratings of S&P nor the ratings of Moody's represent any
assessment of the Mortgage Loan Servicers' ability to repurchase any
Convertible Mortgage Loans that are converted to fixed Mortgage Interest
Rates; S&P has so indicated by appending "r" to its ratings of the Class A-1
Certificates.
The Depositor has not requested a rating on the Certificates from
any other rating agency, although data with respect to the Mortgage Loans or
the Mortgage Certificates may have been provided to other agencies solely for
their informational purposes. There can be no assurance that if a rating is
assigned to the Class A-1 Certificates by any other rating agency, such
rating will be as high as that assigned by Moody's or S&P.
S - 78
<PAGE>
INDEX OF TERMS
S - 79
<PAGE>
- - A -
Adjustable Rate Mortgage Loans......... S-13
Advance................................ S-57
Advances............................... S-52
All or Nothing Bids.................... S-35
ARM Certificates....................... S-10
Auction................................ S-10
Auction Date........................... S-10
- - B -
Balance of All Mortgage Loans Covered.. S-51
Balloon Mortgage Loan.................. S-63
Balloon Payment........................ S-49
Beneficial Owner....................... S-39
Book-Entry Certificates................ S-23
Business Day........................... S-29
- - C -
CBE.................................... S-14
Chase.................................. S-42
Cede................................... S-39
Certificate Account.................... S-41
Certificate Administrator.............. S-4
Certificateholder...................... S-2
Certificates........................... S-1
Class A-1 Pass-Through Rate............ S-1
Class A-1 Retirement Amount............ S-35
Class IO Pass-Through Rate............. S-7
CMT.................................... S-13
CMT Mortgage Loans..................... S-14
Code................................... S-17
COFI................................... S-14
COFI Mortgage Loans.................... S-14
Collateral Security Agreement.......... S-51
Collection Period...................... S-7
Comparable Certificate................. S-37
Concentration.......................... S-22
Convertible Mortgage Loan.............. S-62
Co-op Loans............................ S-21
Covered Amounts........................ S-51
CPR.................................... S-67
Credit Event........................... S-37
CS First Boston........................ S-1
Current Reserve Fund Balance........... S-51
- - D -
Deferred Interest...................... S-49
Definitive Certificate................. S-39
Delayed Guaranty Payment............... S-23
Depositor.............................. S-1
Depository Institution................. S-19
Distribution Date...................... S-1
DTC Participants....................... S-39
Due Date............................... S-47
Due Period............................. S-47
- - E -
Effective Quarterly Mortgage
Certificate Pass-Through Rate........ S-7
Eleventh District...................... S-61
ERISA.................................. S-17
Excess Cash............................ S-51
Excess Rate............................ S-49
Exemption.............................. S-76
Extension Premium...................... S-30
- - F -
FHLBSF................................. S-60
FIRREA................................. S-73
Fiscal Agent........................... S-28
Fitch.................................. S-31
Fixed Rate Certificates................ S-10
Fixed Rate Mortgage Loans.............. S-14
FRF.................................... S-73
- - G -
GAAP................................... S-30
GPM.................................... S-49
Gross Margin........................... S-59
Guaranty Payment....................... S-8
Guaranty Payment Account............... S-30
- - H -
Holder................................. S-2
- - I -
Index.................................. S-60
Indices................................ S-20
Indirect DTC Participants.............. S-39
Initial Deposits....................... S-51
Insurer Default........................ S-9
Interest Accrual Period................ S-6
ITG.................................... S-42
Interest Available Funds............... S-24
Interest Shortfall Amount.............. S-6
S - 80
<PAGE>
- - L -
Lease.................................. S-21
LIBO................................... S-26
LIBOR.................................. S-1
Lifetime Cap........................... S-59
Line Item Bids......................... S-35
- - M -
MBIA................................... S-1
Modeling Assumptions................... S-67
Monthly Payment........................ S-49
Moody's................................ S-11
Mortgage Certificate Balance........... S-26
Mortgage Certificate Factor............ S-7
Mortgage Certificate Interest
Accrual Period....................... S-48
Mortgage Certificate Interest
Distribution Amount.................. S-47
Mortgage Certificates.................. S-1
Mortgage Certificate Principal Amount.. S-48
Mortgage Certificate Unpaid
Interest Shortfall................... S-48
Mortgage Interest Rate................. S-58
Mortgage Loan File..................... S-55
Mortgage Loan Servicer................. S-43
Mortgage Loan Trustee.................. S-43
Mortgage Loans......................... S-13
Mortgage Pool Available
Distribution Amount.................. S-47
- - N -
Non-Current Pay Certificates........... S-50
Norwest................................ S-41
Norwest Corporation.................... S-9
- - O -
Optimal Interest Amount................ S-5
Optional Termination................... S-55
Original Reserve Fund Balance.......... S-51
Overcollateralization.................. S-53
- - P -
Payment Adjustment Cap................. S-63
Payment Change Date.................... S-63
Percentage Interest.................... S-23
Periodic Cap........................... S-59
Plan................................... S-18
Policy................................. S-1
Pool Principal Distribution Amount..... S-50
Pooling Agreement...................... S-1
Preference Amount...................... S-29
Prepayment Interest Shortfall.......... S-49
Prepayment Period...................... S-47
Price Maintenance Agreement............ S-11
Price Maintenance Breakage Fee......... S-38
Price Maintenance Counterparty......... S-36
Price Maintenance Payment.............. S-11
Price Maintenance Purchase Payment..... S-11
Principal Balance...................... S-26
Prior Classes.......................... S-50
Private Certificate.................... S-43
- - R -
Rate Adjustment Date................... S-59
Rate Scenario I........................ S-32
Rate Scenario II....................... S-32
Rate Scenario III...................... S-32
Rate Scenarios......................... S-32
Rating Agencies........................ S-11
Record Date............................ S-5
Reinvestment Rate...................... S-41
Reference Banks........................ S-26
Regular Interests...................... S-3
Related Senior Certificate............. S-44
Related Subordinated Certificates...... S-44
Relief Act............................. S-50
Relief Act Shortfalls.................. S-50
REMIC.................................. S-3
REO Property........................... S-49
Reserve Fund........................... S-9
Reserve Fund Requirement............... S-53
Reserve Interest Rate.................. S-26
Reset Date............................. S-6
Residual Interest...................... S-3
Reuters Screen LIBO Page............... S-26
RMC.................................... S-76
RTC.................................... S-12
Rules.................................. S-39
- - S -
SAP.................................... S-31
S&P.................................... S-11
Scheduled Principal Distribution
Amount............................... S-50
Securities Act......................... S-43
Selected Mortgage Loan Data............ S-13
Similar Law............................ S-17
SMMEA.................................. S-18
S - 81
<PAGE>
Special Termination.................... S-15
Strike Rate............................ S-9
Subordinated Mortgage Certificates..... S-44
- - T -
Termination Scenario I................. S-70
Termination Scenario II................ S-70
Termination Scenario III............... S-70
Termination Scenario IV................ S-70
Termination Scenarios.................. S-70
Trust Fund............................. S-1
- - U -
Underlying Disclosure Documents........ S-2
Underlying Mortgage Pool............... S-13
Underlying Pooling Agreements.......... S-2
Underlying Series...................... S-12
Underlying Series Certificate
Account.............................. S-56
Underlying Series Cut-off Date......... S-43
Underlying Series Distribution Date.... S-13
Underlying Series Reserve Fund......... S-51
Underlying Trust Fund.................. S-44
- - V -
Voting Rights.......................... S-41
- - W -
Weighted Average Mortgage
Certificate Pass-Through Rate........ S-7
Whole Pool Mortgage Certificates....... S-44
- - Y -
Yield Support Agreement................ S-9
Yield Support Breakage Fee............. S-34
Yield Support Counterparty............. S-9
S - 82
<PAGE>
APPENDIX I
INSURER AUDITED FINANCIAL STATEMENTS
I-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1995 and 1994
and for the years ended
December 31, 1995, 1994 and 1993
I-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
We have audited the accompanying consolidated balance sheets of MBIA
Insurance Corporation and Subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of income, changes in shareholder's
equity and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBIA Insurance
Corporation and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993 the Company adopted Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes." As discussed in Note 2 to
the consolidated financial statements, effective January 1, 1994 the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities."
/s/ Coopers & Lybrand L.L.P.
New York, New York
January 22, 1996
I-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
----------------- -----------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities held as available-for-sale
at fair value (amortized cost $3,428,986 and $3,123,838) $3,652,621 $3,051,906
Short-term investments, at amortized cost
(which approximates fair value) 198,035 121,384
Other investments 14,064 11,970
---------- ----------
TOTAL INVESTMENTS 3,864,720 3,185,260
Cash and cash equivalents 2,135 1,332
Accrued investment income 60,247 55,347
Deferred acquisition costs 140,348 133,048
Prepaid reinsurance premiums 200,887 186,492
Goodwill (less accumulated amortization of
$37,366 and $32,437) 105,614 110,543
Property and equipment, at cost (less accumulated
depreciation of $12,137 and $9,501) 41,169 39,648
Receivable for investments sold 5,729 945
Other assets 42,145 46,552
---------- ----------
TOTAL ASSETS $4,462,994 $3,759,167
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deferred premium revenue $1,616,315 $1,512,211
Loss and loss adjustment expense reserves 42,505 40,148
Deferred income taxes 212,925 97,828
Payable for investments purchased 10,695 6,552
Other liabilities 54,682 46,925
---------- ----------
TOTAL LIABILITIES 1,937,122 1,703,664
---------- ----------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,021,584 953,655
Retained earnings 1,341,855 1,134,061
Cumulative translation adjustment 2,704 427
Unrealized appreciation (depreciation) of investments,
net of deferred income tax provision (benefit)
of $78,372 and $(25,334) 144,729 (47,640)
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,525,872 2,055,503
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $4,462,994 $3,759,167
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
I-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------
1995 1994 1993
-------------------------------
<S> <C> <C> <C>
Revenues:
Gross premiums written $349,812 $361,523 $ 479,390
Ceded premiums (45,050) (49,281) (47,552)
-------- -------- ---------
Net premiums written 304,762 312,242 431,838
Increase in deferred premium revenue (88,365) (93,226) (200,519)
-------- -------- ---------
Premiums earned (net of ceded premiums of $30,655, $33,340 and $41,409) 216,397 219,016 231,319
Net investment income 219,834 193,966 175,329
Net realized gains 7,777 10,335 8,941
Other income 2,168 1,539 3,996
-------- -------- ---------
Total revenues 446,176 424,856 419,585
-------- -------- ---------
Expenses:
Losses and loss adjustment expenses 10,639 8,093 7,821
Policy acquisition costs, net 21,283 21,845 25,480
Underwriting and operating expenses 41,812 41,044 38,006
-------- -------- ---------
Total expenses 73,734 70,982 71,307
-------- -------- ---------
Income before income taxes and cumulative
effect of accounting changes 372,442 353,874 348,278
Provision for income taxes 81,748 77,125 86,684
-------- -------- ---------
Income before cumulative effect of accounting changes 290,694 276,749 261,594
Cumulative effect of accounting changes --- --- 12,923
-------- -------- ---------
Net income $290,694 $276,749 $ 274,517
======== ======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
I-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Cumulative Appreciation
----------------------------- Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
--------- ------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993 100,000 $15,000 $931,943 $670,795 $(474) $2,379
Net income --- --- --- 274,517 --- ---
Change in foreign currency translation --- --- --- --- (729) ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(1,381) --- --- --- --- --- 2,461
Dividends declared (per
common share $500.00) --- --- (50,000) --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 11,851 --- --- ---
--------- ------- ---------- ---------- ------- ----------
Balance, December 31, 1993 100,000 15,000 943,794 895,312 (1,203) 4,840
--------- ------- ---------- ---------- ------- ----------
Net income --- --- --- 276,749 --- ---
Change in foreign currency translation --- --- --- --- 1,630 ---
Change in unrealized depreciation
of investments net of change in
deferred income taxes of $27,940 --- --- --- --- --- (52,480)
Dividends declared (per
common share $380.00) --- --- --- (38,000) --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,861 --- --- ---
--------- ------- ---------- ---------- ------- ----------
Balance, December 31, 1994 100,0000 15,000 953,655 1,134,061 427 (47,640)
--------- ------- ---------- ---------- ------- ----------
Exercise of stock options --- --- 5,403 --- ---- ---
Net income --- --- --- 290,694 --- ---
Change in foreign currency translation --- --- --- --- 2,277 ---
Change in unrealized appreciation
of investments net of change in
deferred income taxes of $(103,707) --- --- --- --- --- 192,369
Dividends declared (per
common share $829.00) --- --- --- (82,900) --- ---
Capital contribution from MBIA Inc. --- --- 52,800 --- --- ---
Tax reduction related to tax sharing
agreement with MBIA Inc. --- --- 9,726 --- --- ---
--------- ------- ---------- ---------- ------- ----------
Balance, December 31, 1995 100,000 $15,000 $1,021,584 $1,341,855 $2,704 $144,729
========= ======= ========== ========== ======= ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
I-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------
1995 1994 1993
---------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 290,694 $ 276,749 $ 274,517
Adjustments to reconcile net income to net cash provided by operating activities:
Increase in accrued investment income (4,900) (3,833) (5,009)
Increase in deferred acquisition costs (7,300) (12,564) (10,033)
Increase in prepaid reinsurance premiums (14,395) (15,941) (6,143)
Increase in deferred premium revenue 104,104 109,167 206,662
Increase in loss and loss adjustment expense reserves 2,357 6,413 8,225
Depreciation 2,676 1,607 1,259
Amortization of goodwill 4,929 4,961 5,001
Amortization of bond (discount) premium, net (2,426) 621 (743)
Net realized gains on sale of investments (7,778) (10,335) (8,941)
Deferred income taxes 11,391 19,082 7,503
Other, net 29,080 (8,469) 15,234
---------- ---------- ---------
Total adjustments to net income 117,738 90,709 213,015
---------- ---------- ---------
Net cash provided by operating activities 408,432 367,458 487,532
---------- ---------- ---------
Cash flows from investing activities:
Purchase of fixed maturity securities, net of payable for investments purchased (897,128) (1,060,033) (786,510)
Sale of fixed maturity securities, net of receivable for investments sold 473,352 515,548 205,342
Redemption of fixed maturity securities, net of receivable for investments redeemed 83,448 128,274 225,608
(Purchase) sale of short-term investments, net (32,281) 3,547 (40,461)
(Purchase) sale of other investments, net (692) 87,456 (37,777)
Capital expenditures, net of disposals (4,228) (3,665) (3,601)
---------- ---------- ---------
Net cash used in investing activities (377,529) (328,873) (437,399)
---------- ---------- ---------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 52,800 --- ---
Dividends paid (82,900) (38,000) (50,000)
---------- ---------- ---------
Net cash used by financing activities (30,100) (38,000) (50,000)
---------- ---------- ---------
Net increase in cash and cash equivalents 803 585 133
Cash and cash equivalents - beginning of year 1,332 747 614
---------- ---------- ---------
Cash and cash equivalents - end of year $ 2,135 $ 1,332 $ 747
========== ========== =========
Supplemental cash flow disclosures:
Income taxes paid $ 050,790 $ 053,569 $ 052,967
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
I-7
<PAGE>
1. BUSINESS AND ORGANIZATION
-----------------------------
MBIA Insurance Corporation ("MBIA Corp."), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc.
MBIA Inc. was incorporated in Connecticut on November 12, 1986 as a licensed
insurer and, through the following series of transactions during December
1986, become the successor to the business of the Municipal Bond Insurance
Association (the "Association"), a voluntary unincorporated association of
insurers writing municipal bond and note insurance as agent for the member
insurance companies:
. MBIA Inc. acquired for $17 million all of the outstanding common stock
of a New York domiciled insurance company and changed the name of the
insurance company to Municipal Bond Investors Assurance Corporation.
In April 1995, the name was again changed to MBIA Insurance Corp.
Prior to the acquisition, all of the obligations of this company were
reinsured and/or indemnified by the former owner.
. Four of the five member companies of the Association, together with
their affiliates, purchased all of the outstanding common stock of
MBIA Inc. and entered into reinsurance agreements whereby they ceded
to MBIA Inc. substantially all of the net unearned premiums on
existing and future Association business and the interest in, or
obligation for, contingent commissions resulting from their
participation in the Association. MBIA Inc.'s reinsurance obligations
were then assumed by MBIA Corp. The participation of these four
members aggregated approximately 89% of the net insurance in force of
the Association. The net assets transferred from the predecessor
included the cash transferred in connection with the reinsurance
agreements, the related deferred acquisition costs and contingent
commissions receivable, net of the related unearned premiums and
contingent commissions payable. The deferred income taxes inherent in
these assets and liabilities were recorded by MBIA Corp. Contingent
commissions receivable (payable) with respect to premiums earned prior
to the effective date of the reinsurance agreements by the Association
in accordance with statutory accounting practices, remained as assets
(liabilities) of the member companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. ("BIG"), the parent
company of Bond Investors Guaranty Insurance Company ("BIG Ins."), which was
subsequently renamed MBIA Insurance Corp. of Illinois ("MBIA Illinois").
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA
Inc. contributed the common stock of BIG to MBIA Corp. resulting in
additional paid-in capital of $200 million. The insured portfolio acquired
from BIG Ins. consists of municipal obligations with risk characteristics
similar to those insured by MBIA Corp. On December 31, 1990, BIG was merged
into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. ("MBIA Assurance"), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of
I-8
<PAGE>
MBIA Assurance was contributed to MBIA Corp. in 1991 resulting in additional
paid-in capital of $6 million. Pursuant to a reinsurance agreement with MBIA
Corp., a substantial amount of the risks insured by MBIA Assurance is
reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. ("IMC"). IMC, which commenced operations in August 1993,
principally provides guaranteed investment agreements to states,
municipalities and municipal authorities which are guaranteed as to principal
and interest. MBIA Corp. insures IMC's outstanding investment agreement
liabilities.
In 1993, MBIA Corp. assumed the remaining business from the fifth member
of the Association.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp. ("SECO"), to provide fixed-income investment management services for
MBIA Inc.'s municipal cash management service businesses. In 1995, portfolio
management for a portion of MBIA Corp.'s insurance related investment
portfolio was transferred to SECO; the management of the balance of this
portfolio was transferred in January 1996.
2. SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp.,
MBIA Illinois, MBIA Assurance and BIG Services, Inc. All significant
intercompany balances have been eliminated. Certain amounts have been
reclassified in prior years' financial statements to conform to the current
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with
banks.
INVESTMENTS
Effective January 1, 1994, MBIA Corp. adopted Statement of Financial
Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in Debt
and Equity Securities." In accordance with SFAS 115, MBIA Corp. reclassified
its entire investment portfolio ("Fixed-maturity securities") as "available-
for-sale." Pursuant to SFAS 115, securities classified as available-for-sale
are required to be reported in the financial statements at fair value, with
unrealized gains and losses reflected as a separate component of
shareholder's equity. The cumulative effect of MBIA Corp.'s adoption of SFAS
115 was a decrease in shareholder's equity at December 31, 1994 of $46.8
million, net of taxes. The adoption of SFAS 115 had no effect on MBIA
Corp.'s earnings.
I-9
<PAGE>
Bond discounts and premiums are amortized on the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the
remaining term is determined based on the contractual refunding date. Short-
term investments are carried at amortized cost, which approximates fair value
and include all fixed-maturity securities with a remaining term to maturity
of less than one year. Investment income is recorded as earned. Realized
gains or losses on the sale of investments are determined by specific
identification and are included as a separate component of revenues.
Other investments consist of MBIA Corp.'s interest in limited
partnerships and a mutual fund which invests principally in marketable equity
securities. MBIA Corp. records dividends from its investment in marketable
equity securities and its share of limited partnerships and mutual funds as a
component of investment income. In addition, MBIA Corp. records its share of
the unrealized gains and losses on these investments, net of applicable
deferred income taxes, as a separate component of shareholder's equity.
PREMIUM REVENUE RECOGNITION
Premiums are earned pro rata over the period of risk. Premiums are allocated
to each bond maturity based on par amount and are earned on a straight-line
basis over the term of each maturity. When an insured issue is retired
early, is called by the issuer, or is in substance paid in advance through a
refunding or defeasance accomplished by placing U.S. Government securities in
escrow, the remaining deferred premium revenue, net of the portion which is
credited to a new policy in those cases where MBIA Corp. insures the
refunding issue, is earned at that time, since there is no longer risk to
MBIA Corp. Accordingly, deferred premium revenue represents the portion of
premiums written that is applicable to the unexpired risk of insured bonds
and notes.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily
to, and vary with, premium production. For business produced directly by
MBIA Corp., such costs include compensation of employees involved in
marketing, underwriting and policy issuance functions, certain rating agency
fees, state premium taxes and certain other underwriting expenses, reduced by
ceding commission income on premiums ceded to reinsurers. For business
assumed from the Association, such costs were comprised of management fees,
certain rating agency fees and marketing and legal costs, reduced by ceding
commissions received by the Association on premiums ceded to reinsurers.
Policy acquisition costs are deferred and amortized over the period in which
the related premiums are earned.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustments expense ("LAE") are established in
an amount equal to MBIA Corp.'s estimate of the identified and unidentified
losses, including costs of settlement on the obligations it has insured.
To the extent that specified insured issues are identified as currently
or likely to be in default, the present value of expected payments, including
loss and LAE associated with these issues, net of expected recoveries, is
allocated within the total loss reserve as case basis reserves. Management
of MBIA Corp. periodically evaluates its estimates for losses and LAE and any
resulting adjustments are reflected in current earnings. Management believes
that the reserves are adequate to cover the ultimate net cost of claims, but
the reserves are necessarily
I-10
<PAGE>
based on estimates, and there can be no assurance that the ultimate liability
will not exceed such estimates.
CONTINGENT COMMISSIONS
Contingent commissions may be receivable from MBIA Corp.'s and the
Association's reinsurers under various reinsurance treaties and are accrued
as the related premiums are earned.
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly
in shareholder's equity for financial reporting purposes.
Deferred income taxes are provided in respect of temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
The Internal Revenue Code permits financial guarantee insurance
companies to deduct from taxable income additions to the statutory
contingency reserve, subject to certain limitations. The tax benefits
obtained from such deductions must be invested in non-interest bearing U.S.
Government tax and loss bonds. MBIA Corp. records purchases of tax and loss
bonds as payments of Federal income taxes. The amounts deducted must be
restored to taxable income when the contingency reserve is released, at which
time MBIA Corp. may present the tax and loss bonds for redemption to satisfy
the additional tax liability.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters and equipment
and MBIA Assurance's furniture, fixtures and equipment, which are recorded at
cost and, exclusive of land, are depreciated on the straight-line method over
their estimated service lives ranging from 4 to 31 years. Maintenance and
repairs are charged to expenses as incurred.
GOODWILL
Goodwill represents the excess of the cost of the acquired and contributed
subsidiaries over the tangible net assets at the time of acquisition or
contribution. Goodwill attributed to the acquisition of the licensed
insurance company includes recognition of the value of the state licenses
held by that company, and is amortized by the straight-line method over 25
years. Goodwill related to the wholly owned subsidiary of MBIA Inc.
contributed in 1988 is amortized by the straight-line method over 25 years.
Goodwill attributed to the acquisition of MBIA Illinois is amortized
according to the recognition of future profits from its deferred premium
revenue and installment premiums, except for a minor portion attributed to
state licenses, which is amortized by the straight-line method over 25 years.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates
of exchange prevailing during the year. Unrealized gains or losses resulting
from translation are included as a separate component of shareholder's
equity.
I-11
<PAGE>
3. STATUTORY ACCOUNTING PRACTICES
----------------------------------
The financial statements have been prepared on the basis of GAAP, which
differs in certain respects from the statutory accounting practices
prescribed or permitted by the insurance regulatory authorities. Statutory
accounting practices differ from GAAP in the following respects:
. premiums are earned only when the related risk has expired rather than
over the period of the risk;
. acquisition costs are charged to operations as incurred rather than as
the related premiums are earned;
. a contingency reserve is computed on the basis of statutory
requirements and reserves for losses and LAE are established, at
present value, for specific insured issues which are identified as
currently or likely to be in default. Under GAAP reserves are
established based on MBIA Corp.'s reasonable estimate of the
identified and unidentified losses and LAE on the insured obligations
it has written;
. Federal income taxes are only provided on taxable income for which
income taxes are currently payable, while under GAAP, deferred income
taxes are provided with respect to temporary differences;
. fixed-maturity securities are reported at amortized cost rather than
fair value;
. tax and loss bonds purchased are reflected as admitted assets as well
as payments of income taxes; and
. certain assets designated as "non-admitted assets" are charged
directly against surplus but are reflected as assets under GAAP.
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries, MBIA Illinois and MBIA Assurance:
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------
(In thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GAAP shareholder's equity $2,525,872 $2,055,503 $1,857,743
Premium revenue recognition (328,450) (296,524) (242,577)
Deferral of acquisition costs (140,348) (133,048) (120,484)
Unrealized (gains) losses (223,635) 71,932 ---
Contingent commissions (1,645) (1,706) (1,880)
Contingency reserve (743,510) (620,988) (539,103)
Loss and loss adjustment expense reserves 28,024 181,181 26,262
Deferred income taxes 205,425 90,328 99,186
Tax and loss bonds 70,771 50,471 25,771
Goodwill (105,614) (110,543) (115,503)
Other (12,752) (13,568) (11,679)
---------- ---------- ----------
Statutory capital and surplus $1,274,138 $1,110,038 $ 977,736
========== ========== ==========
</TABLE>
I-12
<PAGE>
Consolidated net income of MBIA Corp. determined in accordance with
statutory accounting practices for the years ended December 31, 1995, 1994
and 1993 was $278.3 million, $224.9 million and $258.4 million, respectively.
4. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
--------------------------------------------------
Premiums earned include $34.0 million, $53.0 million and $85.6 million for
1995, 1994 and 1993, respectively, related to refunded and called bonds.
5. INVESTMENTS
---------------
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital and claims-paying capability
through maintenance of high-quality investments with adequate liquidity.
MBIA Corp.'s investment policies limit the amount of credit exposure to any
one issuer. The fixed-maturity portfolio is comprised of high-quality
(average rating Double-A) taxable and tax-exempt investments of diversified
maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
(In thousands) Amortized Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Taxable bonds
United States Treasury and Government Agency $ 6,742 $ 354 $ --- $ 7,096
Corporate and other obligations 592,604 30,536 (212) 622,928
Mortgage-backed 389,943 21,403 (932) 410,414
Tax-exempt bonds
State and municipal
obligations 2,637,732 175,081 (2,595) 2,810,218
Total fixed-maturities $3,627,021 $227,374 $(3,739) $3,850,656
<CAPTION>
Gross Gross
Unrealized Unrealized
(In thousands) Amortized Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
Taxable bonds
United States Treasury and Government Agency $ 15,133 $ --- $ (149) $ 14,984
Corporate and other obligations 461,601 2,353 (23,385) 440,569
Mortgage-backed 317,560 3,046 (12,430) 308,176
Tax-exempt bonds
State and municipal
obligations 2,450,928 36,631 (77,998) 2,409,561
---------- ------- --------- ----------
Total fixed-maturities $3,245,222 $42,030 $(113,962) $3,173,290
========== ======= ========= ==========
</TABLE>
I-13
<PAGE>
Fixed-maturity investments carried at fair value of $8.1 million and
$7.4 million as of December 31, 1995 and 1994, respectively, were on deposit
with various regulatory authorities to comply with insurance laws.
The table below sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value
at December 31, 1995. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
(In thousands) Amortized Fair
Cost Value
- -----------------------------------------------------------------------------------
<S> <C> <C>
Maturity
Within 1 year $ 178,328 $ 178,256
Beyond 1 year but within 5 years 448,817 477,039
Beyond 5 years but within 10 years 1,133,527 1,211,645
Beyond 10 years but within 15 years 742,790 804,421
Beyond 15 years but within 20 years 686,871 730,030
Beyond 20 years 46,745 38,851
---------- ----------
3,237,078 3,440,242
Mortgage-backed 389,943 410,414
---------- ----------
Total fixed-maturities and short-term investments $3,627,021 $3,850,656
========== ==========
</TABLE>
6. INVESTMENT INCOME AND GAINS AND LOSSES
- ---------------------------------------------------
Investment income consists of:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------
(In thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $ 216,653 $ 193,729 $173,070
Short-term investments 6,008 3,003 2,844
Other investments 17 12 2,078
---------- ---------- --------
Gross investment income 222,678 196,744 177,992
Investment expenses 2,844 2,778 2,663
---------- ---------- --------
Net investment income 219,834 193,966 175,329
Net realized gains (losses):
Fixed-maturities:
Gains 9,941 9,635 9,070
Losses (2,537) (8,851) (744)
Net 7,404 784 8,326
Other investments:
Gains 382 9,551 615
Losses (9) --- ---
---------- ---------- --------
Net 373 9,551 615
---------- ---------- --------
Net realized gains 7,777 10,335 8,941
---------- ---------- --------
Total investment income $ 227,611 $ 204,301 $184,270
========== ========== ========
</TABLE>
I-14
<PAGE>
Unrealized gains (losses) consist of:
<TABLE>
<CAPTION>
As of December 31
-----------------------
(In thousands) 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C>
Fixed-maturities:
Gains $ 227,374 $ 42,030
Losses (3,739) (113,962)
---------- ----------
Net 223,635 (71,932)
Other investments:
Gains 287 ---
Losses (821) (1,042)
---------- ----------
Net (534) (1,042)
---------- ----------
Total 223,101 (72,974)
Deferred income tax (benefit) 78,372 (25,334)
---------- ----------
Unrealized gains (losses) - net $ 144,729 $ (47,640)
========== ==========
</TABLE>
The deferred taxes in 1995 and 1994 relate primarily to unrealized gains
and losses on MBIA Corp.'s fixed-maturity investments, which are reflected in
shareholders' equity in 1995 and 1994 in accordance with MBIA Corp.'s
adoption of SFAS 115.
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------
(In thousands) 1995 1994 1993
- --------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $295,567 $(289,327) $101,418
Other investments 508 (8,488) 3,842
-------- --------- --------
Total 296,075 (297,815) 105,260
Deferred income taxes (benefit) 103,706 (27,940) 1,381
-------- --------- --------
Unrealized gains (losses), net $192,369 $(269,875) $103,879
======== ========= ========
</TABLE>
7. INCOME TAXES
- ------------------------------------
Effective January 1, 1993, MBIA Corp. changed its method of accounting for
income taxes from the income statement-based deferred method to the balance
sheet-based liability method required by SFAS 109 "Accounting for Income
Taxes." MBIA Corp. adopted the new pronouncement on the cumulative catch-up
basis and recorded a cumulative adjustment, which increased net income and
reduced the deferred tax liability by $13.0 million. The cumulative effect
represents the impact of adjusting the deferred tax liability to reflect the
January 1, 1993 tax rate of 34% as opposed to the higher tax rates in effect
when certain of the deferred taxes originated.
SFAS 109 requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse. The effect on tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
I-15
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as presented below:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Tax and loss bonds $ 71,183 $ 50,332
Unrealized losses --- 25,334
Alternative Minimum tax credit carry forwards 39,072 22,391
Loss and loss adjustment expense reserves 9,809 6,363
Other 954 3,981
-------- --------
Total gross deferred tax assets 121,018 108,401
-------- --------
Deferred tax liabilities
Contingency reserve 131,174 91,439
Deferred premium revenue 64,709 54,523
Deferred acquisition costs 49,122 48,900
Unrealized gains 78,372 ---
Contingent commissions 7,158 4,746
Other 3,408 6,621
-------- --------
Total gross deferred tax liabilities 333,943 206,229
-------- --------
Net deferred tax liability $212,925 $ 97,828
======== ========
</TABLE>
Under SFAS 109, a change in the Federal tax rate requires a restatement
of deferred tax assets and liabilities. Accordingly, the restatement for the
change in the 1993 Federal tax rate resulted in a $5.4 million increase in
the tax provision, of which $3.2 million resulted from the recalculation of
deferred taxes at the new Federal rate.
The provision for income taxes is composed of:
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands) 1995 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Current $70,357 $58,043 $66,086
Deferred 11,391 19,082 20,598
------- ------- -------
Total $81,748 $77,125 $86,684
======= ======= =======
</TABLE>
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective
income tax rate differs from the statutory rate on ordinary income. The
reasons for MBIA Corp.'s lower effective tax rates are as follows:
I-16
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income taxes computed on pre-tax financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes resulting from:
Tax-exempt interest (12.5) (12.0) (10.6)
Amortization of goodwill 0.5 0.5 0.5
Other (1.1) (1.7) ---
---- ---- ----
Provision for income taxes 21.9% 21.8% 24.9%
==== ==== ====
</TABLE>
8. DIVIDENDS AND CAPITAL REQUIREMENTS
- -------------------------------------------------------------------------
Under New York state insurance law, MBIA Corp. may pay a dividend only from
earned surplus subject to the maintenance of a minimum capital requirement.
The dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-
month period, without prior approval of the superintendent of the New York
State Insurance Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Corp. had approximately $44 million
available for the payment of dividends as of December 31, 1995. In 1995,
1994 and 1993, MBIA Corp. declared and paid dividends of $83 million, $38
million and $50 million, respectively, to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed
the greater of 10% of policyholders' surplus (total capital and surplus) at
the end of the preceding calendar year, or the net income of the preceding
calendar year without prior approval of the Illinois State Insurance
Department.
In accordance with such restrictions on the amount of dividends which
can be paid in any 12-month period, MBIA Illinois may pay a dividend only
with prior approval as of December 31, 1995.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies which rate the bonds
insured by MBIA Corp. have various requirements relating to the maintenance
of certain minimum ratios of statutory capital and reserves to net insurance
in force. MBIA Corp. and MBIA Assurance were in compliance with these
requirements as of December 31, 1995.
9. LINES OF CREDIT
-------------------
MBIA Corp. has a standby line of credit commitment in the amount of $650
million with a group of major banks to provide loans to MBIA Corp. after it
has incurred cumulative losses (net of any recoveries) from September 30,
1995 in excess of the greater of $500 million and 6.25% of average annual
debt service. The obligation to repay loans made under this agreement is a
limited recourse obligation payable solely from, and collateralized by, a
pledge
I-17
<PAGE>
of recoveries realized on defaulted insured obligations including certain
installment premiums and other collateral. This commitment has a seven-year
term and expires on September 30, 2002 and contains an annual renewal
provision subject to the approval by the bank group.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities aggregating
$275 million. At December 31, 1995, MBIA Inc. had $18 million outstanding
under these facilities.
10. NET INSURANCE IN FORCE
---------------------------
MBIA Corp. guarantees the timely payment of principal and interest on
municipal, asset-/mortgage-backed and other non-municipal securities. MBIA
Corp.'s ultimate exposure to credit loss in the event of nonperformance by
the insured is represented by the insurance in force as set forth below.
The insurance policies issued by MBIA Corp. are unconditional
commitments to guarantee timely payment on the bonds and notes to
bondholders. The creditworthiness of each insured issue is evaluated prior
to the issuance of insurance and each insured issue must comply with MBIA
Corp.'s underwriting guidelines. Further, the payments to be made by the
issuer on the bonds or notes may be backed by a pledge of revenues, reserve
funds, letters of credit, investment contracts or collateral in the form of
mortgages or other assets. The right to such money or collateral would
typically become MBIA Corp.'s upon the payment of a claim by MBIA Corp.
As of December 31, 1995, insurance in force, net of cessions to
reinsurers, has a range of maturity of 1-43 years. The distribution of net
insurance in force by geographic location and type of bond, including $2.7
billion and $1.5 billion relating to IMC's municipal investment agreements
guaranteed by MBIA Corp. in 1995 and 1994, respectively, is set forth in the
following tables:
I-18
<PAGE>
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------------------------------------------
($ in billions) 1995 1994
----------------------------------------------------------------------------------------------------
% of Net Number of % of Net
Geographic Net Insurance Number of Issues Insurance In Net Insurance Issues Insurance In
Location In Force Outstanding Force In Force Outstanding Force
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California $ 51.2 3,122 14.8% $ 43.9 2,832 14.3%
New York 30.1 4,846 8.7 25.0 4,447 8.2
Florida 26.9 1,684 7.7 25.4 1,805 8.3
Texas 20.4 2,031 5.9 18.6 2,102 6.1
Pennsylvania 19.7 2,143 5.7 19.5 2,108 6.4
New Jersey 16.4 1,730 4.7 15.0 1,590 4.9
Illinois 15.0 1,090 4.3 14.7 1,139 4.8
Massachusetts 9.3 1,070 2.7 8.6 1,064 2.8
Ohio 9.1 1,017 2.6 8.3 996 2.7
Michigan 7.9 1,012 2.3 5.7 972 1.9
------ ------- ----- ------ ------ -----
Subtotal 206.0 19,745 59.4 184.7 19,055 60.4
Other 135.6 11,147 39.1 118.8 10,711 38.8
------ ------- ----- ------ ------ -----
Total U.S. 341.6 30,892 98.5 303.5 29,766 99.2
International 5.1 53 1.5 2.5 18 0.8
------ ------- ----- ------ ------ -----
$346.7 30,945 100.0% $306.0 29,784 100.0%
====== ======= ===== ====== ====== =====
</TABLE>
I-19
<PAGE>
<TABLE>
<CAPTION>
As of December 31
----------------------------------------------------------------------------------------------------
($ in billions) 1995 1994
----------------------------------------------------------------------------------------------------
% of Net Number of % of Net
Net Insurance Number of Issues Insurance In Net Insurance Issues Insurance In
Type of Bond In Force Outstanding Force In Force Outstanding Force
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal
General Obligation $ 91.6 11,445 26.4% $ 84.2 11,029 27.5%
Utilities 60.3 4,931 17.4 56.0 5,087 18.3
Health Care 51.9 2,458 15.0 50.6 2,670 16.5
Transportation 25.5 1,562 7.4 21.3 1,486 7.0
Special Revenue 24.4 1,445 7.0 22.7 1,291 7.4
Industrial development
and pollution control
revenue 17.2 924 5.0 15.1 1,016 4.9
Housing 15.8 2,671 4.5 13.6 2,663 4.5
Higher Education 15.2 1,261 4.4 14.0 1,208 4.6
Other 7.3 134 2.1 3.8 124 1.2
------ ------ ----- ------ ------ -----
309.2 26,831 89.2 281.3 26,574 91.9
------ ------ ----- ------ ------ -----
Non-municipal
Asset/mortgage-backed 20.2 256 5.8 12.8 151 4.2
Investor-owned utilities 6.4 3,559 1.8 5.7 2,918 1.9
International 5.1 53 1.5 2.5 18 0.8
Other 5.8 246 1.7 3.7 123 1.2
------ ------ ----- ------ ------ -----
37.5 4,114 10.8 24.7 3,210 8.1
------ ------ ----- ------ ------ -----
$346.7 30,945 100.0% $306.0 29,784 100.0%
====== ====== ===== ====== ====== =====
11. REINSURANCE
- -----------------------------
</TABLE>
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to
meet their obligations, MBIA Corp. would be liable for such defaulted
amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp., MBIA Assurance and MBIA Illinois were $50.1 billion and $42.6
billion, at December 31, 1995 and 1994, respectively. The distribution of
ceded insurance in force by geographic location and type of bond is set forth
in the tables below:
I-20
<PAGE>
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------------
(In billions) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
% of Ceded Insurance in Ceded Insurance In % of Ceded Insurance in
Geographic Location Ceded Insurance In Force Force Force Force
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California $ 8.8 17.5% $ 7.5 17.6%
New York 5.7 11.4 4.9 11.5
New Jersey 3.1 6.1 2.0 4.7
Texas 2.8 5.6 2.5 5.9
Pennsylvania 2.7 5.4 2.6 6.1
Florida 2.3 4.6 2.1 4.9
Illinois 2.2 4.5 2.3 5.4
District of Columbia 1.5 3.0 1.6 3.8
Washington 1.4 2.7 1.2 2.8
Puerto Rico 1.3 2.6 1.1 2.6
Massachusetts 1.1 2.1 0.9 2.1
Ohio 1.0 2.1 0.9 2.1
----- ----- ----- -----
Subtotal 33.9 67.6 29.6 69.5
Other 14.4 28.8 12.3 28.9
----- ----- ----- -----
Total U.S. 48.3 96.4 41.9 98.4
International 1.8 3.6 0.7 1.6
----- ----- ----- -----
$50.1 100.0% $42.6 100.0%
===== ===== ===== =====
</TABLE>
I-21
<PAGE>
<TABLE>
<CAPTION>
As of December 31
------------------------------------------------------------------------------------------------------
(In billions) 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
% of Ceded Insurance in Ceded Insurance In % of Ceded Insurance in
Type of Bond Ceded Insurance In Force Force Force Force
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal
General obligation $11.7 23.3% $ 9.7 22.8%
Utilities 9.0 18.0 8.5 20.0
Health care 6.6 13.1 6.5 15.3
Transportation 5.5 11.0 4.5 10.6
Special revenue 3.2 6.4 2.7 6.3
Industrial development
and pollution control
revenue 3.0 6.0 2.9 6.8
Housing 1.4 2.8 1.0 2.3
Higher education 1.2 2.4 1.2 2.8
Other 2.4 4.8 1.5 3.5
----- ----- ----- -----
44.0 87.8 38.5 90.4
----- ----- ----- -----
Non-municipal
Asset/mortgage-backed 3.6 7.2 2.7 6.3
International 1.8 3.6 0.7 1.6
Other 0.7 1.4 0.7 1.7
----- ----- ----- -----
6.1 12.2 4.1 9.6
----- ----- ----- -----
$50.1 100.0% $42.6 100.0%
===== ===== ===== =====
</TABLE>
Included in gross premiums written are assumed premiums from other
insurance companies of $11.7 million, $6.3 million and $20.4 million for the
years ended December 31, 1995, 1994 and 1993, respectively. The percentages
of the amounts assumed to net premiums written were 3.8%, 2.0% and 4.7% in
1995, 1994 and 1993, respectively.
Gross premiums written include $0.2 million in 1994 and $5.4 million in
1993 related to the reassumption by MBIA Corp. of reinsurance previously
ceded by the Association. Also included in gross premiums in 1993 is $10.8
million of premiums assumed from a member of the Association. Ceded premiums
written are net of $0.2 million in 1995, $1.6 million in 1994 and $2.5
million in 1993 related to the reassumption of reinsurance previously ceded
by MBIA Corp. or MBIA Illinois.
12. EMPLOYEE BENEFITS
----------------------
MBIA Corp. participates in MBIA Inc.'s pension plan covering all eligible
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation.
Pension expense for the years ended December 31, 1995, 1994 and 1993 was $3.2
million, $3.0 million and $3.1 million, respectively. MBIA Corp. also has a
profit sharing/401(k) plan which allows eligible employees to contribute up
to 10% of eligible compensation. MBIA Corp. matches employee contributions
up to the first 5% of total compensation. MBIA Corp. contributions to the
profit sharing plan aggregated $1.4 million, $1.4 million and $1.3 million
for the years ended December 31, 1995, 1994 and 1993, respectively. The
401(k) plan amounts are invested in common stock of MBIA Inc. Amounts
relating to the above plans that exceed limitations established by Federal
regulations
I-22
<PAGE>
are contributed to a non-qualified deferred compensation plan. Of the above
amounts for the pension and profit sharing plans, $2.7 million, $2.6 million
and $2.6 million for the years ended December 31, 1995, 1994 and 1993,
respectively, are included in policy acquisition costs.
MBIA Corp. also participates in MBIA Inc.'s common stock incentive plan
which enables employees of MBIA Corp. to acquire shares of MBIA Inc. or to
benefit from appreciation of the price of common stock of MBIA Inc.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. MBIA Corp. recorded
$0.1 million of compensation expense in 1995 relating to this program.
Effective January 1, 1993, MBIA Corp. adopted SFAS 106 "Employer's
Accounting for Postretirement Benefits Other than Pensions." Under SFAS 106,
companies are required to accrue the cost of employee post-retirement
benefits other than pensions during the years that employees render service.
Prior to January 1, 1993, MBIA Corp. had accounted for these post-retirement
benefits on a cash basis. In 1993, MBIA Corp. adopted the new pronouncement
on the cumulative catch-up basis and recorded a cumulative effect adjustment
which decreased net income and increased other liabilities by $0.1 million.
As of January 1, 1994, MBIA Corp. eliminated these post-retirement benefits.
13. RELATED PARTY TRANSACTIONS
-------------------------------
The business assumed from the Association, relating to insurance on unit
investment trusts sponsored by two members of the Association, includes
deferred premium revenue of $1.6 million and $1.9 million at December 31,
1995 and 1994, respectively.
In 1993, MBIA Corp. assumed the balance of $10.8 million of deferred
premium revenue from a member of the Association which had not previously
ceded its insurance portfolio to MBIA Corp. Also in 1993, MBIA Corp. assumed
$0.4 million of deferred premium revenue relating to one of the trusts which
was previously ceded to an affiliate of an Association member.
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the
payment obligations of the members of the Association, one of which is a
principal shareholder of MBIA Inc., which had their Standard & Poor's claims-
paying rating downgraded from Triple-A on their previously issued Association
policies. In the event that they do not meet their Association policy
payment obligations, MBIA Corp. will pay the required amounts directly to the
paying agent instead of to the former Association member as was previously
required. The aggregate amount payable by MBIA Corp. on these surety bonds
is limited to $340 million. These surety bonds remain outstanding as of
December 31, 1995.
MBIA Corp. has investment management and advisory agreements with an
affiliate of a principal shareholder of MBIA Inc., which provides for payment
of fees on assets under management. Total related expenses for the years
ended December 31, 1995, 1994 and 1993 amounted to $2.5 million, $2.6 million
and $2.4 million, respectively. These agreements were terminated on January
1, 1996 at which time SECO commenced management of MBIA Corp.'s consolidated
investment portfolios. In addition, investment management expenses of
I-23
<PAGE>
$0.1 million were paid to SECO for the portion of the investment portfolio
transferred in 1995.
MBIA Corp. has various insurance coverages provided by a principal
shareholder of MBIA Inc., the cost of which was $1.9 million, $1.9 million
and $2.0 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
Included in other assets at December 31, 1995 and 1994 is $1.1 million
and $14.5 million of net receivables from MBIA Inc. and other subsidiaries.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
----------------------------------------
The estimated fair value amounts of financial instruments shown in the
following table have been determined by MBIA Corp. using available market
information and appropriate valuation methodologies. However, in certain
cases considerable judgment is necessarily required to interpret market data
to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amount MBIA Corp. could realize
in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which, because of their short duration, is a reasonable estimate of fair
value.
OTHER INVESTMENTS - Other investments consist of MBIA Corp.'s interest in
limited partnerships and a mutual fund which invests principally in
marketable equity securities. The fair value of other investments is based
on quoted market prices.
CASH AND CASH EQUIVALENTS, RECEIVABLES FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the
entire portfolio with third party reinsurers under current market conditions.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed
of the present value of the expected cash flows for specifically identified
claims combined with an estimate for unidentified claims. Therefore, the
carrying amount is a reasonable estimate of the fair value of the reserve.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream at 9% and 13.25% at December
31, 1995 and December 31, 1994, respectively.
I-24
<PAGE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------------------------
1995 1994
------------------------------------- -------------------------------------
(In thousands) Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed-maturity securities $3,652,621 $3,652,621 $3,051,906 $3,051,906
Short-term investments 198,035 198,035 121,384 121,384
Other investments 14,064 14,064 11,970 11,970
Cash and cash equivalents 23,258 23,258 1,332 1,332
Prepaid reinsurance premiums 200,887 174,444 186,492 159,736
Receivable for investments sold 5,729 5,729 945 945
LIABILITIES:
Deferred premium revenue 1,616,315 1,395,159 1,512,211 1,295,305
Loss and loss adjustment expense reserves 42,505 42,505 40,148 40,148
Payable for investments purchased 10,695 10,695 6,552 6,552
OFF-BALANCE SHEET INSTRUMENTS
Installment premiums --- 235,371 --- 176,944
</TABLE>
I-25
<PAGE>
APPENDIX II
INSURER UNAUDITED FINANCIAL STATEMENTS
II-1
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1996 AND DECEMBER 31, 1995
AND FOR THE PERIODS ENDED MARCH 31, 1996 AND 1995
II-2
<PAGE>
MBIA INSURANCE CORPORATION
AND SUBSIDIARIES
I N D E X
PAGE
Consolidated Balance Sheets -
March 31, 1996 (Unaudited) and December 31, 1995 (Audited)... 4
Consolidated Statements of Income -
Three months ended March 31, 1996 and 1995 (Unaudited)....... 5
Consolidated Statement of Changes in Shareholder's Equity -
Three months ended March 31, 1996 (Unaudited)................ 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995 (Unaudited)....... 7
Notes to Consolidated Financial Statements (Unaudited)....... 8
II-3
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Investments:
Fixed-maturity securities held as available-for-sale at fair value (amortized cost
$3,664,571 and $3,428,986) $3,784,836 $3,652,621
Short-term investments, at amortized cost(which approximates fair value) 135,428 198,035
Other investments 13,374 14,064
-------------- -----------------
TOTAL INVESTMENTS 3,933,638 3,864,720
Cash and cash equivalents 2,499 2,135
Accrued investment income 60,462 60,247
Deferred acquisition costs 140,919 140,348
Prepaid reinsurance premiums 206,383 200,887
Goodwill (less accumulated amortization of $38,590 and $37,366) 104,390 105,614
Property and equipment, at cost (less accumulated depreciation of $12,822 and $12,137) 41,771 41,169
Receivable for investments sold 6,501 5,729
Other assets 51,534 42,145
-------------- -----------------
TOTAL ASSETS $4,548,097 $4,462,994
============== =================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Deferred premium revenue $1,666,945 $1,616,315
Loss and loss adjustment expense reserves 46,376 42,505
Deferred income taxes 180,843 212,925
Payable for investments purchased 15,715 10,695
Other liabilities 96,600 54,682
-------------- -----------------
TOTAL LIABILITIES 2,006,479 1,937,122
-------------- -----------------
SHAREHOLDER'S EQUITY:
Common stock, par value $150 per share; authorized, issued and outstanding -100,000 shares 15,000 15,000
Additional paid-in capital 1,025,591 1,021,584
Retained earnings 1,423,157 1,341,855
Cumulative translation adjustment 330 2,704
Unrealized appreciation of investments, net of deferred income tax provision of $42,114
and $78,372 77,540 144,729
-------------- -----------------
TOTAL SHAREHOLDER'S EQUITY 2,541,618 2,525,872
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY 4,548,097 $4,462,994
============== =================
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
II-4
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands)
Three Months Ended
-------------------
March 31
-------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Gross premiums written $121,011 $ 71,112
Ceded premiums (14,715) (7,080)
-------- --------
Net premiums written 106,296 64,032
Increase in deferred premium revenue (45,532) (12,680)
-------- --------
Premiums earned (net of ceded premiums of $9,220 and $7,839) 60,764 51,352
Net investment income 59,003 53,065
Net realized gains 2,692 1,724
Other income 969 908
-------- --------
Total revenues 123,428 107,049
Expenses:
Losses and loss adjustment expenses 3,178 2,033
Policy acquisition costs, net 5,900 5,140
Underwriting and operating expenses 10,549 9,752
-------- --------
Total expenses 19,627 16,925
-------- --------
Income before income taxes 103,801 90,124
Provision for income taxes 22,499 19,476
-------- --------
Net income $ 81,302 $ 70,648
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-5
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(Unaudited)
For the three months ended March 31, 1996
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Unrealized
Additional Cumulative Appreciation
Common Stock Paid-in Retained Translation (Depreciation)
Shares Amount Capital Earnings Adjustment of Investments
------ ------ ---------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 100,000 $15,000 $1,021,584 $1,341,855 $2,704 $144,729
Exercise of stock options -- -- 1,179 -- -- --
Net income -- -- -- 81,302 -- --
Change in foreign currency transactions -- -- -- -- (2,374) --
Change in unrealized appreciation of investment net
of change in deferred income taxes of $36,285 -- -- -- -- -- (67,189)
Tax reduction related to tax sharing agreement with
MBIA, Inc. -- -- 2,828 -- -- --
------- ------- ---------- ---------- ------- -------
Balance, March 31, 1996 100,000 $15,000 $1,025,591 $1,423,157 $330 $77,540
======= ======= ========== ========== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
II-6
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 31
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 81,302 $ 70,648
Adjustments to reconcile net income to net cash provided by operating activities:
(Increase) decrease in accrued investment income (215) 960
Increase in deferred acquisition costs (571) (1,634)
(Increase) decrease in prepaid reinsurance premiums (5,496) 758
Increase in deferred premium revenue 51,028 11,922
Increase in loss and loss adjustment expense reserves 3,871 1,885
Depreciation 719 630
Amortization of goodwill 1,224 1,232
Amortization of bond discount, net (1,014) (358)
Net realized gains on sale of investments (2,692) (1,724)
Deferred income taxes 4,176) 3,782
Other, net 34,288 19,601
--------- ---------
Total adjustments to net income 85,318 37,054
--------- ---------
Net cash provided by operating activities 166,620 107,702
--------- ---------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net of payable for investments purchased (329,252) (182,603)
Sale of fixed-maturity securities, net of receivable for investments sold 146,729 92,890
Redemption of fixed-maturity securities, net of receivable for investments redeemed 32,644 16,717
Purchase of short-term investments, net (15,259) (9,908)
Sale (purchase) of other investments, net 215 (863)
Capital expenditures, net of disposals (1,333) (817)
--------- ---------
Net cash used in investing activities (166,256) (84,584)
--------- ---------
Cash flows from financing activities:
Dividends paid -- (22,500)
--------- ---------
Net cash used by financing activities -- (22,500)
--------- ---------
Net increase in cash and cash equivalents 364 618
Cash and cash equivalents - beginning of period 2,135 1,332
--------- ---------
Cash and cash equivalents - end of period $ 2,499 $ 1,950
========= =========
Supplemental cash flow disclosures:
Income taxes paid $ 1,161 $ 1
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
II-7
<PAGE>
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
---------------------
The accompanying consolidated financial statements are unaudited and
include the accounts of MBIA Insurance Corporation and its Subsidiaries (the
"Company"). The statements do not include all of the information and
disclosures required by generally accepted accounting principles. These
statements should be read in conjunction with the Company's consolidated
financial statements and notes thereto for the year ended December 31, 1995.
