================================================================================
As filed with the Securities and Exchange Commission on May 1, 1998
Registration Statement No. 333-48429
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------------
IMC Securities, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 59-3284026
- ------------------------ --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
5901 East Fowler Avenue
Tampa, FL 33617-2362
(813) 984-8801
-------------------------------------------------------------
(Address and telephone number of principal executive offices)
Joseph V. Gatti, Esq.
Arter & Hadden LLP
1801 K Street, N.W., Suite 400K
Washington, DC 20006
(202) 775-4442
Fax: (202) 857-0172
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(Name, address and telephone number of agent for service)
Please send copies of communications to:
Thomas Middleton
IMC Mortgage Company
5901 East Fowler Avenue
Tampa, FL 33617-2362
(813) 984-2533
Fax: (813) 984-2593
---------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC. From time to
time after the effective date of this Registration Statement as determined by
market conditions and pursuant to Rule 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus filed
as part of this Registration Statement may be used in connection with the
securities covered by Registration Statements No. 333-24455 and 333-31197.
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities Amount Being Offering Price Aggregate Offering Amount of
Being Registered Registered Per Unit* Price Registration Fee
<S> <C> <C> <C> <C>
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Home Equity Loan Asset $5,000,000,000.00** 100% $5,000,000,000.00 $1,474,705.00***
Backed Certificates and Notes
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</TABLE>
* Estimated solely for purposes of calculating the registration fee.
** In addition to the amount being registered hereto, pursuant to Rule 429,
$645,242,786.86 is being carried forward from Registration Statement No.
333-24455 and $404,200,228.61 is being carried forward from Registration
Statement No. 333-31197, for which a filing fee was paid equal to
$195,528.12 and $122,484.92, respectively.
*** Registration fee was wired on April 30, 1998. $295.00 was previously paid
by wire transfer on March 19, 1998.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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<PAGE>
This registration statement registers up to $5,000,000,000.00 of mortgage
asset backed certificates and notes collateralized by various types of mortgage
collateral described herein. The registration statement contains a form of
prospectus covering, one-to-four ("single") family residential first and junior
lien, fixed and adjustable rate home equity loans or interests therein
represented by agency or private label pass-through securities and notes
("Securities"). The prospectus is accompanied by three forms of prospectus
supplement describing each of the structures that are expected to be employed by
the Registrant for the issuance of certificates and notes. As described in the
Prospectus, each transaction may have Classes of Securities with various
characteristics, mortgage assets with various characteristics, various forms and
terms of credit enhancement, one or more subservicers, various underwriting and
servicing standards with respect to mortgage assets, various tax consequences
and various other characteristics, each of which will be fully described in the
actual form of prospectus supplement filed pursuant to Rule 424(b)(2), (3) or
(5).
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Items and Caption in Form S-3 Location in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus.............................................. Forepart of Registration
Statement and Outside Front
Cover Page **
2. Inside Front and Outside Back Cover Pages of Prospectus............ Inside Front Cover Page and
Outside Back Cover Page of
Prospectus **
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................................... Summary of Prospectus**; The
Seller**; Risk Factors**
4. Use of Proceeds.................................................... Use of Proceeds**
5. Determination of Offering Price.................................... *
6. Dilution........................................................... *
7. Selling Security-Holders........................................... *
8. Plan of Distribution............................................... Plan of Distribution **
9. Description of Securities to be Registered......................... Outside Front Cover; Summary
of Prospectus; The Trusts;
Description of the Securities;
Servicing of Mortgage Loans;
The Pooling and Servicing
Agreement; The Indenture; and
Federal Income Tax
Consequences**
10. Interests of Named Experts and Counsel............................. *
11. Material Changes................................................... *
12. Incorporation of Certain Information by Reference.................. Inside Front Cover Page**;
Incorporation of Certain
Documents by Reference**
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities...................................... See Page II-2
</TABLE>
- --------------------------
* Answer negative or item inapplicable.
** To be completed from time to time by Prospectus Supplement.
<PAGE>
PROSPECTUS Subject to Completion, Dated _____ __, 1998
Home Equity Loan Asset Backed Certificates
Home Equity Loan Asset Backed Notes
(Issuable in Series)
IMC Securities, Inc.
(Depositor)
This Prospectus relates to Home Equity Loan Asset Backed Certificates (the
"Certificates") and Home Equity Loan Asset Backed Notes (the "Notes" and
together with the Certificates, the "Securities") to be issued from time to time
in one or more series (each, a "Series") (and one or more classes within a
Series), certain classes of which may be offered on terms determined at the time
of sale and described in this Prospectus and the related Prospectus Supplement.
Each Series of Securities will be issued by a separate trust (each, a "Trust")
and will evidence either a beneficial ownership interest in, or the debt
obligation of, such Trust. The assets of a Trust will include one or more of the
following: (i) single family residential mortgage loans, including mortgage
loans secured by junior liens on the related mortgaged properties, (ii) mortgage
backed securities and (iii) investment income, reserve funds, cash accounts,
insurance policies (including financial guaranty insurance policies and surety
bonds), guaranties, letters of credit or similar types of credit support or
enhancement as more particularly described in the related Prospectus Supplement.
One or more classes of Securities of a Series may be (i) entitled to
receive distributions allocable to principal, principal prepayments, interest or
any combination thereof prior to one or more other classes of Securities of such
Series or after the occurrence of certain events or (ii) subordinated in the
right to receive such distributions to one or more senior classes of Securities
of such Series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities entitled to distributions allocable to
interest may accrue at a fixed rate or at a rate that is subject to change from
time to time as specified in the related Prospectus Supplement. The Depositor or
its affiliates may retain or hold for sale from time to time one or more classes
of a Series of Securities.
Distributions on the Securities will be made at the intervals and on the
dates specified in the related Prospectus Supplement from the assets of the
related Trust and any other assets pledged for the benefit of the Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
limited representations and warranties with respect to mortgage assets assigned
to the related Trust. Neither the Depositor nor any affiliates will have any
other obligation with respect to the Securities.
The yield on Securities will be affected by the rate of payment of
principal (including prepayments) of mortgage assets in the related Trust. Each
Series of Securities will be subject to early termination under the
circumstances described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement for a Series of Certificates, one
or more elections may be made to treat the Trust for the related Series or
specified portions thereof as a "real estate mortgage investment conduit"
("REMIC") for federal income tax purposes. See "Federal Income Tax Consequences"
herein and in the related Prospectus Supplement.
It is a condition to the issuance of the Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
See "Risk Factors" beginning on page 7 herein and in the related Prospectus
Supplement for a discussion of significant matters affecting investments in the
Securities.
See "ERISA Considerations" herein and in the related Prospectus Supplement
for a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
An investor should carefully review the information in the related
Prospectus Supplement concerning the risks associated with the different types
and classes of Securities.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE, ANY
INDENTURE TRUSTEE, ANY OWNER TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET
FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES
NOR THE UNDERLYING MORTGAGE ASSETS WILL BE GUARANTEED OR INSURED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE DEPOSITOR, ANY SERVICER, ANY
MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE, ANY INDENTURE TRUSTEE, ANY OWNER
TRUSTEE OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED
PROSPECTUS SUPPLEMENT.
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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 OR ANY RELATED PROSPECTUS
SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Offers of the Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein and
"Underwriting" in the related Prospectus Supplement. Prior to their issuance
there will have been no market for the Securities nor can there by any assurance
that one will develop or if it does develop, that it will provide the Owners of
the Securities with liquidity or will continue for the life of the Securities.
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Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of Securities unless accompanied by a Prospectus
Supplement.
The date of this Prospectus is ________________ __, 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these Securities has been filed with the
Securities and Exchange Commission. These Securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This preliminary prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
Securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.