The accompanying consolidated financial statements have not been audited by
independent accountants in accordance with generally accepted auditing
standards but in the opinion of management such financial statements include
all adjustments, consisting only of normal recurring adjustments, necessary
to summarize fairly the Company's financial position and results of
operations. The results of operations for the three months ended March 31,
1996 may not be indicative of the results that may be expected for the year
ending December 31, 1996. The December 31, 1995 condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. Dividends Declared
---------------------
No dividends were declared by the Company during the three months ended
March 31, 1996.
II-8
<PAGE>
P R O S P E C T U S
CS First Boston Mortgage Securities Corp.
Depositor
Conduit Mortgage and Manufactured Housing Contract
Pass-Through Certificates
(Issuable in Series)
_____________________
The Conduit Mortgage and Manufactured Housing Contract Pass-Through Certificates
(the "Certificates") offered hereby and by the related Prospectus Supplements
will be offered from time to time in series (each, a "Series") in one or more
separate classes (each, a "Class"), which may be divided into one or more
subclasses (each, a "Subclass"), that represent interests in specified
percentages of principal and interest (a "Percentage Interest") with respect to
the related Mortgage Pool or the Contract Pool (each, as defined below), or that
have been assigned a Stated Principal Balance and an Interest Rate (as such
terms are defined herein), as more fully set forth herein, and will evidence the
undivided interest, beneficial interest or notional amount specified in the
related Prospectus Supplement in one of a number of trusts, each to be created
by CS First Boston Mortgage Securities Corp. (the "Depositor") from time to
time. The trust property of each trust (the "Trust Fund") will consist of a pool
containing one- to four-family residential mortgage loans, mortgage loans
secured by multifamily residential rental properties consisting of five or more
dwelling units or apartment buildings owned by cooperative housing corporations,
loans made to finance the purchase of certain rights relating to cooperatively
owned properties secured by a pledge of shares of a cooperative corporation and
an assignment of a proprietary lease or occupancy agreement on a cooperative
dwelling, mortgage participation certificates evidencing participation interests
in such loans that are acceptable to the nationally recognized statistical
rating agency or agencies rating the related Series of Certificates
(collectively, the "Rating Agency") for a rating in one of the four highest
rating categories of such Rating Agency (such loans and participation
certificates being referred to collectively hereinafter as the "Mortgage
Loans"), or certain conventional mortgage pass-through certificates (the
"Mortgage Certificates") and related property (the "Mortgage Pool") or a pool of
manufactured housing conditional sales contracts and installment loan agreements
(the "Contracts") or participation certificates representing participation
interests in such Contracts and related property (the "Contract Pool") conveyed
to such trust by the Depositor. The Mortgage Loans may be conventional mortgage
loans, conventional cooperative loans, mortgage loans insured by the Federal
Housing Administration (the "FHA"), or mortgage loans partially guaranteed by
the Veterans Administration (the "VA"), or any combination of the foregoing,
bearing fixed or variable rates of interest. The Contracts may be conventional
contracts, contracts insured by the FHA or partially guaranteed by the VA, or
any combination of the foregoing, bearing fixed or variable rates of interest,
as specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, the rights of the holders of the Certificates of
one or more Classes or Subclasses of a Series to receive distributions with
respect to the related Mortgage Pool or Contract Pool may be subordinated to
such rights of the holders of the Certificates of one or more Classes or
Subclasses of such Series to the extent described herein and in such Prospectus
Supplement. As provided in the applicable Prospectus Supplement, the timing of
payments, whether of principal or of interest, to any one or more of such
Classes or Subclasses may be on a sequential or a pro rata basis. The Prospectus
Supplement with respect to each Series will also set forth specific information
relating to the Trust Fund with respect to the Series in respect of which the
Prospectus is being delivered, together with specific information regarding the
Certificates of such Series.
The Certificates do not represent an obligation of or interest in the Depositor
or any affiliate thereof. Neither the Certificates, the Mortgage Loans, the
Contracts nor the Mortgage Certificates are insured or guaranteed by any
governmental agency or instrumentality, except to the extent provided herein.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, which may include CS First Boston
Corporation, an affiliate of the Depositor, as more fully described under "Plan
of Distribution" and in the related Prospectus Supplement. Certain offerings of
the Certificates, as specified in the related Prospectus Supplement, may be made
in one or more transactions exempt from the registration requirements of the
Securities Act of 1933. Such offerings are not being made pursuant to the
Registration Statement of which this Prospectus forms a part.
There will have been no public market for the Certificates of any Series prior
to the offering thereof. No assurance can be given that such a market will
develop as a result of such offering or, if it does develop, that it will
continue.
The Depositor, as specified in the applicable Prospectus Supplement, may elect
to treat the Trust Fund with respect to certain Series of Certificates as one or
more Real Estate Mortgage Investment Conduits (each, a "REMIC"). See "Certain
Federal Income Tax Consequences."
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Certificates of such Series may be subject to early
termination and may receive Special Distributions (as defined herein) in
reduction of Stated Principal Balance (as defined herein) under the
circumstances described herein and in such Prospectus Supplement.
This Prospectus may not be used to consummate sales of the Certificates offered
hereby unless accompanied by a Prospectus Supplement.
__________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
CS First Boston
The date of this Prospectus is December 4, 1995.
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement with respect to each Series of Certificates
will, among other things, set forth with respect to such Series of Certificates:
(i) the identity of each Class or Subclass within such Series; (ii) the
undivided interest, Percentage Interest, Stated Principal Balance or notional
amount of each Class or Subclass of Certificates; (iii) the Pass-Through Rate,
Interest Rate or Annual Rate borne by each Class or Subclass within such Series;
(iv) certain information concerning the Mortgage Loans, the Mortgage
Certificates, the Contracts, if any, and the other assets comprising the Trust
Fund for such Series; (v) the final Distribution Date of each Class or Subclass
of Certificates within such Series; (vi) the identity of each Class or Subclass
of Compound Interest Certificates, if any, within such Series; (vii) the method
used to calculate the amount to be distributed with respect to each Class or
Subclass of Certificates; (viii) the order of application of distributions to
each of the Classes or Subclasses within such Series, whether sequential, pro
rata, or otherwise; (ix) the Distribution Dates with respect to such Series; (x)
information with respect to the terms of the Residual Certificates or
Subordinated Certificates offered hereby, if any are offered; (xi) information
with respect to the method of credit support, if any, with respect to such
Series; and (xii) additional information with respect to the plan of
distribution of such Series of Certificates.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each
Series of Certificates will contain, a summary of the material terms of the
documents referred to herein and therein, but neither contains nor will contain
all of the information set forth in the Registration Statement of which this
Prospectus and the related Prospectus Supplement is a part. For further
information, reference is made to such Registration Statement and the exhibits
thereto which the Depositor has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as amended.
Statements contained in this Prospectus and any Prospectus Supplement as to the
contents of any contract or other document referred to are summaries and in each
instance reference is made to the copy of the contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. Copies of the Registration Statement may be
obtained from the Commission, upon payment of the prescribed charges, or may be
examined free of charge at the Commission's offices. Reports and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at 75 Park
Plaza, Room 1102, New York, New York 10007; and Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Copies of
the Pooling and Servicing Agreement pursuant to which a Series of Certificates
is issued will be provided to each person to whom a Prospectus and the related
Prospectus Supplement are delivered, upon written or oral request directed to:
Treasurer, CS First Boston Mortgage Securities Corp., Park Avenue Plaza, 55 East
52nd Street, New York, New York 10055, (212) 909-2000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports
filed or caused to be filed by the Depositor with respect to a Trust Fund
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the
termination of the offering of Certificates offered hereby. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, upon request, a copy of any or all such documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such Classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed to: CS First Boston Mortgage Securities Corp., Park Avenue Plaza, 55
East 52nd Street, New York, New York 10055, telephone number (212) 909-2000.
-2-
<PAGE>
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus, and by reference to
the information with respect to each Series of Certificates contained in the
related Prospectus Supplement. Certain capitalized terms used and not otherwise
defined herein shall have the meanings given elsewhere in this Prospectus.
SECURITIES OFFERED.......... Conduit Mortgage and Manufactured Housing Contract
Pass-Through Certificates (the "Certificates"),
issuable in series (each, a "Series"). The
Certificates may be issued in one or more classes
(each, a "Class") and such Classes may be divided
into one or more subclasses (each, a "Subclass").
One or more of such Classes or Subclasses of a
Series may be subordinated to one or more Classes
or Subclasses of such Series, as specified in the
related Prospectus Supplement (any such Class or
Subclass to which another Class or Subclass is
subordinated being hereinafter referred to as a
"Senior Class" or a "Senior Subclass,"
respectively, and any such subordinated Class or
Subclass being hereinafter referred to as a
"Subordinated Class" or "Subordinated Subclass,"
respectively). One or more of such Classes or
Subclasses of Certificates of a Series (the
"Residual Certificates") may evidence a residual
interest in the related Trust Fund (as defined
below). If so specified in the related Prospectus
Supplement, one or more Classes or Subclasses of
Certificates within a Series (the "Multi-Class
Certificates") may be assigned a principal
balance (a "Stated Principal Balance" or a
"Certificate Principal Balance") based on the
cash flow from the Mortgage Loans (as hereinafter
defined), Mortgage Certificates (as hereinafter
defined), the Contracts (as hereinafter defined)
and/or the other assets in the Trust Fund if
specified as such in the related Prospectus
Supplement and a stated annual interest rate,
determined in the manner set forth in such
Prospectus Supplement, which may be fixed or
variable (an "Interest Rate"). If so specified in
the related Prospectus Supplement, one or more
such Classes or Subclasses may receive unequal
amounts of the distributions of principal and
interest on the Mortgage Loans, the Contracts and
the Mortgage Certificates included in the related
Trust Fund, as specified in such Prospectus
Supplement (any such Class or Subclass receiving
the higher proportion of principal distributions
being referred to hereinafter as a "Principal
Weighted Class" or "Principal Weighted Subclass,"
respectively, and any such Class or Subclass
receiving the higher proportion of interest
distributions being referred to hereinafter as an
"Interest Weighted Class" or an "Interest
Weighted Subclass," respectively). If so
specified in the related Prospectus Supplement,
the allocation of the principal and interest
distributions may involve as much as 100% of each
distribution of principal or interest being
allocated to one or more Classes or Subclasses
and 0% to another. If so specified in the related
Prospectus Supplement, one or more Classes or
Subclasses may receive disproportionate amounts
of certain distributions of principal, which
proportions may change over time subject to
certain conditions. Payments may be applied to
any one or more Class or Subclass on a sequential
or pro rata basis, or otherwise, as specified in
the related Prospectus Supplement.
Each Certificate will represent the undivided
interest, beneficial interest or percentage
interest specified in the related Prospectus
Supplement in one of a number of trusts to be
created by the Depositor from time to time. The
trust property of each trust (the "Trust Fund")
will consist of (a) one
-3-
<PAGE>
or more mortgage pools (each, a "Mortgage Pool")
containing (i) conventional one- to four-family
residential, mortgage loans, (ii) loans (the
"Cooperative Loans") made to finance the purchase
of certain rights relating to cooperatively owned
properties secured by the pledge of shares issued
by a cooperative corporation (the "Cooperative")
and the assignment of a proprietary lease or
occupancy agreement providing the exclusive right
to occupy a particular dwelling unit (a
"Cooperative Dwelling" and, together with one- to
four-family residential properties, "Single
Family Property"), (iii) mortgage loans secured
by multifamily residential rental properties
consisting of five or more dwelling units or
apartment buildings owned by cooperative housing
corporations ("Multifamily Property"), purchased
by the Depositor either directly or through one
or more affiliates from an affiliate or from
unaffiliated sellers, (iv) mortgage participation
certificates evidencing participation interests
in such loans that are acceptable to the
nationally recognized rating agency or agencies
identified in the related Prospectus Supplement
(collectively, the "Rating Agency") rating the
Certificates of such Series for a rating in one
of the four highest rating categories of such
Rating Agency (such loans and mortgage
participation certificates being referred to
collectively hereinafter as the "Mortgage
Loans"), or (v) certain conventional mortgage
pass-through certificates (the "Mortgage
Certificates") issued by one or more trusts
established by one or more private entities or
(b) one or more contract pools (each, a "Contract
Pool") containing manufactured housing
conditional sales contracts and installment loan
agreements (the "Contracts") or participation
certificates representing participation interests
in such Contracts (such Contracts, together with
the Mortgage Loans and the Mortgage Certificates,
being referred to collectively hereinafter as the
"Trust Assets") purchased by the Depositor either
directly or through one or more affiliates or
Unaffiliated Sellers, and related property
conveyed to such trust by the Depositor.
Unless otherwise specified in the related
Prospectus Supplement, each Series of
Certificates will be offered in fully registered
form only, in one or more Classes, which may be
divided into one or more Subclasses evidencing
the right to receive a share of principal
payments and the percentages of interest payments
on the underlying Mortgage Loans, Mortgage
Certificates or Contracts at the Pass-Through
Rate for the related Mortgage Pool or Contract
Pool. If so specified in the related Prospectus
Supplement, Multi-Class Certificates of a Series
may be issued with the Stated Principal Balances
and the Interest Rates therein specified. At the
time of issuance, each Certificate offered by
means of this Prospectus and the related
Prospectus Supplements will be rated in one of
the four highest rating categories by at least
one Rating Agency. The minimum undivided
interest, percentage interest or beneficial
interest in a Mortgage Pool or Contract Pool, the
minimum notional amount to be evidenced by a
Certificate of a Class or Subclass, or the
minimum denomination in which a Certificate of a
Class or Subclass is to be issued will be set
forth in the related Prospectus Supplement.
DEPOSITOR................... CS First Boston Mortgage Securities Corp., a
Delaware corporation.
MASTER SERVICER............. The entity, if any, named as Master Servicer in the
applicable Prospectus Supplement, which may be an
affiliate of the Depositor. See "Description of
the Certificates."
-4-
<PAGE>
INTEREST.................... Interest will be distributed on the days specified
in the Prospectus Supplement with respect to a
Series, or if any such day is not a business day,
the next succeeding business day (the
"Distribution Date"), at the rate, or pursuant to
the method of determining such rate, specified in
the related Prospectus Supplement for each Class
or Subclass within such Series, commencing on the
day specified in such Prospectus Supplement, in
the manner specified in such Prospectus
Supplement. See "Yield Considerations" and
"Description of the Certificates--Payments on
Mortgage Loans" and "--Payments on Contracts."
PRINCIPAL (INCLUDING
PREPAYMENTS).............. Unless otherwise specified in the related
Prospectus Supplement, principal on each Trust
Asset underlying a Series of Certificates will be
distributed on each Distribution Date, commencing
on the date specified in the related Prospectus
Supplement in the priority and manner specified
in such Prospectus Supplement. If so specified in
the Prospectus Supplement with respect to a
Series that includes Multi-Class Certificates,
distributions on such Multi-Class Certificates
may be made in reduction of the Stated Principal
Balance, in an amount equal to the Stated
Principal Distribution Amount. Unless otherwise
specified in the related Prospectus Supplement,
the Stated Principal Distribution Amount will
equal the amount by which the Stated Principal
Balance of such Class of Multi-Class Certificates
(before taking into account the amount of
interest accrued and added to the Stated
Principal Balance of any Class or of Compound
Interest Certificates) exceeds the Asset Value
(as defined herein) of the Trust Assets and other
property in the related Trust Fund as of the
Business Day prior to the related Distribution
Date. See "Maturity and Prepayment
Considerations" and "Description of the
Certificates--Payments on Mortgage Loans" and "--
Payments on Contracts." If so specified in the
Prospectus Supplement relating to a Series, the
Multi-Class Certificates of such Series which
have other than monthly Distribution Dates may
receive special distributions in reduction of
Stated Principal Balance ("Special
Distributions") in any month, other than a month
in which a Distribution Date occurs, if, as a
result of principal prepayments on the Trust
Assets included in the related Trust Fund and/or
low reinvestment yields, the Trustee determines,
based on assumptions specified in the related
Pooling and Servicing Agreement, that the amount
of cash anticipated to be on deposit in the
Certificate Account for such Series on the next
Distribution Date may be less than the sum of the
interest distributions and the amount of
distributions in reduction of Stated Principal
Balance to be made on such Distribution Date.
Unless otherwise specified in the related
Prospectus Supplement, Special Distributions will
be made on such Certificates in the same priority
and manner as distributions in reduction of
Stated Principal Balance would be made on the
next Distribution Date for such Certificates. See
"Description of the Certificates--Special
Distributions."
THE MORTGAGE POOLS.......... If so specified in the related Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Mortgage Pool or
Pools included in the Trust Fund for such Series.
Unless otherwise specified in the applicable
Prospectus Supplement, the original principal
amount of each Mortgage Loan in a Mortgage Pool
will not be more than 95% (such ratio, the "Loan-
to-Value Ratio") of the value of the property
securing such Mortgage Loan (the "Mortgaged
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Property"), based upon an appraisal of the
Mortgaged Property considered acceptable to the
originator of such Mortgage Loan or the sales
price, whichever is less (the "Original Value").
Unless otherwise specified in the applicable
Prospectus Supplement, Mortgage Loans secured by
Single Family Property having an original
principal amount exceeding 80% of the Original
Value will be covered by a policy of private
mortgage insurance until the outstanding
principal amount is reduced to the percentage of
the Original Value set forth in the related
Prospectus Supplement as a result of principal
payments by the borrower (the "Mortgagor").
Unless otherwise specified in the applicable
Prospectus Supplement, the principal balance at
origination of each Mortgage Loan that is secured
by Single Family Property will not exceed
$500,000. Mortgage Loans in a Mortgage Pool will
all have original maturities of 10 to 40 years,
unless otherwise specified in the applicable
Prospectus Supplement. Mortgage Pools may be
formed from time to time in varying sizes.
FIXED PASS-THROUGH RATE
MORTGAGE POOLS........... Unless otherwise specified in the related
Prospectus Supplement, with respect to each
Mortgage Pool included in the Trust Fund with
respect to a Series bearing a fixed Pass-Through
Rate, the Depositor will be obligated to deliver
Mortgage Loans that (i) have interest rates (the
"Mortgage Rates") at least 3/8 of 1% over the
interest rate (the "Pass-Through Rate") for such
Series, (ii) conform to the eligibility
requirements for such Series set forth in the
related Prospectus Supplement, and (iii) have an
aggregate principal balance equal to the amount
specified in such Prospectus Supplement, subject
to a permitted variance of up to 10%.
VARIABLE PASS-THROUGH RATE
MORTGAGE POOLS......... If so specified in the related Prospectus
Supplement, the Depositor may establish one or
more Mortgage Pools, each of which will have a
variable as opposed to a fixed Pass-Through Rate.
Unless otherwise provided in the applicable
Prospectus Supplement, the variable Pass-Through
Rate will equal the weighted average of the
Mortgage Rates of all of the Mortgage Loans in
the Mortgage Pool minus the fixed percentage
servicing fee for each Mortgage Loan set forth in
the related Prospectus Supplement or in a Current
Report on Form 8-K. A Mortgage Pool with a
variable Pass-Through Rate may be composed of
Mortgage Loans that have fluctuating Mortgage
Rates. The characteristics of a variable Pass-
Through Rate and its effect on the yield to
Certificateholders as well as the servicing
compensation payable to the related Servicer and
the Master Servicer and the amounts, if any, with
respect to such Mortgage Loans payable to the
Depositor or to the person or entity specified in
the related Prospectus Supplement will be more
fully described in such Prospectus Supplement.
MORTGAGE CERTIFICATES....... If so specified in the related Prospectus
Supplement, the Trust Fund for a Series of
Certificates may include Mortgage Certificates
issued by one or more trusts established by one
or more private entities, with the respective
aggregate principal balances and the
characteristics described in such Prospectus
Supplement. Each Mortgage Certificate included in
a Trust Fund will evidence an interest of the
type specified in the related Prospectus
Supplement in a pool of mortgage loans of the
type described in such Prospectus Supplement,
secured principally by mortgages on one- to four-
family residences, mortgages on multi-family
residential rental
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<PAGE>
properties or apartment buildings owned by
cooperative housing corporations or by pledges of
shares of cooperative corporations and
assignments of proprietary leases or occupancy
agreements on cooperative dwellings, unless
otherwise specified in such Prospectus
Supplement.
THE CONTRACT POOLS.......... If so specified in the related Prospectus
Supplement, the Certificates of a Series will
represent the interest specified in such
Prospectus Supplement in the Contract Pool or
Pools included in the Trust Fund for such Series.
Unless otherwise specified in the applicable
Prospectus Supplement, the Contracts will be
fixed rate Contracts. Such Contracts, as
specified in the related Prospectus Supplement,
will consist of manufactured housing conditional
sales contracts and installment loan agreements
and will be conventional Contracts or Contracts
insured by the FHA or partially guaranteed by the
VA. Each Contract may be secured by a new or used
unit of manufactured housing (a "Manufactured
Home").
The related Prospectus Supplement will specify the
range of terms to maturity of the Contracts at
origination and the maximum Loan-to-Value Ratio
at origination (the "Contract Loan-to-Value
Ratio"). Because manufactured homes, unlike site-
built homes, generally depreciate in value, the
Loan-to-Value Ratios of some of the Contracts may
be higher at the Cut-off Date than at origination
and may increase over time. Unless otherwise
specified in the related Prospectus Supplement,
Contracts that are conventional Contracts will
not be covered by primary mortgage insurance
policies or primary credit insurance policies.
Each Manufactured Home which secures a Contract
will be covered by a standard hazard insurance
policy (which may be a blanket policy) to the
extent described herein or in the related
Prospectus Supplement insuring against hazard
losses due to various causes, including fire,
lightning and windstorm. A Manufactured Home
located in a federally designated flood area will
be required to be covered by flood insurance.
Contract Pools may be formed from time to time in
varying sizes.
None of the Contracts will have been originated by
the Depositor or any of its affiliates.
YIELD CONSIDERATIONS........ If so specified in the applicable Prospectus
Supplement, an assumed rate of prepayment will be
used to calculate the expected yield to maturity
on each Class of the Certificates of a Series.
The yield on any Class of Certificates, the
purchase price of which is greater than the
aggregate amount of the Principal Distributions
to be made to such Class (a "Premium
Certificate"), is likely to be adversely affected
by a higher than anticipated level of principal
prepayments on the Trust Assets included in the
related Trust Fund. This effect on yield will
intensify with any increase in the amount by
which the purchase price of such Certificate
exceeds the aggregate amount of such Principal
Distributions. If the differential is
particularly wide and a high level of prepayments
occurs, it is possible for Holders of Premium
Certificates not only to suffer a lower than
anticipated yield but, in extreme cases, to fail
to recoup fully their initial investment.
Conversely, a lower than anticipated level of
principal prepayments (which can be anticipated
to increase the expected yield to Holders of
Certificates that are Premium Certificates) will
likely result in a lower than anticipated yield
to Holders of Certificates of a Class the
purchase price of which is less than the
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<PAGE>
aggregate amount of the Principal Distributions
to be made to such Class (a "Discount
Certificate"). The Prospectus Supplement for each
Series of Certificates that includes an Interest
Weighted or a Principal Weighted Class will set
forth certain yield calculations on each such
Class based upon a range of specified prepayment
assumptions on the Trust Assets included in the
related Trust Fund.
The yield to Certificateholders will also be
adversely affected because interest will accrue
on the Mortgage Loans, the Contracts or the
mortgage loans underlying the Mortgage
Certificates included in a Trust Fund, from the
first day of the month preceding the month in
which a Distribution Date occurs, but the
distribution of such interest will be made no
earlier than the 25th day of the succeeding month
unless otherwise provided in the applicable
Prospectus Supplement. The adverse effect on
yield of this delay will intensify with any
increase in the period of time by which the
Distribution Date for a Series of Certificates
succeeds the date on which distributions on the
Mortgage Loans, the Contracts, or the Mortgage
Certificates are received by the Master Servicer
or the Trustee. See "Yield Considerations."
CREDIT SUPPORT.............. Neither the Certificates nor the Trust Assets are
insured or guaranteed by any governmental agency,
except to the extent of any FHA insurance or VA
guarantee. Credit support will be provided on the
Mortgage Pools or Contract Pools by one or more
irrevocable letters of credit (the "Letter of
Credit"), a policy of mortgage pool insurance
(the "Pool Insurance Policy"), a bond or similar
form of insurance coverage against certain losses
in the event of the bankruptcy of a Mortgagor
(the "Mortgagor Bankruptcy Bond") or any
combination of the foregoing as specified in the
applicable Prospectus Supplement. In lieu or in
addition to the foregoing credit support
arrangements if so specified in the related
Prospectus Supplement, the Certificates of a
Series may be issued in one or more Classes or
Subclasses. Payments on the Certificates of one
or more Classes or Subclasses (the "Senior
Certificates") may be supported by a prior right
to receive distributions attributable or
otherwise payable to another Class or Subclass
(the "Subordinated Certificates") to the extent
specified in the related Prospectus Supplement
(the "Subordinated Amount"). In addition, if so
specified in the related Prospectus Supplement,
one or more Classes or Subclasses of Subordinated
Certificates may be subordinated to another Class
or Subclass of Subordinated Certificates and may
be entitled to receive disproportionate amounts
of distributions of principal. If so specified in
the related Prospectus Supplement, a reserve (the
"Reserve Fund") and certain other accounts or
funds may be established to support payments on
the Certificates. A Prospectus Supplement with
respect to a Series may also provide for
additional or alternative forms of credit
support, including a guarantee or surety bond,
acceptable to the Rating Agency ("Alternative
Credit Support").
A. LETTER OF CREDIT........ If so specified in the applicable Prospectus
Supplement, the issuer of one or more Letters of
Credit (the "L/C Bank") will deliver to the
Trustee the Letters of Credit for the Mortgage
Pool or Contract Pool. Unless otherwise specified
in the related Prospectus Supplement, to the
extent described herein, the L/C Bank will honor
the Trustee's demands with respect to such Letter
of Credit, to the extent of the amount available
thereunder, to make payments to the Certificate
Account on each
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<PAGE>
Distribution Date in an amount equal to the
amount sufficient to repurchase each Liquidating
Loan that has not been purchased by the related
Servicer or the Master Servicer pursuant to the
terms of the applicable Servicing Agreement or
Pooling and Servicing Agreement referred to
herein. Unless otherwise provided in the related
Prospectus Supplement, the term "Liquidating
Loan" means: (a) each Mortgage Loan with respect
to which foreclosure proceedings have been
commenced (and the Mortgagor's right of
reinstatement has expired), (b) each Mortgage
Loan with respect to which the Servicer or the
Master Servicer has agreed to accept a deed to
the property in lieu of foreclosure, (c) each
Cooperative Loan as to which the shares of the
related Cooperative and the related proprietary
lease or occupancy agreement have been sold or
offered for sale or (d) each Contract with
respect to which repossession proceedings have
been commenced. The liability of the L/C Bank
under the Letter of Credit will be reduced by the
amount of unreimbursed payments thereunder. In
the event that at any time there remains no
amount available under the Letter of Credit for a
specific Mortgage Pool or Contract Pool, and
coverage under another form of credit support, if
any, is exhausted, any losses will be borne by
the holder of Certificates of the Series
evidencing interests in such Mortgage Pool or
Contract Pool, as specified in the related
Prospectus Supplement.
Unless otherwise specified in the related
Prospectus Supplement, the maximum liability of
the L/C Bank under the Letter of Credit for a
Mortgage Pool or Contract Pool will be an amount
equal to a percentage (not greater than 10% of
the initial aggregate principal balance of the
Mortgage Loans in such Mortgage Pool or Contracts
in such Contract Pool) (the "L/C Percentage"),
set forth in the Prospectus Supplement, relating
to such Mortgage Pool or Contract Pool. The
maximum amount available at any time to be paid
under the Letter of Credit will be determined in
accordance with the provisions of the applicable
Pooling and Servicing Agreement referred to
herein. The duration of coverage and the amount
and frequency of any reduction in coverage
provided by the Letter of Credit with respect to
a Series of Certificates will be in compliance
with requirements established by the Rating
Agency rating such Series and will be set forth
in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement,
the Letter of Credit with respect to a Series of
Certificates may, in addition to or in lieu of
the foregoing, provide coverage with respect to
the unpaid principal or notional amount of the
Certificates of a Class or Classes within such
Series. See "Credit Support--Letter of Credit."
B. POOL INSURANCE.......... If so specified in the applicable Prospectus
Supplement, the Master Servicer will obtain a
Pool Insurance Policy to cover any loss (subject
to the limitations described below) by reason of
default by the Mortgagors on the related Mortgage
Loans to the extent not covered by any policy of
primary mortgage insurance (a "Primary Mortgage
Insurance Policy"). The amount of coverage
provided by the Pool Insurance Policy for a
Mortgage Pool will be specified in the related
Prospectus Supplement. A Pool Insurance Policy
for a Mortgage Pool, however, will not be a
blanket policy against loss, because claims
thereunder may only be made for particular
defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent. See
"Description of Insurance--Pool Insurance
Policies."
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<PAGE>
The Master Servicer, if any, or the Depositor or
the applicable Servicer will be required to use
its best reasonable efforts to maintain the Pool
Insurance Policy for each such Mortgage Pool and
to present claims thereunder to the issuer of
such Pool Insurance Policy (the "Pool Insurer")
on behalf of the Trustee and the
Certificateholders. See "Description of the
Certificates--Presentation of Claims."
C. MORTGAGOR BANKRUPTCY
BOND............. If so specified in the related Prospectus
Supplement, the Master Servicer, if any, or the
Depositor or the applicable Servicer will obtain
and use its best reasonable efforts to maintain a
Mortgagor Bankruptcy Bond for such Series
covering certain losses resulting from action
that may be taken by a bankruptcy court in
connection with the bankruptcy of a Mortgagor.
The level of coverage provided by such Mortgagor
Bankruptcy Bond will be specified in the
applicable Prospectus Supplement. See
"Description of Insurance--Mortgagor Bankruptcy
Bond."
D. SUBORDINATED
CERTIFICATES............ If so specified in the related Prospectus
Supplement, the rights of holders of the
Certificates of one or more Subordinated Classes
or Subclasses of a Series to receive
distributions with respect to the Mortgage Loans
in the Mortgage Pool or Contracts in the Contract
Pool for such Series, or with respect to a
Subordinated Pool (as defined herein), will be
subordinated to the rights of the holders of the
Certificates of one or more Classes or Subclasses
of such Series to receive such distributions to
the extent described in the related Prospectus
Supplement, and limited to the Subordinated
Amount set forth in the related Prospectus
Supplement. This subordination will be intended
to enhance the likelihood of regular receipt by
holders of the Senior Certificates of the full
amount of scheduled payments of principal and
interest due them and to reduce the likelihood
that the holders of such Senior Certificates will
experience losses. See "Credit Support--
Subordinated Certificates."
E. SHIFTING INTEREST....... If so specified in the applicable Prospectus
Supplement, the protection afforded to holders of
Senior Certificates of a Series by the
subordination of certain rights of holders of
Subordinated Certificates of such Series to
distributions on the related Mortgage Loans or
Contracts may be effected by the preferential
right of the holders of the Senior Certificates
to receive, prior to any distribution being made
in respect of the holders of the related
Subordinated Certificates, current distributions
on the related Mortgage Loans or Contracts of
principal and interest due them on each
Distribution Date out of funds available for
distribution on such date in the related
Certificate Account and by the distribution to
the holders of the Senior Certificates on each
Distribution Date of a greater than pro rata
percentage of certain principal prepayments or
other recoveries of principal specified in the
related Prospectus Supplement on a Mortgage Loan
or Contract that are received in advance of their
scheduled Due Dates and are not accompanied by an
amount as to interest representing scheduled
interest due on any date or dates in any month or
months subsequent to the month of prepayment (the
"Principal Prepayments"). The allocation of a
greater than pro rata share of such amounts to
the Senior Certificates will have the effect of
accelerating the amortization of the Senior
Certificates while increasing the respective
interest in the Trust Fund evidenced by the
Subordinated Certificates. Increasing the
respective interest of the Subordinated
Certificates relative to that of the Senior
Certificates is intended to preserve the
availability of the benefits
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<PAGE>
of the subordination provided by the Subordinated
Certificates. See "Description of the
Certificates--Distributions of Principal and
Interest" and "--Distributions on Certificates"
and "Credit Support--Shifting Interest."
F. RESERVE FUND............ If so specified in the related Prospectus
Supplement, a Reserve Fund may be established for
such Series. Unless otherwise specified in such
Prospectus Supplement, such Reserve Fund will not
be included in the corpus of the Trust Fund for
such Series. If so specified in the related
Prospectus Supplement, such Reserve Fund may be
created by the deposit, in escrow, by the
Depositor, of a separate pool of mortgage loans,
cooperative loans or manufactured housing
conditional sales contracts and installment loan
agreements (the "Subordinated Pool"), with the
aggregate principal balance specified in the
related Prospectus Supplement, or by the deposit
of cash in the amount specified in the related
Prospectus Supplement (the "Initial Deposit").
The Reserve Fund will be funded by the retention
of specified distributions on the Trust Assets of
the related Mortgage Pool or Contract Pool,
and/or on the mortgage loans, cooperative loans
or manufactured housing conditional sales
contracts and installment loan agreements in the
Subordinated Pool, until the Reserve Fund
(without taking into account the amount of any
Initial Deposit) reaches an amount (the "Required
Reserve") set forth in the related Prospectus
Supplement. Thereafter, specified distributions
on the Trust Assets of the related Mortgage Pool
or Contract Pool, and/or on the mortgage loans,
cooperative loans or manufactured housing
conditional sales contracts and installment loan
agreements in the Subordinated Pool, will be
retained to the extent necessary to maintain such
Reserve Fund (without taking into account the
amount of the Initial Deposit, if any) at the
related Required Reserve. In no event will the
Required Reserve for any Series ever be required
to exceed the lesser of the Subordinated Amount
for such Series or the outstanding aggregate
principal amount of Certificates of the
Subordinated Classes or Subclasses of such Series
specified in the related Prospectus Supplement.
If so specified in the related Prospectus
Supplement, the Reserve Fund with respect to such
Series may be funded at a lesser amount or in
another manner acceptable to the Rating Agency
rating such Series. See "Credit Support--
Subordinated Certificates" and "--Reserve Fund."
G. OTHER FUNDS............. Assets consisting of cash, certificates of deposit
or letters of credit, or any combination thereof,
in the aggregate amount specified in the related
Prospectus Supplement, will be deposited by the
Depositor in one or more accounts to be
established with respect to a Series of
Certificates by the Depositor with the Trustee on
the related Delivery Date if such assets are
required to make timely distributions in respect
of principal of, and interest on, the
Certificates of such Series, are otherwise
required as a condition to the rating of such
Certificates in the rating category specified in
the Prospectus Supplement, or are required in
order to provide for certain contingencies or in
order to make certain distributions regarding
Certificates which represent interests in GPM
Loans (a "GPM Fund") or Buy-Down Loans (a "Buy-
Down Fund"). Following each Distribution Date,
amounts may be withdrawn from any such fund and
used and/or distributed in accordance with the
Pooling and Servicing Agreement under the
conditions and to the extent specified in the
related Prospectus Supplement.
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<PAGE>
H. SWAP AGREEMENT.......... If so specified in the Prospectus Supplement
relating to a Series of Certificates, the Trust
will enter into or obtain an assignment of a swap
agreement or similar agreement pursuant to which
the Trust will have the right to receive certain
payments of interest (or other payments) as set
forth or determined as described therein. See
"Credit Support--Swap Agreement."
HAZARD INSURANCE AND SPECIAL
HAZARD INSURANCE POLICIES.. Unless otherwise specified in the applicable
Prospectus Supplement, all of the Mortgage Loans
(except for the Cooperative Loans) and the
Contracts will be covered by standard hazard
insurance policies insuring against losses due to
various causes, including fire, lightning and
windstorm. In addition, the Depositor will, if so
specified in the applicable Prospectus
Supplement, obtain an insurance policy (the
"Special Hazard Insurance Policy") covering
losses that result from certain other physical
risks that are not otherwise insured against
(including earthquakes and mudflows). The Special
Hazard Insurance Policy will be limited in scope
and will cover losses in an amount specified in
the applicable Prospectus Supplement. Any hazard
losses not covered by either standard hazard
policies or the Special Hazard Insurance Policy
will not be insured against and to the extent
that the amount available under any other method
of credit support available for such Series is
exhausted, will be borne by Certificateholders of
such Series. The hazard insurance policies and
the Special Hazard Insurance Policy will be
subject to the limitations described under
"Description of Insurance--Standard Hazard
Insurance Policies on Mortgage Loans," "--
Standard Hazard Insurance Policies on the
Manufactured Homes" and "--Special Hazard
Insurance Policies."
SUBSTITUTION OF TRUST
ASSETS.............. If so specified in the Prospectus Supplement
relating to a Series of Certificates, within the
period following the date of issuance of such
Certificates specified in such Prospectus
Supplement, the Depositor or one or more
Servicers will deliver to the Trustee with
respect to such Series Trust Assets in
substitution for any one or more of the Trust
Assets included in the Trust Fund relating to
such Series which do not conform in one or more
material respects to the representations and
warranties in the related Pooling and Servicing
Agreement. See "Description of the Certificates--
Assignment of Mortgage Loans," "--Assignment of
Contracts" and "--Assignment of Mortgage
Certificates."
ADVANCES.................... The Servicers of the Mortgage Loans and Contracts
(and the Master Servicer, if any, with respect to
each Mortgage Loan and Contract that it services
directly, and otherwise to the extent the related
Servicer does not do so) will be obligated to
advance delinquent installments of principal and
interest on the Mortgage Loans and Contracts (the
"Advances") under certain circumstances. See
"Description of the Certificates--Advances."
OPTIONAL TERMINATION........ If so specified in the Prospectus Supplement with
respect to a Series, the Depositor or such other
persons as may be specified in a Prospectus
Supplement may purchase the Trust Assets in the
related Trust Fund and any property acquired in
respect thereof at the time, in the manner and at
the price specified in such Prospectus
Supplement. In the event that the Depositor
elects to treat the related Trust Fund as a Real
Estate Mortgage Investment Conduit (a "REMIC")
under the Internal Revenue Code of 1986, as
amended (the "Code"), any such repurchase will be
effected
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<PAGE>
only in compliance with the requirements of
Section 860F(a)(4) of the Code, so as to
constitute a "qualified liquidation" thereunder.
The exercise of the right of repurchase will
effect early retirement of the Certificates of
that Series. See "Maturity and Prepayment
Considerations" and "Description of the
Certificates--Termination."
ERISA LIMITATIONS........... A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of
the Code should carefully review with its own
legal advisers whether the purchase or holding of
Certificates could give rise to a transaction
prohibited or otherwise impermissible under ERISA
or Section 4975 of the Code. See "ERISA
Considerations."
TAX STATUS.................. See "Certain Federal Income Tax Consequences."
LEGAL INVESTMENT............ If so specified in the related Prospectus
Supplement relating to a Series of Certificates,
a Class or Subclass of such certificates will
constitute a "mortgage related security" under
the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") if and for so long as it is rated
in one of the two highest rating categories by at
least one nationally recognized statistical
rating organization. Such Classes or Subclasses,
if any, will be legal investments for certain
types of institutional investors to the extent
provided in SMMEA, subject, in any case, to any
other regulations which may govern investments by
such institutional investors. See "Legal
Investment."
USE OF PROCEEDS............. The Depositor will use the net proceeds from the
sale of each Series for one or more of the
following purposes: (i) to purchase the related
Trust Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such
Trust Assets, (iii) to establish any reserve
funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring,
guaranteeing and issuing such Certificates. If so
specified in the related Prospectus Supplement,
the purchase of the Trust Assets for a Series may
be effected by an exchange of Certificates by the
Depositor with the seller of such Trust Assets.
See "Use of Proceeds."
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<PAGE>
THE TRUST FUND
Ownership of the Mortgage or Contract Pool or Pools included in the
Trust Fund (hereinafter defined) for a Series of Certificates may be evidenced
by one or more Classes of Certificates, which may consist of one or more
Subclasses, as specified in the Prospectus Supplement for such Series. Each
Certificate will evidence the undivided interest, beneficial interest or
notional amount specified in the related Prospectus Supplement in one or more
Mortgage Pools containing one or more Mortgage Loans or Contract Pools
containing Contracts, having an aggregate principal balance of not less than
approximately $50,000,000 as of the first day of the month of its creation (the
"Cut-off Date"), unless otherwise specified in the applicable Prospectus
Supplement. If so specified in the related Prospectus Supplement, each Class or
Subclass of the Certificates of a Series will evidence the percentage interest
specified in such Prospectus Supplement in the payments of principal and
interest on the Mortgage Loans in the related Mortgage Pool or Pools or on the
Contracts in the related Contract Pool or Pools (a "Percentage Interest"). To
the extent specified in the related Prospectus Supplement, each Mortgage Pool or
Contract Pool with respect to a Series will be covered by a Letter of Credit, a
Pool Insurance Policy, a Special Hazard Insurance Policy, a Mortgagor Bankruptcy
Bond, by the subordination of the rights of the holders of the Subordinated
Certificates of a Series to the rights of the holders of the Senior
Certificates, which, if so specified in the related Prospectus Supplement, may
include Certificates of a Subordinated Class or Subclass and the establishment
of a Reserve, by the right of one or more Classes or Subclasses of Certificates
to receive a disproportionate amount of certain distributions of principal or
another form or forms of Alternative Credit Support acceptable to the Rating
Agency rating the Certificates of such Series or by any combination of the
foregoing. See "Description of Insurance" and "Credit Support."
THE MORTGAGE POOLS
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include (a) one or more Mortgage Pools
containing (i) conventional one- to four-family residential, first and/or second
mortgage loans, (ii) Cooperative Loans made to finance the purchase of certain
rights relating to cooperatively owned properties secured by the pledge of
shares issued by a Cooperative and the assignment of a proprietary lease or
occupancy agreement providing the exclusive right to occupy a particular
Cooperative Dwelling, (iii) mortgage loans secured by Multifamily Property, (iv)
mortgage participation certificates evidencing participation interests in such
loans that are acceptable to the nationally recognized Rating Agency rating the
Certificates of such Series for a rating in one of the four highest rating
categories of such Rating Agency, or (v) certain conventional Mortgage
Certificates issued by one or more trusts established by one or more private
entities or (b) one or more Contract Pools containing manufactured housing
conditional sales contracts and installment loan agreements or participation
certificates representing participation interests in such Contracts purchased by
the Depositor either directly or through one or more affiliates or Unaffiliated
Sellers, and related property conveyed to such trust by the Depositor.
A Mortgage Pool may include Mortgage Loans insured by the FHA ("FHA
Loans") and/or Mortgage Loans partially guaranteed by the Veterans
Administration (the "VA" and such mortgage loans are referred to as "VA Loans").
All Mortgage Loans will be evidenced by promissory notes (the "Mortgage Notes")
secured by first mortgages or first or second deeds of trust or other similar
security instruments creating a first lien, as applicable, on the Mortgaged
Properties (as defined below). Single Family Property and Multifamily Property
will consist of single family detached homes, attached homes (single family
units having a common wall), individual units located in condominiums,
multifamily residential rental properties, apartment buildings owned by
cooperative housing corporations and such other type of homes or units as are
set forth in the related Prospectus Supplement. Each such detached or attached
home or multifamily property will be constructed on land owned in fee simple by
the Mortgagor or on land leased by the Mortgagor for a term at least two years
greater than the term of the applicable Mortgage Loan. Attached homes may
consist of duplexes, triplexes and fourplexes (multifamily structures where each
Mortgagor owns the land upon which the unit is built with the remaining adjacent
land owned in common). Multifamily Property may include mixed commercial and
residential buildings. The Mortgaged Properties may include investment
properties and vacation and second homes. Mortgage Loans secured by Multifamily
Property may also be secured by an assignment of leases and rents and operating
or other cash flow guarantees relating to the Mortgaged Properties to the extent
specified in the related Prospectus Supplement.
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Unless otherwise specified below or in the applicable Prospectus
Supplement, each Mortgage Loan in a Mortgage Pool will (i) have an individual
principal balance at origination of not less than $25,000 nor more than
$500,000, (ii) have monthly payments due on the first day of each month (the
"Due Date"), (iii) be secured by Mortgaged Properties or relate to Cooperative
Loans located in any of the 50 states or the District of Columbia, and (iv)
consist of fully-amortizing Mortgage Loans, each with a 10 to 40 year term at
origination, a fixed or variable rate of interest and level or variable monthly
payments over the term of the Mortgage Loan. Unless otherwise specified in the
related Prospectus Supplement, the Loan-to-Value Ratio (as hereinafter
described) of such Mortgage Loans at origination will not exceed 95% on any
Mortgage Loan with an original principal balance of $150,000 or less, 90% on any
Mortgage Loan with an original principal balance in excess of $150,000 through
$200,000, 85% on any Mortgage Loan with an original principal balance in excess
of $200,000 through $300,000 and 80% on any Mortgage Loan with an original
principal balance exceeding $300,000. If so specified in the related Prospectus
Supplement, a Mortgage Pool may also include fully amortizing, adjustable rate
Mortgage Loans ("ARM Loans") with (unless otherwise specified in the applicable
Prospectus Supplement) a 30-year term at origination and a mortgage interest
rate adjusted periodically (with corresponding adjustments in the amount of
monthly payments) to equal the sum (which may be rounded) of a fixed margin and
an index described in such Prospectus Supplement, subject to any applicable
restrictions on such adjustments. The Mortgage Pools may also include other
types of Mortgage Loans to the extent set forth in the applicable Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, no
Mortgage Loan will have a Loan-to-Value Ratio at origination in excess of 95%,
regardless of its original principal balance. The Loan-to-Value Ratio is the
ratio, expressed as a percentage, of the principal amount of the Mortgage Loan
at the date of determination to the lesser of (a) the appraised value determined
in an appraisal obtained by the originator and (b) the sales price for such
property (the "Original Value"). Unless otherwise specified in the related
Prospectus Supplement, with respect to a Mortgage Loan secured by a mortgage on
a vacation or second home or an investment property (other than Multifamily
Property), no income derived from the property will be considered for
underwriting purposes, the Loan-to-Value Ratio (taking into account any
secondary financing) of such Mortgage Loan may not exceed 80% and the original
principal balance of the Mortgage Loan may not exceed $250,000.
If so specified in the related Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans with fluctuating Mortgage Rates. Any such Mortgage
Loan may provide that on the day on which the Mortgage Rate adjusts, the amount
of the monthly payments on the Mortgage Loan will be adjusted to provide for the
payment of the remaining principal amount of the Mortgage Loan with level
monthly payments of principal and interest at the new Mortgage Rate to the
maturity date of the Mortgage Loan. Alternatively, the Mortgage Loan may provide
that the Mortgage Rate adjusts more frequently than the monthly payment. As a
result, a greater or lesser portion of the monthly payment will be applied to
the payment of principal on the Mortgage Loan, thus increasing or decreasing the
rate at which the Mortgage Loan is repaid. See "Yield Considerations." In the
event that an adjustment to the Mortgage Rate causes the amount of interest
accrued in any month to exceed the amount of the monthly payment on such
Mortgage Loan, the excess (the "Deferred Interest") will be added to the
principal balance of the Mortgage Loan (unless otherwise paid by the Mortgagor),
and will bear interest at the Mortgage Rate in effect from time to time. The
amount by which the Mortgage Rate or monthly payment may increase or decrease
and the aggregate amount of Deferred Interest on any Mortgage Loan may be
subject to certain limitations, as described in the related Prospectus
Supplement.
If so specified in the Prospectus Supplement for the related Series,
the Mortgage Rate on certain ARM Loans will be convertible from an adjustable
rate to a fixed rate, at the option of the Mortgagor under certain
circumstances. Unless otherwise specified in the related Prospectus Supplement,
the Pooling and Servicing Agreement will provide that the Unaffiliated Seller
from which such convertible ARM Loans were acquired will be obligated to
repurchase from the Trust Fund any such ARM Loan as to which the conversion
option has been exercised (a "Converted Mortgage Loan"), at a purchase price set
forth in the related Prospectus Supplement. The amount of such purchase price
will be required to be deposited in the Certificate Account and will be
distributed to the Certificateholders on the Distribution Date in the month
following the month of the exercise of the conversion option. The obligation of
the Unaffiliated Seller to repurchase Converted Mortgage Loans may or may not be
supported by cash, letters of credit, third party guarantees or other similar
arrangements.
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If provided for in the applicable Prospectus Supplement, a Mortgage
Pool may contain Mortgage 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 ("Buy-Down Loans"). The
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor, the seller of the related Mortgaged Property, the
Servicer or another source and placed in a custodial account (the "Buy-Down
Fund") by the Servicer, or if so specified in the related Prospectus Supplement,
with the Trustee. In lieu of a cash deposit, if so specified in the related
Prospectus Supplement, a letter of credit or guaranteed investment contract may
be delivered to the Trustee to fund the Buy-Down Fund. See "Description of the
Certificates--Payments on Mortgage Loans." Buy-Down Loans included in a Mortgage
Pool will provide for a reduction in monthly interest payments by the Mortgagor
for a period of up to the first four years of the term of such Mortgage Loans.
If provided for in the applicable Prospectus Supplement, a Mortgage
Pool may contain Mortgage Loans pursuant to which the monthly payments by the
Mortgagor during the early years of the related Mortgage Note are less than the
amount of interest that would otherwise be payable thereon, with the interest
not so paid added to the outstanding principal balance of such Mortgage Loan
("GPM Loans"). If so specified in the related Prospectus Supplement, the
resulting difference in payment shall be compensated for from an amount
contributed by the Depositor or another source and delivered to the Trustee (the
"GPM Fund"). In lieu of cash deposit, the Depositor may deliver to the Trustee a
letter of credit, guaranteed investment contract or another instrument
acceptable to the Rating Agency rating the related Series to fund the GPM Fund.
FHA Loans will be insured by the Federal Housing Administration (the
"FHA") as authorized under the National Housing Act, as amended, and the United
States Housing Act of 1937, as amended. Such FHA loans will be insured under
various FHA programs including the standard FHA 203-b programs to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated payment
mortgage program and the FHA 221 and 223 programs to finance certain multifamily
residential rental properties. FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal amount exceeding the
applicable FHA limits at the time of origination of such FHA Loan.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in certain instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA Loan will have an
original principal amount greater than five times the partial VA guarantee for
such VA Loan. The maximum guarantee that may be issued by VA under this program
is 50% of the principal amount of the Mortgage Loan if the principal amount of
the Mortgage Loan is $45,000 or less, the lesser of $36,000 and 40% of the
principal amount of the Mortgage Loan if the principal amount of the Mortgage
Loan is greater than $45,000 but less than or equal to $144,000, and the lesser
of $46,000 and 25% of the principal amount of the Mortgage Loan if the principal
amount of the Mortgage Loan is greater than $144,000.
The Prospectus Supplement (or, if such information is not available in
advance of the date of such Prospectus Supplement, a Current Report on Form 8-K
to be filed with the Commission) for each Series of Certificates the Trust Fund
with respect to which contains Mortgage Loans will contain information as to the
type of Mortgage Loans that will comprise the related Mortgage Pool or Pools and
information as to (i) the aggregate principal balance of the Mortgage Loans as
of the applicable Cut-off Date, (ii) the type of Mortgaged Properties securing
the Mortgage Loans, (iii) the original terms to maturity of the Mortgage Loans,
(iv) the largest in principal balance of the Mortgage Loans, (v) the earliest
origination date and latest maturity date of the Mortgage Loans, (vi) the
aggregate principal balance of Mortgage Loans having Loan-to-Value Ratios at
origination exceeding 80%, (vii) the interest rate or range of interest rates
borne by the Mortgage Loans, (viii) the average outstanding principal balance of
the Mortgage Loans, (ix) the geographical distribution of the Mortgage Loans,
(x) the number and aggregate principal balance of Buy-Down Loans or GPM Loans,
if applicable, (xi) with respect to ARM Loans, the adjustment dates, the
highest, lowest and weighted average margin, and the maximum Mortgage Rate
variation at the time of any periodic adjustment and over the life of such ARM
Loans, and (xii) with respect to Mortgage Loans secured by Multifamily Property
or such other Mortgage Loans as are specified in the Prospectus Supplement,
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whether the Mortgage Loan provides for an interest only period and whether the
principal amount of such Mortgage Loan is amortized on the basis of a period of
time that extends beyond the maturity date of the Mortgage Loan.
No assurance can be given that values of the Mortgaged Properties in a
Mortgage Pool have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the real estate market should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans and any secondary financing on the Mortgaged
Properties in a particular Mortgage Pool become equal to or greater than the
value of the Mortgaged Properties, the actual Rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced in
the mortgage lending industry. In addition, the value of property securing
Cooperative Loans and the delinquency rate with respect to Cooperative Loans
could be adversely affected if the current favorable tax treatment of
cooperative stockholders were to become less favorable. See "Certain Legal
Aspects of the Mortgage Loans and Contracts--The Mortgage Loans." To the extent
that such losses are not covered by the methods of credit support or the
insurance policies described herein or by Alternative Credit Support, they will
be borne by holders of the Certificates of the Series evidencing interests in
the Mortgage Pool.
Multifamily lending is generally viewed as exposing the lender to a
greater risk of loss than one- to four-family residential lending. Multifamily
lending typically involve larger loans to single borrowers or groups of related
borrowers than residential one- to four-family mortgage loans. Furthermore, the
repayment of loans secured by income producing properties is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed), the borrower's ability to repay the loan may be impaired. Multifamily
real estate can be affected significantly by supply and demand in the market for
the type of property securing the loan and, therefore, may be subject to adverse
economic conditions. Market values may vary as a result of economic events or
governmental regulations outside the control of the borrower or lender, such as
rent control laws, which impact the future cash flow of the property.
Corresponding to the greater lending risk is a generally higher interest rate
applicable to multifamily mortgage lending.
The Depositor will cause the Mortgage Loans constituting each Mortgage
Pool to be assigned to the Trustee named in the applicable Prospectus
Supplement, for the benefit of the holders of the Certificates of such Series
(the "Certificateholders"). The Master Servicer, if any, named in the related
Prospectus Supplement will service the Mortgage Loans, either by itself or
through other mortgage servicing institutions, if any (each, a "Servicer"),
pursuant to a Pooling and Servicing Agreement, as described herein, among the
Master Servicer, if any, the Depositor and the Trustee (the "Pooling and
Servicing Agreement") and will receive a fee for such services. See "--Mortgage
Loan Program" and "Description of the Certificates." With respect to those
Mortgage Loans serviced by a Servicer, such Servicer will be required to service
the related Mortgage Loans in accordance with the Seller's Warranty and
Servicing Agreement between the Servicer and the Depositor (a "Servicing
Agreement") and will receive the fee for such services specified in such
Servicing Agreement; however, any Master Servicer will remain liable for its
servicing obligations under the Pooling and Servicing Agreement as if the Master
Servicer alone were servicing such Mortgage Loans.
The Depositor will make certain representations and warranties
regarding the Mortgage Loans, but its assignment of the Mortgage Loans to the
Trustee will be without recourse. See "Description of the Certificates--
Assignment of Mortgage Loans." The Master Servicer's obligations with respect to
the Mortgage Loans will consist principally of its contractual servicing
obligations under the Pooling and Servicing Agreement (including its obligation
to enforce certain purchase and other obligations of Servicers and/or
Unaffiliated Sellers, as more fully described herein under "--Mortgage Loan
Program--Representations by Unaffiliated Sellers; Repurchases" and "Description
of the Certificates--Assignment of Mortgage Loans" and "--Servicing by
Unaffiliated Sellers") and its obligations to make Advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans or in
connection with prepayments and liquidations of such Mortgage Loans, in amounts
described herein under "Description of the Certificates--Advances." Unless
otherwise specified in the related Prospectus Supplement, such Advances with
respect to delinquencies will be limited to amounts that the Master Servicer
believes ultimately would be reimbursable under any applicable Letter of Credit,
Pool Insurance Policy, Special Hazard Insurance Policy, Mortgagor Bankruptcy
Bond or other policy of insurance, from amounts in the Reserve Fund, under any
Alternative Credit Support or out of the proceeds of liquidation of the Mortgage
Loans, cash in the Certificate Account or otherwise. See "Description of the
Certificates--Advances," "Credit Support" and "Description of Insurance."
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Unless otherwise specified in the applicable Prospectus Supplement,
each Mortgage Pool included in the related Trust Fund will be composed of
Mortgage Loans evidencing interests in Mortgage Loans that bear interest at
annual rates that will exceed by at least 3/8 of 1% the fixed or variable Pass-
Through Rate established for the Mortgage Pool. To the extent and in the manner
specified in the related Prospectus Supplement, Certificateholders of a Series
will be entitled to receive distributions based on the payments of principal on
the underlying Mortgage Loans, plus interest on the principal balance thereof at
the Pass-Through Rate. The difference between a Mortgage Rate and the related
Pass-Through Rate (less any servicing compensation payable to the Servicers of
such Mortgage Loans and the amount, if any, payable to the Depositor or the
person or entity specified in the applicable Prospectus Supplement) may be
retained by the Master Servicer as servicing compensation to it. See
"Description of the Certificates--Servicing Compensation and Payment of
Expenses."
MORTGAGE LOAN PROGRAM
The Mortgage Loans will have been purchased by the Depositor either
directly or through affiliates, from one or more affiliates or from sellers
unaffiliated with the Depositor ("Unaffiliated Sellers"). Mortgage Loans
acquired by the Depositor will have been originated in accordance with the
underwriting criteria specified below under "Underwriting Standards" or as
otherwise described in a related Prospectus Supplement.
Underwriting Standards
Except in the case of certain Mortgage Loans originated by
Unaffiliated Sellers in accordance with their own underwriting criteria ("Closed
Loans") or such other standards as may be described in the applicable Prospectus
Supplement, all prospective Mortgage Loans will be subject to the underwriting
standards adopted by the Depositor. See "Closed Loan Program" below for a
description of underwriting standards applicable to Closed Loans. Unaffiliated
Sellers will represent and warrant that Mortgage Loans originated by them and
purchased by the Depositor have been originated in accordance with the
applicable underwriting standards established by the Depositor or such other
standards as may be described in the applicable Prospectus Supplement. The
following discussion describes the underwriting standards of the Depositor with
respect to any Mortgage Loan that it purchases.
The mortgage credit approval process for one- to four-family
residential loans follows a standard procedure that generally complies with
FHLMC and FNMA regulations and guidelines (except that certain Mortgage Loans
may have higher loan amount and qualifying ratios) and applicable federal and
state laws and regulations. The credit approval process for Cooperative Loans
follows a procedure that generally complies with applicable FNMA regulations and
guidelines (except for the loan amounts and qualifying ratios) and applicable
federal and state laws and regulations. The originator of a Mortgage Loan (the
"Originator") generally will review a detailed credit application by the
prospective mortgagor designed to provide pertinent credit information,
including a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as an authorization to apply for a
credit report that summarizes the prospective mortgagor's credit history with
local merchants and lenders and any record of bankruptcy. In addition, an
employment verification is obtained from the prospective mortgagor's employer
wherein the employer reports the length of employment with that organization,
the current salary, and gives an indication as to whether it is expected that
the prospective mortgagor will continue such employment in the future. If the
prospective mortgagor is self-employed, he or she is required to submit copies
of signed tax returns. The prospective mortgagor may also be required to
authorize verification of deposits at financial institutions. In certain
circumstances, other credit considerations may cause the Originator or Depositor
not to require some of the above documents, statements or proofs in connection
with the origination or purchase of certain Mortgage Loans.
An appraisal generally will be required to be made on each residence
to be financed. Such appraisal generally will be made by an appraiser who meets
FNMA requirements as an appraiser of one- to four-family residential properties.
The appraiser is required to inspect the property and verify that it is in good
condition and that, if new, construction has been completed. The appraisal
generally will be based on the appraiser's judgment of value, giving appropriate
weight to both the market value of comparable homes and the cost of replacing
the residence. These underwriting standards also require a search of the public
records relating to a mortgaged property for liens and judgments against such
mortgaged property.
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Based on the data provided, certain verifications and the appraisal, a
determination is made by the Originator as to whether the prospective mortgagor
has sufficient monthly income available to meet the prospective mortgagor's
monthly obligations on the proposed loan and other expenses related to the
residence (such as property taxes, hazard and primary mortgage insurance and, if
applicable, maintenance) and other financial obligations and monthly living
expenses. Each Originator's lending guidelines for conventional mortgage loans
generally will specify that mortgage payments plus taxes and insurance and all
monthly payments extending beyond one year (including those mentioned above and
other fixed obligations, such as car payments) would equal no more than
specified percentages of the prospective mortgagor's gross income. These
guidelines will be applied only to the payments to be made during the first year
of the loan. For FHA and VA Loans, the Originator's lending guidelines will
follow HUD and VA guidelines, respectively. Other credit considerations may
cause an Originator to depart from these guidelines. For example, when two
individuals co-sign the loan documents, the incomes and expenses of both
individuals may be included in the computation.
The Mortgaged Properties may be located in states where, in general, a
lender providing credit on a single-family property may not seek a deficiency
judgment against the Mortgagor but rather must look solely to the property for
repayment in the event of foreclosure. The Depositor's underwriting standards
applicable to all states (including anti-deficiency states) require that the
value of the property being financed, as indicated by the appraisal, currently
supports and is anticipated to support in the future the outstanding loan
balance.
Certain of the types of Mortgage Loans that may be included in the
Mortgage Pools or Subsidiary Trust Funds may involve additional uncertainties
not present in traditional types of loans. For example, Buy-Down Loans and GPM
Loans provide for escalating or variable payments by the Mortgagor. These types
of Mortgage Loans are underwritten on the basis of a judgment that the Mortgagor
will have the ability to make larger monthly payments in subsequent years. In
some instances the Mortgagor's income may not be sufficient to enable it to
continue to make scheduled loan payments as such payments increase.
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase Mortgage Loans for inclusion in a Trust Fund that are
underwritten under standards and procedures which vary from and are less
stringent than those described herein. For instance, Mortgage Loans may be
underwritten under a "limited documentation" program if so specified in the
related Prospectus Supplement. With respect to such Mortgage Loans, minimal
investigation into the borrowers' credit history and income profile is
undertaken by the originator and such Mortgage Loans may be underwritten
primarily on the basis of an appraisal of the Mortgaged Property or Cooperative
Dwelling and the Loan-to-Value Ratio at origination. Thus, if the Loan-to-Value
Ratio is less than a percentage specified in the related Prospectus Supplement,
the originator may forego certain aspects of the review relating to monthly
income, and traditional ratios of monthly or total expenses to gross income may
not be considered.
The underwriting standards for Mortgage Loans secured by Multifamily
Property will be described in the related Prospectus Supplement.
Qualifications of Unaffiliated Sellers
Unless otherwise specified in the applicable Prospectus Supplement
with respect to an Unaffiliated Seller of Closed Loans secured by residential
properties, each Unaffiliated Seller must be an institution experienced in
originating conventional mortgage loans and/or FHA Loans or VA Loans in
accordance with accepted practices and prudent guidelines, and must maintain
satisfactory facilities to originate those loans. In addition, except as
otherwise specified, the Depositor requires adequate financial stability and
adequate servicing experience, where appropriate, as well as satisfaction of
certain other criteria.
Representations by Unaffiliated Sellers; Repurchases
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller (or the Master Servicer, if the Unaffiliated Seller is also
the Master Servicer under the Pooling and Servicing Agreement) will have made
representations and warranties in respect of the Mortgage Loans sold by such
Unaffiliated Seller to the Depositor. Such representations and warranties will
generally include, among other things: (i) with respect to
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each Mortgaged Property, that title insurance (or in the case of Mortgaged
Properties located in areas where such policies are generally not available, an
attorney's certificate of title) and any required hazard and primary mortgage
insurance was effective at the origination of each Mortgage Loan, and that each
policy (or certificate of title) remained in effect on the date of purchase of
the Mortgage Loan from the Unaffiliated Seller; (ii) that the Unaffiliated
Seller had good and marketable title to each such Mortgage Loan; (iii) with
respect to each Mortgaged Property, that each mortgage constituted a valid first
lien on the Mortgaged Property (subject only to permissible title insurance
exceptions); (iv) that there were no delinquent tax or assessment liens against
the Mortgaged Property; and (v) that each Mortgage Loan was current as to all
required payments (unless otherwise specified in the related Prospectus
Supplement). With respect to a Cooperative Loan, the Unaffiliated Seller will
represent and warrant that (a) the security interest created by the cooperative
security agreements constituted a valid first lien on the collateral securing
the Cooperative Loan (subject to the right of the related Cooperative to cancel
shares and terminate the proprietary lease for unpaid assessments and to the
lien of the related Cooperative for unpaid assessments representing the
Mortgagor's pro rata share of the Cooperative's payments for its mortgage,
current and future real property taxes, maintenance charges and other
assessments to which like collateral is commonly subject) and (b) the related
cooperative apartment was free from damage and was in good repair.
All of the representations and warranties of an Unaffiliated Seller in
respect of a Mortgage Loan will have been made as of the date on which such
Unaffiliated Seller sold the Mortgage Loan to the Depositor or its affiliate. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the Series of Certificates evidencing an interest in such
Mortgage Loan. Since the representations and warranties of an Unaffiliated
Seller do not address events that may occur following the sale of a Mortgage
Loan by an Unaffiliated Seller, the repurchase obligation described below will
not arise if, during the period commencing on the date of sale of a Mortgage
Loan by the Unaffiliated Seller to or on behalf of the Depositor, the relevant
event occurs that would have given rise to such an obligation had the event
occurred prior to sale of the affected Mortgage Loan. However, the Depositor
will not include any Mortgage Loan in the Trust Fund for any Series of
Certificates if anything has come to the Depositor's attention that would cause
it to believe that the representations and warranties of an Unaffiliated Seller
will not be accurate and complete in all material respects in respect of such
Mortgage Loan as of the related Cut-off Date.
The only representations and warranties to be made for the benefit of
holders of Certificates of a Series in respect of any Mortgage Loan relating to
the period commencing on the date of sale of such Mortgage Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under "Description of the Certificates--
Assignment of Mortgage Loans." If the Master Servicer is also an Unaffiliated
Seller of Mortgage Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
in its capacity as an Unaffiliated Seller.
Upon the discovery of the breach of any representation or warranty
made by an Unaffiliated Seller in respect of a Mortgage Loan that materially and
adversely affects the interests of the Certificateholders of the related Series,
such Unaffiliated Seller or the Servicer of such Mortgage Loan will be obligated
to repurchase such Mortgage Loan at a purchase price equal to 100% of the unpaid
principal balance thereof at the date of repurchase or, in the case of a Series
of Certificates as to which the Depositor has elected to treat the related Trust
Fund as a REMIC, as defined in the Code, at such other price as may be necessary
to avoid a tax on a prohibited transaction, as described in Section 860F(a) of
the Code, in each case together with accrued interest at the Pass-Through Rate
for the related Mortgage Pool, to the first day of the month following such
repurchase and the amount of any unreimbursed Advances made by the Master
Servicer or the Servicer, as applicable, in respect of such Mortgage Loan. The
Master Servicer will be required to enforce this obligation for the benefit of
the Trustee and the Certificateholders, following the practices it would employ
in its good faith business judgment were it the owner of such Mortgage Loan.
Unless otherwise specified in the applicable Prospectus Supplement, and subject
to the ability of the Depositor, the Unaffiliated Seller or the Servicer to
substitute for certain Mortgage Loans as described below, this repurchase
obligation constitutes the sole remedy available to the Certificateholders of
such Series for a breach of representation or warranty by an Unaffiliated
Seller.
The obligation of the Master Servicer to purchase a Mortgage Loan if
an Unaffiliated Seller or a Servicer defaults on its obligation to do so is
subject to limitations, and no assurance can be given that Unaffiliated Sellers
will carry out their respective repurchase obligations with respect to Mortgage
Loans. However, to the extent
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that a breach of the representations and warranties of an Unaffiliated Seller
may also constitute a breach of the representations and warranties made by the
Depositor or by the Master Servicer with respect to the insurability of the
Mortgage Loans, the Depositor may have a repurchase obligation, and the Master
Servicer may have the limited purchase obligation, in each case as described
below under "Description of the Certificates--Assignment of Mortgage Loans."
Closed Loan Program
The Depositor may also acquire Closed Loans that have been originated
by Unaffiliated Sellers in accordance with underwriting standards acceptable to
the Depositor. Unless otherwise specified in the applicable Prospectus
Supplement, Closed Loans for which 11 or fewer monthly payments have been
received will be further subject to the Depositor's customary underwriting
standards. Unless otherwise specified in the applicable Prospectus Supplement,
Closed Loans for which 12 to 60 monthly payments have been received will be
subject to a review of payment history and will conform to the Depositor's
guidelines for the related mortgage program. In the event one or two payments
were over 30 days delinquent, a letter explaining the delinquencies will be
required of the Mortgagor. Unless otherwise specified in the applicable
Prospectus Supplement, the Depositor will not purchase for inclusion in a
Mortgage Pool a Closed Loan for which (i) more than two monthly payments were
over 30 days delinquent, (ii) one payment was over 60 days delinquent, or (iii)
more than 60 monthly payments were received.
MORTGAGE CERTIFICATES
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include certain conventional mortgage pass-
through certificates (the "Mortgage Certificates") issued by one or more trusts
established by one or more private entities and evidencing, unless otherwise
specified in such Prospectus Supplement, the entire interest in a pool of
mortgage loans. A description of the mortgage loans underlying the Mortgage
Certificates, the related pooling and servicing arrangements and the insurance
arrangements in respect of such mortgage loans will be set forth in the
applicable Prospectus Supplement or in the Current Report on Form 8-K referred
to below. Such Prospectus Supplement (or, if such information is not available
in advance of the date of such Prospectus Supplement, a Current Report on Form
8-K to be filed by the Depositor with the Commission within 15 days of the
issuance of the Certificates of such Series) will also set forth information
with respect to the entity or entities forming the related mortgage pool, the
issuer of any credit support with respect to such Mortgage Certificates, the
aggregate outstanding principal balance and the pass-through rate borne by each
Mortgage Certificate included in the Trust Fund, together with certain
additional information with respect to such Mortgage Certificates. The inclusion
of Mortgage Certificates in a Trust Fund with respect to a Series of
Certificates is conditioned upon their characteristics being in form and
substance satisfactory to the Rating Agency rating the related Series of
Certificates. Mortgage Certificates, together with the Mortgage Loans and
Contracts, are referred to herein as the "Trust Assets."
THE CONTRACT POOLS
If so specified in the Prospectus Supplement with respect to a Series,
the Trust Fund for such Series may include a Contract Pool evidencing interests
in manufactured housing conditional sales contracts and installment loan
agreements (the "Contracts") originated by a manufactured housing dealer in the
ordinary course of business and purchased by the Depositor. The Contracts may be
conventional manufactured housing contracts or contracts insured by the FHA or
partially guaranteed by the VA. Each Contract will be secured by a Manufactured
Home, as defined below. Unless otherwise specified in the related Prospectus
Supplement, the Contracts will be fully amortizing and will bear interest at a
fixed annual percentage rate ("APR").
The Manufactured Homes securing the Contracts consist of manufactured
homes within the meaning of 42 United States Code, Section 5402(6), which
defines a "manufactured home" as "a structure, transportable in one or more
sections, which in the traveling mode, is eight body feet or more in width or
forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained therein; except that such term
shall include any structure which meets all the requirements of [this] paragraph
except the size
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requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under [this] chapter."
The Depositor will cause the Contracts constituting each Contract Pool
to be assigned to the Trustee named in the related Prospectus Supplement for the
benefit of the related Certificateholder. The Master Servicer specified in the
related Prospectus Supplement will service the Contracts, either by itself or
through other Servicers, pursuant to the Pooling and Servicing Agreement. See
"Description of the Certificates--Servicing by Unaffiliated Sellers." With
respect to those Contracts serviced by the Master Servicer through a Servicer,
the Master Servicer will remain liable for its servicing obligations under the
Agreement as if the Master Servicer alone were servicing such Contracts. The
Contract documents, if so specified in the related Prospectus Supplement, may be
held for the benefit of the Trustee by a Custodian (the "Custodian") appointed
pursuant to a Custodial Agreement (the "Custodial Agreement") among the
Depositor, the Trustee and the Custodian.
Unless otherwise specified in the related Prospectus Supplement, each
Contract Pool will be composed of Contracts bearing interest at the annual fixed
APRs specified in the Prospectus Supplement. Each registered holder of a
Certificate will be entitled to receive periodic distributions, which will be
monthly unless otherwise specified in the related Prospectus Supplement, of all
or a portion of principal on the underlying Contracts or interest on the
principal balance thereof at the Pass-Through Rate, or both. Unless otherwise
stated in the related Prospectus Supplement, the difference between the APR on a
Contract and the related Pass-Through Rate (less sub-servicing compensation),
will be retained by the Master Servicer as servicing compensation to it. See
"Description of the Certificates--Payments on Contracts."
The related Prospectus Supplement (or, if such information is not
available in advance of the date of such Prospectus Supplement, a Current Report
on Form 8-K to be filed with the Commission) will specify, for the Contracts
contained in the related Contract Pool, among other things: (a) the dates of
origination of the Contracts; (b) the weighted average APR on the Contracts; (c)
the range of outstanding principal balances as of the Cut-off Date; (d) the
average outstanding principal balance of the Contracts as of the Cut-off Date;
(e) the weighted average term to maturity as of the Cut-off Date; and (f) the
range of original maturities of the Contracts.
With respect to the Contracts included in the Contract Pool, the
Depositor, the Master Servicer or such other party, as specified in the related
Prospectus Supplement, will make or cause to be made representations and
warranties as to the types and geographical distribution of such Contracts and
as to the accuracy in all material respects of certain information furnished to
the Trustee in respect of each such Contract. In addition, the Master Servicer
or the Unaffiliated Seller of the Contracts will represent and warrant that, as
of the Cut-off Date, unless otherwise specified in the Prospectus Supplement no
Contract was more than 30 days delinquent as to payment of principal and
interest. Upon a breach of any representation that materially and adversely
affects the interest of the Certificateholder in a Contract, the Master
Servicer, the Unaffiliated Seller or such other party, as appropriate, will be
obligated either to cure the breach in all material respects or to purchase the
Contract or, if so specified in the related Prospectus Supplement, to substitute
another Contract as described below. This repurchase or substitution obligation
constitutes the sole remedy available to the Certificateholders or the Trustee
for a breach of representation by the Master Servicer, the Unaffiliated Seller
or such other party.
If so specified in the related Prospectus Supplement, in addition to
making certain representations and warranties regarding its authority to enter
into, and its ability to perform its obligations under, the Agreement, the
Master Servicer will make certain representations and warranties, except to the
extent that another party specified in the Prospectus Supplement makes any such
representations, to the Trustee with respect to the enforceability of coverage
under any applicable insurance policy or hazard insurance policy. See
"Description of Insurance" for information regarding the extent of coverage
under certain of such insurance policies. Upon a breach of the insurability
representation that materially and adversely affects the interests of the
Certificateholders in a Contract, the Master Servicer, the Unaffiliated Seller
or such other party, as appropriate, will be obligated either to cure the breach
in all material respects or, unless otherwise specified in the related
Prospectus Supplement, to purchase such Contract at a price equal to the
principal balance thereof as of the date of purchase plus accrued interest at
the related Pass-Through Rate to the first day of the month following the month
of purchase. The Master Servicer, if required by the rating agency or agencies
rating the Certificates, will procure a surety bond, guaranty, letter of credit
or other instrument (the "Performance Bond") acceptable to such rating agency to
support this
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purchase obligation. See "Credit Support--Performance Bond." The purchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for a breach of the Master Servicer's or seller's insurability
representation.
Unless otherwise provided in the related Prospectus Supplement, if the
Depositor discovers or receives notice of any breach of its representations and
warranties relating to a Contract within two years or such other period as may
be specified in the related Prospectus Supplement of the date of the initial
issuance of the Certificates, the Depositor may remove such Contract from the
Trust Fund ("Deleted Contract"), rather than repurchase the Contract as provided
above, and substitute in its place another Contract ("Substitute Contract"). Any
Substitute Contract, on the date of substitution, will (i) have an outstanding
principal balance, after deduction of all scheduled payments due in the month of
substitution, not in excess of the outstanding principal balance of the Deleted
Contract (the amount of any shortfall to be distributed to Certificateholders in
the month of substitution), (ii) have an APR not less than (and not more than 1%
greater than) the APR of the Deleted Contract, (iii) have a Pass-Through Rate
equal to the Pass-Through Rate of the Deleted Contract, (iv) have a remaining
term to maturity not greater than (and not more than one year less than) that of
the Deleted Contract and (v) comply with all the representations and warranties
set forth in the Pooling and Servicing Agreement as of the date of substitution.
This repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for any such breach.
Underwriting Policies
Conventional Contracts will comply with the underwriting policies of
the Originator or Unaffiliated Seller of the Contracts described in the related
Prospectus Supplement. Except as described below or in the related Prospectus
Supplement, the Depositor believes that these policies were consistent with
those utilized by mortgage lenders or manufactured home lenders generally during
the period of origination.
With respect to a Contract made in connection with the Obligor's
purchase of a Manufactured Home, the "appraised value" is the amount determined
by a professional appraiser. The appraiser must personally inspect the
Manufactured Home and prepare a report which includes market data based on
recent sales of comparable Manufactured Homes and, when deemed applicable, a
replacement cost analysis based on the current cost of a similar Manufactured
Home. Unless otherwise specified in the related Prospectus Supplement, the
Contract Loan-to-Value Ratio is equal to the original principal amount of the
Contract divided by the lesser of the "appraised value" or the sales price for
the Manufactured Home.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on December
31, 1985, as a wholly-owned subsidiary of First Boston Securities Corporation,
the name of which was subsequently changed to CS First Boston Securities
Corporation ("FBSC"). FBSC is a wholly-owned subsidiary of CS First Boston, Inc.
CS First Boston Corporation, which may act as an underwriter in offerings made
hereby, as described in "Plan of Distribution" below, is also a wholly-owned
subsidiary of CS First Boston, Inc. The principal executive offices of the
Depositor are located at 55 East 52nd Street, New York, N.Y. 10055. Its
telephone number is (212) 909-3512.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. Neither the Depositor, its parent nor
any of the Depositor's affiliates will ensure or guarantee distributions on the
Certificates of any Series.
Trust Assets will be acquired by the Depositor directly or through one
or more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series offered hereby and by the related Prospectus
Supplement to purchase the Trust Assets, to repay indebtedness which has been
incurred to obtain funds to acquire the Trust Assets, to establish the Reserve
Funds, if any, for the Series and to pay costs of structuring and issuing the
Certificates. If so specified in the related Prospectus Supplement,
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Certificates may be exchanged by the Depositor for Trust Assets. Unless
otherwise specified in the related Prospectus Supplement, the Trust Assets for
each Series of Certificates will be acquired by the Depositor either directly,
or through one or more affiliates which will have acquired such Trust Assets
from time to time either in the open market or in privately negotiated
transactions.
YIELD CONSIDERATIONS
Each monthly payment on a Mortgage Loan is calculated as one-twelfth
of the applicable Mortgage Rate multiplied by the unpaid principal balance of
such Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, the amount of such interest payment distributed monthly to
Certificateholders with respect to each Mortgage Loan will be similarly
calculated based on the applicable Pass-Through Rate for the related Mortgage
Pool. The Pass-Through Rate for a Mortgage Pool will be either fixed or
variable, as specified in the related Prospectus Supplement.
Each monthly accrual of interest on a Contract is calculated as one-
twelfth of the product of the APR and the principal balance outstanding on the
scheduled payment date for such Contract in the preceding month. Unless
otherwise specified in the related Prospectus Supplement, the Pass-Through Rate
with respect to each Contract will be calculated on a Contract-by-Contract basis
and the Servicing Fee applicable to each Contract from the applicable APR.
With respect to a Mortgage Pool or a Contract Pool bearing a fixed
Pass-Through Rate, each Mortgage Loan or Contract will have a Mortgage Rate or
APR that exceeds the Pass-Through Rate by at least 3/8 of 1% unless otherwise
specified in the related Prospectus Supplement. The difference between a
Mortgage Rate or APR and the related fixed Pass-Through Rate for the Mortgage
Pool or Contract Pool (less any servicing compensation payable to the related
Servicers and the amounts, if any, payable to the Depositor or the person or
entity specified in the related Prospectus Supplement) will be retained by the
Master Servicer as servicing compensation to it. See "Description of the
Certificates--Servicing Compensation and Payment of Expenses." Although Mortgage
Rates and APRs in a fixed Pass-Through Rate Mortgage Pool or Contract Pool,
respectively, may vary, unless otherwise specified in the related Prospectus
Supplement, disproportionate principal prepayments among Mortgage Loans bearing
different Mortgage Rates or APRs will not affect the return to
Certificateholders since, as set forth above, the Pass-Through Rate may not
exceed any Mortgage Rate or APR.
With respect to Mortgage Pools having a variable Pass-Through Rate,
the Pass-Through Rate will equal the weighted average of the Mortgage Rates on
all the Mortgage Loans in the Mortgage Pool, minus the servicing compensation
payable to the Master Servicer and the Servicer of such Mortgage Loans and the
amounts, if any, retained by the Depositor or an Unaffiliated Seller or paid to
the person or entity specified in the related Prospectus Supplement. The
servicing fee and such other amounts will be fixed as to each Mortgage Loan at a
rate per annum, and may vary among Mortgage Loans. Because the Mortgage Rates in
such a Mortgage Pool will differ and the aggregate servicing compensation and
such other amounts to be retained or distributed with respect to each Mortgage
Loan will be fixed, it is likely that the weighted average of the Mortgage
Rates, and the corresponding variable Pass-Through Rate, will change as the
Mortgage Loans amortize and as a result of prepayments.
If so specified in the related Prospectus Supplement, a Mortgage Pool
may contain Mortgage Loans with fluctuating Mortgage Rates that adjust more
frequently than the monthly payment with respect to such Mortgage Loans. As a
result, the portion of each monthly payment allocated to principal may vary from
month to month. Negative amortization with respect to a Mortgage Loan will occur
if an adjustment to the Mortgage Rate causes the amount of interest accrued in
any month, calculated at the new Mortgage Rate for such period, to exceed the
amount of the monthly payment or if the allowable increase in any monthly
payment is limited to an amount that is less than the amount of interest accrued
in any month. The amount of any resulting Deferred Interest will be added to the
principal balance of the Mortgage Loan and will bear interest at the Mortgage
Rate in effect from time to time. To the extent that, as a result of the
addition of any Deferred Interest, the Mortgage Loan negatively amortizes over
its term, the weighted average life of the certificates of the related Series
will be greater than would otherwise be the case. As a result, the yield on any
such Mortgage Loan at any time may be less than the yields on similar adjustable
rate mortgage loans, and the rate of prepayment may be lower or higher than
would otherwise be anticipated.
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Generally, when a full prepayment is made on a Mortgage Loan or
Contract, the Mortgagor or the borrower under a Contract (the "Obligor"), is
charged interest for the number of days actually elapsed from the due date of
the preceding monthly payment up to the date of such prepayment, at a daily
interest rate determined by dividing the Mortgage Rate or APR by 365. Full
prepayments will reduce the amount of interest paid by the Mortgagor or the
Obligor because interest on the principal amount of any Mortgage Loan or
Contract so prepaid will be paid only to the date of prepayment instead of for a
full month; however, unless otherwise provided in the applicable Prospectus
Supplement, the Master Servicer with respect to a Series will be required to
advance from its own funds the portion of any interest at the related Pass-
Through Rate that is not so received. Partial prepayments generally are applied
on the first day of the month following receipt, with no resulting reduction in
interest payable for the period in which the partial prepayment is made. Unless
otherwise specified in the related Prospectus Supplement, full and partial
prepayments, together with interest on such full and partial prepayments at the
Pass-Through Rate for the related Mortgage Pool or Contract Pool to the last day
of the month in which such prepayments occur, will be deposited in the
Certificate Account and will be available for distribution to Certificateholders
on the next succeeding Distribution Date in the manner specified in the related
Prospectus Supplement. See "Maturity and Prepayment Considerations."
Generally, the effective yield to holders of Certificates having a
monthly Distribution Date will be lower than the yield otherwise produced by the
Pass-Through Rate with respect to a Mortgage Pool or Contract Pool or the pass-
through rate borne by a Mortgage Certificate because, while interest will accrue
on each Mortgage Loan or Contract, or mortgage loan underlying a Mortgage
Certificate, to the first day of the month, the distribution of such interest to
holders of such Certificates will be made no earlier than the 25th day of the
month following the month of the accrual (unless otherwise provided in the
applicable Prospectus Supplement). The adverse effect on yield will intensify
with any increase in the period of time by which the Distribution Date with
respect to a Series of Certificates succeeds such 25th day. With respect to the
Multi-Class Certificates of a Series having other than monthly Distribution
Dates, the yield to holders of such Certificates will also be adversely affected
by any increase in the period of time from the date to which interest accrues on
such Certificate to the Distribution Date on which such interest is distributed.
In the event that the Certificates of a Series are divided into two or
more Classes or Subclasses and that a Class or Subclass is an Interest Weighted
Class, in the event that such Series includes a Class of Residual Certificates,
or as otherwise may be appropriate, the Prospectus Supplement for such Series
will indicate the manner in which the yield to Certificateholders will be
affected by different rates of prepayments on the Mortgage Loans, on the
Contracts or on the mortgage loans underlying the Mortgage Certificates. In
general, the yield on Certificates that are offered at a premium to their
principal or notional amount ("Premium Certificates") is likely to be adversely
affected by a higher than anticipated level of principal prepayments on the
Mortgage Loans, on the Contracts or on the mortgage loans underlying the
Mortgage Certificates. This relationship will become more sensitive as the
amount by which the Percentage Interest of such Class in each Interest
Distribution is greater than the corresponding Percentage Interest of such Class
in each Principal Distribution. If the differential is particularly wide (e.g.,
the Interest Distribution is allocated primarily or exclusively to one Class or
Subclass and the Principal Distribution primarily or exclusively to another) and
a high level of prepayments occurs, there is a possibility that
Certificateholders of Premium Certificates will not only suffer a lower than
anticipated yield but, in extreme cases, will fail to recoup fully their initial
investment. Conversely, a lower than anticipated level of principal prepayments
(which can be anticipated to increase the expected yield to holders of
Certificates that are Premium Certificates) will likely result in a lower than
anticipated yield to holders of Certificates that are offered at a discount to
their principal amount ("Discount Certificates"). If so specified in the
applicable Prospectus Supplement, a disproportionately large amount of Principal
Prepayments may be distributed to the holders of the Senior Certificates at the
times and under the circumstances described therein.
In the event that the Certificates of a Series include one or more
Classes or Subclasses of Multi-Class Certificates, the Prospectus Supplement for
such Series will set forth information, measured relative to a prepayment
standard or model specified in such Prospectus Supplement, with respect to the
projected weighted average life of each such Class or Subclass and the
percentage of the initial Stated Principal Balance of each such Subclass that
would be outstanding on special Distribution Dates for such Series based on the
assumptions stated in such Prospectus Supplement, including assumptions that
prepayments on the Mortgage Loans or Contracts or on the
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mortgage loans underlying the Mortgage Certificates in the related Trust Fund
are made at rates corresponding to the various percentages of such prepayment
standard or model.
MATURITY AND PREPAYMENT CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, the
scheduled maturities of all of the Mortgage Loans (or the mortgage loans
underlying the Mortgage Certificates) at origination will not be less than
approximately 10 years or exceed 40 years and all the Contracts will have
maturities at origination of not more than 20 years, but such Mortgage Loans (or
such underlying mortgage loans) or Contracts may be prepaid in full or in part
at any time. Unless otherwise specified in the applicable Prospectus Supplement,
no such Mortgage Loan (or mortgage loan) or Contract will provide for a
prepayment penalty and each will contain (except in the case of FHA and VA
Loans) due-on-sale clauses permitting the mortgagee or obligee to accelerate the
maturity thereof upon conveyance of the Mortgaged Property, Cooperative Dwelling
or Manufactured Home.
The FHA has compiled statistics relating to one- to four-family, level
payment mortgage loans insured by the FHA under the National Housing Act of
1934, as amended, at various interest rates, all of which permit assumption by
the new buyer if the home is sold. Such statistics indicate that while some of
such mortgage loans remain outstanding until their scheduled maturities, a
substantial number are paid prior to their respective stated maturities. The
Actuarial Division of HUD has prepared tables which, assuming full mortgage
prepayments at the rates experienced by FHA, set forth the percentages of the
original number of FHA Loans in pools of level payment mortgage loans of varying
maturities that will remain outstanding on each anniversary of the original date
of such mortgage loans (assuming they all have the same origination date) ("FHA
Experience"). Published information with respect to conventional residential
mortgage loans indicates that such mortgage loans have historically been prepaid
at higher rates than government insured loans because, unlike government insured
mortgage loans, conventional mortgage loans may contain due-on-sale clauses that
allow the holder thereof to demand payment in full of the remaining principal
balance of such mortgage loans upon sales or certain transfers of the mortgaged
property. There are no similar statistics with respect to the prepayment rates
of cooperative loans or loans secured by multifamily properties.
It is customary in the residential mortgage industry in quoting yields
(a) on a pool of 30-year fixed-rate, level payment mortgages, to compute the
yield as if the pool were a single loan that is amortized according to a 30-year
schedule and is then prepaid in full at the end of the twelfth year and (b) on a
pool of 15-year fixed-rate, level payment mortgages, to compute the yield as if
the pool were a single loan that is amortized according to a 15-year schedule
and then is prepaid in full at the end of the seventh year.
Prepayments on residential mortgage loans are also commonly measured
relative to a prepayment standard or model. If so specified in the Prospectus
Supplement relating to a Series of Certificates, the model used in a Prospectus
Supplement will be the Standard Prepayment Assumption ("SPA"). SPA represents an
assumed rate of prepayment relative to the then outstanding principal balance of
a pool of mortgages. A prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such
mortgages in the first month of the life of the mortgages and an additional 0.2%
per annum in each month thereafter until the thirtieth month and in each month
thereafter during the life of the mortgages, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Information regarding FHA Experience, other published information, SPA
or any other rate of assumed prepayment, as applicable, will be set forth in the
Prospectus Supplement with respect to a Series of Certificates. There is,
however, no assurance that prepayment of the Mortgage Loans underlying a Series
of Certificates will conform to FHA Experience, mortgage industry custom, any
level of SPA, or any other rate specified in the related Prospectus Supplement.
A number of factors, including homeowner mobility, economic conditions,
enforceability of due-on-sale clauses, mortgage market interest rates, mortgage
recording taxes and the availability of mortgage funds, may affect prepayment
experience on residential mortgage loans.
The terms of the Pooling and Servicing Agreement will require the
Servicer or the Master 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 or Cooperative Dwelling; provided, however, that any
enforcement action that
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would impair or threaten to impair any recovery under any related Insurance
Policy will not be required or permitted. See "Description of the Certificates--
Enforcement of "Due-On-Sale" Clauses; Realization Upon Defaulted Mortgage Loans"
and "Certain Legal Aspects of the Mortgage Loans And Contracts--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, the Servicer may refinance the
Mortgage Loans in any Mortgage Pool by accepting prepayments thereon and making
new loans secured by a mortgage on the same property. Upon such refinancing, the
new loans will not be included in the Mortgage Pool and the related Servicer
will be required to repurchase the affected Mortgage Loan. A Mortgagor may be
legally entitled to require the Servicer to allow such a refinancing. Any such
repurchase will have the same effect as a prepayment in full of the related
Mortgage Loan.
There are no uniform statistics compiled for prepayments of contracts
relating to Manufactured Homes. Prepayments on the Contracts may be influenced
by a variety of economic, geographic, social and other facts, including
repossessions, aging, seasonality and interest rate fluctuations. Other factors
affecting prepayment of mortgage loans or Contracts include changes in housing
needs, job transfers, unemployment and servicing decisions. An investment in
Certificates evidencing interests in Contracts may be affected by, among other
things, a downturn in regional or local economic conditions. These regional or
local economic conditions are often volatile, and historically have affected the
delinquency, loan loss and repossession experience of the Contracts. To the
extent that losses on the Contracts are not covered by the Subordination Amount,
if any, Letters of Credit, applicable Insurance Policies, if any, or by any
Alternative Credit Support, holders of the Certificates of a Series evidencing
interests in such Contracts will bear all risk of loss resulting from default by
Obligors and will have to look primarily to the value of the Manufactured Homes,
which generally depreciate in value, for recovery of the outstanding principal
and unpaid interest of the defaulted Contracts. See "The Trust Fund--The
Contract Pools."
While most Contracts will contain "due-on-sale" provisions permitting
the holder of the Contract to accelerate the maturity of the Contract upon
conveyance by the borrower, the Master Servicer may permit proposed assumptions
of Contracts where the proposed buyer meets the underwriting standards described
above. Such assumption would have the effect of extending the average life of
the Contract. FHA Mortgage Loans and Contracts and VA Mortgage Loans and
Contracts are not permitted to contain "due on sale" clauses, and are freely
assumable.
Mortgage Loans made with respect to Multifamily Properties may have
provisions that prevent prepayment for a number of years and may provide for
payments of interest only during a certain period followed by amortization of
principal on the basis of a schedule extending beyond the maturity of the
related Mortgage Loan. Prepayments of Mortgage Loans secured by Multifamily
Property may be affected by these and other factors, including changes in
interest rates and the relative tax benefits associated with ownership of
Multifamily Property.
If set forth in the applicable Prospectus Supplement, the Depositor or
other specified entity will have the option to repurchase the Trust Assets
included in the related Trust Fund under the conditions stated in such
Prospectus Supplement. For any Series of Certificates for which the Depositor
has elected to treat the Trust as a REMIC pursuant to the provisions or the
Internal Revenue Code of 1986, as amended (the "Code"), any such repurchase will
be effected in compliance with the requirements of Section 860F(a)(4) of the
Code so as to constitute a "qualifying liquidation" thereunder. In addition, the
Depositor will be obligated, under certain circumstances, to repurchase certain
of the Trust Assets. The Master Servicer and Unaffiliated Sellers will also have
certain repurchase obligations, as more fully described herein. In addition, the
mortgage loans underlying the Mortgage Certificates may be subject to repurchase
under circumstances similar to those described above. Such repurchases will have
the same effect as prepayments in full. See "The Trust Fund--Mortgage Loan
Program--Representations by Unaffiliated Sellers; Repurchases," "Description of
the Certificates--Assignment of Mortgage Loans," "--Assignment of Mortgage
Certificates," "--Assignment of Contracts" and "--Termination."
DESCRIPTION OF THE CERTIFICATES
Each Series of Certificates will be issued pursuant to an agreement
consisting of either (a) a Pooling and Servicing Agreement or (b) a Reference
Agreement (the "Reference Agreement") and the Standard Terms and Provisions of
Pooling and Servicing Agreement (such Standard Terms, the "Standard Terms"),
either the Standard
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Terms together with the Reference Agreement or the Pooling and Servicing
Agreement referred to as the "Pooling and Servicing Agreement") among the
Depositor, the Master Servicer, if any, and the Trustee named in the applicable
Prospectus Supplement or a deposit trust agreement between the Depositor and the
Trustee (the "Deposit Trust Agreement," together with the Pooling and Servicing
Agreement, the "Agreement"). Forms of the Pooling and Servicing Agreement and
the Deposit Trust Agreement have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. The following summaries describe
certain provisions common to each Pooling and Servicing Agreement and Deposit
Trust Agreement. The summaries do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, all of the provisions of
the Pooling and Servicing Agreement or Deposit Trust Agreement for the
applicable Series and the related Prospectus Supplement. Wherever defined terms
of the Pooling and Servicing Agreement or Deposit Trust Agreement are referred
to, such defined terms are thereby incorporated herein by reference.
GENERAL
Unless otherwise specified in the Prospectus Supplement with respect
to a Series, each Certificate offered hereby and by means of the related
Prospectus Supplement will be issued in fully registered form and will represent
the undivided interest or beneficial interest attributable to such Class or
Subclass in the Trust Fund. The Trust Fund with respect to a Series will consist
of: (i) such Mortgage Loans, Contracts, and Mortgage Certificates and
distributions thereon as from time to time are subject to the applicable
Agreement; (ii) such assets as from time to time are identified as deposited in
the Certificate Account referred to below; (iii) property acquired by
foreclosure of Mortgage Loans or deed in lieu of foreclosure, or Manufactured
Homes acquired by repossession; (iv) the Letter of Credit, if any, with respect
to such Series; (v) the Pool Insurance Policy, if any, with respect to such
Series (described below under "Description of Insurance"); (vi) the Special
Hazard Insurance Policy, if any, with respect to such Series (described below
under "Description of Insurance"); (vii) the Mortgagor Bankruptcy Bond and
proceeds thereof, if any, with respect to such Series (as described below under
"Description of Insurance"); (viii) the Performance Bond and proceeds thereof,
if any, with respect to such Series; (ix) the Primary Mortgage Insurance
Policies, if any, with respect to such Series (as described below under
"Description of Insurance"); (x) the Depositor's rights under the Warranty and
Servicing Agreement with respect to the Mortgage Loans or Contracts, if any,
with respect to such Series; and (xi) the GPM and Buy-Down Funds, if any, with
respect to such Series; or, in lieu of some or all of the foregoing, such
Alternative Credit Support as shall be described in the applicable Prospectus
Supplement. Upon the original issuance of a Series of Certificates, Certificates
representing the minimum undivided interest or beneficial ownership interest in
the related Trust Fund or the minimum notional amount allocable to each Class
will evidence the undivided interest, beneficial ownership interest or
percentage ownership interest specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, one or more
Servicers or the Depositor may directly perform some or all of the duties of a
Master Servicer with respect to a Series.
If so specified in the Prospectus Supplement for a Series with respect
to which the Depositor has elected to treat the Trust Fund as a REMIC under the
Code, ownership of the Trust Fund for such Series may be evidenced by Multi-
Class Certificates and Residual Certificates. Distributions of principal and
interest with respect to Multi-Class Certificates may be made on a sequential or
concurrent basis, as specified in the related Prospectus Supplement. If so
specified in the related Prospectus Supplement, one or more of such Classes or
Subclasses may be Compound Interest Certificates.
The Residual Certificates, if any, included in a Series will be
designated by the Depositor as the "residual interest" in the related REMIC for
purposes of Section 860G(a)(2) of the Code, and will represent the right to
receive distributions as specified in the Prospectus Supplement for such Series.
All other Classes of Certificates of such Series will constitute "regular
interests" in the related REMIC, as defined in the Code. If so specified in the
related Prospectus Supplement, such Residual Certificates may be offered hereby
and by means of such Prospectus Supplement. See "Certain Federal Income Tax
Consequences."
If so specified in the Prospectus Supplement for a Series which
includes Multi-Class Certificates, each Trust Asset in the related Trust Fund
will be assigned an initial "Asset Value." Unless otherwise specified in the
related Prospectus Supplement, the Asset Value of each Trust Asset in the
related Trust Fund will be the Stated
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Principal Balance of each Class or Classes of Certificates of such Series that,
based upon certain assumptions, can be supported by distributions on such Trust
Assets allocable to such Class or Subclass, together with reinvestment income
thereon, to the extent specified in the related Prospectus Supplement, and
amounts available to be withdrawn from any Buy-Down, GPM Fund or Reserve Fund
for such Series. The method of determining the Asset Value of the Trust Assets
in the Trust Fund for such a Series that includes Multi-Class Certificates will
be specified in the related Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series,
ownership of the Trust Fund for such Series may be evidenced by one or more
Classes or Subclasses of Certificates that are Senior Certificates and
Subordinated Certificates, each representing the undivided interests in the
Trust Fund specified in such Prospectus Supplement. If so specified in the
related Prospectus Supplement, one or more Classes or Subclasses or Subordinated
Certificates of a Series may be subordinated to the right of the holders of
Certificates of one or more Classes or Subclasses within such Series to receive
distributions with respect to the Mortgage Loans or Contracts in the related
Trust Fund, in the manner and to the extent specified in such Prospectus
Supplement. If so specified in the related Prospectus Supplement, the holders of
each Subclass of Senior Certificates will be entitled to the Percentage
Interests in the principal and/or interest payments on the underlying Mortgage
Loans or Contracts specified in such Prospectus Supplement. If so specified in
the related Prospectus Supplement, the Subordinated Certificates of a Series
will evidence the right to receive distributions with respect to a specific pool
of Mortgage Loans or Contracts, which right will be subordinated to the right of
the holders of the Senior Certificates of such Series to receive distributions
with respect to such specific pool of Mortgage Loans or Contracts, as more fully
set forth in such Prospectus Supplement. If so specified in the related
Prospectus Supplement, the holders of the Senior Certificates may have the right
to receive a greater than pro rata percentage of Principal Prepayments in the
manner and under the circumstances described in the Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Depositor
may sell certain Classes or Subclasses of the Certificates of a Series,
including one or more Classes or Subclasses of Subordinated or Residual
Certificates, in privately negotiated transactions exempt from registration
under the Securities Act of 1933, as amended (the "Securities Act"). Such
Certificates will be transferable only pursuant to an effective registration
statement or an applicable exemption under the Securities Act and pursuant to
any applicable state law. Alternatively, if so specified in the related
Prospectus Supplement, the Depositor may offer one or more Classes or Subclasses
of the Subordinated or Residual Certificates of a Series by means of this
Prospectus and such Prospectus Supplement.
The Certificates of a Series offered hereby and by means of the
related Prospectus Supplements will be transferable and exchangeable at the
office or agency maintained by the Trustee for such purpose set forth in the
related Prospectus Supplement, unless such Prospectus Supplement provides
otherwise. No service charge will be made for any transfer or exchange of
Certificates, but the Trustee may require payment of a sum sufficient to cover
any tax or other governmental charge in connection with such transfer or
exchange.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
Beginning on the date specified in the related Prospectus Supplement,
distributions of principal and interest on the Certificates of a Series will be
made by the Master Servicer or Trustee, if so specified in the Prospectus
Supplement, on each Distribution Date to persons in whose name the Certificates
are registered at the close of business on the day specified in such Prospectus
Supplement (the "Record Date"). Such distributions of interest will be made
periodically at the intervals, in the manner and at the per annum rate specified
in the related Prospectus Supplement, which rate may be fixed or variable.
Interest on the Certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months, unless otherwise specified in the related
Prospectus Supplement. Distributions of principal on the Certificates will be
made in the priority and manner and in the amounts specified in the related
Prospectus Supplement.
If so specified in the Prospectus Supplement with respect to a Series
of Certificates, distributions of interest and principal to a Certificateholder
will be equal to the product of the undivided interest evidenced by such
Certificate and the payments of principal and interest (adjusted to the related
Pass-Through Rate) on or with respect
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to the Mortgage Loans or Contracts (including any Advances thereof) or the
Mortgage Certificates included in the Trust Fund with respect to such Series.
If so specified in the related Prospectus Supplement, distributions on
a Class or Subclass of Certificates of a Series may be based on the Percentage
Interest evidenced by a Certificate of such Class or Subclass in the
distributions (including any Advances thereof) of principal (the "Principal
Distribution") and interest (adjusted to the Pass-Through Rate for the related
Mortgage Pool or Contract Pool) (the "Interest Distribution") on or with respect
to the Mortgage Loans, the Contracts or the Mortgage Certificates in the related
Trust Fund. Unless otherwise specified in the related Prospectus Supplement, on
each Distribution Date, the Trustee will distribute to each holder of a
Certificate of such Class or Subclass an amount equal to the product of the
Percentage Interest evidenced by such Certificate and the interest of such Class
or Subclass in the Principal Distribution and the Interest Distribution. A
Certificate of such a Class or Subclass may represent a right to receive a
percentage of both the Principal Distribution and the Interest Distribution or a
percentage of either the Principal Distribution or the Interest Distribution, as
specified in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the holders of
the Senior Certificates may have the right to receive a percentage of Principal
Prepayments that is greater than the percentage of regularly scheduled payment
of principal such holder is entitled to receive. Such percentages may vary from
time to time, subject to the terms and conditions specified in the Prospectus
Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates, distributions of
interest on each such Class or Subclass will be made on the Distribution Dates,
and at the Interest Rates, specified in such Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement relating to such a Series of
Certificates, distributions of interest on each Class or Subclass of Compound
Interest Certificates of such Series will be made on each Distribution Date
after the Stated Principal Balance of all Certificates of such Series having a
Final Scheduled Distribution Date prior to that of such Class or Subclass of
Compound Interest Certificates has been reduced to zero. Prior to such time,
interest on such Class or Subclass of Compound Interest Certificates will be
added to the Stated Principal Balance thereof on each Distribution Date for such
Series.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates, distributions in
reduction of the Stated Principal Balance of such Certificates will be made as
described herein. Distributions in reduction of the Stated Principal Balance of
such Certificates will be made on each Distribution Date for such Series to the
holders of the Certificates of the Class or Subclass then entitled to receive
such distributions until the aggregate amount of such distributions have reduced
the Stated Principal Balance of such Certificates to zero. Allocation of
distributions in reduction of Stated Principal Balance will be made to each
Class or Subclass of such Certificates in the order specified in the related
Prospectus Supplement, which, if so specified in such Prospectus Supplement, may
be concurrently. Unless otherwise specified in the related Prospectus
Supplement, distributions in reduction of the Stated Principal Balance of each
Certificate of a Class or Subclass then entitled to receive such distributions
will be made pro rata among the Certificates of such Class or Subclass.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates, the maximum
amount which will be distributed in reduction of Stated Principal Balance to
holders of Certificates of a Class or Subclass then entitled thereto on any
Distribution Date will equal, to the extent funds are available in the
Certificate Account, the sum of (i) the amount of the interest, if any, that has
accrued but is not yet payable on the Compound Interest Certificates of such
Series since the prior Distribution Date (or since the date specified in the
related Prospectus Supplement in the case of the first Distribution Date) (the
"Accrual Distribution Amount"); (ii) the Stated Principal Distribution Amount;
and (iii) to the extent specified in the related Prospectus Supplement, the
applicable percentage of the Excess Cash Flow specified in such Prospectus
Supplement.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates, the "Stated
Principal Distribution Amount" with respect to a Distribution Date will equal
the sum of the Accrual Distribution Amount, if any, and the amount, if any, by
which the then outstanding
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Stated Principal Balance of the Multi-Class Certificates of such Series (before
taking into account the amount of interest accrued on any Class of Compound
Interest Certificates of such Series to be added to the Stated Principal Balance
thereof on such Distribution Date) exceeds the Asset Value of the Trust Assets
in the Trust Fund underlying such Series as of the end of a period (a "Due
Period") specified in the related Prospectus Supplement. For purposes of
determining the Stated Principal Distribution Amount with respect to a
Distribution Date, the Asset Value of the Trust Assets will be reduced to take
into account the interest evidenced by such Classes or Subclasses of
Certificates in the principal distributions on or with respect of such Trust
Assets received by the Trustee during the preceding Due Period.