<PAGE>
AVAILABLE INFORMATION
The representative has filed a Registration Statement under the Securities
Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange
Commission (the "Commission") with respect to the Securities. The Registration
Statement and amendments thereof and to the exhibits thereto, as well as such
reports and other information, are available for inspection without charge at
the public reference facilities maintained by the Commission at its Public
Reference Section 450 Fifth Street, N.W., Washington, D.C. 20549, and at its
Regional Offices located as follows: New York Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048; and Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of the Registration Statement and amendments thereof and
exhibits thereto may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates
and electronically through the Commission's Electronic Data Gathering, Analysis
and Retrieval system at the Commission's Web site (http://www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any accompanying
Prospectus Supplement with respect hereto do not constitute an offer to sell or
a solicitation of an offer to buy any securities other than the Securities
offered hereby and thereby nor an offer of the Securities to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning any Securities and the related Trust
will be provided to the persons in whose names the Securities are registered
(the "Owners"). See "The Pooling and Servicing Agreement - Reports", "The
Indenture - Indenture Trustee's Annual Report" and "- Reports by Indenture
Trustee to Note Owners" herein. If specified in the related Prospectus
Supplement, a Series of Securities may be issuable in book-entry form. In such
event, the related Securities will be registered in the name of a Clearing
Agency (as defined herein) and, therefore, the Clearing Agency will be the Owner
for purposes hereof. All reports will be provided to the Clearing Agency, which
in turn will provide such reports to its Clearing Agency Participants (as
defined herein). Such Clearing Agency Participants will then forward such
reports to the beneficial owners of Securities. See "Description of the
Securities - Book Entry Registration" herein. The Depositor will file or cause
to be filed with the Commission such periodic reports with respect to each Trust
as are required under the Exchange Act and the rules and regulations of the
Commission thereunder. It is the Depositor's intent to suspend filing such
reports as soon as such reports are no longer statutorily required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Securities of such Trust offered hereby shall be deemed to be
incorporated by reference into this Prospectus when delivered with respect to
such Trust. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida
33617-2362 (telephone number (813) 984-8801).
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the interest rate or method of determining
the rate or the amount of interest, if any, to be paid
<PAGE>
to each such class; (ii) the aggregate principal amount and Payment Dates
relating to such Series and, if applicable, the initial and final scheduled
Payment Dates for each class; (iii) information as to the assets comprising the
Trust, including the general characteristics of the Trust Assets included
therein and, if applicable, the insurance policies, surety bonds, guarantees,
letters of credit, reserve funds, cash accounts, reinvestment income or other
instruments or agreements included in the Trust or otherwise, and the amount and
source of any reserve account or cash account; (iv) the circumstances, if any,
under which the Trust may be subject to early termination; (v) the methods used
to calculate the amount of principal to be distributed with respect to each
class of Securities; (vi) the order of application of distributions to each of
the classes within such Series, whether sequential, pro rata, or otherwise;
(vii) additional information with respect to the method of distribution of such
Securities; (viii) whether one or more REMIC elections will be made and
designation of the regular interests and residual interests; (ix) the aggregate
original percentage ownership interest in the Trust to be evidenced by each
class of Securities; (x) information as to the Trustee or Indenture Trustee;
(xi) information as to the nature and extent of subordination with respect to
any class of Securities that is subordinate in right of payment to any other
class; and (xii) information as to the Master Servicer, if any.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Securities covered by such Prospectus Supplement,
whether or not participating in the distribution thereof, may be required to
deliver such Prospectus Supplement and this Prospectus. This is in addition to
the obligations of dealers to deliver a Prospectus Supplement and the Prospectus
when acting as underwriters of the Securities covered by such Prospectus
Supplement and with respect to their unsold allotments or subscriptions.
<PAGE>
TABLE OF CONTENTS
Page
SUMMARY OF PROSPECTUS................................................... 1
RISK FACTORS............................................................ 7
DESCRIPTION OF THE SECURITIES........................................... 11
General............................................................ 11
Classes of Securities.............................................. 12
Distributions of Principal and Interest............................ 13
Book Entry Registration............................................ 15
List of Owners of Securities....................................... 15
THE TRUSTS.............................................................. 16
Mortgage Loans..................................................... 16
Mortgage-Backed Securities......................................... 18
Other Mortgage Securities.......................................... 19
CREDIT ENHANCEMENT...................................................... 19
SERVICING OF MORTGAGE LOANS............................................. 24
Payments on Mortgage Loans......................................... 24
Advances........................................................... 25
Collection and Other Servicing Procedures.......................... 25
Primary Mortgage Insurance......................................... 27
Standard Hazard Insurance.......................................... 27
Title Insurance Policies........................................... 28
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other
Realization Upon Defaulted Loan................................ 28
Servicing Compensation and Payment of Expenses..................... 28
Master Servicer.................................................... 29
THE POOLING AND SERVICING AGREEMENT..................................... 29