Unless otherwise specified in the Prospectus Supplement relating to a
Series of Certificates that includes Multi-Class Certificates, Excess Cash Flow
represents the excess of (i) the interest evidenced by such Multi-Class
Certificates in the distributions received on the Mortgage Loans or Contracts
underlying such Series in the Due Period preceding a Distribution Date for such
Series (and, in the case of the first Due Period, the amount deposited in the
Certificate Account on the closing day for the sale of such Certificates),
together with income from the reinvestment thereof, and, to the extent specified
in such Prospectus Supplement, the amount of cash withdrawn from any Reserve,
GPM or Buy-Down Fund for such Series in the Due Period preceding such
Distribution Date, over (ii) the sum of all interest accrued, whether or not
then distributable, on the Multi-Class Certificates since the preceding
Distribution Date (or since the date specified in the related Prospectus
Supplement in the case of the first Distribution Date), the Stated Principal
Distribution Amount for the then current Distribution Date and, if applicable,
any payments made on any Certificates of such Class or Subclass pursuant to any
special distributions in reduction of Stated Principal Balance during such Due
Period.
The Stated Principal Balance of a Multi-Class Certificate of a Series
at any time represents the maximum specified dollar amount (exclusive of
interest at the related Interest Rate) to which the holder thereof is entitled
from the cash flow on the Trust Assets in the Trust Fund for such Series, and
will decline to the extent distributions in reduction of Stated Principal
Balance are received by such holder. The Initial Stated Principal Balance of
each Class or Subclass within a Series that has been assigned a Stated Principal
Balance will be specified in the related Prospectus Supplement.
Distributions (other than the final distribution in retirement of the
Certificates) will be made by check mailed to the address of the person entitled
thereto as it appears on the Certificate Register, except that, with respect to
any holder of a Certificate meeting the requirements specified in the applicable
Prospectus Supplement, distributions shall be made by wire transfer in
immediately available funds, provided that the Trustee shall have been furnished
with appropriate wiring instructions not less than two 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 designated by the Master Servicer for such
purpose, as specified in the final distribution notice to Certificateholders.
ASSIGNMENT OF MORTGAGE CERTIFICATES
Pursuant to the applicable Agreement for a Series of Certificates that
includes Mortgage Certificates in the related Trust Fund, the Depositor will
cause such Mortgage Certificates to be transferred to the Trustee together with
all principal and interest distributed on such Mortgage Certificates after the
Cut-off Date. Each Mortgage Certificate included in a Trust Fund will be
identified in a schedule appearing as an exhibit to the applicable Agreement.
Such schedule will include information as to the principal balance of each
Mortgage Certificate as of the date of issuance of the Certificates and its
coupon rate, maturity and original principal balance. In addition, such steps
will be taken by the Depositor as are necessary to cause the Trustee to become
the registered owner of each Mortgage Certificate which is included in a Trust
Fund and to provide for all distributions on each such Mortgage Certificate to
be made directly to the Trustee.
In connection with such assignment, the Depositor will make certain
representations and warranties in the Agreement as to, among other things, its
ownership of the Mortgage Certificates. In the event that these representations
and warranties are breached, and such breach or breaches adversely affect the
interests of the Certificateholders in the Mortgage Certificates, the Depositor
will be required to repurchase the affected Mortgage Certificates at a price
equal to the principal balance thereof as of the date of purchase together with
accrued and
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unpaid interest thereon at the related pass-through rate to the distribution
date for such Mortgage Certificates or, in the case of a Series in which an
election has been made to treat the related Trust Fund as a REMIC, at the lesser
of the price set forth above, or the adjusted tax basis, as defined in the Code,
of such Mortgage Certificates. The Mortgage Certificates with respect to a
Series may also be subject to repurchase, in whole but not in part, under the
circumstances and in the manner described in the related Prospectus Supplement.
Any amounts received in respect of such repurchases will be distributed to
Certificateholders on the immediately succeeding Distribution Date.
If so specified in the related Prospectus Supplement, within the
specified period following the date of issuance of a Series of Certificates, the
Depositor may, in lieu of the repurchase obligation set forth above, and in
certain other circumstances, deliver to the Trustee Mortgage Certificates
("Substitute Mortgage Certificates") in substitution for any one or more of the
Mortgage Certificates ("Deleted Mortgage Certificates") initially included in
the Trust Fund. The required characteristics or any such Substitute Mortgage
Certificates and any additional restrictions relating to the substitution of
Mortgage Certificates will be set forth in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE LOANS
The Depositor will cause the Mortgage Loans constituting a Mortgage
Pool to be assigned to the Trustee, together with all principal and interest
received on or with respect to such Mortgage Loans after the Cut-off Date, but
not including principal and interest due on or before the Cut-off Date. The
Trustee will, concurrently with such assignment, deliver the Certificates to the
Depositor in exchange for the Mortgage Loans. Each Mortgage Loan will be
identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement. Such schedule will include information as to the adjusted
principal balance of each Mortgage Loan as of the Cut-off Date, as well as
information respecting the Mortgage Rate, the currently scheduled monthly
payment of principal and interest, the maturity of the Mortgage Note and the
Loan-to-Value Ratio at origination.
In addition, the Depositor will, as to each Mortgage Loan that is not
a Cooperative Loan, deliver or cause to be delivered to the Trustee (or to the
custodian hereinafter referred to) the Mortgage Note endorsed to the order of
the Trustee, the Mortgage with evidence of recording indicated thereon (except
for any Mortgage not returned from the public recording office, in which case
the Depositor will deliver a copy of such Mortgage together with its certificate
that the original of such Mortgage was delivered to such recording office) and
an assignment of the Mortgage in recordable form. Assignments of the Mortgage
Loans to the Trustee will be recorded in the appropriate public office for real
property records, 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 the Originator of such Mortgage
Loan.
The Depositor will cause to be delivered to the Trustee, its agent, or
a custodian, with respect to any Cooperative Loan, the related original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing statement and the relevant stock certificate
and related blank stock powers. The Master Servicer will file in the appropriate
office a financing statement evidencing the Trustee's security interest in each
Cooperative Loan.
The Trustee (or the custodian hereinafter referred to) will, generally
within 60 days after receipt thereof, review and hold such documents in trust
for the benefit of the Certificateholders. Unless otherwise specified in the
applicable Prospectus Supplement, if any such document is found to be defective
in any material respect, the Trustee will promptly notify the Master Servicer
and the Depositor, and the Master Servicer will notify the related Servicer. If
the Servicer cannot cure the defect within 60 days after notice is given to the
Master Servicer, the Servicer will be obligated either to substitute for the
related Mortgage Loan a Replacement Mortgage Loan or Loans, or to purchase
within 90 days of such notice the related Mortgage Loan from the Trustee at a
price equal to the principal balance thereof as of the date of purchase or, in
the case of a Series as to which an election has been made to treat the related
Trust Fund as a REMIC, at such other price as may be necessary to avoid a tax on
a prohibited transaction, as described in Section 860F(a) of the Code, in each
case together with accrued interest at the applicable Pass-Through Rate to the
first day of the month following such repurchase, plus the amount of any
unreimbursed Advances made by the Master Servicer or the Servicer, as
applicable, in respect of such Mortgage Loan. The Master Servicer is obligated
to enforce the repurchase obligation of the Servicer, to the extent described
above under "The
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Trust Fund--Mortgage Loan Program--Representations by Unaffiliated Sellers;
Repurchases." Unless otherwise specified in the applicable Prospectus
Supplement, this purchase obligation constitutes the sole remedy available to
the Certificateholders or the Trustee for a material defect in a constituent
document.
Unless otherwise specified in the applicable Prospectus Supplement,
with respect to the Mortgage Loans in a Mortgage Pool, the Depositor will make
representations and warranties as to the types and geographical distribution of
such Mortgage Loans and as to the accuracy in all material respects of certain
information furnished to the Trustee in respect of each such Mortgage Loan. In
addition, unless otherwise specified in the related Prospectus Supplement, the
Depositor will represent and warrant that, as of the Cut-off Date for the
related Series of Certificates, no Mortgage Loan is more than 30 days delinquent
as to payment of principal and interest. Upon a breach of any representation or
warranty by the Depositor that materially and adversely affects the interest of
the Certificateholders, the Depositor will be obligated either to cure the
breach in all material respects or to purchase the Mortgage Loan at the purchase
price set forth above. Unless otherwise specified in the applicable Prospectus
Supplement and subject to the ability of the Depositor, if so specified in the
applicable Prospectus Supplement, to substitute for certain Mortgage Loans as
described below, this repurchase obligation constitutes the sole remedy
available to the Certificateholders or the Trustee for a breach of
representation or warranty by the Depositor.
Within the period specified in the related Prospectus Supplement,
following the date of issuance of a Series of Certificates, the Depositor, the
Master Servicer or the related Servicer, as the case may be, may deliver to the
Trustee Mortgage Loans ("Substitute Mortgage Loans") in substitution for any one
or more of the Mortgage Loans ("Deleted Mortgage Loans") initially included in
the Trust Fund but which do not conform in one or more respects to the
description thereof contained in the related Prospectus Supplement, or as to
which a breach of a representation or warranty is discovered, which breach
materially and adversely affects the interests of the Certificateholders. The
required characteristics of any such Substitute Mortgage Loan and any additional
restrictions relating to the substitution of Mortgage Loans will generally be as
described under "The Trust Fund--The Contract Pools" with respect to the
substitution of Contracts.
In addition to making certain representations and warranties regarding
its authority to enter into, and its ability to perform its obligations under
the Pooling and Servicing Agreement relating to a Series of Certificates, the
Master Servicer may make certain representations and warranties to the Trustee
in such Pooling and Servicing Agreement with respect to the enforceability of
coverage under any applicable Primary Insurance Policy, Pool Insurance Policy,
Special Hazard Insurance Policy or Mortgagor Bankruptcy Bond. See "Description
of Insurance" for information regarding the extent of coverage under certain of
the aforementioned insurance policies. Upon a breach of any such representation
or warranty that materially and adversely affects the interests of the
Certificateholders of such Series in a Mortgage Loan, the Master Servicer will
be obligated either to cure the breach in all material respects or to purchase
such Mortgage Loan at the price calculated as set forth above.
To the extent described in the related Prospectus Supplement, the
Master Servicer will procure a surety bond, corporate guaranty or another
similar form of insurance coverage acceptable to the Rating Agency rating the
related Series of Certificates to support, among other things, this purchase
obligation. Unless otherwise stated in the applicable Prospectus Supplement, the
aforementioned purchase obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for a breach of the Master Servicer's
insurability representation. The Master Servicer's obligation to purchase
Mortgage Loans upon such a breach is subject to limitations.
The Trustee will be authorized, with the consent of the Depositor and
the Master Servicer, to appoint a custodian pursuant to a custodial agreement to
maintain possession of documents relating to the Mortgage Loans as the agent of
the Trustee.
Pursuant to each Pooling and Servicing Agreement, the Master Servicer,
either directly or through Servicers, will service and administer the Mortgage
Loans assigned to the Trustee as more fully set forth below.
ASSIGNMENT OF CONTRACTS
The Depositor will cause the Contracts constituting the Contract Pool
to be assigned to the Trustee, together with principal and interest due on or
with respect to the Contracts after the Cut-off Date, but not including
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principal and interest due on or before the Cut-off Date. If the Depositor is
unable to obtain a perfected security interest in a Contract prior to transfer
and assignment to the Trustee, the Unaffiliated Seller will be obligated to
repurchase such Contract. The Trustee, concurrently with such assignment, will
authenticate and deliver the Certificates. Each Contract will be identified in a
schedule appearing as an exhibit to the Agreement (the "Contract Schedule").
Unless otherwise specified in the related Prospectus Supplement, the Contract
Schedule will specify, with respect to each Contract, among other things: the
original principal amount and the adjusted principal balance as of the close of
business on the Cut-off Date; the APR; the current scheduled monthly level
payment of principal and interest; and the maturity of the Contract.
In addition, the Depositor, as to each Contract, will deliver or cause
to be delivered to the Trustee, or, as specified in the related Prospectus
Supplement, the Custodian, the original Contract and copies of documents and
instruments related to each Contract and the security interest in the
Manufactured Home securing each Contract. In order to give notice of the right,
title and interest of the Certificateholders to the Contracts, the Depositor
will cause a UCC-1 financing statement to be executed by the Depositor
identifying the Trustee as the secured party and identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Depositor to the Trust Fund. Therefore, if a subsequent purchaser were
able to take physical possession of the Contracts without notice of such
assignment, the interest of the Certificateholders in the Contracts could be
defeated. See "Certain Legal Aspects of Mortgage Loans and Contracts--The
Contracts."
The Trustee (or the Custodian) will review and hold such documents in
trust for the benefit of the Certificateholders. Unless otherwise provided in
the related Prospectus Supplement, if any such document is found to be defective
in any material respect, the Unaffiliated Seller must cure such defect within 60
days, or within such other period specified in the related Prospectus Supplement
the Unaffiliated Seller, not later than 90 days or within such other period
specified in the related Prospectus Supplement, after the Trustee's notice to
the Unaffiliated Seller of the defect. If the defect is not cured, the
Unaffiliated Seller will repurchase the related Contract or any property
acquired in respect thereof from the Trustee at a price equal to the remaining
unpaid principal balance of such Contract (or, in the case of a repossessed
Manufactured Home, the unpaid principal balance of such Contract immediately
prior to the repossession) or, in the case of a Series as to which an election
has been made to treat the related Trust Fund as a REMIC, at such other price as
may be necessary to avoid a tax on a prohibited transaction, as described in
Section 860F(a) of the Code, in each case together with accrued but unpaid
interest to the first day of the month following repurchase at the related Pass-
Through Rate, plus any unreimbursed Advances respecting such Contract. Unless
otherwise specified in the related Prospectus Supplement, the repurchase
obligation constitutes the sole remedy available to the Certificateholders or
the Trustee for a material defect in a Contract document.
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller of Contracts will have represented, among other things, that
(i) immediately prior to the transfer and assignment of the Contracts, the
Unaffiliated Seller had good title to, and was the sole owner of each Contract
and there had been no other sale or assignment thereof, (ii) as of the date of
such transfer, the Contracts are subject to no offsets, defenses or
counterclaims, (iii) each Contract at the time it was made complied in all
material respects with applicable state and federal laws, including usury, equal
credit opportunity and disclosure laws, (iv) as of the date of such transfer,
each Contract is a valid first lien on the related Manufactured Home and such
Manufactured Home is free of material damage and is in good repair, (v) as of
the date of such transfer, no Contract is more than 30 days delinquent in
payment and there are no delinquent tax or assessment liens against the related
Manufactured Home and (vi) with respect to each Contract, the Manufactured Home
securing the Contract is covered by a Standard Hazard Insurance Policy in the
amount required in the Pooling and Servicing Agreement and that all premiums now
due on such insurance have been paid in full.
All of the representations and warranties of a seller in respect of a
Contract will have been made as of the date on which such seller sold the
Contract to the Depositor or its affiliate; the date such representations and
warranties were made may be a date prior to the date of initial issuance of the
related series of Certificates. A substantial period of time may have elapsed
between the date as of which the representations and warranties were made and
the later date of initial issuance of the related Series of Certificates. Since
the representations and warranties referred to in the preceding paragraph are
the only representations and warranties that will be made by a seller, the
seller's repurchase obligation described below will not arise if, during the
period commencing on the date
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of sale of a Contract by the seller to the Depositor or its affiliate, the
relevant event occurs that would have given rise to such an obligation had the
event occurred prior to sale of the affected Contract. Nothing, however, has
come to the Depositor's attention that would cause it to believe that the
representations and warranties referred to in the preceding paragraph will not
be accurate and complete in all material respects in respect of Contracts as of
the date of initial issuance of the related series of Certificates.
The only representations and warranties to be made for the benefit of
Certificateholders in respect of any Contract relating to the period commencing
on the date of sale of such Contract to the Depositor or its affiliate will be
certain limited representations of the Depositor and of the Master Servicer
described above under "The Trust Fund--The Contract Pools."
If an Unaffiliated Seller cannot cure a breach of any representation
or warranty made by it in respect of a Contract that materially and adversely
affects the interest of the Certificateholders in such Contract within 90 days
(or such other period specified in the related Prospectus Supplement) after
notice from the Master Servicer, such Unaffiliated Seller will be obligated to
repurchase such Contract at a price equal to, unless otherwise specified in the
related Prospectus Supplement, the principal balance thereof as of the date of
the repurchase or, in the case of a Series as to which an election has been made
to treat the related Trust Fund as a REMIC, at such other price as may be
necessary to avoid a tax on a prohibited transaction, as described in Section
860F(a) of the Code, in each case together with accrued and unpaid interest to
the first day of the month following repurchase at the related Pass-Through
Rate, plus the amount of any unreimbursed Advances in respect of such Contract
(the "Purchase Price"). The Master Servicer will be required under the
applicable Pooling and Servicing Agreement to enforce this obligation for the
benefit of the Trustee and the Certificateholders, following the practices it
would employ in its good faith business judgment were it the owner of such
Contract. Except as otherwise set forth in the related Prospectus Supplement,
this repurchase obligation will constitute the sole remedy available to
Certificateholders or the Trustee for a breach of representation by an
Unaffiliated Seller.
Neither the Depositor nor the Master Servicer will be obligated to
purchase a Contract if an Unaffiliated Seller defaults on its obligation to do
so, and no assurance can be given that sellers will carry out their respective
repurchase obligations with respect to Contracts. However, to the extent that a
breach of the representations and warranties of an Unaffiliated Seller may also
constitute a breach of a representation made by the Depositor or the Master
Servicer, the Depositor or the Master Servicer may have a purchase obligation as
described above under "The Trust Fund--The Contract Pools."
SERVICING BY UNAFFILIATED SELLERS
Each Unaffiliated Seller of a Mortgage Loan or a Contract may have the
option to act as the Servicer (or Master Servicer) for such Mortgage Loan or
Contract pursuant to a Servicing Agreement. A representative form of Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following description does not purport to be
complete and is qualified in its entirety by reference to the form of Servicing
Agreement and by the discretion of the Master Servicer or Depositor to modify
the Servicing Agreement and to enter into different Servicing Agreements. The
Pooling and Servicing Agreement provides that, if for any reason the Master
Servicer for such Series of Certificates is no longer the Master Servicer of the
related Mortgage Loans or Contracts, the Trustee or any successor master
servicer must recognize the Servicer's rights and obligations under such
Servicing Agreement.
A Servicer may delegate its servicing obligations to third-party
servicers, but continue to act as Servicer under the related Servicing
Agreement. The Servicer will be required to perform the customary functions of a
servicer, including collection of payments from Mortgagors and Obligors and
remittance of such collections to the Master Servicer, maintenance of primary
mortgage, hazard insurance, FHA insurance and VA guarantees and filing and
settlement of claims thereunder, subject in certain cases to (a) the right of
the Master Servicer to approve in advance any such settlement; (b) maintenance
of escrow accounts of Mortgagors and Obligors for payment of taxes, insurance,
and other items required to be paid by the Mortgagor pursuant to terms of the
related Mortgage Loan or the Obligor pursuant to the related Contract; (c)
processing of assumptions or substitutions; (d) attempting to cure
delinquencies; (e) supervising foreclosures or repossessions; (f) inspection and
management of Mortgaged Properties, Cooperative Dwellings or Manufactured Homes
under certain circumstances; and (g) maintaining accounting records
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relating to the Mortgage Loans and Contracts. A Servicer will also be obligated
to make Advances in respect of delinquent installments of principal and interest
on Mortgage Loans and Contracts (as described more fully below under "--Payments
on Mortgage Loans" and "--Payments on Contracts"), and in respect of certain
taxes and insurance premiums not paid on a timely basis by Mortgagors and
Obligors.
As compensation for its servicing duties, a Servicer will be entitled
to amounts from payments with respect to the Mortgage Loans and Contracts
serviced by it. The Servicer will also be entitled to collect and retain, as
part of its servicing compensation, certain fees and late charges provided in
the Mortgage Note or related instruments. The Servicer will be reimbursed by the
Master Servicer for certain expenditures that it makes, generally to the same
extent that the Master Servicer would be reimbursed under the applicable Pooling
and Servicing Agreement.
Each Servicer will be required to agree to indemnify the Master
Servicer for any liability or obligation sustained by the Master Servicer in
connection with any act or failure to act by the Servicer in its servicing
capacity.
Each Servicer will be required to service each Mortgage Loan or
Contract pursuant to the terms of the Servicing Agreement for the entire term of
such Mortgage Loan or Contract, unless the Servicing Agreement is earlier
terminated by the Master Servicer or unless servicing is released to the Master
Servicer. Unless otherwise set forth in the Prospectus Supplement, the Master
Servicer may terminate a Servicing Agreement upon 30 days' written notice to the
Servicer, without cause, upon payment of an amount equal to the fair market
value of the right to service the Mortgage Loans or Contracts serviced by any
such Servicer under such Servicing Agreement, or if such fair market value
cannot be determined, a specified percentage of the aggregate outstanding
principal balance of all such Mortgage Loans or Contracts, or immediately upon
the giving of notice upon certain stated events, including the violation of such
Servicing Agreement by the Servicer.
The Master Servicer may agree with a Servicer to amend a Servicing
Agreement. The Master Servicer may also, at any time and from time to time,
release servicing to third-party servicers, but continue to act as Master
Servicer under the related Pooling and Servicing Agreement. Upon termination of
a Servicing Agreement, the Master Servicer may act as servicer of the related
Mortgage Loans or Contracts or enter into one or more new Servicing Agreements.
If the Master Servicer acts as servicer, it will not assume liability for the
representations and warranties of the Servicer that it replaces. If the Master
Servicer enters into a new Servicing Agreement, each new Servicer must be an
Unaffiliated Seller or meet the standards for becoming an Unaffiliated Seller or
have such servicing experience that is otherwise satisfactory to the Master
Servicer. The Master Servicer will make reasonable efforts to have the new
Servicer assume liability for the representations and warranties of the
terminated Servicer, but no assurance can be given that such an assumption will
occur. In the event of such an assumption, the Master Servicer may, in the
exercise of its business judgment, release the terminated Servicer from
liability in respect of such representations and warranties. Any amendments to a
Servicing Agreement or new Servicing Agreements may contain provisions different
from those described above that are in effect in the original Servicing
Agreements. However, the Pooling and Servicing Agreement with respect to a
Series will provide that any such amendment or new agreement may not be
inconsistent with or violate such Pooling and Servicing Agreement.
PAYMENTS ON MORTGAGE LOANS
The Master Servicer will, unless otherwise specified in the Prospectus
Supplement with respect to a Series of Certificates, establish and maintain a
separate account or accounts in the name of the Trustee (the "Certificate
Account"), which must be maintained with a depository institution and in a
manner acceptable to the Rating Agency rating the Certificates of a Series.
If so specified in the applicable Prospectus Supplement, the Master
Servicer, in lieu of establishing a Certificate Account, may establish a
separate account or accounts in the name of the Trustee (the "Custodial
Account") meeting the requirements set forth herein for the Certificate Account.
In such a case, amounts in such Custodial Account, after making the required
deposits and withdrawals specified below, shall be remitted to the Certificate
Account maintained by the Trustee for distribution to Certificateholders in the
manner set forth herein and in such Prospectus Supplement.
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In those cases where a Servicer is servicing a Mortgage Loan pursuant
to a Servicing Agreement, the Servicer will establish and maintain an account
(the "Servicing Account") that will comply with either the standards set forth
above or, subject to the conditions set forth in the Servicing Agreement, be
maintained with a depository, meeting the requirements of the Rating Agency
rating the Certificates of the related Series, and that is otherwise acceptable
to the Master Servicer. The Servicer will be required to deposit into the
Servicing Account on a daily basis all amounts enumerated in the following
paragraph in respect of the Mortgage Loans received by the Servicer, less its
servicing compensation. On the date specified in the Servicing Agreement, the
Servicer shall remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan. The Servicer will also be required
to advance any monthly installment of principal and interest that was not timely
received, less its servicing fee, provided that, unless otherwise specified in
the related Prospectus Supplement, such requirement shall only apply to the
extent such Servicer determines in good faith any such advance will be
recoverable out of Insurance Proceeds, proceeds of the liquidation of the
related Mortgage Loans or otherwise.
The Certificate Account may be maintained with a depository
institution that is an affiliate of the Master Servicer. The Master Servicer
will deposit in the Certificate Account for each Series of Certificates on a
daily basis the following payments and collections received or made by it
subsequent to the Cut-off Date (other than payments due on or before the Cut-off
Date) in the manner set forth in the related Prospectus Supplement:
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans, net of any portion of such
payments that represent unreimbursed or unrecoverable Advances
made by the related Servicer;
(ii) all payments on account of interest on the Mortgage Loans, net
of any portion thereof retained by the Servicer, if any, as its
servicing fee;
(iii) all proceeds of (A) any Special Hazard Insurance Policy,
Primary Mortgage Insurance Policy, FHA Insurance, VA Guarantee,
Mortgagor Bankruptcy Bond or Pool Insurance Policy with respect
to such Series of Certificates and any title, hazard or other
insurance policy covering any of the Mortgage Loans included in
the related Mortgage Pool (to the extent such proceeds are not
applied to the restoration of the related property or released
to the Mortgagor in accordance with customary servicing
procedures) (collectively, "Insurance Proceeds") or any
Alternative Credit Support established in lieu of any such
insurance and described in the applicable Prospectus
Supplement; and (B) all other cash amounts received and
retained in connection with the liquidation of defaulted
Mortgage Loans, by foreclosure or otherwise, other than
Insurance Proceeds, payments under the Letter of Credit or
proceeds of any Alternative Credit Support, if any, with
respect to such Series ("Liquidation Proceeds"), net of
expenses of liquidation, unpaid servicing compensation with
respect to such Mortgage Loans and unreimbursed or
unrecoverable Advances made by the Servicers of the related
Mortgage Loans;
(iv) all payments under the Letter of Credit, if any, with respect
to such Series;
(v) all amounts required to be deposited therein from the Reserve
Fund, if any, for such Series;
(vi) any Advances made by a Servicer or the Master Servicer (as
described herein under "--Advances");
(vii) any Buy-Down Funds (and, if applicable, investment earnings
thereon) required to be deposited in the Certificate Account,
as described below; and
(viii) all proceeds of any Mortgage Loan repurchased by the Master
Servicer, the Depositor, any Servicer or any Unaffiliated
Seller (as described under "The Trust Fund--Mortgage Loan
Program--Representations by Unaffiliated Sellers; Repurchases"
or "--Assignment of
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Mortgage Loans" above or repurchased by the Depositor as
described under "--Termination" below).
With respect to each Buy-Down Loan, if so specified in the related
Prospectus Supplement, the Master Servicer or the related Servicer will deposit
the Buy-Down Funds with respect thereto in a custodial account complying with
the requirements set forth above for the Certificate Account, which, unless
otherwise specified in the related Prospectus Supplement, may be an interest-
bearing account. The amount of such required deposits, together with investment
earnings thereon at the rate specified in the applicable Prospectus Supplement,
will provide sufficient funds to support the full monthly payments due on such
Buy-Down Loan on a level debt service basis. Neither the Master Servicer nor the
Depositor will be obligated to add to the Buy-Down Fund should investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans. To the extent that any such insufficiency is not recoverable
from the Mortgagor under the terms of the related Mortgage Note, distributions
to Certificateholders will be affected. With respect to each Buy-Down Loan, the
Master Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account on or before each Distribution Date the amount, if any, for
each Buy-Down Loan that, when added to the amount due on that date from the
Mortgagor on such Buy-Down Loan, equals the full monthly payment that would be
due on the Buy-Down Loan if it were not subject to the buy-down plan.
If the Mortgagor on a Buy-Down Loan prepays such loan in its entirety,
or defaults on such loan and the Mortgaged Property is sold in liquidation
thereof, during the period when the Mortgagor is not obligated, on account of
the buy-down plan, to pay the full monthly payment otherwise due on such loan,
the related Servicer will withdraw from the Buy-Down Fund and deposit in the
Certificate Account the amounts remaining in the Buy-Down Fund with respect to
such Buy-Down Loan. In the event of a default with respect to which a claim,
including accrued interest supplemented by amounts in the Buy-Down Fund with
respect to the related Buy-Down Loan, has been made, the Master Servicer or the
related Servicer will pay an amount equal to the remaining amounts in the Buy-
Down Fund with respect to the related Buy-Down Loan, to the extent the claim
includes accrued interest supplemented by amounts in the Buy-Down Fund, to the
related Pool Insurer or the insurer under the related Primary Insurance Policy
(the "Primary Insurer") if the Mortgaged Property is transferred to the Pool
Insurer or the Primary Insurer, as the case may be, which pays 100% of the
related claim (including accrued interest and expenses) in respect of such
default, to the L/C Bank in consideration of such payment under the related
Letter of Credit, or to the guarantor or other person which pays the same
pursuant to Alternative Credit Support described in the applicable Prospectus
Supplement. In the case of any such prepaid or defaulted Buy-Down Loan the
amounts in the Buy-Down Fund in respect of which were supplemented by investment
earnings, the Master Servicer will withdraw from the Buy-Down Fund and remit to
the Depositor or the Mortgagor, depending on the terms of the related buy-down
plan, any investment earnings remaining in the related Buy-Down Fund.
If so specified in the Prospectus Supplement with respect to a Series,
in lieu of, or in addition to the foregoing, the Depositor may deliver cash, a
letter of credit or a guaranteed investment contract to the Trustee to fund the
Buy-Down Fund for such Series, which shall be drawn upon by the Trustee in the
manner and at the times specified in such Prospectus Supplement.
PAYMENTS ON CONTRACTS
A Certificate Account meeting the requirements set forth under
"Description of the Certificates--Payments on Mortgage Loans" will be
established in the name of the Trustee.
There will be deposited in the Certificate Account on a daily basis
the following payments and collections received or made by it subsequent to the
Cut-off Date (including scheduled payments of principal and interest due after
the Cut-off Date but received by the Master Servicer on or before the Cut-off
Date):
(i) all Obligor payments on account of principal, including
principal prepayments, on the Contracts;
(ii) all Obligor payments on account of interest on the Contracts,
adjusted to the Pass-Through Rate;
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(iii) all Liquidation Proceeds received with respect to Contracts or
property acquired in respect thereof by foreclosure or
otherwise;
(iv) all Insurance Proceeds received with respect to any Contract,
other than proceeds to be applied to the restoration or repair
of the Manufactured Home or released to the Obligor;
(v) any Advances made as described under "--Advances" and certain
other amounts required under the Pooling and Servicing
Agreement to be deposited in the Certificate Account;
(vi) all amounts received from Credit Support provided with respect
to a Series of Certificates;
(vii) all proceeds of any Contract or property acquired in respect
thereof repurchased by the Master Servicer, the Depositor or
otherwise as described above or under "--Termination" below;
and
(viii) all amounts, if any, required to be transferred to the
Certificate Account from the Reserve Fund.
COLLECTION OF PAYMENTS ON MORTGAGE CERTIFICATES
The Mortgage Certificates included in the Trust Fund with respect to a
Series of Certificates will be registered in the name of the Trustee so that all
distributions thereon will be made directly to the Trustee. The Pooling and
Servicing Agreement will require the Trustee, if it has not received a
distribution with respect to any Mortgage Certificate by the second business day
after the date on which such distribution was due and payable pursuant to the
terms of such Mortgage Certificate, to request the issuer or guarantor, if any,
of such Mortgage Certificate to make such payment as promptly as possible and
legally permitted and to take such legal action against such issuer or guarantor
as the Trustee deems appropriate under the circumstances, including the
prosecution of any claims in connection therewith. The reasonable legal fees and
expenses incurred by the Trustee in connection with the prosecution of any such
legal action will be reimbursable to the Trustee out of the proceeds of any such
action and will be retained by the Trustee prior to the deposit of any remaining
proceeds in the Certificate Account pending distribution thereof to
Certificateholders of the affected Series. In the event that the Trustee has
reason to believe that the proceeds of any such legal action may be insufficient
to reimburse it for its projected legal fees and expenses, the Trustee will
notify such Certificateholders that it is not obligated to pursue any such
available remedies unless adequate indemnity for its legal fees and expenses is
provided by such Certificateholders.
DISTRIBUTIONS ON CERTIFICATES
On each Distribution Date with respect to a Series of Certificates as
to which credit support is provided by means other than the creation of a
Subordinated Class or Subclasses and the establishment of a Reserve Fund, the
Master Servicer will withdraw from the applicable Certificate Account funds on
deposit therein and distribute, or, if so specified in the applicable Prospectus
Supplement, will withdraw from the Custodial Account funds on deposit therein
and remit to the Trustee, who will distribute, such funds to Certificateholders
of record on the applicable Record Date. Such distributions shall occur in the
manner described herein under "Description of the Certificates--Distributions of
Principal and Interest" and in the related Prospectus Supplement. If so
specified in the applicable Prospectus Supplement, the Master Servicer will
withdraw from the applicable Certificate Account funds on deposit therein and
distribute them to the Trustee. Such funds shall consist of the aggregate of all
previously undistributed payments on account of principal (including principal
prepayments, if any) and interest received after the Cut-off Date and on or
prior to the 20th day (or if such day is not a business day, the next preceding
business day) of the month of such distribution or such other day as may be
specified in the related Prospectus Supplement (in either case the
"Determination Date"), except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments received during the month of
distribution and all payments of interest representing interest
for the month of distribution or any portion thereof;
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(iii) all payments which represent early receipt (other than
prepayments) of scheduled payments of principal and interest
due on a date or dates subsequent to the first day of the month
of distribution;
(iv) amounts received on particular Mortgage Loans or Contracts as
late payments of principal or interest and respecting which the
Master Servicer has made an unreimbursed Advance;
(v) amounts representing reimbursement for other Advances which the
Master Servicer has determined to be otherwise nonrecoverable
and amounts representing reimbursement for certain losses and
expenses incurred or Advances made by the Master Servicer and
discussed below; and
(vi) that portion of each collection of interest on a particular
Mortgage Loan in such Mortgage Pool or on a particular Contract
in such Contract Pool that represents (A) servicing
compensation to the Master Servicer, (B) amounts payable to the
entity or entities specified in the applicable Prospectus
Supplement or permitted withdrawals from the Certificate
Account out of payments under the Letter of Credit, if any,
with respect to the Series, (C) related Insurance Proceeds or
Liquidation Proceeds, (D) amounts in the Reserve Fund, if any,
with respect to the Series or (E) proceeds of any Alternative
Credit Support, each deposited in the Certificate Account to
the extent described under "Description of the Certificates--
Maintenance of Insurance Policies," "--Presentation of Claims,"
"--Enforcement of Due-on-Sale Clauses; Realization Upon
Defaulted Mortgage Loans" and "--Enforcement of Due-on-Sale
Clauses; Realization Upon Defaulted Contracts" or in the
applicable Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement, no
later than the Business Day immediately preceding the Distribution Date for a
Series of Certificates, the Master Servicer will furnish a statement to the
Trustee setting forth the amount to be distributed on the next succeeding
Distribution Date on account of principal and interest on the Mortgage Loans or
Contracts, stated separately or the information enabling the Trustee to
determine the amount of distribution to be made on the Certificates and a
statement setting forth certain information with respect to the Mortgage Loans
or Contracts.
If so specified in the applicable Prospectus Supplement, the Trustee
will establish and maintain the Certificate Account for the benefit of the
holders of the Certificates of the related Series in which the Trustee shall
deposit, as soon as practicable after receipt, each distribution made to the
Trustee by the Master Servicer, as set forth above, with respect to the Mortgage
Loans or Contracts, any distribution received by the Trustee with respect to the
Mortgage Certificates, if any, included in the Trust Fund and deposits from any
Reserve Fund or GPM Fund. If so specified in the applicable Prospectus
Supplement, prior to making any distributions to Certificateholders, any portion
of the distribution on the Mortgage Certificates that represents servicing
compensation, if any, payable to the Trustee shall be deducted and paid to the
Trustee.
Funds on deposit in the Certificate Account may be invested in
Eligible Investments maturing in general not later than the Business Day
preceding the next Distribution Date. Unless otherwise provided in the
Prospectus Supplement, all income and gain realized from any such investment
will be for the benefit of the Master Servicer. The Master Servicer will be
required to deposit the amount of any losses incurred with respect to such
investments out of its own funds, when realized. The Certificate Account
established pursuant to the Deposit Trust Agreement shall be a non-interest
bearing account or accounts.
The timing and method of distribution of funds in the Certificate
Account to Classes or Subclasses of Certificates having differing terms, whether
subordinated or not, to the extent not described herein, shall be set forth in
the related Prospectus Supplement.
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SPECIAL DISTRIBUTIONS
To the extent specified in the Prospectus Supplement relating to a
Series of Certificates, one or more Classes of Multi-Class Certificates that do
not provide for monthly Distribution Dates may receive Special Distributions in
reduction of Stated Principal Balance ("Special Distributions") in any month,
other than a month in which a Distribution Date occurs, if, as a result of
principal prepayments on the Trust Assets in the related Trust Fund and/or low
reinvestment yields, the Trustee determines, based on assumptions specified in
the related Pooling and Servicing Agreement, that the amount of cash anticipated
to be on deposit in the Certificate Account on the next Distribution Date for
such Series and available to be distributed to the holders of the Certificates
of such Classes or Subclasses may be less than the sum of (i) the interest
scheduled to be distributed to holders of the Certificates of such Classes or
Subclasses and (ii) the amount to be distributed in reduction of Stated
Principal Balance or such Certificates on such Distribution Date. Any such
Special Distributions will be made in the same priority and manner as
distributions in reduction of Stated Principal Balance would be made on the next
Distribution Date.
REPORTS TO CERTIFICATEHOLDERS
Unless otherwise specified or modified in the related Prospectus
Supplement for each Series, the Master Servicer or the Trustee will include with
each distribution to Certificateholders of record of such Series, or within a
reasonable time thereafter, a statement generally setting forth, among other
things, the following information, if applicable (per each Certificate, as to
(i) through (iii) or (iv) through (vi) below, as applicable):
(i) to each holder of a Certificate, other than a Multi-Class
Certificate or Residual Certificate, the amount of such
distribution allocable to principal of the Trust Assets,
separately identifying the aggregate amount of any Principal
Prepayments included therein, and the portion, if any, advanced
by a Servicer or the Master Servicer;
(ii) to each holder of a Certificate, other than a Multi-Class
Certificate or Residual Certificate, the amount of such
distribution allocable to interest on the related Trust Assets
and the portion, if any, advanced by a Servicer or the Master
Servicer;
(iii) to each holder of a Certificate, the amount of servicing
compensation with respect to the related Trust Assets and such
other customary information as the Master Servicer deems
necessary or desirable to enable Certificateholders to prepare
their tax returns;
(iv) to each holder of a Multi-Class Certificate on which an
interest distribution and a distribution in reduction of Stated
Principal Balance are then being made, the amount of such
interest distribution and distribution in reduction of Stated
Principal Balance, and the Stated Principal Balance of each
Class after giving effect to the distribution in reduction of
Stated Principal Balance made on such Distribution Date or on
any Special Distribution Date occurring subsequent to the last
report;
(v) to each holder of a Multi-Class Certificate on which a
distribution of interest only is then being made, the aggregate
Stated Principal Balance of Certificates outstanding of each
Class or Subclass after giving effect to the distribution in
reduction of Stated Principal Balance made on such Distribution
Date and on any Special Distribution Date occurring subsequent
to the last such report and after including in the aggregate
Stated Principal Balance the Stated Principal Balance of the
Compound Interest Certificates, if any, outstanding and the
amount of any accrued interest added to the Compound Value of
such Compound Interest Certificates on such Distribution Date;
(vi) to each holder of a Compound Interest Certificate (but only if
such holder shall not have received a distribution of interest
on such Distribution Date equal to the entire amount of
interest accrued on such Certificate with respect to such
Distribution Date):
(a) the information contained in the report delivered pursuant
to clause (v) above;
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(b) the interest accrued on such Class or Subclass of Compound
Interest Certificates with respect to such Distribution
Date and added to the Compound Value of such Compound
Interest Certificate; and
(c) the Stated Principal Balance of such Class or Subclass of
Compound Interest Certificates after giving effect to the
addition thereto of all interest accrued thereon;
(vii) in the case of a series of Certificates with a variable Pass-
Through Rate, the weighted average Pass-Through Rate applicable
to the distribution in question;
(viii) the amount or the remaining obligations of an L/C Bank with
respect to a Letter of Credit, after giving effect to the
declining amount available and any payments thereunder and
other amounts charged thereto on the applicable Distribution
Date, expressed as a percentage of the amount reported pursuant
to (x) below, and the amount of coverage remaining under the
Pool Insurance Policy, Special Hazard Insurance Policy,
Mortgagor Bankruptcy Bond, or Reserve Fund as applicable, in
each case, as of the applicable Determination Date, after
giving effect to any amounts with respect thereto distributed
to Certificateholders on the Distribution Date;
(ix) in the case of a Series of Certificates benefiting from the
Alternative Credit Support described in the related Prospectus
Supplement, the amount of coverage under such Alternative
Credit Support as of the close of business on the applicable
Determination Date, after giving effect to any amounts with
respect thereto distributed to Certificateholders on the
Distribution Date;
(x) the aggregate scheduled principal balance of the Trust Assets
as of a date not earlier than such Distribution Date after
giving effect to payments of principal distributed to
Certificateholders on the Distribution Date;
(xi) the book value of any collateral acquired by the Mortgage Pool
or Contract Pool through foreclosure, repossession or
otherwise; and
(xii) the number and aggregate principal amount of Mortgage Loans or
Contracts one month and two months delinquent.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer, or the Trustee, if specified in the
applicable Prospectus Supplement, will cause to be furnished to each
Certificateholder of record at any time during such calendar year a report as to
the aggregate of amounts reported pursuant to (i) through (iii) or (iv) through
(vi) above and such other information as in the judgment of the Master Servicer
or the Trustee, as the case may be, is needed for the Certificateholder to
prepare its tax return, as applicable, for such calendar year or, in the event
such person was a Certificateholder of record during a portion of such calendar
year, for the applicable portion of such year.
ADVANCES
Unless otherwise stated in the related Prospectus Supplement, each
Servicer and the Master Servicer (with respect to Mortgage Loans or Contracts
serviced by it and with respect to Advances required to be made by the Servicers
that were not so made) will be obligated to advance funds in an amount equal to
the aggregate scheduled installments of payments of principal and interest
(adjusted to the applicable Pass-Through Rate) that were due on the Due Date
with respect to a Mortgage Loan or Contract and that were delinquent (including
any payments that have been deferred by the Servicer or the Master Servicer) as
of the close of business on the date specified in the Pooling and Servicing
Agreement, to be remitted no later than the close of business on the business
day immediately preceding the Distribution Date, subject to (unless otherwise
provided in the applicable Prospectus Supplement) their respective
determinations that such advances are reimbursable under any Letter of Credit,
Pool Insurance Policy,
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Primary Mortgage Insurance Policy, Mortgagor Bankruptcy Bond, from the proceeds
of Alternative Credit Support, from cash in the Reserve Fund, the Servicing or
Certificate Accounts or otherwise. In making such advances, the Servicers and
Master Servicer will endeavor to maintain a regular flow of scheduled interest
and principal payments to the Certificateholders, rather than to guarantee or
insure against losses. Any such Advances are reimbursable to the Servicer or
Master Servicer out of related recoveries on the Mortgage Loans respecting which
such amounts were advanced. In addition, such Advances are reimbursable from
cash in the Reserve Fund, the Servicing or Certificate Accounts to the extent
that the Servicer or the Master Servicer, as the case may be, shall determine
that any such Advances previously made are not ultimately recoverable. The
Servicers and the Master Servicer generally will also be obligated to make
advances in respect of certain taxes and insurance premiums not paid by
Mortgagors or Obligors on a timely basis and, to the extent deemed recoverable,
foreclosure costs, including reasonable attorney's fees. Funds so advanced are
reimbursable out of recoveries on the related Mortgage Loans. This right of
reimbursement for any Advance will be prior to the rights of the
Certificateholders to receive any amounts recovered with respect to such
Mortgage Loans or Contracts. Unless otherwise provided in the applicable
Prospectus Supplement, the Servicers and the Master Servicer will also be
required to advance an amount necessary to provide a full month's interest
(adjusted to the applicable Pass-Through Rate) in connection with full or
partial prepayments, liquidations, defaults and repurchases of the Mortgage
Loans or Contracts. Any such Advances will not be reimbursable to the Servicers
or the Master Servicer.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through the Servicers, as the case
may be, will make reasonable efforts to collect all payments called for under
the Mortgage Loans or Contracts and will, consistent with the applicable Pooling
and Servicing Agreement and any applicable Letter of Credit, Pool Insurance
Policy, Special Hazard Insurance Policy, Primary Mortgage Insurance Policy,
Mortgagor Bankruptcy Bond, or Alternative Credit Support, follow such collection
procedures as it follows with respect to mortgage loans or contracts serviced by
it that are comparable to the Mortgage Loans or Contracts, except when, in the
case of FHA or VA Loans, applicable regulations require otherwise. Consistent
with the above, the Master Servicer may, in its discretion, waive any late
payment charge or any prepayment charge or penalty interest in connection with
the prepayment of a Mortgage Loan or Contract or extend the due dates for
payments due on a Mortgage Note or Contract for a period of not greater than 270
days, provided that the insurance coverage for such Mortgage Loan or Contract or
the coverage provided by any Letter of Credit or any Alternative Credit Support,
will not be adversely affected.
Under the Pooling and Servicing Agreement, the Master Servicer, either
directly or through Servicers, to the extent permitted by law, may establish and
maintain an escrow account (the "Escrow Account") in which Mortgages or Obligors
will be required to deposit amounts sufficient to pay taxes, assessments,
mortgage and hazard insurance premiums and other comparable items. This
obligation may be satisfied by the provision of insurance coverage against loss
occasioned by the failure to escrow insurance premiums rather than causing such
escrows to be made. Withdrawals from the Escrow Account may be made to effect
timely payment of taxes, assessments, mortgage and hazard insurance, to refund
to Mortgagors or Obligors amounts determined to be overages, to pay interest to
Mortgagors or Obligors on balances in the Escrow Account, if required, and to
clear and terminate such account. The Master Servicer will be responsible for
the administration of each Escrow Account and will be obliged to make advances
to such accounts when a deficiency exists therein. Alternatively, in lieu of
establishing an Escrow Account, the Servicer may procure a performance bond or
other form of insurance coverage, in an amount acceptable to the Rating Agency
rating the related Series of Certificates, covering loss occasioned by the
failure to escrow such amounts.
MAINTENANCE OF INSURANCE POLICIES
To the extent that the applicable Prospectus Supplement does not
expressly provide for a method of credit support described below under "Credit
Support" or for Alternative Credit Support in lieu of some or all of the
insurance coverage set forth below, the following paragraphs on insurance shall
apply.
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STANDARD HAZARD INSURANCE
To the extent specified in a related Prospectus Supplement, the terms
of each Servicing Agreement will require the Servicer to cause to be maintained
for each Mortgage Loan or Contract that it services (and the Master Servicer
will be required to maintain for each Mortgage Loan or Contract serviced by it
directly) a policy of standard hazard insurance (a "Standard Hazard Insurance
Policy") covering the Mortgaged Property underlying such Mortgage Loan or
Manufactured Home underlying such Contract in an amount at least equal to the
maximum insurable value or the improvements securing such Mortgage Loan or
Contract or the principal balance of such Mortgage Loan or Contract, whichever
is less. Each Servicer or the Master Servicer, as the case may be, shall also
maintain on property acquired upon foreclosure, or deed in lieu of foreclosure,
of any Mortgage Loan or Contract, a Standard Hazard Insurance Policy in an
amount that is at least equal to the maximum insurable value of the improvements
that are a part of the Mortgaged Property or Manufactured Home. Any amounts
collected by the Servicer or the Master Servicer under any such policies (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or Manufactured Home or released to the borrower in accordance with
normal servicing procedures) shall be deposited in the related Servicing Account
for deposit in the Certificate Account or, in the case of the Master Servicer,
shall be deposited directly into the Certificate Account. Any cost incurred in
maintaining any such insurance shall not, for the purpose of calculating monthly
distributions to Certificateholders, be added to the amount owing under the
Mortgage Loan or Contract, notwithstanding that the terms of the Mortgage Loan
or Contract may so permit. Such cost shall be recoverable by the Servicer only
by withdrawal of funds from the Servicing Account or by the Master Servicer only
by withdrawal from the Certificate Account, as described in the Pooling and
Servicing Agreement. No earthquake or other additional insurance is to be
required of any borrower or maintained on property acquired in respect of a
Mortgage Loan or Contract, other than pursuant to such applicable laws and
regulations as shall at any time be in force and as shall require such
additional insurance. When the Mortgaged Property or Manufactured Home is
located at the time of origination of the Mortgage Loan or Contract in a
federally designated flood area, the related Servicer (or the Master Servicer,
in the case of each Mortgage Loan or Contract serviced by it directly) will
cause flood insurance to be maintained, to the extent available, in those areas
where flood insurance is required under the National Flood Insurance Act of
1968, as amended.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the Cooperative Dwelling relating to any
Cooperative Loan. Generally, the cooperative corporation itself is responsible
for maintenance of hazard insurance for the property owned by the cooperative
and the tenant-stockholders of that cooperative do not maintain individual
hazard insurance policies. To the extent, however, that a Cooperative and the
related borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by other
credit support.
The Pooling and Servicing Agreement will require the Master Servicer
to perform the aforementioned obligations of the Servicer in the event the
Servicer fails to do so. In the event that the Master Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the related
Mortgage Loans or Contracts, it will conclusively be deemed to have satisfied
its obligations to cause to be maintained a Standard Hazard Insurance Policy for
each Mortgage Loan or Contract that it services. This blanket policy may contain
a deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible, deposit in the Certificate Account the amount not otherwise payable
under the blanket policy because of the application of such deductible clause.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans or Contracts may decline as the
principal balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to fully restore the damaged
Mortgaged Property or Manufactured Home. See "Description of Insurance--Special
Hazard Insurance Policies" for a description of the limited protection afforded
by a Special Hazard Insurance Policy against losses occasioned by certain
hazards that are otherwise uninsured against as well as against losses caused by
the application of the coinsurance provisions contained in the Standard Hazard
Insurance Policies.
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SPECIAL HAZARD INSURANCE
If so specified in the related Prospectus Supplement, the Master
Servicer will be required to exercise its best reasonable efforts to maintain
the Special Hazard Insurance Policy, if any, with respect to a Series of
Certificates in full force and effect, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premium for the Special
Hazard Insurance Policy on a timely basis; provided, however, that the Master
Servicer shall be under no such obligation if coverage under the Pool Insurance
Policy with respect to such Series has been exhausted. In the event that the
Special Hazard Insurance Policy is cancelled or terminated for any reason (other
than the exhaustion of total policy coverage), the Master Servicer will exercise
its best reasonable efforts to obtain from another insurer a replacement policy
comparable to the Special Hazard Insurance Policy with a total coverage that is
equal to the then existing coverage of the Special Hazard Insurance Policy;
provided that if the cost of any such replacement policy is greater than the
cost of the terminated Special Hazard Insurance Policy, the amount of coverage
under the replacement Special Hazard Insurance Policy may be reduced to a level
such that the applicable premium will not exceed the cost of the Special Hazard
Insurance Policy that was replaced. Certain characteristics of the Special
Hazard Insurance Policy are described under "Description of Insurance--Special
Hazard Insurance Policies."
POOL INSURANCE
To the extent specified in a related Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Pool Insurance
Policy with respect to a Series of Certificates in effect throughout the term of
the Pooling and Servicing Agreement, unless coverage thereunder has been
exhausted through payment of claims, and will pay the premiums for such Pool
Insurance Policy on a timely basis. In the event that the Pool Insurer ceases to
be a qualified insurer because it is not qualified to transact a mortgage
guaranty insurance business under the laws of the state of its principal place
of business or any other state which has jurisdiction over the Pool Insurer in
connection with the Pool Insurance Policy, or if the Pool Insurance Policy is
cancelled or terminated for any reason (other than the exhaustion of total
policy coverage), the Master Servicer will exercise its best reasonable efforts
to obtain a replacement policy of pool insurance comparable to the Pool
Insurance Policy and may obtain, under the circumstances described above with
respect to the Special Hazard Insurance Policy, a replacement policy with
reduced coverage. In the event the Pool Insurer ceases to be a qualified insurer
because it is not approved as an insurer by FHLMC, FNMA or any successors
thereto, the Master Servicer will agree to review, not less often than monthly,
the financial condition of the Pool Insurer with a view towards determining
whether recoveries under the Pool Insurance Policy are jeopardized and, if so,
will exercise its best reasonable efforts to obtain from another qualified
insurer a replacement insurance policy under the above-stated limitations.
Certain characteristics of the Pool Insurance Policy are described under
"Description of Insurance--Pool Insurance Policies."
PRIMARY MORTGAGE INSURANCE
To the extent specified in the related Prospectus Supplement, the
Master Servicer will be required to keep in force and effect for each Mortgage
Loan secured by Single Family Property serviced by it directly, and each
Servicer of a Mortgage Loan secured by Single Family Property will be required
to keep in full force and effect with respect to each such Mortgage Loan
serviced by it, in each case to the extent required by the underwriting
standards of the Depositor, a Primary Mortgage Insurance Policy issued by a
qualified insurer (the "Primary Mortgage Insurer") with regard to each Mortgage
Loan for which such coverage is required pursuant to the applicable Servicing
Agreement and the Pooling and Servicing Agreement and to act on behalf of the
Trustee (the "Insured") under each such Primary Mortgage Insurance Policy.
Neither the Servicer nor the Master Servicer will cancel or refuse to renew any
such Primary Mortgage Insurance Policy in effect at the date of the initial
issuance of a Series of Certificates that is required to be kept in force under
the Pooling and Servicing Agreement or applicable Servicing Agreement unless the
replacement Primary Mortgage Insurance Policy for such cancelled or non-renewed
policy is maintained with an insurer whose claims-paying ability is acceptable
to the Rating Agency rating the Certificates. See "Description of Insurance--
Primary Mortgage Insurance Policies."
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MORTGAGOR BANKRUPTCY BOND
If so specified in the related Prospectus Supplement, the Master
Servicer will exercise its best reasonable efforts to maintain a Mortgagor
Bankruptcy Bond for a Series of Certificates in full force and effect throughout
the term of the Pooling and Servicing Agreement, unless coverage thereunder has
been exhausted through payment of claims, and will pay the premiums for such
Mortgagor Bankruptcy Bond on a timely basis. At the request of the Depositor,
coverage under a Mortgagor Bankruptcy Bond will be cancelled or reduced by the
Master Servicer to the extent permitted by the Rating Agency rating the related
Series of Certificates, provided that such cancellation or reduction does not
adversely affect the then current rating of such Series. See "Description of
Insurance--Mortgagor Bankruptcy Bond."
PRESENTATION OF CLAIMS
The Master Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to HUD, the VA, the Pool Insurer, the
Special Hazard Insurer, the issuer of the Mortgagor Bankruptcy Bond, and each
Primary Mortgage Insurer, as applicable, and take such reasonable steps as are
necessary to permit recovery under such insurance policies or Mortgagor
Bankruptcy Bond, if any, with respect to a Series concerning defaulted Mortgage
Loans or Contracts or Mortgage Loans or Contracts that are the subject of a
bankruptcy proceeding. All collections by the Master Servicer under any FHA
insurance or VA guarantee, any Pool Insurance Policy, any Primary Mortgage
Insurance Policy or any Mortgagor Bankruptcy Bond and, where the related
property has not been restored, any Special Hazard Insurance Policy, are to be
deposited in the Certificate Account, subject to withdrawal as heretofore
described. In those cases in which a Mortgage Loan or Contract is serviced by a
Servicer, the Servicer, on behalf of itself, the Trustee and the
Certificateholders, will present claims to the applicable Primary Mortgage
Insurer and to the FHA and the VA, as applicable, and all collections thereunder
shall be deposited in the Servicing Account, subject to withdrawal, as set forth
above, for deposit in the Certificate Account.
If any property securing a defaulted Mortgage Loan or Contract is
damaged and proceeds, if any, from the related Standard Hazard Insurance Policy
or the applicable Special Hazard Insurance Policy are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any Pool
Insurance Policy or any Primary Mortgage Insurance Policy, neither the related
Servicer nor the Master Servicer, as the case may be, will be required to expend
its own funds to restore the damaged property unless it determines, and, in the
case of a determination by a Servicer, the Master Servicer agrees, (i) that such
restoration will increase the proceeds to Certificateholders on liquidation of
the Mortgage Loan or Contract after reimbursement of the expenses incurred by
the Servicer or the Master Servicer, as the case may be, and (ii) that such
expenses will be recoverable through proceeds of the sale of the Mortgaged
Property or proceeds of any related Pool Insurance Policy, any related Primary
Mortgage Insurance Policy or otherwise.
If recovery under a Pool Insurance Policy or any related Primary
Mortgage Insurance Policy is not available because the related Servicer or the
Master Servicer has been unable to make the above determinations or otherwise,
the Servicer or the Master Servicer is nevertheless obligated to follow such
normal practices and procedures as are deemed necessary or advisable to realize
upon the defaulted Mortgage Loan. If the proceeds of any liquidation of the
Mortgaged Property or Manufactured Home are less than the principal balance of
the defaulted Mortgage Loan or Contract, respectively, plus interest accrued
thereon at the Pass-Through Rate, and if coverage under any other method of
credit support with respect to such Series is exhausted, the related Trust Fund
will realize a loss in the amount of such difference plus the aggregate of
expenses incurred by the Servicer or the Master Servicer in connection with such
proceedings and which are reimbursable under the related Servicing Agreement or
the Pooling and Servicing Agreement. In the event that any such proceedings
result in a total recovery that is, after reimbursement to the Servicer or the
Master Servicer of its expenses, in excess of the principal balance of the
related Mortgage Loan or Contract, together with accrued and unpaid interest
thereon at the applicable Pass-Through Rates, the Servicer and the Master
Servicer will be entitled to withdraw amounts representing normal servicing
compensation on such Mortgage Loan or Contract from the Servicing Account or the
Certificate Account, as the case may be.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES; REALIZATION UPON DEFAULTED MORTGAGE LOANS
Each Servicing Agreement and the Pooling and Servicing Agreement with
respect to Certificates representing interests in a Mortgage Pool will provide
that, when any Mortgaged Property has been conveyed by the borrower, such
Servicer or the Master Servicer, as the case may be, will, to the extent it has
knowledge of such conveyance, exercise its rights to accelerate the maturity of
such Mortgage Loan under any "due-on-sale" clause applicable thereto, if any,
unless it reasonably believes that such enforcement is not exercisable under
applicable law or regulations or if such exercise would result in loss of
insurance coverage with respect to such Mortgage Loan. In either case, where the
due-on-sale clause will not be exercised, the Servicer or the Master 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. In the case
of an FHA Loan, such an assumption can occur only with HUD approval of the
substitute Mortgagor. Each Servicer and the Master Servicer will also be
authorized, with the prior approval of the Insurer under any required insurance
policies, 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.
Under the Servicing Agreements and the Pooling and Servicing
Agreement, the Servicer or the Master Servicer, as the case may be, will
foreclose upon or otherwise comparably convert the ownership of properties
securing such of the related Mortgage Loans as come into and continue in default
and as to which no satisfactory arrangements can be made for collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Servicer or the Master Servicer will follow such practices and procedures as
are deemed necessary or advisable and as shall be normal and usual in its
general mortgage servicing activities and in accordance with FNMA guidelines,
except when, in the case of FHA or VA Loans, applicable regulations require
otherwise. However, neither the Servicer nor the Master Servicer will be
required to expend its own funds in connection with any foreclosure or towards
the restoration of any property unless it determines and, in the case of a
determination by a Servicer, the Master Servicer agrees (i) that such
restoration and/or foreclosure will increase the proceeds of liquidation of the
related Mortgage Loan to Certificateholders after reimbursement to itself for
such expenses and (ii) that such expenses will be recoverable to it either
through Liquidation Proceeds, Insurance Proceeds, payments under the Letter of
Credit, or amounts in the Reserve Fund, if any, with respect to the related
Series, or otherwise.
Any prospective purchaser of a Cooperative Dwelling will generally be
required to obtain the approval of the board of directors of the related
Cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing the Cooperative Loan. See
"Certain Legal Aspects of the Mortgage Loans and Contracts--The Mortgage Loans--
Foreclosure" herein. This approval is usually based on the purchaser's income
and net worth and numerous other factors. Although the Cooperative's approval is
unlikely to be unreasonably withheld or delayed, the necessity of acquiring such
approval could limit the number of potential purchasers for those shares and
otherwise limit the Trust Fund's ability to sell and realize the value of those
shares.
The market value of any Multifamily Property obtained in foreclosure
or by deed in lieu of foreclosure will be based substantially on the operating
income obtained from renting the dwelling units. Since a default on a Mortgage
Loan secured by Multifamily Property is likely to have occurred because
operating income, net of expenses, is insufficient to make debt service payments
on the related Mortgage Loan, it can be anticipated that the market value of
such property will be less than was anticipated when such Mortgage Loan was
originated. To the extent that the equity in the property does not absorb the
loss in market value and such loss is not covered by other credit support, a
loss may be experienced by the related Trust Fund. With respect to Multifamily
Property consisting of an apartment building owned by a Cooperative, the
Cooperative's ability to meet debt service obligations on the Mortgage Loan, as
well as all other operating expenses, will be dependent in large part on the
receipt of maintenance payments from the tenant-stockholders, as well as any
rental income from units or commercial areas the Cooperative might control.
Unanticipated expenditures may in some cases have to be paid by special
assessments of the tenant-stockholders. The Cooperative's ability to pay the
principal amount of the Mortgage Loan at maturity may depend on its ability to
refinance the Mortgage Loan. The Depositor, the Unaffiliated Seller and the
Master Servicer will have no obligation to provide refinancing for any such
Mortgage Loan.
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ENFORCEMENT OF "DUE-ON-SALE" CLAUSES; REALIZATION UPON DEFAULTED CONTRACTS
Each Servicing Agreement and Pooling and Servicing Agreement with
respect to Certificates representing interests in a Contract Pool will provide
that, when any Manufactured Home securing a Contract is about to be conveyed by
the Obligor, the Master Servicer, to the extent it has knowledge of such
prospective conveyance and prior to the time of the consummation of such
conveyance, may exercise its rights to accelerate the maturity of such Contract
under the applicable "due-on-sale" clause, if any, unless it is not exercisable
under applicable law. In such case, the Master Servicer is authorized to take or
enter into an assumption agreement from or with the person to whom such
Manufactured Home has been or is about to be conveyed, pursuant to which such
person becomes liable under the Contract and, unless determined to be materially
adverse to the interests of Certificateholders, with the prior approval of the
Pool Insurer, if any, to enter into a substitution of liability agreement with
such person, pursuant to which the original Obligor is released from liability
and such person is substituted as Obligor and becomes liable under the Contract.
Where authorized by the Contract, the APR may be increased, upon assumption, to
the then-prevailing market rate, but shall not be decreased.
Under the Servicing Agreement or the Pooling and Servicing Agreement,
the Master Servicer will repossess or otherwise comparably convert the ownership
of properties securing such of the related Manufactured Homes as come into and
continue in default and as to which no satisfactory arrangements can be made for
collection of delinquent payments. In connection with such repossession or other
conversion, the Servicer or Master Servicer will follow such practices and
procedures as it shall deem necessary or advisable and as shall be normal and
usual in its general Contract servicing activities. The Servicer or Master
Servicer, however, will not be required to expend its own funds in connection
with any repossession or towards the restoration of any property unless it
determines (i) that such restoration or repossession will increase the proceeds
of liquidation of the related Contract to the Certificateholders after
reimbursement to itself for such expenses and (ii) that such expenses will be
recoverable to it either through liquidation proceeds or through insurance
proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Under the Pooling and Servicing Agreement for a Series of
Certificates, the Depositor or the person or entity specified in the related
Prospectus Supplement and any Master Servicer will be entitled to receive an
amount described in such Prospectus Supplement. The Master Servicer's primary
compensation generally will be equal to the difference, with respect to each
interest payment on a Mortgage Loan, between the Mortgage Rate and the Pass-
Through Rate for the related Mortgage Pool and with respect to each interest
payment on a Contract, between the APR and the Pass-Through Rate for the related
Contract (less any servicing compensation payable to the Servicer of the related
Mortgage Loan or Contract, if any, as set forth below, and the amount, if any,
payable to the Depositor or to the person or entity specified in the applicable
Prospectus Supplement). As compensation for its servicing duties, a Servicer
will be entitled to receive a monthly servicing fee in the amount specified in
the related Servicing Agreement. Such servicing compensation shall be payable by
withdrawal from the related Servicing Account prior to deposit in the
Certificate Account. Each Servicer (with respect to the Mortgage Loans or
Contracts serviced by it) and the Master Servicer will be entitled to servicing
compensation out of Insurance Proceeds, Liquidation Proceeds, or Letter of
Credit payments. Additional servicing compensation in the form of prepayment
charges, assumption fees, late payment charges or otherwise shall be retained by
the Servicers and the Master Servicer to the extent not required to be deposited
in the Certificate Account.
The Servicers and the Master Servicer, unless otherwise specified in
the related Prospectus Supplement, will pay from their servicing compensation
certain expenses incurred in connection with the servicing of the Mortgage Loans
or Contracts, including, without limitation, payment of the Insurance Policy
premiums and, in the case of the Master Servicer, fees or other amounts payable
for any Alternative Credit Support, payment of the fees and disbursements of the
Trustee (and any custodian selected by the Trustee), the Certificate Register
and independent accountants and payment of expenses incurred in enforcing the
obligations of Servicers and Unaffiliated Sellers. Certain of these expenses may
be reimbursable by the Depositor pursuant to the terms of the Pooling and
Servicing Agreement. In addition, the Master Servicer will be entitled to
reimbursement of expenses incurred in enforcing the obligations of Servicers and
Unaffiliated Sellers under certain limited circumstances.
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As set forth in the preceding section, the Servicers and the Master
Servicer will be entitled to reimbursement for certain expenses incurred by them
in connection with the liquidation of defaulted Mortgage Loans or Contracts. The
related Trust Fund will suffer no loss by reason of such expenses to the extent
claims are fully paid under the Letter of Credit, if any, the related insurance
policies, from amounts in the Reserve Fund or under any applicable Alternative
Credit Support described in a Prospectus Supplement. In the event, however, that
claims are either not made or fully paid under such Letter of Credit, Insurance
Policies or Alternative Credit Support, or if coverage thereunder has ceased, or
if amounts in the Reserve Fund are not sufficient to fully pay such losses, the
related Trust Fund will suffer a loss to the extent that the proceeds of the
liquidation proceedings, after reimbursement of the expenses of the Servicers or
the Master Servicer, as the case may be, are less than the principal balance of
the related Mortgage Loan or Contract. In addition, the Servicers and the Master
Servicer will be entitled to reimbursement of expenditures incurred by them in
connection with the restoration of a Mortgaged Property, Cooperative Dwelling or
Manufactured Home, such right of reimbursement being prior to the rights of the
Certificateholders to receive any payments under the Letter of Credit, or from
any related Insurance Proceeds, Liquidation Proceeds, amounts in the Reserve
Fund or any proceeds of Alternative Credit Support.
Under the Deposit Trust Agreement, the Trustee will be entitled to
deduct, from distributions of interest with respect to the Mortgage
Certificates, a specified percentage of the unpaid principal balance of each
Mortgage Certificate as servicing compensation. The Trustee shall be required to
pay all expenses, except as expressly provided in the Deposit Trust Agreement,
subject to limited reimbursement as provided therein.
EVIDENCE AS TO COMPLIANCE
The Master Servicer will deliver to the Depositor and the Trustee, on
or before the date specified in the Pooling and Servicing Agreement, an
Officer's Certificate stating that (i) a review of the activities of the Master
Servicer and the Servicers during the preceding calendar year and of its
performance under the Pooling and 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, the Master Servicer and each Servicer has fulfilled all
its obligations under the Pooling and Servicing Agreement and the applicable
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 servicing of the Mortgage Loans or Contract, conducted in accordance
with generally accepted accounting principles in the mortgage banking industry,
the servicing of the Mortgage Loans or Contract was conducted in compliance with
the provisions of the Pooling and Servicing Agreement and the Servicing
Agreements, except for such exceptions as such firm believes it is required to
report.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR AND THE TRUSTEE
The Master Servicer under each Pooling and Servicing Agreement will be
named in the applicable Prospectus Supplement. The entity acting as Master
Servicer may be an Unaffiliated Seller and have other normal business
relationships with the Depositor and/or affiliates of the Depositor and may be
an affiliate of the Depositor. In the event there is no Master Servicer under a
Pooling and Servicing Agreement, all servicing of Mortgage Loans or Contracts
will be performed by a Servicer pursuant to a Servicing Agreement.
The Master Servicer may not resign from its obligations and duties
under the Pooling and Servicing Agreement except upon a determination that its
duties thereunder are no longer permissible under applicable law. No such
resignation will become effective until the Trustee or a successor servicer has
assumed the Master Servicer's obligations and duties under the Pooling and
Servicing Agreement.
The Trustee under each Pooling and Servicing Agreement or Deposit
Trust Agreement 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 and/or its affiliates and with the Master
Servicer and/or its affiliates.
The Trustee may resign from its obligations under the Pooling and
Servicing Agreement at any time, in which event a successor trustee will be
appointed. In addition, the Depositor may remove the Trustee if the
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Trustee ceases to be eligible to act as Trustee under the Pooling and Servicing
Agreement or if the Trustee becomes insolvent, at which time the Depositor will
become obligated to appoint a successor Trustee. The Trustee may also be removed
at any time by the holders of Certificates evidencing voting rights aggregating
not less than 50% of the voting rights evidenced by the Certificates of such
Series. 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 may resign at any time from its obligations and duties
under the Deposit Trust Agreement by executing an instrument in writing
resigning as Trustee, filing the same with the Depositor, mailing a copy of a
notice of resignation to all Certificateholders then of record, and appointing a
qualified successor trustee. No such resignation will become effective until the
successor trustee has assumed the Trustee's obligations and duties under the
Deposit Trust Agreement.
Each Pooling and Servicing Agreement and Deposit Trust Agreement will
also provide that neither the Depositor nor the Master Servicer nor any
director, officer, employee or agent of the Depositor or the Master Servicer or
the Trustee, or any responsible officers of the Trustee will be under any
liability to 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 none
of the Depositor, the Master Servicer or the Trustee nor any such person will be
protected against, in the case of the Master Servicer and the Depositor, any
breach of representations or warranties made by them, and in the case of the
Master Servicer, the Depositor and the Trustee, against any liability that would
otherwise be imposed by reason of willful misfeasance, bad faith or negligence
in the performance of its duties or by reason of reckless disregard of its
obligations and duties thereunder. Each Pooling and Servicing Agreement and
Deposit Trust Agreement will further provide that the Depositor, the Master
Servicer and the Trustee and any director, officer and employee or agent of the
Depositor, the Master Servicer or the Trustee shall be entitled to
indemnification, by the Trust Fund in the case of the Depositor and Master
Servicer and by the Master Servicer in the case of the Trustee and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the applicable Agreement or the Certificates and in the
case of the Trustee, resulting from any error in any tax or information return
prepared by the Master Servicer or from the exercise of any power of attorney
granted pursuant to the Pooling and Servicing Agreement, other than any loss,
liability or expense related to any specific Mortgage Loan, Contract or Mortgage
Certificate (except any such loss, liability or expense otherwise reimbursable
pursuant to the applicable Agreement) and any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of their duties thereunder or by reason of reckless disregard of
their obligations and duties thereunder. In addition, each Agreement will
provide that neither the Depositor nor the Master Servicer, as the case may be,
will be under any obligation to appear in, prosecute or defend any legal action
that is not incidental to its duties under the Agreement and that in its opinion
may involve it in any expense or liability. The Depositor or the Master Servicer
may, however, in their discretion, undertake any such action deemed by them
necessary or desirable with respect to the applicable Agreement and the rights
and duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund, and the Master Servicer or the Depositor, as the case may be, will
be entitled to be reimbursed therefor out of the Certificate Account.
DEFICIENCY EVENT
To the extent a deficiency event is specified in the related
Prospectus Supplement, a deficiency event (a "Deficiency Event") with respect to
the Certificates of each Series may be defined in the Pooling and Servicing
Agreement as being the inability of the Trustee to distribute to holders of one
or more Classes of Certificates of such Series, in accordance with the terms
thereof and the Pooling and Servicing Agreement, any distribution of principal
or interest thereon when and as distributable, in each case because of the
insufficiency for such purpose of the funds then held in the related Trust Fund.
To the extent a deficiency event is specified in the related
Prospectus Supplement, upon the occurrence of a Deficiency Event, the Trustee is
required to determine whether or not the application on a monthly basis
(regardless of the frequency of regular Distribution Dates) of all future
scheduled payments on the Mortgage Loans, Contracts and Mortgage Certificates
included in the related Trust Fund and other amount receivable with
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respect to such Trust Fund towards payments on such Certificates in accordance
with the priorities as to distributions of principal and interest set forth in
such Certificates will be sufficient to make distributions of interest at the
applicable Interest Rates and to distribute in full the principal balance of
each such Certificate on or before the latest Final Distribution Date of any
outstanding Certificates of such Series.
To the extent a deficiency event is specified in the related
Prospectus Supplement, the Trustee will obtain and rely upon an opinion or
report of a firm of independent accountants of recognized national reputation as
to the sufficiency of the amounts receivable with respect to such Trust Fund to
make such distributions on the Certificates, which opinion or report will be
conclusive evidence as to such sufficiency. Pending the making of any such
determination, distributions on the Certificates shall continue to be made in
accordance with their terms.
To the extent a deficiency event is specified in the related
Prospectus Supplement, in the event that the Trustee makes a positive
determination, the Trustee will apply all amounts received in respect of the
related Trust Fund (after payment of fees and expenses of the Trustee and
accountants for the Trust Fund) to distributions on the Certificates of such
Series in accordance with their terms, except that such distributions shall be
made monthly and without regard to the amount of principal that would otherwise
be distributable on any Distribution Date. Under certain circumstances following
such positive determination, the Trustee may resume making distributions on such
Certificates expressly in accordance with their terms.
To the extent a deficiency event is specified in the related
Prospectus Supplement, if the Trustee is unable to make the positive
determination described above, the Trustee will apply all amounts received in
respect of the related Trust Fund (after payment of Trustee and accountants'
fees and expenses) to monthly distributions on the Certificates of such series
pro rata, without regard to the priorities as to distribution of principal set
forth in such Certificates, and such Certificates will, to the extent permitted
by applicable law, accrue interest at the highest Interest Rate borne by any
Certificate of such Series, or in the event any Class of such Series shall
accrue interest at a floating rate, at the weighted average Interest Rate,
calculated on the basis of the maximum interest rate applicable to the Class
having such floating interest rate and on the original principal amount of the
Certificates of that Class. In such event, the holders of a majority in
outstanding principal balance of such Certificates may direct the Trustee to
sell the related Trust Fund, any such direction being irrevocable and binding
upon the holders of all Certificates of such Series and upon the owners of the
residual interests in such Trust Fund. In the absence of such a direction, the
Trustee may not sell all or any portion of such Trust Fund.
EVENTS OF DEFAULT
Events of Default under each Pooling and Servicing Agreement will
consist of: (i) any failure to make a specified payment which continues
unremedied, in most cases, for five business days after the giving of written
notice; (ii) any failure by the Trustee, the Servicer or the Master Servicer, as
applicable, duly to observe or perform in any material respect any other of its
covenants or agreements in the Pooling and Servicing Agreement which failure
shall continue for 60 days (15 days in the case of a failure to pay the premium
for any insurance policy) or any breach of any representation and warranty made
by the Master Servicer or the Servicer, if applicable, which continues
unremedied for 120 days after the giving of written notice of such failure or
breach; (iii) certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings regarding the Master Servicer or a
Servicer, as applicable; and (iv) any lowering, withdrawal or notice of an
intended or potential lowering, of the outstanding rating of the Certificates by
the Rating Agency rating such Certificates because the existing or prospective
financial condition or mortgage loan servicing capability of the Master Servicer
is insufficient to maintain such rating.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default with respect to a Series of
Certificates remains unremedied, the Depositor, the Trustee or the holders of
Certificates evidencing not less than 25% of the voting rights evidenced by the
Certificates of such Series may terminate all of the rights and obligations of
the Master Servicer under the Pooling and Servicing Agreement and in and to the
Mortgage Loans and Contracts and the proceeds thereof, whereupon (subject to
applicable law regarding the Trustee's ability to make advances) the Trustee or,
if the Depositor so notifies the Trustee and the Master Servicer, the Depositor
or its designee, will succeed to all the
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responsibilities, duties and liabilities of the Master Servicer under such
Pooling and Servicing Agreement and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling or unable so to act, it may appoint, or
petition to a court of competent jurisdiction for the appointment of, a
successor master servicer. Pending such appointment, the Trustee (unless
prohibited by law from so acting) shall be obligated to act in such capacity.
The Trustee and such successor master servicer may agree upon the servicing
compensation to be paid to such successor, which in no event may be greater than
the compensation to the Master Servicer under the Pooling and Servicing
Agreement.
AMENDMENT
Each Pooling and Servicing Agreement may be amended by the Depositor,
the Master Servicer and the Trustee, without the consent of the
Certificateholders, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein that may be inconsistent with any other provision therein, or
(iii) 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 adversely affect in any
material respect the interests of any Certificateholder of the related Series.
The Pooling and Servicing Agreement may also be amended by the Depositor, the
Master Servicer and the Trustee with the consent of holders of Certificates
evidencing not less than 66 2/3% of the voting rights evidenced by the
Certificates, 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, delay the timing of or change the manner in which payments received
on or with respect to Mortgage Loans and Contracts are required to be
distributed with respect to 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 or Subclass of the Senior Certificates, if any, of a
Series in a manner other than that set forth in (i) above without the consent of
the holders of the Senior Certificates of such Subclass evidencing not less than
66 2/3% of such Class or Subclass, (iii) adversely affect in any material
respect the interests of the holders of the Subordinated Certificates of a
Series in a manner other than that set forth in (i) above without the consent of
the holders of Subordinated Certificates evidencing not less than 66 2/3% of
such Class or Subclass, or (iv) reduce the aforesaid percentage of the
Certificates, the holders of which are required to consent to such amendment,
without the consent of the holders of the Class affected thereby.
The Deposit Trust Agreement for a Series may be amended by the Trustee
and the Depositor without Certificateholder consent, to cure any ambiguity, to
correct or supplement any provision therein that may be inconsistent with any
other provision therein, or to make any other provisions with respect to matters
or questions arising thereunder that are not inconsistent with any other
provisions thereof, provided that such action will not, as evidenced by an
opinion of counsel, adversely affect the interests of any Certificateholders of
that Series in any material respect. The Deposit Trust Agreement for each Series
may also be amended by the Trustee and the Depositor with the consent of the
Holders of Certificates evidencing Percentage Interests aggregating not less
than 66 2/3% of each Class of the Certificates of such Series affected thereby
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of such Agreement or modifying in any manner
the rights of Certificateholders of that Series; provided, however, that no such
amendment may (i) reduce in any manner the amount of, or delay the timing of, or
change the manner in which payments received on Mortgage Certificates are
required to be distributed in respect of any Certificate, without the consent of
the Holder of such Certificate or (ii) reduce the aforesaid percentage of
Certificates the Holders of which are required to consent to any such amendment,
without the consent of the Holders of all Certificates of such Series then
outstanding.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a
Series of Certificates will terminate upon the earlier of (a) the repurchase of
all Mortgage Loans or Contracts and all property acquired by foreclosure of any
such Mortgage Loan or Contract and (b) the later of (i) the maturity or other
liquidation of the last Mortgage Loan or Contract subject thereto and the
disposition of all property acquired upon foreclosure of any such Mortgage Loan
or Contract and (ii) the payment to the Certificateholders of all
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amounts held by the Master Servicer and required to be paid to them pursuant to
such Pooling and Servicing Agreement. The obligations created by the Deposit
Trust Agreement for a Series of Certificates will terminate upon the
distribution to Certificateholders of all amounts required to be distributed to
them pursuant to such Deposit Trust Agreement. In no event, however, will the
trust created by either such Agreement continue beyond the expiration of 21
years from the death of the last survivor of certain persons identified therein.
For each Series of Certificates, the Master Servicer will give written notice of
termination of the applicable Agreement of each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination.
If so provided in the related Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates will permit, but not
require, the Depositor or such other person as may be specified in the
Prospectus Supplement to repurchase from the Trust Fund for such Series all
remaining Mortgage Loans or Contracts subject to the Pooling and Servicing
Agreement at a price specified in such Prospectus Supplement. In the event that
the Depositor elects to treat the related Trust Fund as a REMIC under the Code,
any such repurchase will be effected in compliance with the requirements of
Section 860F(a)(4) of the Code, in order to constitute a "qualifying
liquidation" thereunder. The exercise of any such right will effect early
retirement of the Certificates of that Series, but the right so to repurchase
may be effected only on or after the aggregate principal balance of the Mortgage
Loans or Contracts for such Series at the time of repurchase is less than a
specified percentage of the aggregate principal balance at the Cut-off Date for
the Series, or on or after the date set forth in the related Prospectus
Supplement.
CREDIT SUPPORT
Credit support for a Series of Certificates may be provided by one or
more Letters of Credit, the issuance of Subordinated Classes or Subclasses of
Certificates (which may, if so specified in the related Prospectus Supplement,
be issued in notional amounts) the provision for shifting interest credit
enhancement, the establishment of a Reserve Fund, the method of Alternative
Credit Support specified in the applicable Prospectus Supplement, or any
combination of the foregoing, in addition to, or in lieu of, the insurance
arrangements set forth below under Description of Insurance. The amount and
method of credit support will be set forth in the Prospectus Supplement with
respect to a Series of Certificates.
LETTERS OF CREDIT
The Letters of Credit, if any, with respect to a Series of
Certificates will be issued by the bank or financial institution specified in
the related Prospectus Supplement (the "L/C Bank"). The maximum obligation of
the L/C Bank under the Letter of Credit will be to honor requests for payment
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, equal to the percentage of the aggregate principal balance on the
related Cut-off Date of the Mortgage Loans or Contracts evidenced by each Series
(the "L/C Percentage") specified in the Prospectus Supplement for such Series.
The duration of coverage and the amount and frequency of any reduction in
coverage provided by the Letter of Credit with respect to a Series of
Certificates will be in compliance with the requirements established by the
Rating Agency rating such Series and will be set forth in the Prospectus
Supplement relating to such Series of Certificates. The amount available under
the Letter of Credit in all cases shall be reduced to the extent of the
unreimbursed payments thereunder. The obligations of the L/C Bank under the
Letter of Credit for each Series of Certificates will expire 30 days after the
latest of the scheduled final maturity dates of the Mortgage Loans or Contracts
in the related Mortgage Pool or Contract Pool or the repurchase of all Mortgage
Loans or Contracts in the Mortgage Pool or Contract Pool in the circumstances
specified above. See "Description of the Certificates--Termination."
Unless otherwise specified in the applicable Prospectus Supplement,
under the Pooling and Servicing Agreement, the Master Servicer will be required
not later than three business days prior to each Distribution Date to determine
whether a payment under the Letter of Credit will be necessary on the
Distribution Date and will, no later than the third business day prior to such
Distribution Date, advise the L/C Bank and the Trustee of its determination,
setting forth the amount of any required payment. On the Distribution Date, the
L/C Bank will be required to honor the Trustee's request for payment thereunder
in an amount equal to the lesser of (A) the remaining amount available under the
Letter of Credit and (B) the outstanding principal balances of any Liquidating
Loans to be assigned on such Distribution Date (together with accrued and unpaid
interest thereon at the related Mortgage Rate or APR to the related Due Date).
The proceeds of such payments under the Letter of Credit will be deposited into
the Certificate Account and will be distributed to Certificateholders, in the
manner specified in
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the related Prospectus Supplement, on such Distribution Date, except to the
extent of any unreimbursed Advances, servicing compensation due to the Servicers
and the Master Servicer and other amounts payable to the Depositor or the person
or entity named in the applicable Prospectus Supplement therefrom.
If at any time the L/C Bank makes a payment in the amount of the full
outstanding principal balance and accrued interest on a Liquidating Loan, it
will be entitled to receive an assignment by the Trustee of such Liquidating
Loan, and the L/C Bank will thereafter own such Liquidating Loan free of any
further obligation to the Trustee or the Certificateholders with respect
thereto. Payments made to the Certificate Account by the L/C Bank under the
Letter of Credit with respect to such a Liquidating Loan will be reimbursed to
the L/C Bank only from the proceeds (net of liquidation costs) of such
Liquidating Loan. The amount available under the Letter of Credit will be
increased to the extent it is reimbursed for such payments.
To the extent the proceeds of liquidation of a Liquidating Loan
acquired by the L/C Bank in the manner described in the preceding paragraph
exceed the amount of payments made with respect thereto, the L/C Bank will be
entitled to retain such proceeds as additional compensation for issuance of the
Letter of Credit.
Prospective purchasers of Certificates of a Series with respect to
which credit support is provided by a Letter of Credit must look to the credit
of the L/C Bank, to the extent of its obligations under the Letter of Credit, in
the event of default by Mortgagors or Obligors. If the amount available under
the Letter of Credit is exhausted, or the L/C Bank becomes insolvent, and
amounts in the Reserve Fund, if any, with respect to such Series are
insufficient to pay the entire amount of the loss and still be maintained at the
level specified in the related Prospectus Supplement (the "Required Reserve"),
the Certificateholders (in the priority specified in the related Prospectus
Supplement) will thereafter bear all risks of loss resulting from default by
Mortgagors or Obligors (including losses not covered by insurance or Alternative
Credit Support), and must look primarily to the value of the properties securing
defaulted Mortgage Loans or Contracts for recovery of the outstanding principal
and unpaid interest.
In the event that a Subordinated Class or Subclass of a Series of
Certificates is issued with a notional amount, the coverage provided by the
Letter of Credit with respect to such Series, and the terms and conditions of
such coverage, will be set forth in the related Prospectus Supplement.
SUBORDINATED CERTIFICATES
To the extent specified in the Prospectus Supplement with respect to a
Series of Certificates, credit support may be provided by the subordination of
the rights of the holders of one or more Classes or Subclasses of Certificates
to receive distributions with respect to the Mortgage Loans in the Mortgage Pool
or Contracts in the Contract Pool underlying such Series, or with respect to a
Subordinated Pool of mortgage loans or manufactured housing conditional sales
contracts and installment loan agreements, to the rights of the Senior
Certificateholders or holders of one or more Classes or Subclasses of
Subordinated Certificates of such Series to receive such distributions, to the
extent of the applicable Subordinated Amount. In such a case, credit support may
also be provided by the establishment of a Reserve Fund, as described below. The
Subordinated Amount, as described below, will be reduced by an amount equal to
Aggregate Losses. Aggregate Losses are defined in the related Pooling and
Servicing Agreement for any given period as the aggregate amount of
delinquencies, losses and other deficiencies in the amounts due to the holders
of the Certificates of one or more classes or Subclasses of such Series paid or
borne by the holders of one or more Classes or Subclasses of Subordinated
Certificates of such Series ("payment deficiencies"), but excluding any payments
of interest on any amounts originally due to the holders of the Certificates of
a Class or Subclass to which the applicable Class or Subclass of Subordinated
Certificates are subordinated on a previous Distribution Date, but not paid as
due, whether by way of withdrawal from the Reserve Fund (including, prior to the
time that the Subordinated Amount is reduced to zero, any such withdrawal of
amounts attributable to the Initial Deposit, if any), reduction in amounts
otherwise distributable to the Subordinated Certificateholders on any
Distribution Date or otherwise, less the aggregate amount of previous payment
deficiencies recovered by the related Trust Fund during such period in respect
of the Mortgage Loans or Contracts giving rise to such previous payment
deficiencies, including, without limitation, such recoveries resulting from the
receipt of delinquent principal and/or interest payments, Liquidation Proceeds
or Insurance Proceeds (net, in each case, of servicing compensation, foreclosure
costs and other servicing costs, expenses and unreimbursed Advances relating to
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such Mortgage Loans or Contracts). The Prospectus Supplement for each Series of
Certificates with respect to which credit support will be provided by one or
more Classes or Subclasses of Subordinated Certificates will set forth the
Subordinated Amount for such Series. If specified in the related Prospectus
Supplement, the Subordinated Amount will decline over time in accordance with a
schedule which will also be set forth in the related Prospectus Supplement.
SHIFTING INTEREST
If specified in the Prospectus Supplement for a Series of Certificates
for which credit enhancement is provided by shifting interest as described
herein, the rights of the holders of the Subordinated Certificates of a Series
to receive distributions with respect to the Mortgage Loans or Contracts in the
related Trust Fund or Subsidiary Trust will be subordinated to such right of the
holders of the Senior Certificates of the same Series to the extent described in
such Prospectus Supplement. This subordination feature 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 by the shifting interest subordination feature will be effected by
distributing to the holders of the Senior Certificates a disproportionately
greater percentage (the "Senior Prepayment Percentage") of Principal
Prepayments. The initial Senior Prepayment Percentage will be the percentage
specified in the related Prospectus Supplement and will decrease in accordance
with the schedule and subject to the conditions set forth in the Prospectus
Supplement. This disproportionate distribution of Principal Prepayments will
have the effect of accelerating the amortization of the Senior Certificates
while increasing the respective interest of the Subordinated Certificates in the
Mortgage Pool or Contract Pool. Increasing the respective interest of the
Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the benefits of the subordination
provided by the Subordinated Certificates.
SWAP AGREEMENT
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Trust will enter into or obtain an assignment of a swap
agreement or other similar agreement pursuant to which the Trust will have the
right to receive certain payments of interest (or other payments) as set forth
or determined as described therein. The Prospectus Supplement relating to a
Series of Certificates having the benefit of an interest rate swap agreement
will describe the material terms of such agreement and the particular risks
associated with the interest rate swap feature, including market and credit
risk, the effect of counterparty defaults and other risks, if any, addressed by
the rating. The Prospectus Supplement relating to such Series of Certificates
also will set forth certain information relating to the corporate status,
ownership and credit quality of the counterparty or counterparties to such swap
agreement.
RESERVE FUND
If so specified in the related Prospectus Supplement, credit support
with respect to a Series of Certificates may be provided by the establishment
and maintenance with the Trustee for such Series of Certificates, in trust, of a
Reserve Fund for such Series. Unless otherwise specified in the applicable
Prospectus Supplement, the Reserve Fund for a Series will not be included in the
Trust Fund for such Series. The Reserve Fund for each Series will be created by
the Depositor and shall be funded by the retention by the Master Servicer of
certain payments on the Mortgage Loans or Contracts, by the deposit with the
Trustee, in escrow, by the Depositor of a Subordinated Pool of mortgage loans or
manufactured housing conditional sales contracts and installment loan agreements
with the aggregate principal balance, as of the related Cut-off Date, set forth
in the related Prospectus Supplement, by any combination of the foregoing, or in
another manner specified in the related Prospectus Supplement. Following the
initial issuance of the Certificates of a Series and until the balance of the
Reserve Fund first equals or exceeds the Required Reserve, the Master Servicer
will retain specified distributions on the Mortgage Loans or Contracts and/or on
the mortgage loans or manufactured housing conditional sales contracts and
installment loan agreements in the Subordinated Pool otherwise distributable to
the holders of Subordinated Certificates and deposit such amounts in the Reserve
Fund. After the amounts in the Reserve Fund for a Series first equal or exceed
the applicable Required
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Reserve, the Master Servicer will retain such distributions and deposit so much
of such amounts in the Reserve Fund as may be necessary, after the application
of such distributions to amounts due and unpaid on the Certificates or on the
Certificates of such Series to which the applicable Class or Subclass of
Subordinated Certificates are subordinated and the reimbursement of unreimbursed
Advances and liquidation expenses, to maintain the Reserve Fund at the Required
Reserve. The balance in the Reserve Fund in excess of the Required Reserve shall
be paid to the applicable Class or Subclass of Subordinated Certificates, or to
another specified person or entity, as set forth in the related Prospectus
Supplement, and shall be unavailable thereafter for future distribution to
Certificateholders of either Class. The Prospectus Supplement for each Series
will set forth the amount of the Required Reserve applicable from time to time.
The Required Reserve may decline over time in accordance with a schedule which
will also be set forth in the related Prospectus Supplement.
Amounts held in the Reserve Fund for a Series from time to time will
continue to be the property of the Subordinated Certificateholders of the
Classes or Subclasses specified in the related Prospectus Supplement until
withdrawn from the Reserve Fund and transferred to the Certificate Account as
described below. If on any Distribution Date the amount in the Certificate
Account available to be applied to distributions on the Senior Certificates of
such Series, after giving effect to any Advances made by the Servicers or the
Master Servicer on such Distribution Date, is less than the amount required to
be distributed to such Senior Certificateholders (the "Required Distribution")
on such Distribution Date, the Master Servicer will withdraw from the Reserve
Fund and deposit into the Certificate Account the lesser of (i) the entire
amount on deposit in the Reserve Fund available for distribution to the Senior
Certificateholders (which amount will not in any event exceed the Required
Reserve) or (ii) the amount necessary to increase the funds in the Certificate
Account eligible for distribution to the Senior Certificateholders on such
Distribution Date to the Required Distribution; provided, however, that in no
event will any amount representing investment earnings on amounts held in the
Reserve Fund be transferred into the Certificate Account or otherwise used in
any manner for the benefit of the Senior Certificateholders. If so specified in
the applicable Prospectus Supplement, the balance, if any, in the Reserve Fund
in excess of the Required Reserve shall be released, to the Subordinated
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, whenever the Reserve Fund is less than the Required Reserve, holders
of the Subordinated Certificates of the applicable Class or Subclass will not
receive any distributions with respect to the Mortgage Loans or Contracts other
than amounts attributable to interest on the Mortgage Loans or Contracts after
the initial Required Reserve has been attained and amounts attributable to any
income resulting from investment of the Reserve Fund as described below. Whether
or not the amount of the Reserve Fund exceeds the Required Reserve on any
Distribution Date, the holders of the Subordinated Certificates of the
applicable Class or Subclass are entitled to receive from the Certificate
Account their share of the proceeds of any Mortgage Loan or Contract, or any
property acquired in respect thereof, repurchased by reason of defective
documentation or the breach of a representation or warranty pursuant to the
Pooling and Servicing Agreement. Amounts in the Reserve Fund shall be applied in
the following order:
(i) to the reimbursement of Advances determined by the Master
Servicer and the Servicers to be otherwise unrecoverable, other
than Advances of interest in connection with prepayments in
full, repurchases and liquidations, and the reimbursement of
liquidation expenses incurred by the Servicers and the Master
Servicer if sufficient funds for such reimbursement are not
otherwise available in the related Servicing Accounts and
Certificate Account;
(ii) to the payment to the holders of the Senior Certificates of
such Series of amounts distributable to them on the related
Distribution Date in respect of scheduled payments of principal
and interest due on the related Due Date to the extent that
sufficient funds in the Certificate Account are not available
therefor; and
(iii) to the payment to the holders of the Senior Certificates of
such Series of the principal balance or purchase price, as
applicable, of Mortgage Loans or Contracts repurchased,
liquidated or foreclosed during the period ending on the day
prior to the Due Date to which such distribution relates and
interest thereon at the related Pass-Through Rate, to the
extent that sufficient funds in the Certificate Account are not
available therefor.
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Amounts in the Reserve Fund in excess of the Required Reserve,
including any investment income on amounts therein, as set forth below, shall
then be released to the holders of the Subordinated Certificates, or to such
other person as is specified in the applicable Prospectus Supplement, as set
forth above.
Funds in the Reserve Fund for a Series shall be invested as provided
in the related Pooling and Servicing Agreement in certain types of eligible
investments. The earnings on such investments will be withdrawn and paid to the
holders of the applicable Class or Subclass of Subordinated Certificates in
accordance with their respective interests in the Reserve Fund in the priority
specified in the related Prospectus Supplement. Investment income in the Reserve
Fund is not available for distribution to the holders of the Senior Certificates
of such Series or otherwise subject to any claims or rights of the holders of
the applicable Class or Subclass of Senior Certificates. Eligible investments
for monies deposited in the Reserve Fund will be specified in the Pooling and
Servicing Agreement for a Series of Certificates for which a Reserve Fund is
established and in some instances will be limited to investments acceptable to
the Rating Agency rating the Certificates of such Series from time to time as
being consistent with its outstanding rating of such Certificates. Such eligible
investments will be limited, however, to obligations or securities that mature
at various time periods up to 30 days according to a schedule in the Pooling and
Servicing Agreement based on the current balance of the Reserve Fund at the time
of such investment or the contractual commitment providing for such investment.
The time necessary for the Reserve Fund of a Series to reach and
maintain the applicable Required Reserve at any time after the initial issuance
of the Certificates of such Series and the availability of amounts in the
Reserve Fund for distributions on such Certificates will be affected by the
delinquency, foreclosure and prepayment experience of the Mortgage Loans or
Contracts in the related Trust Fund and/or in the Subordinated Pool and
therefore cannot be accurately predicted.
PERFORMANCE BOND
If so specified in the related Prospectus Supplement, the Master
Servicer may be required to obtain a Performance Bond that would provide a
guarantee of the performance by the Master Servicer of one or more of its
obligations under the Agreement, including its obligation to advance delinquent
installments of principal and interest on Mortgage Loans or Contracts and its
obligation to repurchase Mortgage Loans or Contracts in the event of a breach by
the Master Servicer of a representation or warranty contained in the Agreement.
In the event that the outstanding credit rating of the obligor of the
Performance Bond is lowered by the Rating Agency, with the result that the
outstanding rating on the Certificates would be reduced by such Rating Agency,
the Master Servicer will be required to secure a substitute Performance Bond
issued by an entity with a rating sufficient to maintain the outstanding rating
on the Certificates or to deposit and maintain with the Trustee cash in the
amount specified in the applicable Prospectus Supplement.
DESCRIPTION OF INSURANCE
To the extent that the applicable Prospectus Supplement does not
expressly provide for a form of credit support specified above or for
Alternative Credit Support in lieu of some or all of the insurance mentioned
below, the following paragraphs on insurance shall apply with respect to the
Mortgage Loans included in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, each Manufactured Home that secures a
Contract will be covered by a standard hazard insurance policy and other
insurance policies to the extent described in the related Prospectus Supplement.
Any material changes in such insurance from the description that follows or the
description of any Alternative Credit Support will be set forth in the
applicable Prospectus Supplement.
PRIMARY MORTGAGE INSURANCE POLICIES
To the extent specified in the related Prospectus Supplement, each
Servicing Agreement will require the Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to each
Mortgage Loan that is secured by a Single Family Property covered by the
Servicing Agreement requiring such insurance and to act on behalf of the Insured
with respect to all actions required to be taken by the Insured under each such
Primary Mortgage Insurance Policy. Any primary mortgage insurance or primary
credit
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insurance policies relating to the Contracts underlying a Series of Certificates
will be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
amount of a claim for benefits under a Primary Mortgage Insurance Policy
covering a Mortgage Loan in the related Mortgage Pool (herein referred to as the
"Loss") will consist of the insured portion of the unpaid principal amount of
the covered Mortgage Loan (as described herein) and accrued and unpaid interest
thereon and reimbursement of certain expenses, less (i) all rents or other
payments collected or received by the Insured (other than the proceeds of hazard
insurance) that are derived from or in any way related to such Mortgaged
Property, (ii) hazard insurance proceeds in excess of the amount required to
restore such Mortgaged Property and which have not been applied to the payment
of such Mortgage Loan, (iii) amounts expended but not approved by the Primary
Mortgage Insurer, (iv) claim payments previously made by the Primary Mortgage
Insurer, and (v) unpaid premiums.
Unless otherwise specified in the related Prospectus Supplement, as
conditions precedent to the filing of or payment of a claim under a Primary
Mortgage Insurance Policy covering a Mortgage Loan in the related Mortgage Pool,
the Insured will be required to, in the event of default by the Mortgagor: (i)
advance or discharge (A) all hazard insurance premiums and (B) as necessary and
approved in advance by the Primary Mortgage Insurer, (1) real estate property
taxes, (2) all expenses required to preserve, repair and prevent waste to the
Mortgaged Property so as to maintain such Mortgaged Property in at least as good
a condition as existed at the effective date of such Primary Mortgage Insurance
Policy, ordinary wear and tear excepted, (3) property sales expenses, (4) any
outstanding liens (as defined in such Primary Mortgage Insurance Policy) on the
Mortgaged Property and (5) foreclosure costs, including court costs and
reasonable attorneys' fees; (ii) in the event of a physical loss or damage to
the Mortgaged Property, have restored and repaired the Mortgaged Property to at
least as good a condition as existed at the effective date of such Primary
Mortgage Insurance Policy, ordinary wear and tear excepted; and (iii) tender to
the Primary Mortgage Insurer good and merchantable title to and possession of
the mortgaged property.
Unless otherwise specified in the related Prospectus Supplement, other
provisions and conditions of each Primary Mortgage Insurance Policy covering a
Mortgage Loan in the related Mortgage Pool generally will provide that: (a) no
change may be made in the terms of such Mortgage Loan without the consent of the
Primary Mortgage Insurer; (b) written notice must be given to the Primary
Mortgage Insurer within 10 days after the Insured becomes aware that a Mortgagor
is delinquent in the payment of a sum equal to the aggregate of two scheduled
monthly payments due under such Mortgage Loan or that any proceedings affecting
the Mortgagor's interest in the Mortgaged Property securing such Mortgage Loan
have commenced, and thereafter the Insured must report monthly to the Primary
Mortgage Insurer the status of any such Mortgage Loan until such Mortgage Loan
is brought current, such proceedings are terminated or a claim is filed; (c) the
Primary Mortgage Insurer will have the right to purchase such Mortgage Loan, at
any time subsequent to the 10 days' notice described in (b) above and prior to
the commencement of foreclosure proceedings, at a price equal to the unpaid
principal amount of the Mortgage Loan, plus accrued and unpaid interest thereon
and reimbursable amounts expended by the Insured for the real estate taxes and
fire and extended coverage insurance on the Mortgaged Property for a period not
exceeding 12 months, and less the sum of any claim previously paid under the
Primary Mortgage Insurance Policy and any due and unpaid premiums with respect
to such policy; (d) the Insured must commence proceedings at certain times
specified in the Primary Mortgage Insurance Policy and diligently proceed to
obtain good and merchantable title to and possession of the Mortgaged Property;
(e) the Insured must notify the Primary Mortgage Insurer of the price specified
in (c) above at least 15 days prior to the sale of the Mortgaged Property by
foreclosure, and bid such amount unless the Mortgage Insurer specifies a lower
or higher amount; and (f) the Insured may accept a conveyance of the Mortgaged
Property in lieu of foreclosure with written approval of the Mortgage Insurer
provided the ability of the Insured to assign specified rights to the Primary
Mortgage Insurer are not thereby impaired or the specified rights of the Primary
Mortgage Insurer are not thereby adversely affected.
Unless otherwise specified in the related Prospectus Supplement, the
Primary Mortgage Insurer will be required to pay to the Insured either: (1) the
insured percentage of the Loss; or (2) at its option under certain of the
Primary Mortgage Insurance Policies, the sum of the delinquent monthly payments
plus any advances made by the Insured, both to the date of the claim payment,
and thereafter, monthly payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
Insured until the earlier of (A) the date the Mortgage Loan would have been
discharged in full if the default had not occurred or (B)
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an approved sale. Any rents or other payments collected or received by the
Insured which are derived from or are in any way related to the Mortgaged
Property will be deducted from any claim payment.
FHA INSURANCE AND VA GUARANTEES
The FHA is responsible for administering various federal programs,
including mortgage insurance, authorized under the National Housing Act, as
amended, and the United States Housing Act of 1937, as amended. Any FHA
Insurance or VA Guarantees relating to Contracts underlying a Series of
Certificates will be described in the related Prospectus Supplement.
The insurance premiums for FHA Loans are collected by HUD approved
lenders or by the Servicers of such FHA Loans and are paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted FHA Loan to HUD. With respect to a defaulted FHA Loan, the
Servicer of such FHA Loan will be limited in its ability to initiate foreclosure
proceedings. When it is determined, either by the Servicer or HUD, that default
was caused by circumstances beyond the Mortgagor's control, the Servicer will be
expected to make an effort to avoid foreclosure by entering, if feasible, into
one of a number of available forms of forbearance plans with the Mortgagor. Such
plans may involve the reduction or suspension of scheduled mortgage payments for
a specified period, with such payments to be made upon or before the maturity
date of the mortgage, or the recasting of payments due under the mortgage up to
or beyond the scheduled maturity date. In addition, when a default caused by
such circumstances is accompanied by certain other criteria, HUD may provide
relief by making payments to the Servicer of such Mortgage Loan in partial or
full satisfaction of amounts due thereunder (which payments are to be repaid by
the Mortgagor to HUD) or by accepting assignment of the Mortgage Loan from the
Servicer. With certain exceptions, at least three full monthly installments must
be due and unpaid under the Mortgage Loan, and HUD must have rejected any
request for relief from the Mortgagor before the Servicer may initiate
foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or
in debentures issued by HUD. Presently, claims are being paid in cash, and
claims have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Servicer of each FHA Loan in a Mortgage Pool will
be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the principal amount of
the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to
the entire unpaid principal balance of the defaulted FHA Loan, adjusted to
reimburse the Servicer of such FHA Loan for certain costs and expenses and to
deduct certain amounts received or retained by such Servicer after default. When
entitlement to insurance benefits results from foreclosure (or other acquisition
of possession) and conveyance to HUD, the Servicer is compensated for no more
than two-thirds of its foreclosure costs, and is compensated for interest
accrued and unpaid prior to such date in general only to the extent it was
allowed pursuant to a forbearance plan approved by HUD. When entitlement to
insurance benefits results from assignment of the FHA Loan to HUD, the insurance
payment includes full compensation for interest accrued and unpaid to the
assignment date. The insurance payment itself, upon foreclosure of an FHA Loan,
bears interest from a date 30 days after the mortgagor's first uncorrected
failure to perform any obligation or make any payment due under the Mortgage
Loan and, upon assignment, from the date of assignment, to the date of payment
of the claim, in each case at the same interest rate as the applicable HUD
debenture interest rate as described above.
The maximum guarantee that may be issued by the VA under a VA Loan is
50% of the principal amount of the VA Loan if the principal amount of the
Mortgage Loan is $45,000 or less, the lesser of $36,000 and 40% if the principal
amount of the VA Loan if the principal amount of such VA Loan is greater than
$45,000 but less than or equal to $144,000, and the lesser of $46,000 and 25% of
the principal amount of the Mortgage Loan if the principal amount of the
Mortgage Loan is greater than $144,000. The liability on the guarantee is
reduced or increased pro rata with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guarantee exceed
the amount of the original guarantee. The VA may, at its option and without
regard to the guarantee, make full payment to a mortgage holder of unsatisfied
indebtedness on a Mortgage upon its assignment to the VA.
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With respect to a defaulted VA Loan, the Servicer is, absent
exceptional circumstances, authorized to announce its intention to foreclose
only when the default has continued for three months. Generally, a claim for the
guarantee is submitted after liquidation of the Mortgaged Property.
The amount payable under the guarantee will be the percentage of the
VA Loan originally guaranteed applied to indebtedness outstanding as of the
applicable date of computation specified in the VA regulations. Payments under
the guarantee will be equal to the unpaid principal amount of the VA Loan,
interest accrued on the unpaid balance of the VA Loan to the appropriate date of
computation and limited expenses of the mortgagee, but in each case only to the
extent that such amounts have not been recovered through liquidation of the
Mortgaged Property. The amount payable under the guarantee may in no event
exceed the amount of the original guarantee.
STANDARD HAZARD INSURANCE POLICIES ON MORTGAGE LOANS
The Standard Hazard Insurance Policies covering the Mortgage Loans in
a Mortgage Pool will provide for coverage at least equal to the applicable state
standard form of fire insurance policy with extended coverage. In general, the
standard form of fire and extended coverage policy 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, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive.