Assignment of Mortgage Assets...................................... 29
Evidence as to Compliance.......................................... 31
The Trustee........................................................ 31
Administration of the Security Account............................. 32
Reports............................................................ 33
Forward Commitments; Pre-Funding................................... 33
Servicer Events of Default......................................... 34
Rights Upon Servicer Event of Default.............................. 34
Amendment.......................................................... 34
Termination........................................................ 35
THE INDENTURE........................................................... 35
General............................................................ 35
Modification of Indenture ......................................... 35
Note Events of Default............................................. 36
Rights Upon Note Events of Default................................. 37
List of Note Owners................................................ 37
Annual Compliance Statement........................................ 37
Indenture Trustee's Annual Report.................................. 38
Satisfaction and Discharge of Indenture............................ 38
Redemption of Notes................................................ 38
Reports by Indenture Trustee to Note Owners........................ 38
Limitation on Suits................................................ 38
The Sale and Servicing Agreement................................... 38
USE OF PROCEEDS......................................................... 39
THE DEPOSITOR........................................................... 39
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS............................ 40
General............................................................ 40
Foreclosure........................................................ 41
Enforceability of Certain Provisions............................... 44
Soldiers' and Sailors' Civil Relief Act............................ 46
LEGAL INVESTMENT MATTERS................................................ 46
ERISA CONSIDERATIONS.................................................... 47
FEDERAL INCOME TAX CONSEQUENCES......................................... 48
Federal Income Tax Consequences For REMIC Securities............... 49
Taxation of Regular Securities..................................... 50
Taxation of Residual Securities.................................... 55
Treatment of Certain Items of REMIC Income and Expense............. 57
Tax-Related Restrictions on Transfer of Residual Securities........ 59
Sale or Exchange of a Residual Security............................ 61
Taxes That May Be Imposed on the REMIC Pool........................ 61
Liquidation of the REMIC Pool...................................... 62
Administrative Matters............................................. 62
Limitations on Deduction of Certain Expenses....................... 63
Taxation of Certain Foreign Investors.............................. 63
Backup Withholding................................................. 64
Reporting Requirements............................................. 64
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made................................ 65
Standard Securities................................................ 65
Premium and Discount............................................... 66
Stripped Securities................................................ 68
Reporting Requirements and Backup Withholding...................... 71
Taxation of Certain Foreign Investors.............................. 71
Debt Certificates.................................................. 71
Notes.............................................................. 73
Taxation of Certificates Classified as Partnership Interests....... 73
Federal Income Tax Consequences For FASIT Securities............... 73
PLAN OF DISTRIBUTION.................................................... 74
RATINGS................................................................. 75
LEGAL MATTERS........................................................... 75
FINANCIAL INFORMATION................................................... 75
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.............................A-1
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular Series of Securities and to
the Pooling and Servicing Agreement or the Indenture and the Trust Agreement
which will be prepared in connection with each Series of Securities. Unless
otherwise specified, capitalized terms used and not defined in this Summary of
Prospectus have the meanings given to them in this Prospectus and in the related
Prospectus Supplement. An index indicating where certain capitalized terms used
herein are defined appears on Appendix A hereto.
Securities................. Home Equity Loan Asset Backed Certificates (the
"Certificates") and Home Equity Loan Asset Backed
Notes (the "Notes" and together with the
Certificates, the "Securities"), issuable from
time to time in Series, in fully registered form
or book entry only form, in authorized
denominations, as described in the Prospectus
Supplement. Each Security will represent a
beneficial ownership interest in a trust (a
"Trust") created from time to time pursuant to a
pooling and servicing agreement (a "Pooling and
Servicing Agreement") or trust agreement (a "Trust
Agreement" and together with a Pooling and
Servicing Agreement an "Agreement"). Securities
evidencing a debt obligation of a Trust will be
issued pursuant to a trust indenture (each, an
"Indenture").
The Depositor.............. IMC Securities, Inc. (the "Depositor") is a
Delaware corporation. The Depositor's principal
executive offices are located at 5901 East Fowler
Avenue, Tampa, Florida 33617-2362; telephone
number (813) 984-8801. See "The Depositor" herein.
The Depositor or its affiliates may retain or hold
for sale from time to time one or more classes of
a Series of Securities.
The Servicer............... The entity or entities named as the Servicer in
the Prospectus Supplement (the "Servicer"), will
act as servicer, with respect to the Mortgage
Loans included in the related Trust. The Servicer
may be an affiliate of the Depositor and may be
the seller of Mortgage Assets to the Depositor
(each, a "Seller").
The Master Servicer........ A "Master Servicer" may be specified in the
related Prospectus Supplement for the related
Series of Securities.
Trustees................... The trustee (the "Trustee") for each Series of
Certificates will be specified in the related
Prospectus Supplement. The owner trustee (the
"Owner Trustee") and the indenture trustee (the
"Indenture Trustee") for each Series of Notes will
be specified in the related Prospectus Supplement.
Issuer of Notes............. With respect to each Series of Notes, the issuer
(the "Issuer") will be the Depositor or an owner
trust established by it for the purpose of issuing
such Series of Notes. Each such owner trust will
be created pursuant to a Trust Agreement between
the Depositor, acting as depositor, and the Owner
Trustee. Each Series of Notes will represent
indebtedness of the Issuer and will be issued
pursuant to an Indenture between the Issuer and
the Trustee whereby the Issuer will pledge the
related Trust to secure the Notes under the lien
of the Indenture. As to each Series of Notes where
the Issuer is an owner trust, the ownership of the
related Trust will be
1
<PAGE>
evidenced by certificated or noncertificated
interests (the "Equity Certificates") issued under
the Trust Agreement, which, unless otherwise
specified in the Prospectus Supplement, are not
offered hereby. The Notes will represent
nonrecourse obligations solely of the Issuer, and
the proceeds of the related Trust will be the sole
source of payments on the Notes, except as
described herein under "Credit Enhancement" and in
the related Prospectus Supplement.
Trust Assets................ The assets of a Trust will be mortgage-related
assets (the "Mortgage Assets") consisting of one
or more of the following types of assets:
A. The Mortgage Loans....... "Mortgage Loans" may include: (i) conventional
(i.e., not insured or guaranteed by any
governmental agency) Mortgage Loans secured by
one-to-four family residential properties; (ii)
Mortgage Loans secured by security interests in
shares issued by private, non-profit, cooperative
housing corporations ("Cooperatives") and in the
related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific
dwelling units in such Cooperatives' buildings;
and, (iii) Mortgage Loans secured by junior liens
on the related mortgaged properties, including
home improvement retail installment contracts. See
"The Trusts - Mortgage Loans" herein.
B. Mortgage-
Backed Securities........ "Mortgage-Backed Securities" (or "MBS") may
include (i) private (that is, not guaranteed or
insured by the United States or any agency or
instrumentality thereof) mortgage participations,
mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates
insured or guaranteed by Federal Home Loan
Mortgage Corporation ("FHLMC") or Fannie Mae
("Fannie Mae") or Government National Mortgage
Association ("GNMA"). See "The Trusts -
Mortgage-Backed Securities" herein.
C. Other Mortgage Assets.... Trust assets may also include reinvestment income,
reserve funds, cash accounts, insurance policies
(including financial guaranty insurance policies
and surety bonds), guaranties, letters of credit
or similar types of credit support or enhancement
as described in the related Prospectus Supplement.
The related Prospectus Supplement for a Series of
Securities will describe the Mortgage Assets to be
included in the Trust for such Series.
The Securities.............. The Securities of any Series may be issued in one
or more classes, as specified in the Prospectus
Supplement. One or more classes of Securities of
each Series (i) may be entitled to receive
distributions allocable only to principal, only to
interest or to any combination thereof; (ii) may
be entitled to receive distributions only of
prepayments of principal throughout the lives of
the Securities or during specified periods; (iii)
may be subordinated in the right to receive
distributions of scheduled payments of principal,
prepayments of principal, interest or any
combination thereof to one or more other classes
of Securities of such Series throughout the lives
of the Securities or during specified periods;
(iv) may be entitled to receive such distributions
only after the occurrence
2
<PAGE>
of events specified in the Prospectus Supplement;
(v) may be entitled to receive distributions in
accordance with a schedule or formula or on the
basis of collections from designated portions of
the assets in the related Trust; (vi) as to
Securities entitled to distributions allocable to
interest, may be entitled to receive interest at a
fixed rate or a rate that is subject to change
from time to time; (vii) may accrue interest, with
such accrued interest added to the principal or
notional amount of the Securities, and no payments
being made thereon until certain other classes of
the Series have been paid in full; and (viii) as
to Securities entitled to distributions allocable
to interest, may be entitled to distributions
allocable to interest only after the occurrence of
events specified in the Prospectus Supplement and
may accrue interest until such events occur, in
each case as specified in the related Prospectus
Supplement. The timing and amounts of such
distributions may vary among classes, over time,
or otherwise as specified in the related
Prospectus Supplement.
Distributions on
the Securities............. The related Prospectus Supplement will specify (i)
whether distributions on the Securities entitled
thereto will be made monthly, quarterly,
semi-annually or at other intervals and dates out
of the payments received in respect of the
Mortgage Assets included in the related Trust and
other assets, if any, pledged for the benefit of
the related holders of the Securities (the
"Owners"); (ii) the amount allocable to payments
of principal and interest on any Payment Date; and
(iii) whether all distributions will be made pro
rata to Owners of Securities of the class entitled
thereto.