The Standard Hazard Insurance Policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the Cooperative Dwelling relating to any
Cooperative Loan. Generally, the cooperative corporation itself is responsible
for maintenance of hazard insurance for the property owned by the cooperative
and the tenant-stockholders of that cooperative do not maintain individual
hazard insurance policies. To the extent, however, that a Cooperative and the
related borrower on a Cooperative Loan do not maintain such insurance or do not
maintain adequate coverage or any insurance proceeds are not applied to the
restoration of damaged property, any damage to such borrower's Cooperative
Dwelling or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Loan to the extent not covered by other
credit support.
Any losses incurred with respect to Mortgage Loans due to uninsured
risks (including earthquakes, mudflows and, with respect to Mortgaged Properties
located other than in HUD designated flood areas, floods) or insufficient hazard
insurance proceeds and any hazard losses incurred with respect to Cooperative
Loans could affect distributions to the Certificateholders.
With respect to Mortgage Loans secured by Multifamily Property,
certain additional insurance policies may be required with respect to the
Multifamily Property; for example, general liability insurance for bodily injury
and property damage, steam boiler coverage where a steam boiler or other
pressure vessel is in operation, and
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rent loss insurance to cover income losses following damage or destruction of
the Mortgaged Property. The related Prospectus Supplement will specify the
required types and amounts of additional insurance that may be required in
connection with Mortgage Loans secured by Multifamily Property and will describe
the general terms of such insurance and conditions to payment thereunder.
STANDARD HAZARD INSURANCE POLICIES ON THE MANUFACTURED HOMES
The terms of the Pooling and Servicing Agreement will require the
Master Servicer to cause to be maintained with respect to each Contract one or
more Standard Hazard Insurance Policies which provide, at a minimum, the same
coverage as a standard form file and extended coverage insurance policy that is
customary for manufactured housing, issued by a company authorized to issue such
policies in the state in which the Manufactured Home is located, and in an
amount which is not less than the maximum insurable value of such Manufactured
Home or the principal balance due from the Obligor on the related Contract,
whichever is less; provided, however, that the amount of coverage provided by
each Standard Hazard Insurance Policy shall be sufficient to avoid the
application of any co-insurance clause contained therein. When a Manufactured
Home's location was, at the time of origination of the related Contract, within
a federally designated flood area, the Master Servicer also shall cause such
flood insurance to be maintained, which coverage shall be at least equal to the
minimum amount specified in the preceding sentence or such lesser amount as may
be available under the federal flood insurance program. Each Standard Hazard
Insurance Policy caused to be maintained by the Master Servicer shall contain a
standard loss payee clause in favor of the Master Servicer and its successors
and assigns. If any Obligor is in default in the payment of premiums on its
Standard Hazard Insurance Policy or Policies, the Master Servicer shall pay such
premiums out of its own funds, and may add separately such premium to the
Obligor's obligation as provided by the Contract, but may not add such premium
to the remaining principal balance of the Contract.
The Master Servicer may maintain, in lieu of causing individual
Standard Hazard Insurance Policies to be maintained with respect to each
Manufactured Home, and shall maintain, to the extent that the related Contract
does not require the Obligor to maintain a Standard Hazard Insurance Policy with
respect to the related Manufactured Home, one or more blanket insurance policies
covering losses on the Obligor's interest in the Contracts resulting from the
absence or insufficiency of individual Standard Hazard Insurance Policies. Any
such blanket policy shall be substantially in the form and in the amount carried
by the Master Servicer as of the date of the Pooling and Servicing Agreement.
The Master Servicer shall pay the premium for such policy on the basis described
therein and shall pay any deductible amount with respect to claims under such
policy relating to the Contracts. If the insurer thereunder shall cease to be
acceptable to the Master Servicer, the Master Servicer shall exercise its best
reasonable efforts to obtain from another insurer a replacement policy
comparable to such policy.
If the Master Servicer shall have repossessed a Manufactured Home on
behalf of the Trustee, the Master Servicer shall either (i) maintain at its
expense hazard insurance with respect to such Manufactured Home or (ii)
indemnify the Trustee against any damage to such Manufactured Home prior to
resale or other disposition.
POOL INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master
Servicer will obtain a Pool Insurance Policy for a Mortgage Pool underlying
Certificates of such Series. Such Pool Insurance Policy will be issued by the
Pool Insurer named in the applicable Prospectus Supplement. Any Pool Insurance
Policy for a Contract Pool underlying a Series of Certificates will be described
in the related Prospectus Supplement. Each Pool Insurance Policy will cover any
loss (subject to the limitations described below) by reason of default to the
extent the related Mortgage Loan is not covered by any Primary Mortgage
Insurance Policy, FHA insurance or VA guarantee. The amount of the Pool
Insurance Policy, if any, with respect to a Series will be specified in the
related Prospectus Supplement. A Pool Insurance Policy, however, will not be a
blanket policy against loss, because claims thereunder may only be made for
particular defaulted Mortgage Loans and only upon satisfaction of certain
conditions precedent described below. Any Pool Insurance Policies relating to
the Contracts will be described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Pool Insurance Policy will provide that as a condition precedent to the payment
of any claim the Insured will be required (i) to advance hazard
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insurance premiums on the Mortgaged Property securing the defaulted Mortgage
Loan; (ii) to advance, as necessary and approved in advance by the Pool Insurer,
(a) real estate property taxes, (b) all expenses required to preserve and repair
the Mortgaged Property, to protect the Mortgaged Property from waste, so that
the Mortgaged Property is in at least as good a condition as existed on the date
upon which coverage under the Pool Insurance Policy with respect to such
Mortgaged Property first became effective (ordinary wear and tear excepted), (c)
property sales expenses, (d) any outstanding liens on the Mortgaged Property and
(e) foreclosure costs including court costs and reasonable attorneys' fees; and
(iii) if there has been physical loss or damage to the Mortgaged Property, to
restore the Mortgaged Property to its condition (reasonable wear and tear
excepted) as of the issue date of the Pool Insurance Policy. It also will be a
condition precedent to the payment of any claim under the Pool Insurance Policy
that the Insured maintain a Primary Mortgage Insurance Policy that is acceptable
to the Pool Insurer on all Mortgage Loans that have Loan-to-Value Ratios at the
time of origination in excess of 80%. FHA insurance and VA guarantees will be
deemed to be an acceptable Primary Mortgage Insurance Policy under the Pool
Insurance Policy. Assuming satisfaction of these conditions, the Pool Insurer
will pay to the Insured the amount of loss, determined as follows: (i) the
amount of the unpaid principal balance of the Mortgage Loan immediately prior to
the Approved Sale (as described below) of the Mortgaged Property, (ii) the
amount of the accumulated unpaid interest on such Mortgage Loan to the date of
claim settlement at the applicable Mortgage Rate and (iii) advances as described
above, less (a) all rents or other payments (excluding proceeds of fire and
extended coverage insurance) collected or received by the Insured, which are
derived from or in any way related to the Mortgaged Property, (b) amounts paid
under applicable fire and extended coverage policies which are in excess of the
cost of restoring and repairing the Mortgaged Property and which have not been
applied to the payment of the Mortgage Loan, (c) any claims payments previously
made by the Pool Insurer on the Mortgage Loan, (d) due and unpaid premiums
payable with respect to the Pool Insurance Policy and (e) all claim payments
received by the Insured pursuant to any Primary Mortgage Insurance Policy. An
"Approved Sale" is (1) a sale of the Mortgaged Property acquired because of a
default by the Mortgagor to which the Pool Insurer has given prior approval, (2)
a foreclosure or trustee's sale of the Mortgaged Property at a price exceeding
the maximum amount specified by the Pool Insurer, (3) the acquisition of the
Mortgaged Property under the Primary Insurance Policy by the Primary Mortgage
Insurer or (4) the acquisition of the Mortgaged Property by the Pool Insurer.
The Pool Insurer must be provided with good and merchantable title to the
Mortgaged Property as a condition precedent to the payment of any Loss. If any
Mortgaged Property securing a defaulted Mortgage Loan is damaged and the
proceeds, if any, from the related Standard Hazard Insurance Policy or the
applicable Special Hazard Insurance Policy are insufficient to restore the
Mortgaged Property to a condition sufficient to permit recovery under the Pool
Insurance Policy, the Master Servicer or the Servicer of the related Mortgage
Loan will not be required to expend its own funds to restore the damaged
Mortgaged Property unless it is determined (A) that such restoration will
increase the proceeds to the Certificateholders of the related Series on
liquidation of the Mortgage Loan, after reimbursement of the expenses of the
Master Servicer or the Servicer, as the case may be, and (B) that such expenses
will be recoverable by it through payments under the Letter of Credit, if any,
with respect to such Series, Liquidation Proceeds, Insurance Proceeds, amounts
in the Reserve Fund, if any, or payments under any Alternative Credit Support,
if any, with respect to such Series.
No Pool Insurance Policy will insure (and many Primary Mortgage
Insurance Policies may not insure) against loss sustained by reason of a default
arising from, among other things, (i) fraud or negligence in the origination or
servicing of a Mortgage Loan, including misrepresentation by the Mortgagor, the
Unaffiliated Seller, the Originator or other persons involved in the origination
thereof, (ii) the exercise by the Insured of its right to call the Mortgage
Loan, or the term of the Mortgage Loan is shorter than the amortization period
and the defaulted payment is for an amount more than twice the regular periodic
payments of principal and interest for such Mortgage Loan, or (iii) the exercise
by the Insured of a "due-on-sale" clause or other similar provision in the
Mortgage Loan; provided, in either case (ii) or (iii), such exclusion shall not
apply if the Insured offers a renewal or extension of the Mortgage Loan or a new
Mortgage Loan at the market rate in an amount not less than the then outstanding
principal balance with no decrease in the amortization period. A failure of
coverage attributable to one of the foregoing events might result in a breach of
the Master Servicer's insurability representation described under "Description
of the Certificates--Assignment of Mortgage Loans" above, and in such event,
subject to the limitations described therein, might give rise to an obligation
on the part of the Master Servicer to purchase the defaulted Mortgage Loan if
the breach materially and adversely affects the interests of the
Certificateholders of the related Series and cannot be cured by the Master
Servicer. Depending upon the nature of the event, a breach of representation
made by the Depositor or an Unaffiliated Seller may also have occurred. Such a
breach, if it materially and adversely affects the interests of the
Certificateholders of such Series and cannot be cured, would give rise to a
repurchase obligation on
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the part of the Unaffiliated Seller as more fully described under "The Trust
Fund--Mortgage Loan Program--Representations by Unaffiliated Sellers;
Repurchases" and "Description of the Certificates--Assignment of Mortgage
Loans."
The original amount of coverage under the Pool Insurance Policy will
be reduced over the life of the Certificates of the related Series by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed Mortgaged
Properties covered thereby. The amount of claims paid will include certain
expenses incurred by the Master Servicer or by the Servicer of the defaulted
Mortgage Loan as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. Accordingly, if aggregate net claims paid under a
Pool Insurance Policy reach the original policy limit, coverage under the Pool
Insurance Policy will lapse and any further losses will be borne by the holders
of the Certificates of such Series. In addition, unless the Master Servicer or
the related Servicer could determine that an Advance in respect of a delinquent
Mortgage Loan would be recoverable to it from the proceeds of the liquidation of
such Mortgage Loan or otherwise, neither such Servicer nor the Master Servicer
would be obligated to make an Advance respecting any such delinquency, since the
Advance would not be ultimately recoverable to it from either the Pool Insurance
Policy or from any other related source. See "Description of the Certificates--
Advances."
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the related Prospectus Supplement, the Master
Servicer shall obtain a Special Hazard Insurance Policy for the Mortgage Pool
underlying a Series of Certificates. Any Special Hazard Insurance Policies for a
Contract Pool underlying a Series of Certificates will be described in the
related Prospectus Supplement. The Special Hazard Insurance Policy for the
Mortgage Pool underlying the Certificates of a Series will be issued by the
Special Hazard Insurer named in the applicable Prospectus Supplement. Each
Special Hazard Insurance Policy will, subject to the limitations described
below, protect against loss by reason of damage to Mortgaged Properties caused
by certain hazards (including vandalism and earthquakes and, except where the
Mortgagor is required to obtain flood insurance, floods and mudflows) not
insured against under the standard form of hazard insurance policy for the
respective states in which the Mortgaged Properties are located. See
"Description of the Certificates--Maintenance of Insurance Policies" and "--
Standard Hazard Insurance." The Special Hazard Insurance Policy will not cover
losses occasioned by war, certain governmental actions, nuclear reaction and
certain other perils. Coverage under a Special Hazard Insurance Policy will be
at least equal to the amount set forth in the related Prospectus Supplement.
Subject to the foregoing limitations, each Special Hazard Insurance
Policy will provide that, when there has been damage to the Mortgaged Property
securing a defaulted Mortgage Loan and to the extent such damage is not covered
by the Standard Hazard Insurance Policy, if any, maintained by the Mortgagor,
the Master Servicer or the Servicer, the Special Hazard Insurer will pay the
lesser of (i) the cost of repair or replacement of such Mortgaged Property or
(ii) upon transfer of such Mortgaged Property to the Special Hazard Insurer, the
unpaid balance of such Mortgage Loan at the time of acquisition of such
Mortgaged Property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement (excluding late charges and penalty
interest) and certain expenses incurred in respect of such Mortgaged Property.
No claim may be validly presented under a Special Hazard Insurance Policy unless
(i) hazard insurance on the Mortgaged Property has been kept in force and other
reimbursable protection, preservation and foreclosure expenses have been paid
(all of which must be approved in advance as necessary by the insurer) and (ii)
the insured has acquired title to the Mortgaged Property as a result of default
by the Mortgagor. If the sum of the unpaid principal balance plus accrued
interest and certain expenses is paid by the Special Hazard Insurer, the amount
of further coverage under the related Special Hazard Insurance Policy will be
reduced by such amount less any net proceeds from the sale of the Mortgaged
Property. Any amount paid as the cost of repair of the Mortgaged Property will
further reduce coverage by such amount.
The terms of the Pooling and Servicing Agreement will require the
Master Servicer to maintain the Special Hazard Insurance Policy in full force
and effect throughout the term of the Pooling and Servicing Agreement. If a Pool
Insurance Policy is required to be maintained pursuant to the Pooling and
Servicing Agreement, the Special Hazard Insurance Policy will be designed to
permit full recoveries under the Pool Insurance Policy in circumstances where
such recoveries would otherwise be unavailable because Mortgaged Property has
been damaged by a cause not insured against by a Standard Hazard Insurance
Policy. In such event the Pooling and
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Servicing Agreement will provide that, if the related Pool Insurance Policy
shall have terminated or been exhausted through payment of claims, the Master
Servicer will be under no further obligation to maintain such Special Hazard
Insurance Policy.
MORTGAGOR BANKRUPTCY BOND
In the event of a personal bankruptcy of a Mortgagor, a bankruptcy
court may establish the value of the related Mortgaged Property or Cooperative
Dwelling at an amount less than the then outstanding principal balance of the
related Mortgage Loan. The amount of the secured debt could be reduced to such
value, and the holder of such Mortgage Loan thus would become an unsecured
creditor to the extent the outstanding principal balance of such Mortgage Loan
exceeds the value so assigned to the Mortgaged Property or Cooperative Dwelling
by the bankruptcy court. In addition, certain other modifications of the terms
of a Mortgage Loan can result from a bankruptcy proceeding. If so specified in
the related Prospectus Supplement, losses resulting from a bankruptcy proceeding
affecting the Mortgage Loans in a Mortgage Pool 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 that rated such Series). Any
Mortgagor Bankruptcy Bond will provide for coverage in an amount acceptable to
the Rating Agency rating the Certificates of the related Series, which will be
set forth in the related Prospectus Supplement. Subject to the terms of the
Mortgagor Bankruptcy Bond, the issuer thereof may have the right to purchase any
Mortgage Loan with respect to which a payment or drawing has been made or may be
made for an amount equal to the outstanding principal amount of such Mortgage
Loan plus accrued and unpaid interest thereon. The coverage of the Mortgagor
Bankruptcy Bond with respect to a Series of Certificates may be reduced as long
as any such reduction will not result in a reduction of the outstanding rating
of the Certificates of such Series by the Rating Agency rating such Series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS AND CONTRACTS
The following discussion contains summaries of certain legal aspects
of mortgage loans and manufactured housing conditional sales contracts and
installment loan agreements 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 nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Mortgage Loans or Contracts is situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans and Contracts.
THE MORTGAGE LOANS
General
The Mortgage Loans (other than the Cooperative Loans) comprising or
underlying the Trust Assets for a Series will be secured by either first
mortgages or deeds of trust, depending upon the prevailing practice in the state
in which the underlying property is located. The filing of a mortgage, deed of
trust or deed to secure debt creates a lien or title interest upon the real
property covered by such instrument and represents the security for the
repayment of an obligation that is customarily evidenced by a promissory note.
It is not prior to the lien for real estate taxes and assessments or other
charges imposed under governmental police powers. Priority with respect to such
instruments depends on their terms, the knowledge of the parties to the mortgage
and generally on the order of recording with the applicable state, county or
municipal office. There are two parties to a mortgage: the mortgagor, who is the
borrower and homeowner, and the mortgagee, who is the lender. In a mortgage
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: the borrower-homeowner 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 to 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.
Though a deed of trust may also be foreclosed by judicial action,
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 upon a default by the borrower under the terms
of the note or deed of trust. In some states, the trustee must record a notice
of default and send a copy to the borrower-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 in the real property, including any junior lienholders. If
the loan 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 a number of factors, including the difficulty a
potential buyer at the sale would have in determining the exact status of title
and the fact that 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 a credit bid less than or
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.
Cooperative Loans
If specified in the Prospectus Supplement relating to a Series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property that it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
A corporation that is entitled to be treated as a housing cooperative
under the Code owns all the real property or some interest therein sufficient to
permit it to own the building and all separate dwelling units therein.
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The cooperative is directly responsible for property management and, in most
cases, payment of real estate taxes and hazard and liability insurance. If there
is a blanket mortgage or mortgages on the cooperative apartment building and/or
underlying land, as is generally the case, or an underlying lease of the land,
as is the case in some instances, the cooperative, as property mortgagor, is
also responsible for meeting these mortgage or rental obligations. The interest
of the occupancy under proprietary leases or occupancy agreements as to which
that cooperative is the landlord are generally subordinate to the interest of
the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the cooperative is unable to meet the payment obligations (i) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure by
the holder of a blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual tenant-
stockholder of cooperative shares including, in the case of the Cooperative
Loans, the collateral securing the Cooperative Loans. Similarly, the termination
of the land lease by its holder could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual tenant-
stockholder of the cooperative shares or, in the case of the Cooperative Loans,
the collateral securing the Cooperative Loans.
Each cooperative is owned by tenant-stockholders who, through
ownership of stock or shares in the corporation, receive proprietary leases or
occupancy agreements which confer exclusive rights to occupy specific units.
Generally, a tenant-stockholder of a cooperative must make a monthly payment to
the cooperative representing such tenant-stockholder's pro rata share of the
cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a cooperative and accompanying occupancy rights are financed through
a cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement, and a
financing statement covering the proprietary lease or occupancy agreement and
the cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "--Realizing upon Cooperative Loan Security" below.
Tax Aspects of Cooperative Loans
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of
the Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, such section
requires, among other things, that at least 80% of the gross income of the
corporation be derived from its tenant-stockholder. By virtue of this
requirement the status of a corporation for purposes of Section 216(b)(1) of the
Code must be determined on a year-to-year basis. Consequently, there can be no
assurance that cooperatives relating to the Cooperative Loans will qualify under
such section for any particular year. In the event that such a cooperative fails
to qualify for one or more years, the value of the collateral securing any
related Cooperative Loans could be significantly impaired because no deduction
would be allowable to tenant-stockholders under Section 216(a) of the Code with
respect to those years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
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Realizing upon Cooperative Loan Security
The cooperative shares and proprietary lease or occupancy agreement
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. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled 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. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. The lender and the cooperative will typically enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment subject,
however, to the cooperative's right to sums due under such proprietary lease or
occupancy agreement or that have become liens on the shares relating to the
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the 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 the lender
succeeds to the tenant-shareholder's shares and proprietary lease or occupancy
agreement as the result of realizing upon the collateral for 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. Such approval or consent is usually based on the
prospective purchaser's income and net worth, among other factors, and may
significantly reduce the number of potential purchasers, which could limit the
ability of the lender to sell and realize upon the value of the collateral.
Generally, the lender is not limited in any rights it may have to dispossess the
tenant-shareholders.
The terms of the Cooperative Loans do not require either the Mortgagor
or the Cooperative to obtain title insurance of any type. Consequently, the
existence of any prior liens or other imperfections of title also may adversely
affect the marketability of the Cooperative Dwelling in the event of
foreclosure.
In New York, lenders generally realize upon the pledged shares and
proprietary lease or occupancy agreement given to secure a cooperative loan by
public sale in accordance with the provisions of Article 9 of the Uniform
Commercial Code (the "UCC") and the security agreement relating to those shares.
Article 9 of the UCC requires that a sale be conducted in a "commercially
reasonable" manner. Whether a sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the sale. 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
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indebtedness remains unpaid, the tenant-stockholder is generally responsible for
the deficiency. See "Anti-Deficiency Legislation and Other Limitations on
Lenders" below.
In the case of foreclosure on a Multifamily Property that was
converted from a rental building to a building owned by a cooperative housing
corporation under a non-eviction plan, some states require that a purchaser at a
foreclosure sale take the property subject to rent control and rent
stabilization laws which apply to certain tenants who elected to remain in the
building but not to purchase shares in the cooperative when the building was so
converted. Any such restrictions could adversely affect the number of potential
purchasers for and the value of such property.
Rights of Redemption
In some states, after a sale pursuant to a deed of trust 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 certain other states, this right of redemption applies only
to a sale following judicial foreclosure, and not a sale pursuant to a non-
judicial power of 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 statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser from the lender
subsequent to foreclosure or sale under a deed of trust. Consequently, the
practical effect of the redemption right is to force the lender to retain the
property and pay the expenses of ownership until the redemption period has run.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory restrictions that limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage.
In some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or a
non-judicial sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the amount due to the lender and the net amount realized upon the
foreclosure sale. Other statutes prohibit a deficiency judgment where the loan
proceeds were used to purchase a dwelling occupied by the borrower.
Some state statutes may require the beneficiary or mortgagee to
exhaust the security afforded under a deed of trust or mortgage by foreclosure
in an attempt to satisfy the full debt before bringing a personal action against
the borrower. In certain other states, the lender has the option of bringing a
personal action against the borrower on the debt without first exhausting such
security; however, in some of these states, the lender, following judgment on
such personal action, may be deemed to have elected a remedy and may be
precluded from exercising remedies with respect to the security. Consequently,
the practical effect of the election requirement, when applicable, is that
lenders will usually proceed first against the security rather than bringing a
personal action against the borrower.
Other statutory provisions may limit any deficiency judgment against
the former borrower following a foreclosure sale to the excess of the
outstanding debt over the fair market value of the property at the time of such
sale. The purpose of these statutes is 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 foreclosure sale.
In some states, exceptions to the anti-deficiency statutes are
provided for in certain instances where the value of the lender's security has
been impaired by acts or omissions of the borrower, for example, in the event of
waste of the property.
In the case of cooperative loans, lenders generally realize on
cooperative shares and the accompanying proprietary lease or occupancy agreement
given to secure a cooperative loan under Article 9 of the UCC. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the
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Cooperative and the related proprietary lease or occupancy agreement) was
conducted in a commercially reasonable manner.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the federal bankruptcy laws,
the federal Soldiers' and Sailors' Civil Relief Act of 1940 and state laws
affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to realize upon its security. For example, in a Chapter
13 proceeding under the federal Bankruptcy Code, when a court determines that
the value of a home is less than the principal balance of the loan, the court
may prevent a lender from foreclosing on the home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the value
of the home as it exists at the time of the proceeding, leaving the lender as a
general unsecured creditor for the difference between that value and the amount
of outstanding indebtedness. A bankruptcy court may grant the debtor a
reasonable time to cure a payment default, and in the case of a mortgage loan
not secured by the debtor's principal residence, also may reduce the monthly
payments due under such mortgage loan, change the rate of interest and alter the
mortgage loan repayment schedule. Certain court decisions have applied such
relief to claims secured by the debtor's principal residence.
The Code provides priority to certain tax liens over the lien of the
mortgage or deed of trust. The laws of some states provide priority to certain
tax liens over the lien of the mortgage or deed of trust. Numerous federal and
some state consumer protection laws impose substantive requirements upon
mortgage lenders in connection with the origination, servicing and the
enforcement of mortgage loans. These laws include the federal Truth in Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws and state laws impose specific statutory
liabilities upon lenders who originate or service mortgage loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan secured by Multifamily Property will be a non-recourse loan to the
Mortgagor. As a result, the Mortgagor's obligation to repay the Mortgage Loan
can be enforced only against the Mortgaged Property regardless of whether the
Mortgagor has other assets from which it could repay the loan.
Unless otherwise specified in the related Prospectus Supplement, the
mortgage securing each Mortgage Loan relating to Multifamily Property will
contain an assignment of rents and an assignment of leases, pursuant to which
the borrower assigns its right, title and interest as landlord under each lease
and the income derived therefrom to the Depositor, while retaining a license to
collect the rents so long as there is no default. In the event the borrower
defaults, the license terminates and the Trustee (as the assignee of such
assignment) is entitled to collect the rents. The Trustee may enforce its right
to such rents by seeking the appointment of a receiver to collect the rents
immediately after giving notice to the borrower of the default.
"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. The
enforceability of these clauses has been subject of legislation or litigation in
many states, and in some cases the enforceability of these clauses was limited
or denied. However, the Garn-St Germain Depository Institutions Act of 1982 (the
"Garn-St Germain Act") preempts state constitutional, statutory and case law
that prohibits the enforcement of due-on-sale clauses and permits lenders to
enforce these clauses in accordance with their terms, subject to certain limited
exceptions. The Garn-St Germain Act does "encourage" lenders to permit
assumption of loans at the original rate of interest or at some other rate less
than the average of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St
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Germain Act also prohibit the imposition of prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
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. State and federal statutes or
regulations may also limit a lender's right to collect a prepayment penalty when
the prepayment is caused by the lender's acceleration of the loan pursuant to a
due-on-sale clause. 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 Servicing Agreements and the Pooling and Servicing Agreement, late charges
and prepayment fees (to the extent permitted by law and not waived by the
Servicers) will be retained by the Servicers or Master 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 sometimes 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 or insure 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 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.
Environmental Considerations
Under the federal Comprehensive Environmental Response Compensation
and Liability Act, as amended, a secured party which takes a deed in lieu of
foreclosure or purchases a mortgaged property at a foreclosure sale may become
liable in certain circumstances for the costs of remedial action ("Cleanup
Costs") if hazardous wastes or hazardous substances have been released or
disposed of on the property. Such Cleanup Costs may be substantial. It is
possible that such costs could become a liability of the Trust Fund and reduce
the amounts otherwise distributable to the Certificateholders if a Mortgaged
Property securing a Mortgage Loan became the property of the Trust Fund in
certain circumstances and if such Cleanup Costs were incurred.
Except as otherwise specified in the related Prospectus Supplement,
each Unaffiliated Seller will represent, as of the date of delivery of the
related Series of Certificates, that to the best of its knowledge no Mortgaged
Property secured by Multifamily Property is subject to an environmental hazard
that would have to be eliminated under applicable law before the sale of, or
which could otherwise affect the marketability of, such Mortgaged Property or
which would subject the owner or operator of such Mortgaged Property or a lender
secured by such Mortgaged Property to liability under law, and that there are no
liens which relate to the existence of any clean-up of a hazardous substance
(and to the best of its knowledge no circumstances are existing that under law
would give rise to any such lien) affecting the Mortgaged Property which are or
may be liens prior to or on a parity with the lien of the related mortgage. The
Agreement will further provide that the Master Servicer, acting on behalf of the
Trust Fund, may not acquire title to a Mortgaged Property or take over its
operation unless the Master
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Servicer has received a report from a qualified independent person selected by
the Master Servicer setting forth whether such Mortgaged Property is subject to
or presents any toxic wastes or environmental hazards and an estimate of the
cost of curing or cleaning up such hazard.
THE CONTRACTS
General
As a result of the Depositor's assignment of the Contract to the
Trustee, the Certificateholders will succeed collectively to all of the rights
(including the right to receive payment on the Contracts) and will assume
certain obligations of the Depositor. Each Contract evidences both (a) the
obligation of the Obligor to repay the loan evidenced thereby and (b) the grant
of a security interest in the Manufactured Home to secure repayment of such
loan. Certain aspects of both features of the Contracts are described more fully
below.
The Contracts generally are "chattel paper" as defined in the Uniform
Commercial Code in effect in the states in which the Manufactured Homes
initially were registered. Pursuant to the UCC, the sale of chattel paper is
treated in a manner similar to perfection of a security interest in chattel
paper. Under the Pooling and Servicing Agreement, the Master Servicer or the
Depositor, as the case may be, will transfer physical possession of the
Contracts to the Trustee or its custodian. In addition, the Master Servicer will
make an appropriate filing of a UCC-1 financing statement in the appropriate
states to give notice of the Trustee's ownership of the Contracts. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will not
be stamped or marked otherwise to reflect their assignment from the Depositor to
the Trustee. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment, the Trustee's
interest in the Contracts could be defeated.
Security Interests in the Manufactured Homes
The law governing perfection of a security interest in a Manufactured
Home varies from state to state. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. The lender or
Master Servicer may effect such notation or delivery of the required documents
and fees, and obtain possession of the certificate of title, as appropriate
under the laws of the state in which any manufactured home securing a
manufactured housing conditional sales contract is registered. In the event the
Master Servicer or the lender fails, due to clerical errors, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a few
states), the Certificateholders may not have a first priority security interest
in the Manufactured Home securing a Contract. As manufactured homes have become
larger and often have been attached their sites without any apparent intention
to move them, courts in many states have held that manufactured homes, under
certain circumstances, may become subject to real estate title and recording
laws. As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security interest
in a manufactured home under real estate laws, the holder of the security
interest must file either a "fixture filing" under the provisions of the UCC or
a real estate mortgage under the real estate laws of the state where the
manufactured home is located. These filings must be made in the real estate
records office of the county where the manufactured home is located.
Substantially all of the Contracts will contain provisions prohibiting the
borrower from permanently attaching the Manufactured Home to its site. So long
as the Obligor does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the seller's security interest in the Manufactured Home. If, however, a
Manufactured Home is permanently attached to its site, other parties could
obtain an interest in the Manufactured Home which is prior to the security
interest originally retained by the Unaffiliated Seller and transferred to the
Depositor. With respect to a Series of Certificates and as described in the
related Prospectus Supplement, the Master Servicer may be required to perfect a
security interest in the Manufactured Home under applicable real estate laws. If
such real estate filings are not required and if any of the foregoing events
were to occur, the only recourse of the Certificateholders would be against the
Unaffiliated Seller
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pursuant to its repurchase obligation for breach of warranties. Based on the
representations of the Unaffiliated Seller, the Depositor, however, believes
that it has obtained a perfected first priority security interest by proper
notation or delivery of the required documents and fees with respect to
substantially all of the Manufactured Homes securing the Contracts.
The Depositor will assign its security interests in the Manufactured
Homes to the Trustee on behalf of the Certificateholders. Unless otherwise
specified in the related Prospectus Supplement, neither the Depositor nor the
Trustee will amend the certificates of title to identify the Trustee as the new
secured party. Accordingly, the Depositor or such other entity as may be
specified in the Prospectus Supplement will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In most
states, such assignment is an effective conveyance of such security interest
without amendment of any lien noted on the related certificate of title and the
new secured party succeeds to the assignor's rights as the secured party.
However, in some states there exists a risk that, in the absence of an amendment
to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the assignor.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien of the Depositor on
the certificate of title or delivery of the required documents and fees will be
sufficient to protect the Certificateholders against the rights of subsequent
purchasers of a Manufactured Home or subsequent lenders who take a security
interest in the Manufactured Home. If there are any Manufactured Homes as to
which the security interest assigned to the Depositor and the Certificateholders
is not perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying the
Certificateholders as the new secured party on the certificate of title that,
through fraud or negligence, the security interest of the Certificateholders
could be released.
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactured Home in such state, and if steps are not
taken to re-perfect the Trustee's security interest in such state, the security
interest in the Manufactured Home would cease to be perfected. A majority of
states generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the Trustee, or the Master Servicer as custodian
for the Trustee, must surrender possession if it holds the certificate of title
to such Manufactured Home or, in the case of Manufactured Homes registered in
states which provide for notation of lien, the Trustee would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Trustee would have the opportunity to re-
perfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection. In
the ordinary course of servicing manufactured housing conditional sales
contracts and installment loan agreements, the Master Servicer takes steps to
effect such re-perfection upon receipt of notice of re-registration or
information from the Obligor as to relocation. Similarly, when an Obligor under
a manufactured housing conditional sales contract or installment loan agreement
sells a Manufactured Home, the Trustee, or the Master Servicer as custodian for
the Trustee, must surrender possession of the certificate of title or will
receive notice as a result of its lien noted thereon and accordingly will have
an opportunity to require satisfaction of the related manufactured housing
conditional sales contract or installment loan agreement before release of the
lien. Under the Pooling and Servicing Agreement, the Master Servicer, on behalf
of the Depositor, is obligated to take such steps, at the Master Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Pooling and Servicing Agreement that it has no
knowledge of any such liens with respect to any Manufactured Home securing
payment on any Contract. However, such liens could arise at any time during the
term of a Contract. No notice will be given to the Trustee or Certificateholders
in the event such a lien arises and such lien would not give rise to a
repurchase obligation on the part of the party specified in the Pooling and
Servicing Agreement.
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Enforcement of Security Interests in Manufactured Homes
The Master Servicer on behalf of the Trustee, to the extent required
by the related Pooling and Servicing Agreement, may take action to enforce the
Trustee's security interest with respect to Contracts in default by repossession
and resale of the Manufactured Homes securing such Defaulted Contracts. Except
in Louisiana, so long as the Manufactured Home has not become subject to the
real estate law, a creditor can repossess a Manufactured Home securing a
Contract by voluntary surrender, by "self-help" repossession that is "peaceful"
(i.e., without breach of the peace) or, in the absence of voluntary surrender
and the ability to repossess without breach of the peace, by judicial process.
The holder of a Contract must give the debtor a number of days notice, which
varies from 10 to 30 days depending on the state, prior to commencement of any
repossession. The UCC and consumer protection laws in most states place
restrictions on repossession sales, including requiring prior notice to the
debtor and commercial reasonableness in effecting such a sale. The law in most
states also requires that the debtor be given notice of any sale prior to resale
of the unit so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the Trustee would be
entitled to be paid out of the sale proceeds before such proceeds could be
applied to the payment of the claims of unsecured creditors or the holders of
subsequently perfected security interests or, thereafter, to the debtor.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a debtor for any deficiency on repossession
and resale of the Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment.
Consumer Protection Laws
The so-called "Holder-in-Due-Course" rule of the Federal Trade
Commission is intended to defeat the ability of the transferor of a consumer
credit contract which is the seller of goods which gave rise to the transaction
(and certain related lenders and assignees) to transfer such contract free of
notice of claims by the debtor thereunder. The effect of this rule is to subject
the assignee of such a contract to all claims and defenses which the debtor
could assert against the seller of goods. Liability under this rule is limited
to amounts paid under a Contract; however, the Obligor also may be able to
assert the rule to set off remaining amounts due as a defense against a claim
brought against such Obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the Contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes, Enforceability of "Due-on-Sale" Clauses
The Contracts, in general, prohibit the sale or transfer of the
related Manufactured Homes without the consent of the Depositor or the Master
Servicer and permit the acceleration of the maturity of the Contracts by the
Depositor or the Master Servicer upon any such sale or transfer that is not
consented to. Unless otherwise specified in the related Prospectus Supplement,
the Depositor or the Master Servicer expects that it will permit most transfers
of Manufactured Homes and not accelerate the maturity of the related Contracts.
In certain cases, the transfer may be made by a delinquent Obligor in order to
avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the
Depositor desires to accelerate the maturity of the related Contract, the
Depositor's ability to do so will depend on the enforceability under state law
of the "due-on-sale" clause. The Garn-St Germain Act preempts, subject to
certain exceptions and conditions, state laws prohibiting enforcement of "due-
on-sale" clauses applicable to the Manufactured Homes. In some states the
Depositor or the Master Servicer may be prohibited from enforcing a "due-on-
sale" clause in respect of certain Manufactured Homes.
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Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, as amended ("Title V"), provides that, subject to the
following conditions, state usury limitations shall not apply to any loan that
is secured by a first lien on certain kinds of manufactured housing. The
Contracts would be covered if they satisfy certain conditions, among other
things, governing the terms of any prepayments, late charges and deferral fees
and requiring a 30-day notice period prior to instituting any action leading to
repossession of or foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates
and finance charges by adopting before April 1, 1983 a law or constitutional
provision that expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
In any state in which application of Title V was expressly rejected or a
provision limiting discount points or other charges has been adopted, no
Contract which imposes finance charges or provides for discount points or
charges in excess of permitted levels has been included in the Trust Assets or
Fund. The Depositor, or the party specified in the related Pooling and Servicing
Agreement will represent that all of the Contracts comply with applicable usury
laws.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
I. GENERAL
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
Certificates. As used hereinafter in "Certain Federal Income Tax Consequences,"
"Mortgage Loans" shall include Mortgage Certificates and Contracts and "Mortgage
Pool" shall include "Contract Pool." The following discussion does not purport
to discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which may be subject to special
rules. Further, the authorities on which this discussion are based are subject
to change or differing interpretation, which change or differing interpretation
could apply retroactively. This discussion does not address the state or local
tax consequences of the purchase, ownership and disposition of such
Certificates. Investors should consult their own tax advisers in determining the
federal, state, local, or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder, particularly
with respect to the federal income tax changes effected by the Tax Reform Act of
1986 (the "1986 Act") as explained by the Conference Committee Report (the
"Committee Report") accompanying such 1986 Act.
The following discussion addresses securities of two general types:
(i) certificates ("REMIC Certificates") representing interests in a Mortgage
Pool ("REMIC Mortgage Pool") which the Master Servicer elects to have treated as
a real estate mortgage investment conduit ("REMIC") under Code Sections 860A
through 860G ("REMIC Provisions") and (ii) certificates ("Trust Certificates")
representing certain interests in a Mortgage Pool which the Master Servicer does
not elect to have treated as a REMIC. REMIC Certificates and Trust Certificates
will be referred to collectively as "Certificates."
Under the REMIC Provisions, REMICs may issue "regular" interests and
must issue one and only one class of "residual" interests. A REMIC Certificate
representing a regular interest in a REMIC Mortgage Pool will be referred to as
a "REMIC Regular Certificate" and a REMIC Certificate representing a residual
interest in a REMIC Mortgage Pool will be referred to as a "REMIC Residual
Certificate."
A Trust Certificate representing an undivided equitable ownership
interest in the principal of the Mortgage Loans constituting the related
Mortgage Pool, together with interest thereon at a remittance rate (which may be
less than, greater than, or equal to the pass-through rate), will be referred to
as a "Trust Fractional Certificate" and a Trust Certificate representing an
equitable ownership of all or a portion of the interest paid on each Mortgage
Loan constituting the related Mortgage Pool (net of normal servicing fees) will
be referred to as a "Trust Interest Certificate."
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The following discussion is based in part upon the rules governing
original issue discount that are set forth in Code Sections 1271 through 1273
and 1275 and in Treasury regulations issued under the original issue discount
provisions of the Code (the "OID Regulations"), and the Treasury regulations
issued under the provisions of the Code relating to REMICs (the "REMIC
Regulations"). The OID Regulations generally are effective with respect to debt
instruments issued on or after April 4, 1994.
II. REMIC TRUST FUNDS
A. Classification of REMIC Trust Funds
With respect to each series of REMIC Certificates, Cadwalader,
Wickersham & Taft, New York, New York, will deliver their opinion generally to
the effect that, assuming that (i) a REMIC election is made timely in the
required form, (ii) there is ongoing compliance with all provisions of the
related Pooling and Servicing Agreement, (iii) certain representations set forth
in the Pooling and Servicing Agreement are true and (iv) there is continued
compliance with applicable provisions of the Code, as it may be amended from
time to time, and applicable Treasury regulations issued thereunder, such REMIC
Mortgage Pool will qualify as a REMIC and the classes of interests offered will
be considered to be "regular interests" or "residual interests" in that REMIC
Mortgage Pool within the meaning of the REMIC Provisions.
Holders of REMIC Certificates ("REMIC Certificateholders") should be
aware that, if an entity electing to be treated as a REMIC fails to comply with
one or more of the ongoing requirements of the Code for 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 such event, an entity electing to be treated as
a REMIC may be taxable as a separate corporation under Treasury regulations, and
the REMIC Certificates issued by such entity may not be accorded the status
described below under the heading "Characterization of Investments in REMIC
Certificates." In the case of an inadvertent termination of REMIC status, the
Code provides the Treasury Department with authority to issue regulations
providing relief. Any such relief, however, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC's
income for the period of time in which the requirements for REMIC status are not
satisfied.
Among the ongoing requirements in order to qualify for REMIC treatment
is that substantially all of the assets of the Trust Fund (as of the close of
the third calendar month beginning after the creation of the REMIC and
continually thereafter) must consist of only "qualified mortgages" and
"permitted investments." In order to be a "qualified mortgage" or support
treatment of a certificate of participation therein as a "qualified mortgage,"
an obligation must be principally secured by an interest in real property. The
REMIC Regulations treat an obligation secured by manufactured housing qualifying
as a single family residence under Code Section 25(e)(10) as an obligation
secured by real property, without regard to the treatment of the obligation or
the property under state law. Under Code Section 25(e)(10), a single family
residence includes any manufactured home that has a minimum of 400 square feet
of living space and a minimum width in excess of 102 inches and that is of a
kind customarily used at a fixed location.
B. Characterization of Investments in REMIC Certificates
In general, REMIC Certificates are not treated for federal income tax
purposes as ownership interests in the assets of a REMIC Mortgage Pool. However,
(i) REMIC Certificates held by a mutual savings bank or a domestic building and
loan association will constitute "qualifying real property loans" within the
meaning of Code Section 593(d) in the same proportion that the assets of the
REMIC Mortgage Pool underlying such Certificates ("Assets") would be so treated;
(ii) 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 would
be treated as "loans secured by an interest in 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); and (iii) REMIC Certificates held by a real estate investment
trust will constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the REMIC 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 would be treated as "interests in
real
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property" as defined in Code Section 856(c)(6)(C) (or, as provided in the
Committee Report, as "real estate assets" as defined in Code Section
856(c)(6)(B)). See, in this regard, "Characterization of Investments in Trust
Certificates--Buydown Mortgage Loans," below. Moreover, if 95% or more of the
Assets qualify for any of the foregoing treatments, the REMIC Certificates will
qualify for the corresponding status in their entirety. Investors should be
aware that the investment of amounts in any Reserve Fund or GPM Fund in non-
qualifying assets would, and, holding property acquired by foreclosure pending
sale might, reduce the amount of the REMIC Certificates that would qualify for
the foregoing treatment. The REMIC Regulations provide that payments on Mortgage
Loans held pending distribution are considered part of the Mortgage Loans for
purposes of Code Sections 593(d) and 856(c)(5)(A); it is unclear whether such
collected payments would be so treated for purposes of Code Section
7701(a)(19)(C)(v), but there appears to be no reason why analogous treatment
should not be given to such collected payments under that provision. The
determination as to the percentage of the REMIC's assets that will constitute
assets described in the foregoing sections of the Code will be made with respect
to each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations. The Prospectus Supplement or the
related Current Report on Form 8-K for each Series of REMIC Certificates will
describe the Assets as of the Cut-off Date. REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(1); in addition, REMIC Regular Certificates
acquired by a REMIC in accordance with the requirements of Section
860G(a)(3)(A)(i) and (ii) or Section 860G(a)(4)(B) of the Code will be treated
as "qualified mortgages" within the meaning of Code Section 860D(a)(4).
Under the REMIC Regulations, for purposes of characterizing an
investment in REMIC Certificates a Contract secured by a Manufactured Home
qualifying as a single family residence under section 25(e)(10) will constitute
(i) a "qualifying real property loan" within the meaning of Code Section 593(d),
(ii) a "real estate asset" within the meaning of Code Section 856, and (iii) an
asset described in Code section 7701(a)(19)(C). The Depositor has not inspected
the Manufactured Homes to determine whether they so qualify and, accordingly, no
opinion can be expressed as to whether the Certificates will be treated as
qualifying assets under the Code sections described above.
C. Tiered REMIC Structures
For certain series of Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of Certificates, Cadwalader, Wickersham & Taft, counsel to the Depositor,
will deliver their opinion generally to the effect that, assuming compliance
with all provisions of the related Pooling and Servicing Agreement, the Tiered
REMICs will each qualify as a REMIC and the REMIC Certificates issued by the
Tiered REMICs, respectively, will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates in the related REMIC within
the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "qualifying real property loans" under Section 593(d) of the Code, "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
assets described in Section 7701(a)(19)(C) of the Code, and whether the income
on such Certificates is interest described in Section 856(c)(3)(B) of the Code,
the Tiered REMICs will be treated as one REMIC.
D. Taxation of Owners of REMIC Regular Certificates
Except as otherwise stated in this discussion, the REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC Mortgage Pool and not as ownership interests in the REMIC
Mortgage Pool or its Assets. In general, interest, original issue discount and
market discount paid or accrued on a REMIC Regular Certificate will be treated
as ordinary income to the holder of such REMIC Regular Certificate.
Distributions in reduction of the stated redemption price at maturity of the
REMIC Regular Certificate will be treated as a return of capital to the extent
of such holder's basis in such REMIC Regular Certificate. Holders of REMIC
Regular Certificates that otherwise report income under a cash method of
accounting will be required to report income with respect to REMIC Regular
Certificates under an accrual method.
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1. Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Code Section 1273(a). Any holders of REMIC
Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, in advance of the receipt of the cash attributable to
such income. The Master Servicer will report annually (or more frequently if
required) to the Internal Revenue Service ("IRS") and to Certificateholders such
information with respect to the original issue discount accruing on the REMIC
Regular Certificates as may be required under Code Section 6049 and the
regulations thereunder. See "Reporting and Other Administrative Matters of
REMICs" below.
Rules governing original issue discount are set forth in Code Sections
1271 through 1273 and 1275 and, to some extent, in the OID Regulations. Code
Section 1272(a)(6) provides special original issue discount rules applicable to
REMIC Regular Certificates. Regulations have not yet been proposed or adopted
interpreting Code Section 1272(a)(6).
Code Section 1272(a)(6) requires that a mortgage prepayment assumption
("Prepayment Assumption") be used in computing the accrual of original issue
discount on REMIC Regular Certificates, and for certain other federal income tax
purposes. The Prepayment Assumption is to be determined in the manner prescribed
in Treasury regulations. To date, no such regulations have been promulgated. The
Committee Report indicates that the regulations will provide that the Prepayment
Assumption, if any, used with respect to a particular transaction must be the
same as that used by the parties in pricing the transaction. The Master Servicer
will use a Prepayment Assumption in reporting original issue discount that is
consistent with this standard. However, neither the Depositor nor the Master
Servicer makes any representation that the Mortgage Loans will in fact prepay at
the rate reflected in the Prepayment Assumption or at any other rate. Each
investor must make its own decision as to the appropriate prepayment assumption
to be used in deciding whether or not to purchase any of the REMIC Regular
Certificates. The Prospectus Supplement with respect to a series of REMIC
Certificates will disclose the Prepayment Assumption to be used in reporting
original issue discount, if any, and for certain other federal income tax
purposes.
The total amount of original issue discount on a REMIC Regular
Certificate is the excess of the "stated redemption price at maturity" of the
REMIC Regular Certificate over its "issue price." Except as discussed in the
following two paragraphs, in general, the issue price of a particular class of
REMIC Regular Certificates offered hereunder will be the price at which a
substantial amount of REMIC Regular Certificates of that class are first sold to
the public (excluding bond houses and brokers), and the stated redemption price
at maturity of a REMIC Regular Certificate will be its Stated Principal Balance.
If a REMIC Regular Certificate is sold with accrued interest that
relates to a period prior to the issue date of such REMIC Regular Certificate,
the amount paid for the accrued interest will be treated instead as increasing
the issue price of the REMIC Regular Certificate. In addition, that portion of
the first interest payment in excess of interest accrued from the date of
initial issuance of the Certificates (the "Closing Date") to the first
Distribution Date will be treated for federal income tax reporting purposes as
includible in the stated redemption price at maturity of the REMIC Regular
Certificates, and as excludible from income when received as a payment of
interest on the first Distribution Date. The OID Regulations suggest that some
or all of this pre-issuance accrued interest "may" be treated as a separate
asset (and hence not includible in a REMIC Regular Certificate's issue price or
stated redemption price at maturity), whose cost is recovered entirely out of
interest paid on the first Distribution Date.
The stated redemption price at maturity of a REMIC Regular Certificate
is equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." Under the OID Regulations, "qualified stated
interest" is interest that is unconditionally payable at least annually during
the entire term of the Certificate at either (i) a single fixed rate that
appropriately takes into account the length of the interval between payments or
(ii) a current value of a single "qualified floating rate" or "objective rate"
(each, a "Single Variable Rate"). A "current value" is the value of a variable
rate on any day that is no earlier than three months prior to the first day on
which that value is in effect and no later than one year following that day. A
"qualified floating rate" is a rate whose variations can reasonably be expected
to measure contemporaneous variations in the cost of newly
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borrowed funds in the currency in which the Certificate is denominated. Such a
rate remains qualified even though it is multiplied by a fixed, positive
multiple not exceeding 1.35, increased or decreased by a fixed rate, or both.
Certain combinations of rates constitute a single qualified floating rate,
including (i) interest stated at a fixed rate for an initial period of less than
one year followed by a qualified floating rate if the value of the floating rate
at the Closing Date is intended to approximate the fixed rate, and (ii) two or
more qualified floating rates that can reasonably be expected to have
approximately the same values throughout the term of the Certificate. A
combination of such rates is conclusively presumed to be a single floating rate
if the values of all rates on the Closing Date are within 0.25 percentage points
of each other. A variable rate that is subject to an interest rate cap, floor,
"governor" or similar restriction on rate adjustment may be a qualified floating
rate only if such restriction is fixed througout the term of the instrument, or
is not reasonably expected as of the Closing Date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. An "objective rate" is a rate (other than a qualified floating
rate) determined using a single formula fixed for the life of the Certificate,
which is based on (i) one or more qualified floating rates (including a multiple
or inverse of a qualified floating rate), (ii) one or more rates each of which
would be a qualified floating rate for a debt instrument denominated in a
foreign currency, (iii) the yield or changes in price of one or more items of
"actively traded" personal property, (iv) a combination of the foregoing
objective rates, or (v) a rate designated by the IRS. However, a variable rate
is not an objective rate if it is reasonably expected that the average value of
the rate during the first half of the Certificate's term will differ
significantly from the average value of such rate during the final half of its
term. A combination of interest stated at a fixed rate for an initial period of
less than one year followed by an objective rate is treated as a single
objective rate if the value of the objective rate at the Closing Date is
intended to approximate the fixed rate; such a combination of rates is
conclusively presumed to be a single objective rate if the objective rate on the
Closing Date does not differ from the fixed rate by more than 0.25 percentage
points. The qualified stated interest payable with respect to certain variable
rate debt instruments not bearing stated interest at a Single Variable Rate is
discussed below under "Variable Rate Certificates." Under the foregoing rules,
some of the payments of interest on a Certificate bearing a fixed rate of
interest for an initial period followed by a qualified floating rate of interest
in subsequent periods could be treated as included in the stated redemption
price at maturity if the initial fixed rate were to differ sufficiently from the
rate that would have been set using the formula applicable to subsequent
periods. See "Variable Rate Certificates." REMIC Regular Certificates offered
hereby other than such Certificates providing for variable rates of interest or
for the accretion of interest are not anticipated to have stated interest other
than "qualified stated interest," but if any such REMIC Regular Certificates are
so offered, appropriate disclosures will be made in the Prospectus Supplement.
Some or all of the payments on REMIC Regular Certificates providing for the
accretion of interest will be included in the stated redemption price at
maturity of such Certificates. Further, because interest is payable to
Certificateholders only to the extent that amounts are received with respect to
the Mortgage Loans, such interest might not be "unconditionally payable" and
hence might not be qualified stated interest; however, the Master Servicer will
not adopt such treatment for purposes of information reporting.
Under a de minimis rule in the Code, as interpreted in the OID
Regulations, original issue discount on a REMIC 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 REMIC Regular Certificate multiplied
by the weighted average life of the REMIC Regular Certificate. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the amount of each payment under
the instrument (other than a payment of qualified stated interest) by a
fraction, whose numerator is the number of complete years from the issue date
until such payment is made and whose denominator is the stated redemption price
at maturity of such REMIC Regular Certificate. The IRS may be anticipated to
take the position that this rule should be applied taking into account the
Prepayment Assumption and the effect of any anticipated investment income. Under
the OID Regulations, REMIC Regular Certificates bearing only qualified stated
interest except for any "teaser" rate, interest holiday or similar provision
would be treated as subject to the de minimis rule if the greater of the
foregone interest or any excess of the Certificates' stated principal amount
over their issue price is less than such de minimis amount.
The OID Regulations generally would treat de minimis original issue
discount as includible in income as each principal payment is made, based on the
product of the total amount of such de minimis original issue discount and a
fraction, whose numerator is the amount of such principal payment and whose
denominator is the outstanding principal balance of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to elect
to accrue de minimis original issue discount into income currently based on a
constant yield method. See "Taxation of Owners of REMIC Regular Certificates--
Market Discount and Premium."