The aggregate original principal balance of the
Securities will equal the aggregate distributions
allocable to principal that such Securities will
be entitled to receive; the Securities will have
an aggregate original principal balance equal to
or less than the aggregate unpaid principal
balance of the related Mortgage Assets (plus
amounts held in a Pre-Funding Account, if any) as
of the first day of the month of creation of the
Trust; and the Securities will bear interest in
the aggregate at a rate (the "Pass-Through Rate")
equal to the interest rate borne by the related
Mortgage Assets net of servicing fees and any
other specified amounts.
Pre-Funding Account......... A Trust may enter into an agreement (each, a
"Subsequent Transfer Agreement") with the
Depositor whereby the Depositor will agree to
transfer additional Mortgage Assets to such Trust
following the date on which such Trust is
established and the related Securities are issued.
Any Subsequent Transfer Agreement will require
that any Mortgage Loans so transferred conform to
the requirements specified in such Subsequent
Transfer Agreement. If a Subsequent Transfer
Agreement is to be utilized, the related Trustee
will be required to deposit in a segregated
account (each, a "Pre-Funding Account") all or a
portion of the proceeds received by the Trustee in
connection with the sale of one or more classes of
Securities of the related Series; subsequently,
the additional Mortgage Assets will be transferred
to the related Trust in exchange for money
released to the Depositor from the related
Pre-Funding Account. The maximum amount deposited
in the Pre-Funding Account to acquire Mortgage
Loans for transfer to a Trust will not exceed 25%
of the
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aggregate principal amount of the Securities
offered pursuant to the related Prospectus
Supplement. Each Subsequent Transfer Agreement
will set a specified period during which any such
transfers must occur, which period will not exceed
90 days from the date the Trust is established. If
all moneys originally deposited to such
Pre-Funding Account are not used by the end of
such specified period, then any remaining moneys
will be applied as a mandatory prepayment of a
class or classes of Securities as specified in the
related Prospectus Supplement.
Optional Termination........ The Servicer, the Seller, the Depositor, or, if
specified in the related Prospectus Supplement,
the Owners of a related class of Securities or a
credit enhancer may at their respective options
effect early retirement of a Series of Securities
through the purchase of the Mortgage Assets in the
related Trust. See "The Pooling and Servicing
Agreement - Termination" and "The Indenture -
Redemption of Notes" herein.
Mandatory Termination....... The Trustee, the Servicer or certain other
entities specified in the related Prospectus
Supplement may be required to effect early
retirement of a Series of Securities by soliciting
competitive bids for the purchase of the assets of
the related Trust or otherwise. See "Pooling and
Servicing Agreement - Termination" and "The
Indenture - Rights Upon Note Events of Default"
herein.
Advances.................... The Servicer of the Mortgage Loans will be
obligated (but only to the extent set forth in the
related Prospectus Supplement) to advance
delinquent installments of principal and/or
interest (less applicable servicing fees) on the
Mortgage Loans in a Trust. Any such obligation to
make advances may be limited to amounts due to the
Owners of Securities of the related Series, to
amounts deemed to be recoverable from late
payments or liquidation proceeds, to specified
periods or to any combination thereof, in each
case as specified in the related Prospectus
Supplement. Any such advance will be recoverable
as specified in the related Prospectus Supplement.
See "Servicing of Mortgage Loans" herein.
Credit Enhancement.......... If specified in the related Prospectus Supplement,
a Series of Securities, or certain classes within
such Series, may have the benefit of one or more
types of credit enhancement ("Credit Enhancement")
including but not limited to
overcollateralization, cross support, mortgage
pool insurance, special hazard insurance,
financial guaranty insurance policies, a
bankruptcy bond, reserve funds, other insurance,
guaranties and similar instruments and
arrangements. Credit Enhancement also may be
provided in the form of subordination of one or
more classes of Securities in a Series under which
losses are first allocated to any Subordinated
Securities up to a specified limit. The protection
against losses afforded by any such Credit
Enhancement will be limited as described in the
related Prospectus Supplement. See "Credit
Enhancement" herein.