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Each holder of a REMIC Regular Certificate must include in gross
income the sum of the "daily portions" of original issue discount on its REMIC
Regular Certificate for each day during its taxable year on which it held such
REMIC Regular Certificate. For this purpose, in the case of an original holder
of a REMIC Regular Certificate, the daily portions of original issue discount
will be determined as follows. A calculation will first be made of the portion
of the original issue discount that accrued during each accrual period, that is,
unless otherwise stated in the applicable Prospectus Supplement, each period
that ends on a date that corresponds to a Distribution Date on the REMIC Regular
Certificate and begins on the first day following the immediately preceding
accrual period (or in the case of the first such period, begins on the Closing
Date). For any accrual period such portion will equal the excess, if any, of (i)
the sum of (A) the present value of all of the distributions remaining to be
made on the REMIC Regular Certificate, if any, as of the end of the accrual
period and (B) distributions made on such REMIC Regular Certificate during the
accrual period of amounts included in the stated redemption price at maturity,
over (ii) the adjusted issue price of such REMIC Regular Certificate at the
beginning of the accrual period. The present value of the remaining payments
referred to in the preceding sentence will be calculated based on (i) the yield
to maturity of the REMIC Regular Certificate, calculated as of the settlement
date, giving effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and (iii)
the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
with respect to such REMIC Regular Certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on such REMIC
Regular Certificate in prior accrual periods of amounts included in the stated
redemption price at maturity. The original issue discount accruing during any
accrual period will then be allocated ratably to each day during the period to
determine the daily portion of original issue discount for each day. With
respect to an accrual period between the settlement date and the first
Distribution Date on the REMIC Regular Certificate that is shorter than a full
accrual period, the OID Regulations permit the daily portions of original issue
discount to be determined according to any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such REMIC Regular Certificate at a cost (not including payment for accrued
qualified stated interest) less than its remaining stated redemption price at
maturity will also be required to include in gross income, for each day on which
it holds such REMIC Regular Certificate, the daily portions of original issue
discount with respect to such REMIC Regular Certificate, but reduced, if such
cost exceeds the "adjusted issue price", by an amount equal to the product of
(i) such daily portions and (ii) a constant fraction, whose numerator is such
excess and whose denominator is the sum of the daily portions of original issue
discount on such REMIC Regular Certificate for all days on or after the day of
purchase. The adjusted issued price of a REMIC Regular Certificate on any given
day is equal to the sum of the adjusted issue price (or, in the case of the
first accrual, the issue price) of the REMIC Regular Certificate at the
beginning of the accrual period during which such day occurs and the daily
portions of original issue discount for all days during such accrual period
prior to such day, reduced by the aggregate amount of distributions previously
made other than distributions of qualified stated interest.
Variable Rate Certificates. REMIC Regular Certificates bearing
interest at one or more variable rates are subject to certain special rules. The
qualified stated interest payable with respect to certain variable rate debt
instruments not bearing interest at a Single Variable Rate generally is
determined under the OID Regulations by converting such instruments into fixed
rate debt instruments. Instruments qualifying for such treatment generally
include those providing for stated interest at (i) more than one qualified
floating rates, or (ii) a single fixed rate and (a) one or more qualified
floating rates or (b) a single "qualified inverse floating rate" (each, a
"Multiple Variable Rate"). A qualified inverse floating rate is an objective
rate equal to a fixed rate reduced by a qualified floating rate, the variations
in which can reasonably be expected to inversely reflect contemporaneous
variations in the cost of newly borrowed funds (disregarding permissible rate
caps, floors, governors and similar restrictions such as are described above).
Purchasers of REMIC Regular Certificates bearing a variable rate of
interest should be aware that there is uncertainty concerning the application of
Section 1272(a)(6) of the Code and the OID Regulations to such Certificates. In
the absence of other authority, the Master Servicer intends to be guided by the
provisions of the OID Regulations governing variable rate debt instruments in
adapting the provisions of Section 1272(a)(6) of the Code to such Certificates
for the purpose of preparing reports furnished to Certificateholders. The effect
of the application of such provisions generally will be to cause
Certificateholders holding Certificates bearing interest at a Single Variable
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Rate to take into account for each period an amount corresponding approximately
to the sum of (i) the qualified stated interest accruing on the outstanding face
amount of the REMIC Regular Certificate as the stated interest rate for that
Certificate varies from time to time and (ii) the amount of original issue
discount that would have been attributable to that period on the basis of a
constant yield to maturity for a bond issued at the same time and issue price as
the REMIC Regular Certificate, having the same face amount and schedule of
payments of principal as such Certificate, subject to the same Prepayment
Assumption, and bearing interest at a fixed rate equal to the value of the
applicable qualified floating rate or qualified inverse floating rate in the
case of a Certificate providing for either such rate, or equal to the fixed rate
that reflects the reasonably expected yield on the Certificate in the case of a
Certificate providing for an objective rate other than an inverse floating rate,
in each case as of the issue date. Certificateholders holding REMIC Regular
Certificates bearing interest at a Multiple Variable Rate generally will take
into account interest and original issue discount under a similar methodology,
except that the amounts of qualified stated interest and original issue discount
attributable to such a Certificate first will be determined for an "equivalent"
debt instrument bearing fixed rates, the assumed fixed rates for which are (a)
for each qualified floating rate, the value of each such rate as of the Closing
Date (with appropriate adjustment for any differences in intervals between
interest adjustment dates), (b) for a qualified inverse floating rate, the value
of the rate as of the Closing Date, and (c) for any other objective rate, the
fixed rate that reflects the yield that is reasonably expected for the
Certificate. If the interest paid or accrued with respect to a Multiple Variable
Rate Certificate during an accrual period differs from the assumed fixed
interest rate, such difference will be an adjustment (to interest or original
issue discount, as applicable) to the Certificateholder's taxable income for the
taxable period or periods to which such difference relates.
In the case of a Certificate that provides for stated interest at a
fixed rate in one or more accrual periods and either one or more qualified
floating rates or a qualified inverse floating rate in other accrual periods,
the fixed rate is first converted into an assumed variable rate. The assumed
variable rate will be a qualified floating rate or a qualified inverse floating
rate according to the type of actual variable rates provided by the Certificate,
and must be such that the fair market value of the REMIC Regular Certificate as
of issuance is approximately the same as the fair market value of an otherwise
identical debt instrument that provides for the assumed variable rate in lieu of
the fixed rate. The REMIC Regular Certificate is then subject to the
determination of the amount and accrual of original issue discount as described
above, by reference to the hypothetical variable rate instrument.
Purchasers of variable rate REMIC Regular Certificates further should
be aware that the provisions of the OID Regulations applicable to variable rate
debt instruments have been limited and may not apply to some REMIC Regular
Certificates having variable rates. If such a Certificate is not governed by the
provisions of the OID Regulations applicable to variable rate debt instruments,
it may be subject to provisions of proposed Treasury regulations applicable to
instruments having contingent payments. The application of those provisions to
instruments such as variable rate REMIC Regular Certificates is subject to
differing interpretations. Prospective purchasers of variable rate REMIC Regular
Certificates are advised to consult their tax advisers concerning the tax
treatment of such Certificates.
2. Market Discount and Premium
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, at a purchase price less than the adjusted issue price
(as defined under "Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount") of such REMIC Regular Certificate, will recognize market
discount upon receipt of each payment of principal. In particular, such a holder
will generally be required to allocate each payment of principal on a REMIC
Regular Certificate first to accrued market discount, and to recognize ordinary
income, to the extent such principal payment does not exceed the aggregate
amount of accrued market discount on such REMIC Regular Certificate not
previously included in income. Such market discount must be included in income
in addition to any original issue discount includible in income with respect to
such REMIC Regular Certificate.
A Certificateholder may elect to include market discount in income
currently as it accrues, rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield
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method. If such an election were made for a REMIC Regular Certificate with
market discount, the Certificateholder would be deemed to have made an election
to currently include market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the year of the election or thereafter. Similarly, a Certificateholder that
makes this election for a Certificate that is acquired at a premium is deemed to
have made an election to amortize bond premium, as described below, with respect
to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. The election to accrue interest, discount
and premium on a constant yield method with respect to a Certificate is
irrevocable without the consent of the IRS.
Under a statutory de minimis exception, market discount with respect
to a REMIC Regular Certificate will be considered to be zero for purposes of
Code Sections 1276 through 1278 if such market discount is less than 0.25% of
the stated redemption price at maturity of such REMIC Regular Certificate
multiplied by the number of complete years to maturity remaining after the date
of its purchase. In interpreting a similar de minimis rule with respect to
original issue discount on obligations payable in installments, the OID
Regulations refer to the weighted average maturity of obligations, and it is
likely that the same rule will be applied in determining whether market discount
is de minimis. It appears that de minimis market discount on a REMIC Regular
Certificate would be treated in a manner similar to original issue discount of a
de minimis amount. See "Taxation of Holders of REMIC Regular Certificates--
Original Issue Discount." Such treatment would result in discount being included
in income at a slower rate than discount would be required to be included using
the method described above. However, Treasury regulations implementing the
market discount de minimis exception have not been issued in proposed or
temporary form, and the precise treatment of de minimis market discount on
obligations payable in more than one installment therefore remains uncertain.
The 1986 Act grants authority to the Treasury Department to issue
regulations providing for the method for accruing market discount of more than a
de minimis amount on debt instruments, the principal of which is payable in more
than one installment. Until such time as regulations are issued by the Treasury
Department, certain rules described in the Committee Report will apply. Under
those rules, the holder of a bond purchased with more than de minimis market
discount may elect to accrue such market discount either on the basis of a
constant yield method or on the basis of the appropriate proportionate method
described below. Under the proportionate method for obligations issued with
original issue discount, the amount of market discount that accrues during a
period is equal to the product of (i) the total remaining market discount,
multiplied by (ii) a fraction, the numerator of which is the original issue
discount accruing during the period and the denominator of which is the total
remaining issue discount at the beginning of the period. Under the proportionate
method for obligations issued without original issue discount, the amount of
market discount that accrues during a period is equal to the product of (i) the
total remaining market discount, multiplied by (ii) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. The Prepayment Assumption, if any, used in
calculating the accrual of original issue discount is to be used in calculating
the accrual of market discount under any of the above methods. Because the
regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax treatment
of a REMIC Regular Certificate purchased at a discount in the secondary market.
Further, a purchaser generally will be required to treat a portion of
any gain on sale or exchange of a REMIC 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. Such purchaser also may be required to defer a
portion of its interest deductions for the taxable year attributable to any
indebtedness incurred or continued to purchase or carry such REMIC Regular
Certificate. 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. If such holder elects to include market discount in income currently
as it accrues on all market discount instruments acquired by such holder in that
taxable year or thereafter, the interest deferral rule described above will not
apply.
A REMIC Regular Certificate purchased at a cost (not including payment
for accrued qualified stated interest) greater than its remaining stated
redemption price at maturity will be considered to be purchased at a premium.
The holder of such a REMIC Regular Certificate may elect to amortize such
premium under the constant yield method. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and
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premium in income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally, as
described above. The Committee Report indicates a Congressional intent that the
same rules that will apply to accrual of market discount on installment
obligations will also apply in amortizing bond premium under Code Section 171 on
installment obligations such as the REMIC Regular Certificates.
3. Treatment of Subordinated Certificates
As described above under "Credit Support--Subordinated Certificates,"
certain Series of Certificates may contain one or more Classes or Subclasses of
Subordinated Certificates. Holders of Subordinated Certificates will be required
to report income with respect to such Certificates on the accrual method without
giving effect to delays and reductions in distributions attributable to defaults
or delinquencies on any Mortgage Loans, except possibly to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income reported by a Certificateholder of a Subordinated Certificate in any
period could significantly exceed the amount of cash distributed to such
Certificateholder in that period.
Although not entirely clear, it appears that a corporate holder or a
holder who holds a Regular Certificate in the course of a trade or business
generally should be allowed to deduct as an ordinary loss any loss sustained on
account of partial or complete worthlessness of a Subordinated Certificate.
Although similarly unclear, a noncorporate holder who does not hold such Regular
Certificate in the course of a trade or business generally should be allowed to
deduct as a short-term capital loss any loss sustained on account of complete
worthlessness of a Subordinated Certificate. Such noncorporate holder
alternatively may be allowed such a loss deduction as the principal balance of a
Subordinated Certificate is reduced by reason of realized losses resulting from
liquidated Mortgage Loans; however, the IRS could contend that a noncorporate
holder should be allowed such losses only after all Mortgage Loans in the Trust
Fund have been liquidated or the Class or Subclass of Subordinated Certificates
otherwise has been retired. Special rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Holders of
Subordinated Certificates should consult their own tax advisers regarding the
appropriate timing, character and amount of any loss sustained with respect to
Subordinated Certificates.
E. Taxation of Owners of REMIC Residual Certificates
1. General
An owner of a REMIC Residual Certificate ("Residual Owner") generally
will be required to report its daily portion of the taxable income or, subject
to the limitation described below in "Taxation of Owners of REMIC Residual
Certificates--Basis Rules and Distributions," the net loss of the REMIC Mortgage
Pool for each day during a calendar quarter that the Residual Owner owned such
REMIC Residual Certificate. For this purpose, the daily portion will be
determined by allocating to each day in the calendar quarter, using a 30 days
per month/90 days per quarter/360 days per year counting convention (unless
otherwise disclosed in the applicable Prospectus Supplement), its ratable
portion of the taxable income or net loss of the REMIC Mortgage Pool for such
quarter, and by allocating the daily portions among the Residual Owners (on such
day) in accordance with their percentage of ownership interests on such day. Any
amount included in the gross income or allowed as a loss of any Residual Owner
by virtue of this paragraph will be treated as ordinary income or loss.
Purchasers of REMIC Residual Certificates should be aware that taxable income
from such Certificates may exceed cash distributions with respect thereto in any
taxable year. For example, if the Mortgage Loans are acquired by a REMIC at a
discount, then the holder of a residual interest may recognize income without
corresponding cash distributions. This result could occur because a payment
produces recognition of discount on the Mortgage Loan while the payment could be
used in whole or in part to make principal payments on REMIC Regular
Certificates issued without substantial discount. Taxable income may also be
greater in earlier years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of the
REMIC Regular Certificates, will increase over time as the lower yielding
sequences of Certificates are paid, whereas 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.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such Certificate will be taken into account
in determining the income of such holder for federal income
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tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an amortization
schedule or according to some other method. Because of the uncertainty
concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisers concerning the treatment of such
payments for income tax purposes.
2. Taxable Income or Net Loss of the REMIC Trust Fund
The taxable income or net loss of the REMIC Mortgage Pool will reflect
a netting of income from the Mortgage Loans, any cancellation of indebtedness
income due to the allocation of Realized Losses to REMIC Regular Certificates,
and the deductions and losses allowed to the REMIC Mortgage Pool. Such taxable
income or net loss for a given calendar quarter will be determined in the same
manner as for an individual having the calendar year as his taxable year and
using the accrual method of accounting, with certain modifications. The first
modification is that a deduction will be allowed for accruals of interest
(including original issue discount) on the REMIC Regular Certificates. Second,
market discount equal to the excess of any Mortgage Loan's adjusted issue price
(as determined under "Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium") over its fair market value at the time of its transfer to
the REMIC Mortgage Pool generally will be included in income as it accrues,
based on a constant yield and on the Prepayment Assumption. For this purpose,
the Master Servicer intends to treat the fair market value of the Mortgage Loans
as being equal to the aggregate issue prices of the REMIC Regular Certificates
and REMIC Residual Certificates; if one or more classes of REMIC Regular
Certificates or REMIC Residual Certificates are retained by the Depositor, the
Master Servicer will estimate the value of such retained interests in order to
determine the fair market value of the Mortgage Loans for this purpose. Third,
no item of income, gain, loss or deduction allocable to a prohibited transaction
(see "Prohibited Transactions and Other Possible REMIC Taxes," below) will be
taken into account. Fourth, the REMIC Mortgage Pool generally may not deduct any
item that would not be allowed in calculating the taxable income of a
partnership by virtue of Code Section 703(a)(2). Fifth, the REMIC Regulations
provide that the limitation on miscellaneous itemized deductions imposed on
individuals by Code Section 67 will not be applied at the Mortgage Pool level to
the servicing fees paid to the Master Servicer or sub-servicers' if any. (See,
however, "Pass-Through of Servicing Fees," below.) If the deductions allowed to
the REMIC Mortgage Pool exceed its gross income for a calendar quarter, such
excess will be the net loss for the REMIC Mortgage Pool for that calendar
quarter.
3. Basis Rules and Distributions
Any distribution by a REMIC Mortgage Pool to a Residual Owner will not
be included in the gross income of such Residual Owner to the extent it does not
exceed the adjusted basis of such Residual Owner's interest in a REMIC Residual
Certificate. Such distribution will reduce the adjusted basis of such interest,
but not below zero. To the extent a distribution exceeds the adjusted basis of
the REMIC Residual Certificate, it will be treated as gain from the sale of the
REMIC Residual Certificate. (See "Sales of REMIC Certificates," below.) The
adjusted basis of a REMIC Residual Certificate is equal to the amount paid for
such REMIC Residual Certificate, increased by amounts included in the income of
the Residual Owner (see "Taxation of Owners of REMIC Residual Certificates--
Daily Portions" above), and decreased by distributions and by net losses taken
into account with respect to such interest.
A Residual Owner is not allowed to take into account any net loss for
any calendar quarter to the extent such net loss exceeds such Residual Owner's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter (determined without regard to such net loss). Any loss
disallowed by reason of this limitation may be carried forward indefinitely to
future calendar quarters and, subject to the same limitation, may be used only
to offset income from the REMIC Residual Certificate.
The effect of these basis and distribution rules is that a Residual
Owner may not amortize its basis in a REMIC Residual Certificate, but may only
recover its basis through distributions, through the deduction of any net losses
of the REMIC Mortgage Pool or upon the sale of its REMIC Residual Certificate.
See "Sales of REMIC Certificates," below. The Residual Owner does, however,
receive reduced taxable income over the life of the REMIC because the REMIC's
basis in the underlying REMIC Mortgage Pool includes the fair market value of
the REMIC Regular Certificates and REMIC Residual Certificates.
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4. Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
are subject to certain special tax rules. With respect to a Residual Owner, the
excess inclusion for any calendar quarter is defined as the excess (if any) of
the daily portions of taxable income over the sum of the "daily accruals" for
each day during such quarter that such REMIC Residual Certificate was held by
such Residual Owner. The daily accruals are determined by allocating to each day
during a calendar quarter its ratable portion of the product of the "adjusted
issue price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120 percent of the long-term "applicable federal rate" (generally,
an average of current yields on Treasury securities of comparable maturity, and
hereafter the "AFR") in effect at the time of issuance of the REMIC Residual
Certificate. For this purpose, the adjusted issue price of a REMIC Residual
Certificate as of the beginning of any calendar quarter is the issue price of
the REMIC Residual Certificate, increased by the amount of daily accruals for
all prior quarters and decreased by any distributions made with respect to such
REMIC Residual Certificate before the beginning of such quarter. The issue price
of a REMIC Residual Certificate is the initial offering price to the public
(excluding bond houses and brokers) at which a substantial amount of the REMIC
Residual Certificates were sold.
For Residual Owners, other than thrift institutions described in Code
Section 593, an excess inclusion cannot be offset by deductions, losses or loss
carryovers from other activities. For Residual Owners that are subject to tax on
unrelated business taxable income (as defined in Code Section 511), an excess
inclusion is treated as unrelated business taxable income. For Residual Owners
that are nonresident alien individuals or foreign corporations generally subject
to United States 30% withholding tax, even if interest paid to such Residual
Owners is generally eligible for exemptions from such tax, an excess inclusion
will be subject to such tax and no tax treaty rate reduction or exemption may be
claimed with respect thereto. See "Foreign Investors in REMIC Certificates."
Provisions enacted by the "Technical and Miscellaneous Revenue Act of
1988" (the "1988 Act") cause the above described exception for thrift
institutions generally to apply only to those residual interests held and
deductions, losses and loss carryovers incurred directly by such institutions
(and not by other members of an affiliated group of corporations filing a
consolidated income tax return) or certain wholly owned direct subsidiaries of
such institutions formed and operated exclusively in connection with the
organization and operation of one or more REMICs. The REMIC Regulations further
limit this exception to residual interests having "significant value." In order
to have significant value, the REMIC Residual Certificates must have an
aggregate issue price, at issuance, at least equal to two percent of the
aggregate issue prices of all of the related REMIC Regular and Residual
Certificates. In addition, the anticipated weighted average life of the REMIC
Residual Certificates must equal or exceed 20 percent of the anticipated
weighted average life of the REMIC, based on the Prepayment Assumption and on
any required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents. Although it has not done so, the Treasury
also has authority to issue regulations that, if REMIC Residual Certificates are
found in the aggregate not to have "significant value," would treat as excess
inclusions with respect to any REMIC Residual Certificate the entire daily
portion of taxable income for such REMIC Residual Certificate. Each Prospectus
Supplement pursuant to which REMIC Residual Certificates are offered will state
whether such REMIC Residual Certificates will have, or may be regarded as
having, significant value under the REMIC Regulations; provided, however, that
any disclosure that a REMIC Residual Certificate will have "significant value"
will be based upon certain assumptions, and the Depositor will make no
representation that a REMIC Residual Certificate will have "significant value"
for purposes of the above described rules or that a REMIC Residual Owner will
receive distributions of amounts calculated pursuant to those assumptions.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder.
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5. Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Certificate is noneconomic unless, at the time of its
transfer and based on the Prepayment Assumption and any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the AFR) on the REMIC Residual Certificate
equals at least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee. Prior to purchasing a REMIC
Residual Certificate, prospective purchasers should consider the possibility
that a purported transfer of such REMIC Residual Certificate by such a purchaser
to another purchaser at some future date may be disregarded in accordance with
the above-described rules, which would result in the retention of tax liability
by such purchaser. The applicable Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered "noneconomic" residual
interests under the REMIC Regulations; provided, however, that any disclosure
that a REMIC Residual Certificate will or will not be considered "noneconomic"
will be based upon certain assumptions, and the Depositor will make no
representation that a REMIC Residual Certificate will not be considered
"noneconomic" for purposes of the above-described rules or that a REMIC Residual
Owner will receive distributions calculated pursuant to such assumptions. See
"Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
6. Tax-Exempt Investors
Tax-exempt organizations (including employee benefit plans) that are
subject to tax on unrelated business taxable income (as defined in Code Section
511) will be subject to tax on any excess inclusions attributed to them as
owners of Residual Certificates. Excess inclusion income associated with a
Residual Certificate may significantly exceed cash distributions with respect
thereto. See "Excess Inclusions."
Generally, tax-exempt organizations that are not subject to federal
income taxation on "unrelated business taxable income" pursuant to Code Section
511 are treated as "disqualified organizations" under provisions of the 1988
Act. Under provisions of the Pooling and Servicing Agreement, such organizations
generally are prohibited from owning Residual Certificates. See "Sales of REMIC
Certificates."
7. Real Estate Investment Trusts
If the applicable Prospectus Supplement so provides, a Mortgage Pool
may hold Mortgage Loans bearing interest based wholly or partially on Mortgagor
profits, Mortgaged Property appreciation, or similar contingencies. Such
interest, if earned directly by a real estate investment trust ("REIT"), would
be subject to the limitations of Code sections 856(f) and 856(j). Treasury
Regulations treat a REIT holding a REMIC Residual Certificate for a principal
purpose of avoiding such Code provisions as receiving directly the income of the
REMIC Mortgage Pool, hence potentially jeopardizing its qualification for
taxation as a REIT and exposing such income to taxation as a prohibited
transaction at a 100 percent rate.
8. Mark-to-Market Rules
Code Section 475 generally requires that securities dealers include
securities in inventory at their fair market value, recognizing gain or loss as
if the securities were sold at the end of each tax year. Prospective
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purchasers of the REMIC Residual Certificates should be aware that on January 3,
1995, the Internal Revenue Service released proposed regulations (the "Proposed
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 Proposed Mark to Market Regulations provide that, for purposes
of this mark-to-market requirement, a REMIC Residual Certificate is not treated
as a security and thus may not be marked to market. The Proposed Mark to Market
Regulations would apply to all REMIC Residual Certificates acquired on or after
January 4, 1995.
F. Sales of REMIC Certificates
If a REMIC Certificate is sold, the seller will recognize gain or loss
equal to the difference between the amount realized on the sale and its adjusted
basis in the REMIC Certificate. The adjusted basis of a REMIC Regular
Certificate generally will equal the cost of such REMIC Regular Certificate to
the seller, increased by any original issue discount or market discount included
in the seller's gross income with respect to such REMIC Regular Certificate and
reduced by premium amortization deductions and distributions previously received
by the seller of amounts included in the stated redemption price at maturity of
such REMIC Regular Certificate. The adjusted basis of a REMIC Residual
Certificate will be determined as described under "Taxation of Owners of REMIC
Residual Certificates--Basis Rules and Distributions." Gain from the disposition
of a REMIC Regular Certificate that might otherwise be treated as a capital gain
will be treated as ordinary income to the extent that such gain does not exceed
the excess, if any, of (i) the amount that would have been includible in such
holder's income had income accrued at a rate equal to 110% of the AFR as of the
date of purchase over (ii) the amount actually includible in such holder's
income. Except as otherwise provided under "Taxation of Owners of REMIC Regular
Certificates--Market Discount and Premium" and under Code Section 582(c), any
additional gain or any loss on the sale or exchange of a REMIC Certificate will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Code
Section 1221. The Code currently provides for a top marginal tax rate of 39.6%
for individuals while maintaining a maximum marginal rate for the long-term
capital gains of individuals at 28%. There is no such rate differential for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes, including
limitations on the use of capital losses to offset ordinary income.
All or a portion of any gain from the sale of a REMIC Certificate that
might otherwise be capital gain may be treated as ordinary income (i) if such
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
holder'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 reduced by any amount treated as ordinary
income with respect to any prior disposition of property that was held as part
of such transaction, or (ii) in the case of a noncorporate taxpayer that has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates.
If a Residual Owner sells a REMIC Residual Certificate at a loss, the
loss will not be recognized if, within six months before or after the sale of
the REMIC Residual Certificate, such Residual Owner purchases another residual
in any REMIC or any interest in a taxable mortgage pool (as defined in Code
Section 7701(i)) comparable to a residual interest in a REMIC. Such disallowed
loss will be allowed upon the sale of the other residual interest (or comparable
interest) if the rule referred to in the preceding sentence does not apply to
that sale. While the Committee Report states that this rule may be modified by
Treasury regulations, the REMIC Regulations do not address this issue and it is
not clear whether any such modification will in fact be implemented or, if
implemented, what its precise nature or effective date would be.
The 1988 Act makes transfers of a residual interest to certain
"disqualified organizations" subject to an additional tax on the transferor in
an amount equal to the maximum corporate tax rate applied to the present value
(using a discount rate equal to the AFR) of the total anticipated excess
inclusions with respect to such residual interest for the periods after the
transfer. For this purpose, "disqualified organizations" includes the United
States, any state or political subdivision of a state, any foreign government or
international organization or any agency or instrumentality of any of the
foregoing; any tax-exempt entity (other than a Code Section 521 cooperative)
which is
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not subject to the tax on unrelated business income; and any rural electrical
and telephone cooperative. The anticipated excess inclusions must be determined
as of the date that the REMIC Residual Certificate is transferred and must be
based on events that have occurred up to the time of such transfer, the
Prepayment Assumption, and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents. The tax
generally is imposed on the transferor of the REMIC Residual Certificate, except
that it is imposed on an agent for a disqualified organization if the transfer
occurs through such agent. The Pooling and Servicing Agreement requires, as a
prerequisite to any transfer of a Residual Certificate, the delivery to the
Trustee of an affidavit of the transferee to the effect that it is not a
disqualified organization and contains other provisions designed to render any
attempted transfer of a Residual Certificate to a disqualified organization
void.
In addition, if a "pass-through entity" includes in income excess
inclusions with respect to a REMIC Residual Certificate, and a disqualified
organization is the record holder of an interest in such entity, then a tax will
be imposed on such entity equal to the product of (i) the amount of excess
inclusions on the REMIC Residual Certificate that are allocable to the interest
in the pass-through entity held by such disqualified organization and (ii) the
highest marginal federal income tax rate imposed on corporations. A pass-through
entity will not be subject to this tax for any period, however, if the record
holder of an interest in such entity furnishes to such entity (i) such holder's
social security number and a statement under penalties of perjury that such
social security number is that of the record holder or (ii) a statement under
penalties of perjury that such record holder is not a disqualified organization.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
shall, with respect to such interest, be treated as a pass-through entity.
Legislation presently pending before the United States Congress would apply this
tax on an annual basis to "large partnerships". Generally, such legislation
would treat partnerships that have, or have had, 250 or more partners as a large
partnership for this purpose. Such legislation would not limit application of
tax to excess inclusions allocable to disqualified organizations, and in fact
would apply the tax to large partnerships having no disqualified organizations
as partners. No prediction can be made whether such legislation will be enacted
in its current or modified form.
G. Pass-Through of Servicing Fees
The general rule is that Residual Certificateholders take into account
taxable income or net loss of the related REMIC Mortgage Pool. Under that rule,
servicing compensation of the Master Servicer and the subservicers (if any)
would be allocated to the holders of the REMIC Residual Certificates, and
therefore would not affect the income or deductions of holders of REMIC Regular
Certificates. However, in the case of a "single-class REMIC", such expenses and
an equivalent amount of additional gross income will be allocated among all
holders of REMIC Regular Certificates and REMIC Residual Certificates for
purposes of the limitations on the deductibility of certain miscellaneous
itemized deductions by individuals contained in Code Sections 56(b)(1) and 67.
Generally, any holder of a REMIC Certificate who is an individual, estate or
trust will be able to deduct such expenses in determining regular tax liability
only to the extent that such expenses together with certain other miscellaneous
itemized deductions of such individual, estate or trust exceed 2% of adjusted
gross income; such a holder may not deduct such expenses to any extent in
determining liability for alternative minimum tax. Accordingly, REMIC Residual
Certificates, and REMIC Regular Certificates receiving an allocation of
servicing compensation, may not be appropriate investments for individuals,
estates or trusts, and such persons should carefully consult with their own tax
advisers regarding the advisability of an investment in such Certificates.
A "single-class REMIC" is a REMIC that either (i) would be treated as
a pass-through trust under the provisions of Treasury Regulation Section
301.7701-4(c) in the absence of a REMIC election, or (ii) is substantially
similar to such a pass-through trust and is structured with the principal
purpose of avoiding the allocation of investment expenses to holders of REMIC
Regular Certificates. Unless otherwise stated in the related Prospectus
Supplement, the Depositor intends to treat a REMIC Mortgage Pool as other than a
"single-class REMIC," consequently allocating servicing compensation expenses
and related income amounts entirely to REMIC Residual Certificates and in no
part to REMIC Regular Certificates.
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H. Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMIC Mortgage Pools equal to 100 percent of
the net income derived from "prohibited transactions". In general, a prohibited
transaction means the disposition of a Mortgage Loan other than pursuant to
certain specified exceptions, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. The Code also imposes a 100 percent tax
on the value of any contribution of assets to the REMIC after the "start-up day"
(the day on which the regular and residual interests are issued), other than
pursuant to specified exceptions, and subjects "net income from foreclosure
property" to tax at the highest corporate rate. It is not anticipated that a
REMIC Mortgage Pool will engage in any such transactions or receive any such
income.
I. Termination of a REMIC Trust Fund
In general, no special tax consequences will apply to a holder of a
REMIC Regular Certificate upon the termination of the REMIC Mortgage Pool by
virtue of the final payment or liquidation of the last Mortgage Loan remaining
in the REMIC Mortgage Pool. If a Residual Owner's adjusted basis in its REMIC
Residual Certificate at the time such termination occurs exceeds the amount of
cash distributed to such Residual Owner in liquidation of its interest, then,
although the matter is not entirely free from doubt, it appears that the
Residual Owner would be entitled to a loss (which could be a capital loss) equal
to the amount of such excess.
J. Reporting and Other Administrative Matters of REMICs
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. Certain holders of REMIC
Regular Certificates who are generally exempt from information reporting on debt
instruments, such as corporations, banks, registered securities or commodities
brokers, real estate investment trusts, registered investment companies, common
trust funds, charitable remainder annuity trusts and unitrusts, will be provided
interest and original issue discount income information and the information set
forth in the following paragraph upon request in accordance with the
requirements of the Treasury regulations. The information must be provided by
the later of 30 days after the end of the quarter for which the information was
requested, or two weeks after the receipt of the request. The REMIC Mortgage
Pool must also comply with rules requiring the face of a REMIC Certificate
issued at more than a de minimis discount to disclose the amount of original
issue discount and the issue date and requiring such information to be reported
to the Treasury Department.
The REMIC Regular Certificate information reports must include a
statement of the "adjusted issue price" of the REMIC Regular Certificate at the
beginning of each accrual period. In addition, the reports must include
information necessary to compute the accrual of any market discount that may
arise upon secondary trading of REMIC Regular Certificates. Because exact
computation of the accrual of market discount on a constant yield method would
require information relating to the holder's purchase price which the REMIC
Mortgage Pool may not have, it appears that this provision will only require
information pertaining to the appropriate proportionate method of accruing
market discount.
The responsibility for complying with the foregoing reporting rules
will be borne by the Master Servicer.
For purposes of the administrative provisions of the Code, REMIC Pools
will be treated as partnerships and the holders of Residual Certificates will be
treated as partners. The Master Servicer will file federal income tax
information returns on behalf of the related REMIC Pool, and will be designated
as agent for and will act on behalf of the "tax matters person" with respect to
the REMIC Pool in all respects.
As agent for the tax matters person, the Master Servicer will, subject
to certain notice requirements and various restrictions and limitations,
generally have the authority to act on behalf of the REMIC and the Residual
Owners in connection with the administrative and judicial review of items of
income, deduction, gain or loss of the REMIC Mortgage Pool, as well as the REMIC
Mortgage Pool's classification. Residual Owners will generally be
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required to report such REMIC Mortgage Pool items consistently with their
treatment on the REMIC Mortgage Pool's federal income tax information return and
may in some circumstances be bound by a settlement agreement between the Master
Servicer, as agent for the tax matters person, and the IRS concerning any such
REMIC Mortgage Pool item. Adjustments made to the REMIC Mortgage Pool tax return
may require a Residual Owner to make corresponding adjustments on its return,
and an audit of the REMIC Mortgage Pool's tax return, or the adjustments
resulting from such an audit, could result in an audit of a Residual Owner's
return.
K. Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal on REMIC Regular Certificates, as
well as payment of proceeds from the sale of REMIC Certificates, may be subject
to the "backup withholding tax" under Section 3406 of the Code at a rate of 31
percent if recipients of such payments fail to furnish to the payor certain
information, including their taxpayer identification numbers, or otherwise fail
to establish an exemption from such tax. Any amounts deducted and withheld from
a distribution to a recipient would be allowed as a credit against such
recipient's federal income tax. Furthermore, certain penalties may be imposed by
the IRS on a recipient of payments that is required to supply information but
that does not do so in the proper manner.
L. Foreign Investors in REMIC Certificates
1. REMIC Regular Certificates
Except as qualified below, payments made on a REMIC Regular
Certificate to a REMIC Regular Certificateholder that is not a U.S. Person, as
hereinafter defined (a "non-U.S. Person"), or to a person acting on behalf of
such a Certificateholder, generally will be exempt from U.S. federal income and
withholding taxes, provided that (a) the holder of the Certificate is not
subject to U.S. tax as a result of a connection to the United States other than
ownership of such Certificate, (b) the holder of such Certificate signs a
statement under penalties of perjury that certifies that such holder is a Non-
U.S. Person, and provides the name and address of such holder, and (c) the last
U.S. Person in the chain of payment to the holder received such statement from
such holder or a financial institution holding on its behalf and does not have
actual knowledge that such statement is false. If the holder does not qualify
for exemption, distributions of interest, including distributions in respect of
accrued original issue discount, to such holder may be subject to a withholding
tax rate of 30 percent, subject to reduction under any applicable tax treaty.
"U.S. Person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust that is subject to U.S. federal income tax regardless of the source of its
income.
Holders of REMIC Regular Certificates should be aware that the IRS
might take the position that exemption from U.S. withholding taxes does not
apply to such a holder that also directly or indirectly owns 10 percent or more
of the REMIC Residual Certificates. Further, the foregoing rules will not apply
to exempt a United States shareholder of a controlled foreign corporation from
taxation on such United States shareholder's allocable portion of the interest
or original issue discount income earned by such controlled foreign corporation.
2. REMIC Residual Certificates
Amounts paid to a Residual Owner that is a Non-U.S. Person generally
will be treated as interest for purposes of applying the withholding tax on Non-
U.S. Persons with respect to income on its REMIC Residual Certificate. However,
it is unclear whether distributions on REMIC Residual Certificates will be
eligible for the general exemption from withholding tax that applies to REMIC
Regular Certificates as described above. Treasury Regulations provide that, for
purposes of the portfolio interest exception, payments to the foreign owner of a
REMIC Residual Certificate are to be considered paid on the obligations held by
the REMIC, rather than on the Certificate itself. Such payments would thus only
qualify for the portfolio interest exception if the underlying obligations held
by the REMIC would so qualify. Such withholding tax generally would be imposed
at a rate of 30 percent but would be subject to reduction under any tax treaty
applicable to the Residual Owner. However, there is no exemption from
withholding tax nor may the rate of such tax be reduced, under a tax treaty or
otherwise, with respect to any
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distribution of income that is an excess inclusion. Although no regulations have
been proposed or adopted addressing withholding on residual interests held by
non-U.S. Persons, the provisions of the REMIC Regulations, described below,
relating to the transfer of residual interests to non-U.S. Persons can be read
as implying that withholding with respect to excess inclusion income is to be
determined by reference to the amount of the accrued excess inclusion income
rather than to the amount of cash distributions. If the IRS were successfully to
assert such a position, cash distributions on Residual Certificates held by non-
U.S. Persons could be subject to withholding at rates as high as 100 percent,
depending on the relationship of accrued excess inclusion income to cash
distributions with respect to such Residual Certificates. See "Taxation of
Owners of REMIC Residual Certificates--Excess Inclusions."
Certain restrictions relating to transfers of REMIC Residual
Certificates to and by investors who are not "U.S. Persons" (as defined above)
are also imposed by the REMIC Regulations. First, transfers of REMIC Residual
Certificates to a non-U.S. Person that have "tax avoidance potential" are
disregarded for all federal income tax purposes. If such transfer is
disregarded, the purported transferor of such a REMIC Residual Certificate to a
non-U.S. Person would continue to remain liable for any taxes due with respect
to the income on such REMIC Residual Certificate. A transfer of a REMIC Residual
Certificate has tax avoidance potential unless, at the time of the transfer, the
transferor reasonably expects (1) that the REMIC will distribute to the
transferee Residual Certificateholder amounts that will equal at least 30
percent of each excess inclusion, and (2) that such amounts will be distributed
at or after the time at which the excess inclusion accrues and not later than
the close of the calendar year following the calendar year of accrual. This rule
does not apply to transfers if the income from the REMIC Residual Certificate is
taxed in the hands of the transferee as income effectively connected with the
conduct of a U.S. trade or business. Second, if a non-U.S. person transfers a
REMIC Residual Certificate to a U.S. person, and the transfer has the effect of
allowing the transferor to avoid tax on accrued excess inclusions, that transfer
is disregarded for all federal income tax purposes and the purported non-U.S.
person transferor continues to be treated as the owner of the REMIC Residual
Certificate. Thus, the REMIC's liability to withhold 30 percent of the accrued
excess inclusions is not terminated even though the REMIC Residual Certificate
is no longer held by a non-U.S. person.
M. State and Local Taxation
Many states do not automatically conform to changes in the federal
income tax laws. Consequently, a REMIC Mortgage Pool that would not qualify as a
fixed investment trust for federal income tax purposes may be characterized as a
corporation, a partnership, or some other entity for purposes of state income
tax law. Such characterization could result in entity level income or franchise
taxation of the REMIC Mortgage Pool formed in, owning mortgages or property in,
or having servicing activity performed in a state without conforming REMIC
provisions in its income or franchise tax law. Further, REMIC Regular
Certificateholders resident in non-conforming states may have their ownership of
REMIC Regular Certificates characterized as an interest other than debt of the
REMIC such as stock or a partnership interest. Investors are advised to consult
their tax advisers concerning the state and local income tax consequences of
their purchase and ownership of REMIC Regular Certificates.
III. MORTGAGE POOLS
A. Classification of Mortgage Pools
With respect to each series of Trust Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus Supplement,
Cadwalader, Wickersham & Taft will deliver their opinion to the effect that the
arrangements pursuant to which such Mortgage Pool will be administered and such
Trust Certificates will be issued will not be classified as an association
taxable as a corporation and that each such Mortgage Pool will be classified as
a trust whose taxation will be governed by the provisions of subpart E, Part I
of subchapter J of the Code.
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B. Characterization of Investments in Trust Certificates
1. Trust Fractional Certificates
In the case of Trust Fractional Certificates, counsel to the Depositor
will deliver an opinion that, in general (and subject to the discussion below of
Contracts and under "Buydown Mortgage Loans"), (i) Trust Fractional Certificates
held by a thrift institution taxed as a "mutual savings bank" or "domestic
building and loan association" will represent interests in "qualifying real
property loans" within the meaning of Code Section 593(d); (ii) Trust Fractional
Certificates held by a thrift institution taxed as a "domestic building and loan
association" will represent "loans . . . secured by an interest in real
property" within the meaning of Code Section 7701 (a)(19)(C)(v); (iii) Trust
Fractional Certificates held by a real estate investment trust will represent
"real estate assets" within the meaning of Code Section 856(c)(5)(A) and
interest on Trust Fractional 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)(5)(B); and (iv) Trust
Fractional Certificates acquired by a REMIC in accordance with the requirements
of Section 860G(a)(3)(A)(i) and (ii) or Section 860G(a)(4)(B) of the Code will
be treated as "qualified mortgages" within the meaning of Code Section
860D(a)(4). In the case of a Trust Fractional Certificate evidencing interests
in Contracts, such Certificates will qualify for the treatment described in (i)
through (iv) of the preceding sentence only to the extent of the fraction of
such Certificate corresponding to the fraction of the Contract Pool that
consists of Contracts that would receive such treatment if held directly by the
Trust Fractional Certificateholder.
2. Trust Interest Certificates
With respect to each Series of Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus Supplement,
Cadwalader, Wickersham & Taft will advise the Depositor that in their opinion,
based on the legislative history, a REMIC that acquires a Trust Interest
Certificate in accordance with the requirements of Section 860G(a)(3)(A)(i) and
(ii) or Section 860G(a)(4)(B) of the Code will be treated as owning a "Qualified
Mortgage" within the meaning of Section 860(G)(a)(3) of the Code.
Although there appears to be no policy reason not to accord to Trust
Interest Certificates the other treatment described above for Trust Fractional
Certificates, there is no authority addressing such characterization for
instruments similar to Trust Interest Certificates. Consequently, it is unclear
to what extent, if any, (1) a Trust Interest 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" within the meaning of Code Section 7701(a)(19)(C)(v); (2) a Trust
Interest Certificate owned by a financial institution described in Code Section
593(a) will be considered to represent "qualifying real property loans" within
the meaning of Code Section 593(d); or (3) a real estate investment trust which
owns a Trust Interest Certificate will be considered to own "real estate assets"
within the meaning of Code Section 856(c)(5)(A), and interest income thereon
will be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B). Prospective
purchasers to which such characterization of an investment in Trust Interest
Certificates is material should consult their own tax advisers regarding whether
the Trust Interest Certificates, and the income therefrom, will be so
characterized.
3. Buydown Mortgage Loans
It is contemplated that the assets of certain Mortgage Pools may
include Buydown Mortgage Loans. The characterization of an investment in Buydown
Mortgage Loans will depend upon the precise terms of the related Buydown
Agreement. There are no directly applicable precedents with respect to the
federal income tax treatment or the characterization of investments in Buydown
Mortgage Loans. Accordingly, holders of Trust Certificates should consult their
own tax advisers with respect to characterization of investments in Mortgage
Pools that include Buydown Mortgage Loans.
Although the matter is not entirely free from doubt, the portion of a
Trust Certificate representing an interest in Buydown Mortgage Loans may be
considered to represent an investment in "loans . . . secured by an interest in
real property" within the meaning of Code Section 7701(a)(19)(C)(v) and
"qualifying real property loans"
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within the meaning of Code Section 593(d) to the extent the outstanding
principal balance of the Buydown Mortgage Loans exceeds the amount held from
time to time in the Buydown Fund. It is also possible that the entire interest
in Buydown Mortgage Loans may be so considered, because the fair market value of
the real property securing each Buydown Mortgage Loan will exceed the amount of
such loan at the time it is made. Purchasers and their tax advisers are advised
to review Section 1.593-11(d)(2) of the Treasury Regulations, which suggests
that this latter treatment may be available, and to compare Revenue Ruling 81-
203, 1981-2 C.B. 137, which may be read to imply that apportionment is generally
required whenever more than a minimal amount of assets other than real property
may be available to satisfy purchasers' claims.
For similar reasons, the portion of such Trust Certificate
representing an interest in Buydown Mortgage Loans may be considered to
represent "real estate assets" within the meaning of Code Section 856(c)(5)(A).
Purchasers and their tax advisers are advised to review Section 1.856-5(c)(1)(i)
of the Treasury Regulations, which specifies that if a mortgage loan is secured
by both real property and by other property and the value of the real property
alone equals or exceeds the amount of the loan, then all interest income will be
treated as "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B).
C. Taxation of Owners of Trust Fractional Certificates
Each holder of a Trust Fractional Certificate (a "Trust Fractional
Certificateholder") will be treated as the owner of an undivided percentage
interest in the principal of, and possibly a different undivided percentage
interest in the interest portion of, each of the Mortgage Loans included in a
Mortgage Pool. Accordingly, each Trust Fractional Certificateholder must report
on its federal income tax return its allocable share of income from its
interests, as described below, at the same time and in the same manner as if it
had held directly interests in the Mortgage Loans and received directly its
share of the payments on such Mortgage Loans. Because of stripped interests,
market discount or original issue discount, or premium, the amount includible in
income on account of a Trust Fractional Certificate may differ significantly
from the amount payable thereon from payments of interest on the Mortgage Loans.
Each Trust Fractional Certificateholder may report and deduct its allocable
share of the servicing and related fees and expenses paid to or retained by the
Company at the same time, to the same extent, and in the same manner as such
items would have been reported and deducted had it held directly interests in
the Mortgage Loans and paid directly its share of the servicing and related fees
and expenses. A holder of a Trust Fractional Certificate who is an individual,
estate or trust will be allowed a deduction for servicing fees in determining
its regular tax liability only to the extent that the aggregate of such holder's
miscellaneous itemized deductions exceeds two percent of adjusted gross income,
and will be allowed no deduction for such fees in determining its liability for
alternative minimum tax. Amounts received by Trust Fractional Certificateholders
in lieu of amounts due with respect to any Mortgage Loan but not received by the
Depositor from the Mortgagor will be treated for federal income tax purposes as
having the same character as the payments which they replace.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Stripped Mortgage
Loans should read the material under the headings "Application of Stripped Bond
Rules," "Market Discount and Premium" and "Allocation of Purchase Price" for a
discussion of particular rules applicable to their Certificates.
Purchasers of Trust Fractional Certificates identified in the
applicable Prospectus Supplement as representing interests in Unstripped
Mortgage Loans should read the material under the headings "Treatment of
Unstripped Certificates," "Market Discount and Premium," and "Allocation of
Purchase Price" for a discussion of particular rules applicable to their
Certificates. However, the IRS has indicated that under some circumstances it
will view a portion of servicing and related fees and expenses paid to or
retained by the Master Servicer or sub-servicers as an interest in the Mortgage
Loans, essentially equivalent to that portion of interest payable with respect
to each Mortgage Loan that is retained by the Depositor ("Retained Yield"). If
such a view were sustained with respect to a particular Mortgage Pool, such
purchasers would be subject to the rules set forth under "Application of
Stripped Bond Rules" rather than those under "Treatment of Unstripped
Certificates." Unless otherwise stated in the related Prospectus Supplement, the
Depositor does not expect any Servicing Fee or Master Servicing Fee to
constitute a retained interest in the Mortgage Loans; nevertheless, any such
expectation generally will be a matter of uncertainty, and prospective
purchasers are advised to consult their own tax advisers with respect to the
existence of a retained interest and any effects on investment in Trust
Fractional Certificates.
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1 Application of Stripped Bond Rules
Each Mortgage Pool will consist of an interest in each of the Mortgage
Loans relating thereto, exclusive of the Depositor's Retained Yield, if any.
With respect to each Series of Certificates for which they are identified as
counsel to the Depositor in the applicable Prospectus Supplement, Cadwalader,
Wickersham & Taft will advise the Depositor that, in their opinion, any Retained
Yield will be treated for federal income tax purposes as an ownership interest
retained by the Depositor in a portion of each interest payment on the
underlying Mortgage Loans. Unless otherwise stated in the Prospectus Supplement,
the sale of the Trust Certificates associated with any Mortgage Pool for which
there is a class of Trust Interest Certificates or two or more Classes of Trust
Fractional Certificates bearing different interest rates or of Trust
Certificates identified in the Prospectus Supplement as representing interests
in "Stripped Mortgage Loans" will be treated for federal income tax purposes as
having effected a separation in ownership between the principal of each Mortgage
Loan and some or all of the interest payable thereon. As a consequence, each
Stripped Mortgage Loan (generally, a Mortgage Loan having Retained Yield or
included in a Mortgage Pool having either Trust Interest Certificates or more
than one class of Trust Fractional Certificates or identified in the Prospectus
Supplement as related to a Class of Trust Certificates identified as
representing interests in Stripped Mortgage Loans) will become subject to the
"stripped bond" rules of the Code (the "Stripped Bond Rules"). The effect of
applying those rules will generally be to require each Trust Fractional
Certificateholder to accrue and report income attributable to its share of the
principal and interest on each of the Stripped Mortgage Loans as original issue
discount on the basis of the yield to maturity of such Stripped Mortgage Loans,
as determined in accordance with the provisions of the Code dealing with
original issue discount. For a description of the general method of calculating
original issue discount, see "REMIC Trust Funds--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount." The yield to maturity of a Trust
Fractional Certificateholder's interest in the Stripped Mortgage Loans will be
calculated taking account of the price at which the holder purchased the
Certificate and the holder's share of the payments of principal and interest to
be made thereon. Although the provisions of the Code and the OID Regulations do
not directly address the treatment of instruments similar to Trust Fractional
Certificates, in reporting to Trust Fractional Certificateholders the Trustee
intends to treat such Certificates as a single obligation with payments
corresponding to the aggregate of the payments allocable thereto from each of
the Mortgage Loans. See "Aggregate Reporting." Further, for purposes of
reporting original issue discount to Trust Fractional Certificate Holders, the
amount of original issue discount allocable to Trust Fractional Certificates for
each period will be calculated taking account of the prepayment assumption set
forth in the applicable Prospectus Supplement using the method prescribed for
REMIC Regular Certificates by Code Section 1272(a)(6). See "Prepayments" and
"Description of the Certificates--Reports to Certificateholders."
Each holder of a Certificate must include in gross income the sum of
the "daily portions" of original issue discount on its Certificate for each day
during its taxable year on which it held such Trust Fractional Certificate. For
this purpose, in the case of an original holder of a Trust Fractional
Certificate, the daily portions of original issue discount will be determined
under the method of Code Section 1272(a)(6) as follows: a calculation will first
be made of the portion of the original issue discount that accrued during each
accrual period, that is, unless otherwise stated in the applicable Prospectus
Supplement, each period that ends on a date that corresponds to a date on which
payments are due on Mortgage Loans and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date). For any accrual period, such portion will equal the
excess, if any, of (i) the sum of (A) the present value of all of the
distributions remaining to be made on the Trust Fractional Certificate, if any,
as of the end of the accrual period and (B) the distribution made on such Trust
Fractional Certificate during the accrual period, over (ii) the adjusted issue
price of such Trust Fractional Certificate at the beginning of the accrual
period. The present value of the remaining payments referred to in the preceding
sentence will be calculated based on (i) the yield to maturity of the Trust
Fractional Certificate, calculated as of the settlement date, giving effect to
the prepayment assumption set forth in the applicable Prospectus Supplement,
(ii) events (including actual prepayments) that have occurred prior to the end
of the accrual period and (iii) the prepayment assumption set forth in the
applicable Prospectus Supplement. The adjusted issue price of a Trust Fractional
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
with respect to such Trust Fractional Certificate that accrued in prior accrual
periods, and reduced by the amount of any distributions made on such Trust
Fractional Certificate in prior accrual periods. The original issue discount
accruing during any accrual period will then be allocated ratably to each day
during the period to determine the daily portion of original issue discount for
each day. With respect to an accrual period between the settlement date and the
first Cut-off Date on the Trust Fractional Certificate
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(notwithstanding that no distribution is scheduled to be made on such date) that
is shorter than a full accrual period, the OID Regulations permit the daily
portions of original issue discount to be determined according to any reasonable
method.
Under Treasury regulations, original issue discount so determined with
respect to a particular Stripped Mortgage Loan may be considered to be zero
under the de minimis rule described above, in which case it is treated as market
discount. See "REMIC Trust Funds--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". Those regulations also provide that
original issue discount so determined with respect to a particular Stripped
Mortgage Loan will be treated as market discount if the rate of interest on the
Stripped Mortgage Loan, including a reasonable Servicing Fee, is no more than
one percentage point less than the unstripped rate of interest. See "--Market
Discount and Premium". The Trustee intends to apply the foregoing de minimis and
market discount rules on an aggregate poolwide basis, although it is possible
that investors may be required to apply them on a loan by loan basis. After the
fact loan by loan information may not be available should such application of
those rules be received.
Although the OID Regulations do not address Code Section 1272(a)(6) or
all of the other issues raised by the application of the original issue discount
rules to Stripped Mortgage Loans, in the absence of other contrary authority the
Depositor intends to be guided by the provisions contained therein in
interpreting the application of Code Section 1272(a)(6) to Trust Fractional
Certificates.
Subsequent purchasers of the Certificates may be required to include
"original issue discount" in income in the manner described above but in an
amount computed using the price at which such subsequent purchaser purchased the
Certificate. Further, such purchasers may be required to determine if the above
described de minimis and market discount rules apply at the time a Trust
Fractional Certificate is acquired, based on the characteristics of the Mortgage
Loans at that time.
Variable Rate Certificates. Purchasers of Trust Fractional
Certificates bearing a variable rate of interest should be aware that there is
considerable uncertainty concerning the application of Code Section 1272(a)(6)
and the OID Regulations to Mortgage Loans bearing a variable rate of interest.
Although such regulations are subject to a different interpretation, as
discussed below, in the absence of other contrary authority in preparing reports
furnished to Certificateholders the Trustee intends to treat Stripped Mortgage
Loans bearing a variable rate of interest (other than those treated as having
market discount pursuant to the regulations described above) as subject to the
provisions therein governing variable rate debt instruments modified to account
for a prepayment assumption using the methods of Code Section 1272(a)(6). The
effect of the application of such provisions generally will be to cause
Certificateholders holding Trust Fractional Certificates bearing interest at a
Single Variable Rate (as defined above under "REMIC Trust Funds--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount") to take into
account for each period an amount corresponding approximately to the sum of (i)
the qualified stated interest accruing on the outstanding face amount of the
Trust Fractional Certificate as the stated interest rate for that Certificate
(including allocable servicing and other costs of the Mortgage Pool) varies from
time to time and (ii) the amount of original issue discount that would have been
attributable to that period on the basis of a constant yield to maturity for a
bond issued at the same time and price as the Trust Fractional Certificate,
having the same face amount and schedule of payment of principal as such
Certificate, subject to the same prepayment assumption, and bearing interest in
each period at a fixed rate equal to the value of the applicable qualified
floating rate or qualified inverse floating rate in the case of a Trust
Fractional Certificate providing for either such rate, or equal to the fixed
rate that reflects the reasonably expected yield on the Certificate in the case
of a Trust Fractional Certificate providing for an objective rate other than an
inverse floating rate, in each case as of the issue date. Certificateholders
holding Trust Fractional Certificates bearing interest at a Multiple Variable
Rate (as defined above under "REMIC Trust Funds--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount") generally will take into account
interest and original issue discount under a similar methodology, except that
the amounts of qualified stated interest and original issue discount
attributable to such a Certificate first will be determined for an "equivalent"
debt instrument bearing fixed rates, the assumed fixed rates for which are (a)
for each qualified floating rate, the value of each such rate as of the Closing
Date (with appropriate adjustment for any differences in intervals between
interest adjustment dates), (b) for a qualified inverse floating rate, the value
of the rate as of Closing Date, and (c) for any other objective rate, the fixed
rate that reflects the yield that is reasonably expected for the Trust
Fractional Certificate. If the interest paid or accrued with respect to a
Multiple Variable Rate Trust Fractional
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Certificate during an accrual period differs from the assumed fixed interest
rate, such difference will be an adjustment (to interest or original issue
discount, as applicable) to the Certificateholder's taxable income for the
taxable period or periods to which such difference relates.
In the case of a Trust Fractional Certificate that provides for stated
interest at a fixed rate in one or more accrual periods and either one or more
qualified floating rates or a qualified inverse floating rate in other accrual
periods, the fixed rate is first converted into an assumed variable rate. The
assumed variable rate will be a qualified floating rate or a qualified inverse
floating rate according to the type of actual variable rates provided by the
Trust Fractional Certificate, and must be such that the fair market value of the
Trust Fractional Certificate as of issuance is approximately the same as the
fair market value of an otherwise identical debt instrument that provides for
the assumed variable rate in lieu of the fixed rate. The Trust Fractional
Certificate is then subject to the determination of the amount and accrual of
original issue discount as described above, by reference to the hypothetical
variable rate instrument.
Prospective purchasers of Trust Fractional Certificates bearing a
variable rate of interest should be aware that the provisions in the OID
Regulations applicable to variable rate debt instruments have been limited and
may not apply to certain adjustable and variable rate mortgage loans, possibly
including the Mortgage Loans. If variable rate Trust Fractional Certificates are
not governed by the provisions of the OID Regulations applicable to variable
rate debt instruments, such Certificates may be subject to the provisions of
proposed Treasury regulations applicable to instruments having contingent
payments. The application of those provisions to instruments such as the Trust
Fractional Certificates is subject to differing interpretations. Prospective
purchasers of variable rate Trust Fractional Certificates are advised to consult
their tax advisers concerning the tax treatment of such Certificates.
Aggregate Reporting. The Trustee intends in reporting information
relating to original issue discount to Certificateholders to provide such
information on an aggregate poolwide basis. Although there are provisions in the
OID Regulations that suggest that the computation of original issue discount on
such a basis is either appropriate or required, it is possible that investors
may be required to compute original issue discount on a mortgage loan by
mortgage loan basis taking account of an allocation of their basis in the
Certificates among the interests in the various mortgage loans represented by
such Certificates according to their respective fair market values. Investors
should be aware that it may not be possible to reconstruct after the fact
sufficient mortgage by mortgage information should a computation on that basis
be required by the IRS.
Because the treatment of the Certificates under the OID Regulations is
both complicated and uncertain, Certificateholders should consult their tax
advisers to determine the proper method of reporting amounts received or accrued
on Certificates.
2. Treatment of Unstripped Certificates
Mortgage Loans in a Mortgage Pool for which there is neither any Class
of Trust Interest Certificates, nor more than one Class of Trust Fractional
Certificates, nor any Retained Yield or otherwise identified in the Prospectus
Supplement as being Unstripped Mortgage Loans ("Unstripped Mortgage Loans") will
be treated as wholly owned by the Trust Fractional Certificateholders of a
Mortgage Pool. Trust Fractional Certificateholders using the cash method of
accounting must take into account their pro rata shares of income from
Unstripped Mortgage Loans as and when collected by the Trustee. Trust Fractional
Certificateholders using an accrual method of accounting must take into account
their pro rata shares of income from Unstripped Mortgage Loans as they become
due or are paid to the Trustee, whichever is earlier.
Code Sections 1272 through 1275 provide rules for the current
inclusion in income of original issue discount on obligations issued by natural
persons on or after March 2, 1984. Generally those sections provide that
original issue discount should be included on the basis of a constant yield to
maturity. However, the application of the original issue discount rules to
mortgages is unclear in certain respects. The Treasury Department has issued the
OID Regulations relating to original issue discount, which generally address the
treatment of mortgages issued on or after April 4, 1994. The OID Regulations
would provide a new de minimis rule for determining whether certain self-
amortizing installment obligations, such as the Mortgage Loans, are to be
treated as having original issue discount. Such obligations would have original
issue discount if the points charged at origination (or other loan discount)
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exceeded the greater of one-sixth of one percent times the number of full years
to final maturity or one-fourth of one percent times weighted average maturity.
The OID Regulations treat certain variable rate mortgage loans as having
original issue discount because of an initial rate of interest that differs from
that determined by the mechanism for setting the interest rate during the
remainder of the loan, or because of the use of an index that does not vary in a
manner approved the OID Regulations. For a description of the general method of
calculating original issue discount see "REMIC Trust Funds--Taxation of Owners
of REMIC Regular Certificates--Original Issue Discount" and "Application of
Stripped Bond Rules--Variable Rate Certificates." Code Section 1272(a)(6)
requires that the inclusion of original issue discount in income for certain
obligations whose principal is subject to acceleration take account of a
prepayment assumption and actual prepayments. It is unclear to what, if any,
extent those provisions could be made applicable to Mortgage Pools composed of
Unstripped Mortgage Loans. See "Prepayments."
A subsequent purchaser of a Trust Fractional Certificate that
purchases such Certificate at a cost (not including payment for accrued
qualified stated interest) less than its allocable portion of the aggregate of
the remaining stated redemption prices at maturity of the Unstripped Mortgage
Loans will also be required to include in gross income, for each day on which it
holds such Trust Fractional Certificate, its allocable share of the daily
portion of original issue discount with respect to each Unstripped Mortgage
Loan, but reduced, if the cost of such subsequent purchaser's interest in such
Unstripped Mortgage Loan exceeds its "adjusted issue price," by an amount equal
to the product of (i) such daily portion and (ii) a constant fraction, whose
numerator is such excess and whose denominator is the sum of the daily portions
of original issue discount allocable to such subsequent purchaser's interest for
all days on or after the day of purchase. The adjusted issue price of an
Unstripped Mortgage Loan on any given day is equal to the sum of the adjusted
issue price (or, in the case of the first accrual period, the issue price) of
such Unstripped Mortgage Loan at the beginning of the accrual period during
which such day occurs and the daily portions of original issue discount for all
days during such accrual period prior to such day, reduced by the aggregate
amount of payments previously made other than payments of qualified stated
interest.
3. Market Discount and Premium
In general, if the Stripped Bond Rules do not apply to a Trust
Fractional Certificate, a purchaser of a Trust Fractional Certificate will be
treated as acquiring market discount bonds to the extent that the share of such
purchaser's purchase price allocable to any Unstripped Mortgage Loan is less
than its allocable share of the "adjusted issue price" of such Mortgage Loan.
See "Treatment of Unstripped Certificates" and "Application of Stripped Bond
Rules." Thus, with respect to such Mortgage Loans, a holder will be required,
under Code Section 1276, to include as ordinary income the previously
unrecognized accrued market discount in an amount not exceeding each principal
payment on any such Mortgage Loans at the time each principal payment is
received or due, in accordance with the purchaser's method of accounting, or
upon a sale or other disposition of the Certificate. Such market discount would
accrue in a manner to be provided in Treasury regulations, and in the absence of
such regulations will be required to be accrued in the manner described in
"Taxation of Owners of REMIC Regular Certificates--Market Discount and Premium";
however, it is unclear whether a prepayment assumption should be used in
determining the rate of accrual of market discount on a Trust Fractional
Certificate. See "Prepayments" below. In addition, the description of the market
discount rules in "Taxation of Owners of REMIC Regular Certificates--Market
Discount and Premium" with respect to (i) conversion to ordinary income of a
portion of any gain recognized on sale or exchange of a market discount bond,
(ii) deferral of interest expense deductions, (iii) the de minimis exception
from the market discount rules and (iv) the elections to include in income
either market discount or all interest, discount and premium as they accrue, is
also generally applicable to Trust Fractional Certificates. Treasury regulations
implementing the market discount rules, including the 1986 Act amendments
thereto, have not yet been issued and investors therefore should consult their
own tax advisers regarding the application of these rules.
If a Trust Fractional Certificate is purchased at a premium, under
existing law such premium must be allocated to each of the Mortgage Loans (on
the basis of its relative fair market value). The portion of any premium
allocated to Unstripped Mortgage Loans originated after September 27, 1985 can
be amortized and deducted under the provisions of the Code relating to
amortizable bond premium. The portion of such premium allocated to Unstripped
Mortgage Loans originated on or before September 27, 1985 may only be deducted
upon the sale or final distribution in respect of any such Mortgage Loan, as the
special rules of the Code that permit the amortization of such premium apply
only to corporate and governmental obligations. Upon such a sale or final
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distribution in respect of such a Mortgage Loan, the premium, if any, allocable
thereto would be recognized as a short-term or long-term capital loss by a
Certificateholder holding the Certificate as a capital asset, depending on how
long the Certificate had been held.
The application of the Stripped Bond Rules to Stripped Mortgage Loans
will generally cause any premium allocable to Stripped Mortgage Loans to be
amortized automatically by adjusting the rate of accrual of interest and
discount to take account of the allocable portion of the actual purchase price
of the Certificate. In that event, no additional deduction for the amortization
of premium would be allowed. It is possible that the IRS may take the position
that the application of the Stripped Bond Rules to the Stripped Mortgage Loans
should be adjusted so as not to take account of any premium allocable to a
Stripped Mortgage Loan originated on or before September 27, 1985. Any such
premium would then be subject to the provisions of the Code relating to the
amortization of bond premium, including the limitations described in the
preceding paragraph on the amortization of premium allocable to Mortgage Loans
originated on or before September 27, 1985.
4. Allocation of Purchase Price
As noted above, it is anticipated that a purchaser of a Trust
Fractional Certificate relating to Unstripped Mortgage Loans will be required to
allocate the purchase price thereof to the undivided interest it acquires in
each of the Mortgage Loans, in proportion to the respective fair market values
of the portions of such Mortgage Loans included in the Mortgage Pool at the time
the Certificate is purchased. The Depositor believes that it may be reasonable
to make such allocation in proportion to the respective principal balances of
the Mortgage Loans, where the interests in the Mortgage Loans represented by a
Trust Fractional Certificate have a common remittance rate and other common
characteristics, and otherwise so as to produce a common yield for each interest
in a Mortgage Loan, provided the Mortgage Loans are not so diverse as to evoke
differing prepayment expectations. However, if there is any significant
variation in interest rates among the Mortgage Loans, a disproportionate
allocation of the purchase price taking account of prepayment expectations may
be required.
D. Taxation of Owners of Trust Interest Certificates
With respect to each Series of Certificates for which they are
identified as counsel to the Depositor in the applicable Prospectus Supplement,
Cadwalader, Wickersham & Taft will advise the Depositor that, in their opinion,
each holder of a Trust Interest Certificate (a "Trust Interest
Certificateholder") will be treated as the owner of an undivided interest in the
interest portion ("Interest Coupon") of each of the Mortgage Loans. Accordingly,
and subject to the discussion under "Application of Stripped Bond Rules" below,
each Trust Interest Certificateholder is treated as owning its allocable share
of the entire Interest Coupon from the Mortgage Loans, will report income as
described below, and may deduct its allocable share of the servicing and related
fees and expenses paid to or retained by the Depositor at the same time and in
the same manner as such items would have been reported under the Trust Interest
Certificateholder's tax accounting method had it held directly an interest in
the Interest Coupon from the Mortgage Loans, received directly its share of the
amounts received with respect to the Mortgage Loans and paid directly its share
of the servicing and related fees and expenses. An individual, estate or trust
holder of a Trust Interest Certificate will be allowed a deduction for servicing
fees in determining its regular tax liability only to the extent that the
aggregate of such holder's miscellaneous itemized deductions exceeds two percent
of adjusted gross income, and will be allowed no deduction for such fees in
determining its liability for alternative minimum tax. Amounts, if any, received
by Trust Interest Certificateholders in lieu of amounts due with respect to any
Mortgage Loan but not received by the Master Servicer from the Mortgagor will be
treated for federal income tax purposes as having the same character as the
payment which they replace.
1. Application of Stripped Bond Rules
A Trust Interest Certificate will consist of an undivided interest in
the Interest Coupon of each of the Mortgage Loans. With respect to each Series
of Certificates for which they are identified as counsel to the Depositor in the
applicable Prospectus Supplement, Cadwalader, Wickersham & Taft will advise the
Depositor that, in their opinion a Trust Interest Certificate will be treated
for federal income tax purposes as comprised of an ownership interest in a
portion of the interest coupon of each of the Mortgage Loans (a "Stripped
Interest") separated by the Depositor from the right to receive principal
payments and the remainder, if any, of each interest
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payment on the underlying Mortgage Loan. As a consequence, the Trust Interest
Certificates will become subject to the Stripped Bond Rules. Each Trust Interest
Certificateholder will be required to apply the stripped bond rules to its
interest in the Interest Coupon under the method prescribed by the Code, taking
account of the price at which the holder purchased the Trust Interest
Certificate and the Trust Interest Certificateholder's share of the scheduled
payment to be made thereon. The Stripped Bond Rules generally require a holder
of stripped bonds or stripped coupons to accrue and report income from such
stripped bonds or coupons daily on the basis of the yield to maturity of such
stripped bonds or coupons, as determined in accordance with the provisions of
the Code dealing with original issue discount. For a discussion of the general
method of calculating original issue discount, see "REMIC Trust Funds--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount." The
provisions of the Code and the OID Regulations do not directly address the
treatment of instruments similar to Trust Interest Certificates. In reporting to
Trust Interest Certificateholders such Certificates will be treated as a single
obligation with payment corresponding to the aggregate of the payment allocable
thereto from each of the Mortgage Loans. See "Aggregate Reporting." Because
prepayment of a Mortgage Loan will eliminate part or all of any subsequent
payments in the related Stripped Interest, and because each Mortgage Loan may
prepay at any time, yield to maturity for a Trust Interest Certificate cannot be
unambiguously computed pursuant to the provisions of the Code governing original
issue discount.
Although there is considerable uncertainty concerning the treatment of
obligations such as the Trust Interest Certificates under the original issue
discount rules, and the OID Regulations could be read to require such
obligations to be treated as obligations providing for contingent principal, the
Depositor believes that it is reasonable to treat such obligations in a manner
similar to that accorded regular interests in a REMIC which have similar
characteristics. Consequently, the Depositor intends to report to the IRS and
investors pursuant to the method described in Section 1272(a)(6) of the Code.
Generally, for holders of Trust Interest Certificates who acquire their
Certificates from the underwriter on the settlement date for the particular
offering, under that method, the daily portions of original issue discount will
be determined as follows. First, a calculation will be made of the amount of
original issue discount that accrued during each accrual period. Such original
issue discount will be the excess, if any, of (i) the sum of (A) the present
value of all of the portions of the payments not yet due on the Mortgage Loans
attributable to the Trust Interest Certificate, if any, as of the end of the
accrual period and (B) the portions of the payments which became due during the
accrual period attributable to the Trust Interest Certificate, over (ii) the
adjusted issue price of such Trust Interest Certificate at the beginning of the
accrual period. The present value of the remaining payments referred to in the
preceding sentence will be calculated based on (i) the yield to maturity of the
Trust Interest Certificate calculated as of the settlement date, giving effect
to the Prepayment Assumption, (ii) events (including actual prepayments) that
have occurred prior to the end of the accrual period, and (iii) the Prepayment
Assumption. The adjusted issue price of a Trust Interest Certificate at the
beginning of any accrual period will equal the issue price of such Certificate,
increased by the aggregate amount of original issue discount with respect to
such Trust Interest Certificate that accrued in prior accrual periods, and
reduced by the amounts attributable to such Trust Interest Certificate which
became due on the Mortgage Loans in prior accrual periods. The original issue
discount accruing during any accrual period will then be allocated ratably to
each day during the period to determine the daily portion of original issue
discount for each day. With respect to an accrual period between the settlement
date and the first Due Date that is shorter than a full accrual period, the OID
Regulations permit the daily portions of original issue discount to be
determined according to any reasonable method.
Subsequent purchasers of the Trust Interest Certificates may be
required to include "original issue discount" in income in the manner described
above but in an amount computed using the price at which such subsequent
purchaser purchased the Trust Interest Certificate.
Under the provisions of proposed Treasury regulations governing
obligations with contingent principal, each Trust Interest Certificate would be
treated as a single installment obligation every payment of which was
contingent, and each payment would be treated as becoming fixed where due from
the mortgagor. As a result, under those proposed regulations the portion of each
monthly payment treated as interest would consist of the sum of (i) interest
accrued at the AFR on the adjusted issue price of the Trust Interest Certificate
as of the beginning of the monthly period and (ii) any such interest for prior
periods not previously allocated to a prior payment. The AFR would be determined
as if Code Section 1274 applied, treating a Trust Interest Certificate as issued
on the date purchased by the Certificateholder and as maturing on the date of
the final scheduled payment of the Trust Interest Certificate. The adjusted
issue price at the beginning of a monthly period would be the Trust Interest
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Certificateholder's purchase price (the "Initial Issue Price") increased by
interest accrued, and decreased by payments due, during prior monthly periods.
However, after the aggregate of payments due treated as principal equaled the
Initial Issue Price, all remaining payments due would be treated as interest. A
final payment would be treated as principal to the extent the Initial Issue
Price exceeds the aggregate of amounts previously treated as principal. Any
principal unrecovered following final payment would be treated as a loss subject
to the general provisions of the Code governing the treatment of losses.
Although the foregoing interpretation of the application of the
original issue discount rules to the Stripped Interests is reasonable, there can
be no assurance that the IRS will agree. In particular, Trust Interest
Certificateholders might be required to account for original issue discount
under the proposed Treasury regulations addressing obligations that have
contingent principal. Alternatively, Trust Interest Certificateholders might be
required to treat each scheduled payment on each Stripped Interest as a separate
obligation for purposes of allocating purchase price and computing original
issue discount.
Aggregate Reporting. The Trustee intends in reporting information
relating to original issue discount to Certificateholders to provide such
information on an aggregate poolwide basis. Although there are provisions in the
OID Regulations that suggest that the computation of original issue discount on
such a basis is either appropriate or required, it is possible that investors
may be required to compute original issue discount either on a mortgage loan by
mortgage loan basis taking account of an allocation of their basis in the
Certificates among the interests in the various mortgage loans represented by
such Certificates according to their respective fair market values. The effect
of an aggregate computation for the inclusion of original issue discount in
income is to defer the recognition of losses due to early prepayments relative
to a computation on a mortgage by mortgage basis. Investors should be aware that
it may not be possible to reconstruct after the fact sufficient mortgage by
mortgage information should a computation on that basis be required by the IRS.
Because the treatment of the Trust Interest Certificates under the
proposed regulations is both complicated and uncertain, Trust Interest
Certificateholders should consult their tax advisers to determine the proper
method of reporting amounts received or accrued on Trust Interest Certificates.
E. Prepayments
The 1986 Act contains a provision requiring original issue discount on
certain obligations issued after December 31, 1986 to be calculated taking into
account a prepayment assumption and requiring such discount to be taken into
income on the basis of a constant yield to assumed maturity taking account of
actual prepayments. The obligations to which this provision applies include
those whose payment may be accelerated by reference to prepayments on an
underlying obligation. It is unclear whether this provision will apply to
require holders of Trust Certificates to compute the original issue discount
associated with Stripped Mortgages on the basis of a prepayment assumption and
to take account of actual prepayments for the purposes of including original
issue discount in income. In circumstances in which there is original issue
discount with respect to a Mortgage Loan upon its origination, the OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on such Mortgage Loan. However, the amendments made by the 1986 Act,
while they appear (in the absence of regulations extending their coverage) to be
technically inapplicable to Trust Certificates, could apply by analogy. Such
amendments may be read to suggest that a prepayment assumption is appropriately
made in computing yield with respect to all mortgage-backed securities.
Certificateholders are advised to consult their own tax advisers concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Trust Certificates. The Trustee intends to use a
prepayment assumption in reporting original issue discount to Trust Fractional
Certificateholders and Trust Interest Certificateholders.
F. Sales of Trust Certificates
If a Certificate is sold, gain or loss will be recognized by the
holder thereof in an amount equal to the difference between the amount realized
on the sale and the Certificateholder's adjusted tax basis in the Certificate.
Such tax basis will equal the Certificateholder's cost for the Certificate,
increased by any original issue or market discount with respect to the interest
in the Mortgage Loans represented by such Certificate previously included in
income, and decreased by any deduction previously allowed for premium and by the
amount of
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payments, other than payments of qualified stated interest, previously received
with respect to such Certificate. The portion of any such gain attributable to
accrued market discount not previously included in income will be ordinary
income, as will gain attributable to a Certificate which is part of a
"conversion transaction" or which the holder elects to treat as ordinary. See
"REMIC Trust Funds--Sales of REMIC Certificates" above. Any remaining gain or
any loss will be capital gain or loss if the Certificate was held as a capital
asset except to the extent that section 582(c) of the Code applies to such gain
or loss.
G. Trust Reporting
The Master Servicer will furnish to each holder of a Trust Fractional
Certificate with each distribution a statement setting forth the amount of such
distribution allocable to principal on the underlying Mortgage Loans and to
interest thereon at the Pass-Through Rate. In addition, the Master Servicer will
furnish, within a reasonable time after the end of each calendar year, to each
holder of a Trust Certificate who was such a holder at any time during such
year, information regarding the amount of servicing compensation received by the
Master Servicer and sub-servicer (if any) and such other customary factual
information as the Master Servicer deems necessary or desirable to enable
holders of Trust Certificates to prepare their tax returns.
H. Back-up Withholding
In general, the rules described in "REMIC Trust Funds--Back-up
Withholding" will also apply to Trust Certificates.
I. Foreign Certificateholders
Payments in respect of interest or original issue discount (including
amounts attributable to servicing fees) on the Mortgage Loans to
Certificateholders who are not citizens or residents of the United States,
corporations or other entities organized in or under the laws of the United
States or of any State thereof, or United States estates or trusts, will
generally be subject to 30% United States withholding tax, unless such
Certificateholders have provided required certification as to their non-United
States status under penalty of perjury and then will be free of such tax only to
the extent that the underlying Mortgages were issued after July 18, 1984. This
withholding tax may be reduced or eliminated by an applicable tax treaty.
Notwithstanding the foregoing, if any such payments are effectively connected
with a United States trade or business conducted by the Certificateholder, they
will be subject to regular United States income tax, but will ordinarily be
exempt from United States withholding tax.
J. State and Local Taxation
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state income tax consequences of the acquisition, ownership, and disposition
of the Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisers with respect to the various state tax
consequences of an investment in the Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended
("ERISA"), imposes certain restrictions on employee benefit plans subject to
ERISA ("ERISA Plans") and on those persons who are ERISA fiduciaries with
respect to the assets of such ERISA Plans. In accordance with the general
fiduciary standards of ERISA, an ERISA Plan fiduciary should consider whether an
investment in the Certificates is permitted by the documents and instruments
governing the Plan, consistent with the Plan's overall investment policy and
appropriate in view of the composition of its investment portfolio.
Employee benefit plans which are governmental plans and certain church
plans (if no election has been made under Section 410(d) of the Code) are not
subject to ERISA requirements. Accordingly, assets of such plans may be invested
in the Certificates subject to the provisions of applicable federal and state
law and, in the case
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of any such plan which is qualified under Section 401(a) of the Code and exempt
from taxation under Section 501(a) of the Code, the restrictions imposed under
Section 503 of the Code.
In addition to imposing general fiduciary standards, ERISA and section
4975 of the Code prohibit a broad range of transactions involving assets of
ERISA Plans and other plans subject to Section 4975 of the Code (together with
ERISA Plans, "Plans") and certain persons ("Parties in Interest") who have
certain specified relationships to the Plans and taxes and/or imposes other
penalities on any such transaction under ERISA and/or Section 4975 of the Code,
unless an exemption applies. If the assets of a Trust Fund are treated for ERISA
purposes as the assets of the Plans that purchase or hold Certificates of the
applicable Series, an investment in Certificates of that Series by or with "plan
assets" of a Plan might constitute or give rise to a prohibited transaction
under ERISA or Section 4975 of the Code, unless a statutory or administrative
exemption applies. Violation of the prohibited transaction rules could result in
the imposition of excise taxes and/or other penalties under ERISA and/or Section
4975 of the Code.
FINAL PLAN ASSETS REGULATION
The United States Department of Labor ("DOL") has issued a final
regulation (the "Final Regulation") under which assets of an entity in which a
Plan makes an equity investment will be treated as assets of the investing Plan
in certain circumstances. Unless the Final Regulation provides an exemption from
this "plan asset" treatment, and if such an exemption is not otherwise available
under ERISA, an undivided portion of the assets of a Trust Fund will be treated,
for purposes of applying the fiduciary standards and prohibited transaction
rules of ERISA and Section 4975 of the Code, as an asset of each Plan which
becomes a Certificateholder of the applicable Series.
The Final Regulation provides an exemption from "plan asset" treatment
for securities issued by an entity if, immediately after the most recent
acquisition of any equity interest in the entity, less than 25% of the value of
each class of equity interests in the entity, excluding interests held by a
person who has discretionary authority or control with respect to the assets of
the entity (or any affiliate of such a person), are held by "benefit plan
investors" (e.g., Plans, governmental and other benefit plans not subject to
ERISA and entities holding assets deemed to be "plan assets"). Because the
availability of this exemption to any Trust Fund depends upon the identity of
the Certificateholders of the applicable Series at any time, there can be no
assurance that any Series or Class of Certificates will qualify for this
exemption.
PROHIBITED TRANSACTION CLASS EXEMPTIONS
Prohibited Transaction Class Exemption 83-1 (Class Exemption for
Certain Transactions Involving Mortgage Pool Investment Trusts) ("PTCE 83-1")
permits, subject to certain conditions, certain transactions involving the
creation, maintenance and termination of certain residential mortgage pools and
the acquisition and holding of certain residential mortgage pool pass-through
certificates by Plans, regardless of whether (a) the mortgage pool is exempt
from "plan asset" treatment or (b) the transactions would otherwise be
prohibited under ERISA or Section 4975 of the Code. A Series of Certificates
will be an "Exempt Series" if the general conditions (described below) of PTCE
83-1 are satisfied, and if the applicable Series of Certificates evidences
ownership interests in Trust Assets which do not include Mortgage Certificates,
Cooperative Loans, Mortgage Loans secured by cooperative buildings, Mortgage
Loans secured by Multifamily Property, or Contracts (collectively "Nonexempt
Assets"). An investment by a Plan in Certificates of an Exempt Series (1) will
be exempt from the prohibitions of Section 406(a) of ERISA (relating generally
to Plan transactions involving Parties in Interest who are not fiduciaries) if
the Plan purchases the Certificates at no more than fair market value, and (2)
will be exempt from the prohibitions of Sections 406(b) (1) and (2) of ERISA
(relating generally to Plan transactions with fiduciaries) if, in addition, (i)
the purchase is approved by an independent fiduciary, (ii) no sales commission
is paid to the Depositor as Mortgage Pool sponsor, (iii) the Plan does not
purchase more than 25% of the Certificates of that Series and (iv) at least 50%
of the Certificates of that Series is purchased by persons independent of the
Depositor, the Trustee and the Insurer, as applicable. It does not appear that
PTCE 83-1 applies to a Series of Certificates with respect to which the Trust
Assets include Nonexempt Assets (a "Nonexempt Series"). See "The Trust Fund--The
Mortgage Pools" and "--The Contract Pools." Accordingly, it appears that PTCE
83-1 will not exempt Plans that acquire Certificates of a
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Nonexempt Series from the prohibited transaction rules of ERISA and Section 4975
of the Code. The applicable Prospectus Supplement will state whether a Series of
Certificates is an Exempt Series or a Nonexempt Series.
PTCE 83-1 sets forth three general conditions that must be satisfied
for any transaction to be eligible for exemption: (1) the existence of a pool
trustee who is not an affiliate of the pool sponsor; (2) the maintenance of a
system of insurance or other protection for the pooled mortgage loans and
property securing such loans, and for indemnifying certificateholders against
reductions in pass-through payment due to property damage or defaults in loan
payments; and (3) a limitation on the amount of the payment retained by the pool
sponsor, together with other benefits inuring to it, to not more than adequate
consideration for selling the mortgage loans and reasonable compensation for
services provided by the pool sponsor to the mortgage pool.
The Trustee for all Series will be unaffiliated with the Depositor,
and, accordingly, the first general condition will be satisfied. With respect to
the second general condition of PTCE 83-1, the credit support method represented
by the issuance of a Subordinated Class or Subclasses of Certificates and/or the
establishment of a Reserve Fund, with respect to any Exempt Series for which
such a method of Credit Support is provided (see "Credit Support--Subordinated
Certificates" and "--Reserve Fund"), is substantially similar to a system for
protecting Certificateholders against reductions in pass-through payments which
has been reviewed and accepted by the DOL as an alternative to pool insurance or
a letter of credit indemnification system. This may support a Plan fiduciary's
conclusion that the second general condition is satisfied with respect to any
such Exempt Series although, in the absence of a ruling to this effect, there
can be no assurance that these features will be so viewed by the DOL. In
addition, the Depositor intends to use its best efforts to establish, for each
Exempt Series for which credit support is provided by a Letter of Credit (see
"Credit Support--Letters of Credit") and/or the insurance arrangements set forth
above under "Description of Insurance" (an "Insured Series"), a system that will
adequately protect the Mortgage Pools and indemnify Certificateholders of the
applicable Series against pass-through payment reductions resulting from
property damage or defaults in loan payments. With respect to the third general
condition of PTCE 83-1, the Depositor intends to use its best efforts to
establish a compensation system which will produce for the Depositor total
compensation that will not exceed adequate consideration for forming the
Mortgage Pool and selling the Certificates. However, the Depositor does not
guarantee that its systems will be sufficient to meet the second and third
general conditions (described above) with respect to any Exempt Series.
If an Exempt Series of Certificates is subdivided into two or more
Classes or Subclasses which are entitled to disproportionate allocations of the
principal and interest payments on the Mortgage Loans held by the applicable
Trust Fund, the availability of the exemption afforded by PTCE 83-1 may be
adversely affected, as described in the applicable Prospectus Supplement.
Moreover, if the Certificateholders of any Class or Subclass of Certificates are
entitled to pass-through payment of principal (but no or only nominal interest)
or interest (but no or only nominal principal), it appears that PTCE 83-1 will
not exempt Plans which acquire Certificates of that Class or Subclass from the
prohibited transaction rules of ERISA and Section 4975 of the Code.
If an Exempt Series of Certificates includes a Class of Subordinated
Certificates, PTCE 83-1 will not provide an exemption from the prohibited
transaction rules of ERISA for Plans that acquire such Subordinated
Certificates.
If for any reason PTCE 83-1 does not provide an exemption for a
particular Plan Certificateholder, one of three other prohibited transaction
class exemptions issued by the DOL might apply, i.e., PTCE 91-38 (formerly PTCE
80-51) (Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds), PTCE 90-1 (formerly PTCE 78-19) (Class Exemption for Certain
Transactions Involving Insurance Company Pooled Separate Accounts) or PTCE 84-14
(Class Exemption for Plan Asset Transactions Determined by Independent Qualified
Professional Asset Managers). There can be no assurance that any of these class
exemptions will apply with respect to any particular Plan Certificateholder or,
even if it were to apply, that the exemption would apply to all transactions
involving the applicable Trust Fund. Any person who is a fiduciary by reason of
his or her authority to invest "plan assets" of any Plan (a "Plan investor") and
who is considering the use of "plan assets" of any Plan to purchase of the
offered Certificates should consult with its counsel with respect to the
potential applicability of ERISA and the Code to such investments, and should
determine on its own whether PTCE 83-1 or another exemption would be applicable
(and whether all conditions have been satisfied with respect to any such
exemptions), and whether the offered Certificates are an appropriate investment
for a Plan. Moreover, each Plan fiduciary should
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determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the offered Certificates is appropriate
for the Plan, taking into account the overall investment policy of the Plan and
the composition of the Plan's investment portfolio.
UNDERWRITER'S PTE
CS First Boston Corporation ("First Boston") is the recipient of a
final prohibited transaction exemption, 54 Fed. Reg. 42597 (Oct. 17, 1989) (the
"Underwriter's PTE" or "CS First Boston Corporation's PTE" if specified in the
applicable Prospectus Supplement), which may accord protection from violations
under Sections 406 and 407 of ERISA and Section 4975 of the Code for Plans that
acquire Certificates. The Underwriter's PTE applies to certificates (a) which
represent (1) a beneficial ownership interest in the assets of a trust and
entitle the holder to pass-through payments of principal, interest and/or other
payments made with respect to the assets of the trust, or (2) an interest in a
REMIC if the certificates are issued by and are obligations of a trust; and (b)
with respect to which First Boston or any of its affiliates is either the sole
underwriter, the manager or co-manager of the underwriting syndicate or a
selling or placement agent. The corpus of a trust to which the Underwriter's PTE
applies may consist of (i) obligations which bear interest or are purchased at a
discount and which are secured by (A) single-family residential, multifamily
residential or commercial real property (including obligations secured by
leasehold interests on commercial real property) or (B) shares issued by a
cooperative housing association; and (ii) "guaranteed governmental mortgage pool
certificates" (as defined in the Final Regulation).
Plans acquiring Certificates may be eligible for protection under the
Underwriter's PTE if:
(a) assets of the type included as Trust Assets have been included in
other investment pools ("Other Pools");
(b) certificates evidencing interests in Other Pools have been both
(1) rated in one of the three highest generic rating categories by Standard &
Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps Inc. or Fitch
Investors Service, Inc., and (2) purchased by investors other than Plans, for at
least one year prior to a Plan's acquisition of Certificates in reliance upon
the Underwriter's PTE;
(c) at the time of such acquisition, the Class of Certificates
acquired by the Plan has received a rating in one of the rating categories
referred to in condition (b) above;
(d) the Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(e) the applicable Series of Certificates evidences ownership in Trust
Assets which may include non Subordinated Mortgage Certificates (whether or not
interest and principal payable with respect to the Mortgage Certificates are
guaranteed by the GNMA, FHLMC or FNMA);
(f) the Class of Certificates acquired by the Plan are not
subordinated to other Classes of Certificates of that Series with respect to the
right to receive payment in the event of defaults or delinquencies on the
underlying Trust Assets;
(g) the Plan is an "accredited investor" (as defined in Rule 501(a)(1)
of Regulation D under the Securities Act);
(h) the acquisition of the Certificates by a Plan is on terms
(including the price for the Certificates) that are at least as favorable to the
Plan as they would be in an arm's length transaction with an unrelated party;
and
(i) the sum of all payments made to and retained by the Underwriter or
members of any underwriting syndicate in connection with the distribution of the
Certificates represents not more than reasonable compensation for underwriting
the Certificates; the sum of all payments made to and retained by the Seller
pursuant to the sale of the Trust Assets to the Trust represents not more than
the fair market value of such Trust Assets; and the sum of all payments made to
and retained by the Master Servicer and all Servicers represents not more than
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reasonable compensation for such Servicers' services under the Pooling and
Servicing Agreement and reimbursement of such Servicers' reasonable expenses in
connection herewith.
In addition, the Underwriter's PTE will not apply to a Plan's
investment in Certificates if the Plan fiduciary responsible for the decision to
invest in a Class of Certificates is a Mortgagor or Obligor with respect to more
than 5% of the fair market value of the obligations constituting the Trust
Assets or an affiliate of such person, unless:
(1) in the case of an acquisition in connection with the initial
issuance of any Series of Certificates, at least 50% of each Class of
Certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least 50% of the aggregate interest in the Trust is
acquired by persons independent of the Restricted Group;
(2) the Plan's investment in any Class of Certificates does not exceed
25% of the outstanding Certificates of that Class at the time of acquisition;
(3) immediately after such acquisition, no more than 25% of the Plan
assets with respect to which the investing fiduciary has discretionary authority
or renders investment advice are invested in certificates evidencing interest in
trusts sponsored or containing assets sold or serviced by the same entity; and
(4) the Plan is not sponsored by the Depositor, any Underwriter, the
Trustee, any Servicer, any Pool, Special Hazard or Primary Mortgage Insurer or
the obligor under any other credit support mechanism, a Mortgagor or Obligor
with respect to obligations constituting more than 5% of the aggregate
unamortized principal balance of the Trust Assets on the date of the initial
issuance of Certificates, or any of their affiliates (the "Restricted Group").
Each Series of Certificates generally is expected to satisfy condition
(a) unless otherwise specified in the applicable Prospectus Supplement. If a
Series includes a Class of Subordinated Certificates, that Class will not
satisfy condition (f). Additionally, the Prospectus permits the issuance of
Certificates rated in one of the four highest rating categories, so a particular
Class of a Series may not satisfy condition (c).
Whether the other conditions in the Underwriter's PTE will be
satisfied as to Certificates or any particular Class will depend upon the
relevant facts and circumstances existing at the time the Plan acquires
Certificates of that Class. Any Plan investor who proposes to use "plan assets"
of a Plan to acquire Certificates in reliance upon the Underwriter's PTE should
determine whether the Plan satisfies all of the applicable conditions and
consult with its counsel regarding other factors that may affect the
applicability of the Underwriter's PTE.
GENERAL CONSIDERATIONS
Any member of the Restricted Group, a Mortgagor or Obligor, or any of
their affiliates might be considered or might become a Party in Interest with
respect to a Plan. In that event, the acquisition or holding of Certificates of
the applicable Series or Class by, on behalf of or with "plan assets" of such
Plan might be viewed as giving rise to a prohibited transaction under ERISA and
Section 4975 of the Code, unless PTCE 83-1 or another exemption is available.
Accordingly, before a Plan investor makes the investment decision to purchase,
to commit to purchase or to hold Certificates of any Series or Class, the Plan
investor should determine (a) whether the second and third general conditions
and the specific conditions (described briefly above) of PTCE 83-1 have been
satisfied; (b) whether the Underwriter's PTE is applicable; (c) whether any
other prohibited transaction exemption (if required) is available under ERISA
and Section 4975 of the Code; or (d) whether an exemption from "plan asset"
treatment is available to the applicable Trust Fund. The Plan investor should
also consult the ERISA discussion, if any, in the applicable Prospectus
Supplement for further information regarding the application of ERISA to any
Series or Class of Certificates.
Subordinated Certificates are not available for purchase by or with
"plan assets" of any Plan, other than a governmental or church plan which is not
subject to ERISA or Section 4975 of the Code (as described above),
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and any acquisition of Subordinated Certificates by, on behalf of or with "plan
assets" of any such Plan will be treated as null and void for all purposes.
ANY PLAN INVESTOR WHO PROPOSES TO USE "PLAN ASSETS" OF ANY PLAN TO
PURCHASE CERTIFICATES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS COUNSEL
WITH RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION 4975 OF THE
CODE OF THE ACQUISITION AND OWNERSHIP OF SUCH CERTIFICATES.
LEGAL INVESTMENT
The applicable Prospectus Supplement for a Series of Certificates will
specify whether a Class or Subclass of such Certificates, as long as it is rated
in one of the two highest rating categories by one or more nationally recognized
statistical rating organizations, will constitute a "mortgage related security"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
Such Class or Subclass, if any, constituting a "mortgage related security" will
be a legal investment for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including depository
institutions, insurance companies, trustees and state government employee
retirement systems) created pursuant to or existing under the laws of the United
States or of any state (including the District of Columbia and Puerto Rico)
whose authorized investments are subject to state regulation to the same extent
that, under applicable law, obligations issued by or guaranteed as to principal
and interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities.
Pursuant to SMMEA, a number of states enacted legislation, on or prior
to the October 3, 1991 cutoff for such enactments, limiting to varying extents
the ability of certain entities (in particular, insurance companies) to invest
in "mortgage related securities," 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
Certificates qualifying as "mortgage related securities" only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal in
mortgage related securities without limitation as to the percentage of their
assets represented thereby, federal credit unions may invest in such securities,
and national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection,
federal credit unions should review NCUA Letter to Credit Unions No. 96, as
modified by Letter to Credit Unions No. 108, which includes guidelines to assist
federal credit unions in making investment decisions for mortgage related
securities. The NCUA has adopted rules, codified as 12 C.F.R. Section 703.5(f)-
(k), which prohibit federal credit unions from investing in certain mortgage
related securities (including securities such as certain Series, Classes or
Subclasses of Certificates), except under limited circumstances.
All depository institutions considering an investment in the
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council.
The Policy Statement which has been adopted by the Board of Governors
of the Federal Reserve System, the Office of the Comptroller of the Currency,
the FDIC and the Office of Thrift Supervision and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain Series,
Classes or Subclasses of the Certificates), except under limited circumstances,
and sets forth certain investment practices deemed to be unsuitable for
regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain Series, Classes or Subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
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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.
Investors should consult their own legal advisers in determining
whether and to what extent such Certificates constitute legal investments for
such investors.
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the related
Prospectus Supplements may be sold directly by the Depositor or may be offered
through CS First Boston Corporation, an affiliate of the Depositor, or
underwriting syndicates represented by CS First Boston Corporation (the
"Underwriters"). The Prospectus Supplement with respect to each such Series of
Certificates will set forth the terms of the offering of such Series or
Certificates and each Subclass within such Series, including the name or names
of the Underwriters, the proceeds to the Depositor, and either the initial
public offering price, the discounts and commissions to the Underwriters and any
discounts or concessions allowed or reallowed to certain dealers, or the method
by which the price at which the Underwriters will sell such Certificates will be
determined.
Unless otherwise specified in the Prospectus Supplement, the
Underwriters will be obligated to purchase all of the Certificates of a Series
described in the Prospectus Supplement with respect to such Series if any such
Certificates are purchased. The Certificates may 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 determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will
authorize Underwriters or other persons acting as the Depositor's agents to
solicit offers by certain institutions to purchase the Certificates from the
Depositor pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Depositor. The obligation of any purchaser
under any such contract will be subject to the condition that the purchase of
the offered Certificates shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
Underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by
means of the related Prospectus Supplements from time to time in negotiated
transactions or otherwise, at prices determined at the time of sale. The
Depositor may effect such transactions by selling Certificates to or through
dealers, and such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Depositor and any purchasers of
Certificates for whom they may act as agents.
The place and time of delivery for each Series of Certificates offered
hereby and by means of the related Prospectus Supplement will be set forth in
the Prospectus Supplement with respect to such Series.
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LEGAL MATTERS
Certain legal matters in connection with the Certificates offered
hereby will be passed upon for the Depositor and for the Underwriters by
Cadwalader, Wickersham & Taft, New York, New York.
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INDEX OF TERMS
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
Accrual Distribution Amount....................................... 30
Advances.......................................................... 12
AFR............................................................... 83
Agreement......................................................... 27
Alternative Credit Support........................................ 8
Approved Sale..................................................... 62
APR............................................................... 21
ARM Loans......................................................... 15
Asset Value....................................................... 28
Assets............................................................ 74
Buy-Down Fund..................................................... 11
Buy-Down Loans.................................................... 16
Certificate Account............................................... 36
Certificate Principal Balance..................................... 3
Certificateholders................................................ 17
Certificates...................................................... 1
Class............................................................. 1
Cleanup Costs..................................................... 69
Closed Loans...................................................... 18
Closing Date...................................................... 76
Code.............................................................. 12
Committee Report.................................................. 73
Contract Loan-to-Value Ratio...................................... 7
Contract Pool..................................................... 1
Contract Schedule................................................. 4
Contracts......................................................... 1
Converted Mortgage Loan........................................... 15
Cooperative....................................................... 4
Cooperative Dwelling.............................................. 4
Cooperative Loans................................................. 4
CS First Boston Corporation's PTE................................. 101
Custodial Account................................................. 36
Custodial Agreement............................................... 22
Custodian......................................................... 22
Cut-off Date...................................................... 14
Deferred Interest................................................. 15
Deficiency Event.................................................. 50
Deleted Contract.................................................. 23
Deleted Mortgage Certificates..................................... 31
Deleted Mortgage Loans............................................ 33
-108-
<PAGE>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
Depositor......................................................... 1
Deposit Trust Agreement........................................... 27
Determination Date................................................ 39
Discount Certificate.............................................. 7
Distribution Date................................................. 5
DOL............................................................... 99
Due Date.......................................................... 15
Due Period........................................................ 30
Escrow Account.................................................... 43
ERISA............................................................. 12
ERISA Plans....................................................... 99
Exempt Series..................................................... 101
FBSC.............................................................. 23
FHA............................................................... 1
FHA Experience.................................................... 26
FHA Loans......................................................... 14
Final Regulation.................................................. 99
First Boston...................................................... 101
Garn-St Germain Act............................................... 68
GPM Fund.......................................................... 11
GPM Loans......................................................... 16
Initial Deposit................................................... 12
Initial Issue Price............................................... 99
Insurance Proceeds................................................ 37
Insured........................................................... 45
Insured Series.................................................... 100
Interest Coupon................................................... 196
Interest Distribution............................................. 29
Interest Rate..................................................... 3
Interest Weighted Class........................................... 3
Interest Weighted Subclass........................................ 3
IRS............................................................... 76
L/C Bank.......................................................... 8
L/C Percentage.................................................... 9
Letter of Credit.................................................. 8
Liquidating Loan.................................................. 8
Liquidation Proceeds.............................................. 37
Loan-to-Value Ratio............................................... 5
Loss.............................................................. 61
Manufactured Home................................................. 7
Master Servicer................................................... 5
Mortgage Certificates............................................. 1
Mortgage Loans.................................................... 1
Mortgage Notes.................................................... 14
-109-
<PAGE>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
Mortgage Pool..................................................... 4
Mortgage Rates.................................................... 6
Mortgaged Property................................................ 5
Mortgagor......................................................... 6
Mortgagor Bankruptcy Bond......................................... 8
Multi-Class Certificates.......................................... 3
Multifamily Property.............................................. 4
Multiple Variable Rate............................................ 78
1988 Act.......................................................... 89
1986 Act.......................................................... 73
Nonexempt Assets.................................................. 100
Nonexempt Series.................................................. 100
non-U.S. Person................................................... 88
Obligor........................................................... 24
OID Regulations................................................... 73
Original Value.................................................... 5
Originator........................................................ 18
Other Pools....................................................... 103
Parties in Interest............................................... 99
Pass-Through Rate................................................. 6
Percentage Interest............................................... 1
Performance Bond.................................................. 22
Plans............................................................. 99
Policy Statement.................................................. 105
Pool Insurance Policy............................................. 8
Pool Insurer...................................................... 9
Pooling and Servicing Agreement................................... 17
Premium Certificate............................................... 7
Prepayment Assumption............................................. 76
Primary Insurer................................................... 38
Primary Mortgage Insurance Policy................................. 9
Primary Mortgage Insurer.......................................... 45
Principal Distribution............................................ 29
Principal Prepayments............................................. 10
Principal Weighted Class.......................................... 3
Principal Weighted Subclass....................................... 3
PTCE 83-1......................................................... 100
Purchase Price.................................................... 35
Rating Agency..................................................... 1
Record Date....................................................... 29
Reference Agreement............................................... 27
REIT.............................................................. 84
REMIC............................................................. 1
REMIC Certificateholders.......................................... 74
-110-
<PAGE>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
REMIC Certificates................................................ 73
REMIC Mortgage Pool............................................... 73
REMIC Provisions.................................................. 73
REMIC Regulations................................................. 74
REMIC Regular Certificate......................................... 73
REMIC Residual Certificate........................................ 73
Required Distribution............................................. 55
Required Reserve.................................................. 11
Reserve Fund...................................................... 8
Residual Certificates............................................. 3
Residual Owner.................................................... 81
Restricted Group.................................................. 102
Retained Yield.................................................... 91
Securities Act.................................................... 29
Senior Certificates............................................... 8
Senior Class...................................................... 3
Senior Prepayment Percentage...................................... 54
Senior Subclass................................................... 3
Series............................................................ 1
Servicemen's Readjustment Act..................................... 16
Servicer.......................................................... 17
Servicing Account................................................. 36
Servicing Agreement............................................... 17
Single-Class REMIC................................................ 87
Single Family Property............................................ 4
Single Variable Rate.............................................. 76
SMMEA............................................................. 14
SPA............................................................... 26
Special Distributions............................................. 5
Special Hazard Insurance Policy................................... 11
Standard Hazard Insurance Policy.................................. 43
Standard Terms.................................................... 27
Stated Principal Balance.......................................... 3
Stated Principal Distribution Amount.............................. 30
Stripped Bond Rules............................................... 91
Stripped Interest................................................. 96
Stripped Mortgage Loan............................................ 91
Subclass.......................................................... 1
Subordinated Amount............................................... 9
Subordinated Certificates......................................... 8
Subordinated Class................................................ 3
Subordinated Pool................................................. 10
Subordinated Subclass............................................. 3
Substitute Contract............................................... 23
-111-
<PAGE>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ---- -----------------
Substitute Mortgage Certificates.................................. 31
Substitute Mortgage Loans......................................... 33
Tiered REMICS..................................................... 75
Title V........................................................... 74
Trust Assets...................................................... 4
Trust Certificates................................................ 73
Trust Fractional Certificateholder................................ 90
Trust Fractional Certificate...................................... 73
Trust Fund........................................................ 1
Trust Interest Certificate........................................ 73
Trust Interest Certificateholder.................................. 96
Unaffiliated Sellers.............................................. 18
Underwriters...................................................... 104
Underwriter's PTE................................................. 101
UCC............................................................... 66
Unstripped Mortgage Loans......................................... 94
U.S. Person....................................................... 88
VA................................................................ 1
VA Loans.......................................................... 14
-112-
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA-
TION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE DEPOSITOR OR THE UN-
DERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED
HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH JURISDICTION.
------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms........................................................... S-4
Risk Factors............................................................... S-19
Description of the Certificates............................................ S-23
The Mortgage Certificates.................................................. S-43
Description of the Mortgage Loans.......................................... S-58
Yield and Prepayment Considerations........................................ S-65
The Mortgage Loan Servicers................................................ S-73
The Resolution Trust Corporation........................................... S-73
Certain Federal Income Tax Consequences.................................... S-74
ERISA Considerations....................................................... S-76
Use of Proceeds............................................................ S-76
Legal Investment Considerations............................................ S-77
Method of Distribution..................................................... S-77
Legal Matters.............................................................. S-77
Ratings.................................................................... S-77
PROSPECTUS
Prospectus Supplement...................................................... 2
Additional Information..................................................... 2
Incorporation of Certain Information by Reference.......................... 2
Summary of Terms........................................................... 3
The Trust Fund............................................................. 14
The Depositor.............................................................. 23
Use of Proceeds............................................................ 23
Yield Considerations....................................................... 24
Maturity and Prepayment Considerations..................................... 25
Description of the Certificates............................................ 27
Credit Support............................................................. 52
Description of Insurance................................................... 57
Certain Legal Aspects of the Mortgage Loans and Contracts.................. 63
Certain Federal Income Tax Consequences.................................... 73
ERISA Considerations....................................................... 99
Legal Investment........................................................... 103
Plan of Distribution....................................................... 104
Legal Matters.............................................................. 105
Index of Terms............................................................. 106
</TABLE>
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CS First Boston Mortgage
Securities Corp. Depositor
$305,580,227
Adjustable Rate Certificates, Series 1996-1
PROSPECTUS SUPPLEMENT
[LOGO] CS FIRST BOSTON
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