Book Entry Registration..... Securities of one or more classes of a Series may
be issued in book entry form ("Book Entry
Securities") in the name of a clearing agency (a
"Clearing Agency") registered with the Securities
and Exchange Commission, or its nominee. Transfers
and pledges of Book Entry
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Securities may be made only through entries on the
books of the Clearing Agency in the name of
brokers, dealers, banks and other organizations
eligible to maintain accounts with the Clearing
Agency ("Clearing Agency Participants") or their
nominees. Transfers and pledges by purchasers and
other beneficial owners of Book Entry Securities
("Beneficial Owners") other than Clearing Agency
Participants may be effected only through Clearing
Agency Participants. All references to the Owners
of Securities shall mean Beneficial Owners to the
extent Beneficial Owners may exercise their rights
through a Clearing Agency. Except as otherwise
specified in this Prospectus or a related
Prospectus Supplement, the term "Owners" shall be
deemed to include Beneficial Owners. See "Risk
Factors - Book Entry Registration" and
"Description of the Securities - Book Entry
Registration" herein.
Federal Income Tax
Consequences............... Federal income tax consequences will depend on,
among other factors, whether one or more elections
are made to treat a Trust or specified portions
thereof as a "real estate mortgage investment
conduit" ("REMIC") or financial asset
securitization investment trust ("FASIT") under
the Internal Revenue Code of 1986, as amended (the
"Code"), or, if no REMIC or FASIT election is
made, whether the Securities are considered to be
debt obligations, Standard Securities, Stripped
Securities or Partnership Interests. The related
Prospectus Supplement for each Series of
Securities will specify whether a REMIC or FASIT
election will be made. See "Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
ERISA Considerations........ A fiduciary of any employee benefit plan subject
to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code should
carefully review with its own legal advisors
whether the purchase or holding of Securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the Code.
Certain classes of Securities may not be
transferred unless the Trustee or the Indenture
Trustee and the Depositor are furnished with a
letter of representation or an opinion of counsel
to the effect that such transfer will not result
in a violation of the prohibited transaction
provisions of ERISA and the Code and will not
subject the Trustee or the Indenture Trustee, the
Depositor or the Servicer to additional
obligations. See "Description of the Securities -
General" herein and "ERISA Considerations" herein
and in the related Prospectus Supplement.
Legal Investment Matters.... Securities that constitute "mortgage related
securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") will be so
described in the related Prospectus Supplement.
Securities that are not so qualified may not be
legal investments for certain types of
institutional investors, subject, in any case, to
any other regulations which may govern investments
by such institutional investors. See "Legal
Investment Matters" herein and in the related
Prospectus Supplement.
Use of Proceeds............. Substantially all the net proceeds from the sale
of a Series of Securities will be applied to the
simultaneous purchase of the Mortgage Assets
included in the related Trust (or to reimburse the
amounts previously used
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to effect such purchase), the costs of carrying
the Mortgage Assets until sale of the Securities
and to pay other expenses. See "Use of Proceeds"
herein.
Rating...................... It is a condition to the issuance of each class of
Securities that each class of the Securities of
such Series be rated by one or more of Moody's
Investors Service, Inc. ("Moody's"), Standard &
Poor's Ratings Services, a division of the
McGraw-Hill Companies ("Standard & Poor's"), Duff
& Phelps Credit Rating Co. ("DCR") and Fitch IBCA,
Inc.("Fitch" and each of Fitch, Moody's, DCR and
Standard & Poor's, a "Rating Agency") in one of
their four highest rating categories; provided,
however, that one or more classes of Subordinated
Securities and Residual Securities need not be so
rated. A security rating is not a recommendation
to buy, sell or hold securities and may be subject
to revision or withdrawal at any time. No person
is obligated to maintain any rating on any
Security, and, accordingly, there can be no
assurance that the ratings assigned to any class
of Securities upon initial issuance thereof will
not be lowered or withdrawn by a Rating Agency at
any time thereafter. If a rating of any class of
Securities of a Series is revised or withdrawn,
the liquidity of such class of Securities may be
adversely affected. In general, the ratings
address credit risk and do not represent any
assessment of the likelihood or rate of principal
prepayments. See "Risk Factors" herein and
"Ratings" in the related Prospectus Supplement.
Risk Factors................ Investment in the Securities will be subject to
one or more risk factors, including declines in
the value of Mortgaged Properties, prepayment of
Mortgage Loans, higher risks of defaults on
particular types of Mortgage Loans, limitations on
security for the Mortgage Loans, limitations on
credit enhancement and various other factors. See
"Risk Factors" herein and in the related
Prospectus Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Securities:
Limited Liquidity. There will be no market for the Securities of any Series
prior to the issuance thereof, and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide liquidity of
investment or will continue for the life of the Securities of such Series. The
market value of the Securities will fluctuate with changes in prevailing rates
of interest. Consequently, the sale of Securities in any market that may develop
may be at a discount from the Securities' par value or purchase price. Owners of
Securities generally have no right to request redemption of Securities, and the
Securities are subject to redemption only under the limited circumstances
described in the related Prospectus Supplement. In addition, the Securities will
not be listed on any securities exchange.
Declining Real Estate Market; Geographic Concentration. If the residential
real estate market in general or a regional or local area where Mortgage Assets
for a Trust are concentrated should experience an overall decline in property
values, or a significant downturn in economic conditions, rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. See "The Trusts - Mortgage Loans"
herein.
Limited Obligations. The Securities will not represent an interest in or
obligation of the Depositor. The Securities of each Series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment experience
on Mortgage Loans constituting or underlying the Mortgage Assets will affect the
average life of each class of Securities relating to a Trust. Prepayments may be
influenced by a variety of economic, geographic, social and other factors,
including changes in interest rate levels. In general, if mortgage interest
rates fall, the rate of prepayment would be expected to increase. Conversely, if
mortgage interest rates rise, the rate of prepayment would be expected to
decrease. Other factors affecting prepayment of mortgage loans include changes
in housing needs, job transfers, unemployment and servicing decisions. See
"Prepayment and Yield Considerations" in the related Prospectus Supplement. In
addition, investors in the Securities should be aware that the Servicer, the
Seller, or, if specified in the related Prospectus Supplement, the Owners of a
Class of Securities or a credit enhancer may at their respective options effect
early retirement of a Series of Securities through the purchase of Mortgage
Assets from the related Trust. See "The Pooling and Servicing Agreement -
Termination" and "The Indenture - Redemption of Notes" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30- year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10, or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers of
Balloon Loans are required to make substantial single payments upon maturity, it
is possible that the default risk associated with the Balloon Loans is greater
than that associated with fully-amortizing Mortgage Loans.
Limited Assets. Owners of Securities of each Series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such Series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that Series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
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Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a Series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Securities of classes having lower priority in payment. In addition, due
to the priority of payments and the allocation of losses, defaults experienced
on the assets comprising a Trust may have a disproportionate effect on a
specified class or classes within such Series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such Series, a Mortgage Pool Insurance
Policy, a Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
See "Credit Enhancement" herein. Regardless of the Credit Enhancement provided,
the amount of coverage may be limited in amount and in most cases will be
subject to periodic reduction in accordance with a schedule or formula.
Furthermore, such Credit Enhancement may provide only very limited coverage as
to certain types of losses and may provide no coverage as to certain other types
of losses. The Trustee or the Indenture Trustee, as applicable, may be permitted
to reduce, terminate or substitute all or a portion of the Credit Enhancement
for any Series of Securities, if the applicable rating agencies indicate that
the then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and Stripped
Securities that are entitled only to interest distributions will be, and certain
of the other Securities may be, issued with original issue discount for federal
income tax purposes. An Owner of a Security issued with original issue discount
will be required to include original issue discount in ordinary gross income for
federal income tax purposes as it accrues, in advance of receipt of the cash
attributable to such income. Accrued but unpaid interest on such Securities
generally will be treated as original issue discount for this purpose. Moreover,
the calculation of original issue discount on REMIC Securities (as defined
herein) is subject to uncertainties because of the lack of guidance from the
Internal Revenue Service under applicable statutory provisions. See "Federal
Income Tax Consequences - Federal Income Tax Consequences for REMIC Securities,"
"- Taxation of Regular Securities - Variable Rate Regular Securities,"
"- Federal Income Tax Consequences for Securities as to Which No REMIC Election
Is Made - Standard Securities," "- Premium and Discount" and "- Stripped
Securities" herein.
Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because such payments will be forwarded by the Trustee to the
Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Securities are recorded, the ability of Beneficial
Owners 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 principal and
interest on Book Entry Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the Seller.
The Seller and the Depositor intend that the transfers of the Mortgage Assets
from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the Seller is a pledge
rather than a sale. This position, if argued or accepted by a court, could
result in a delay in or reduction of distributions on the related Securities.
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Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior (i.e.,
second, third, etc.) liens are subordinate to the rights of the beneficiaries
under the related senior deeds of trust or senior mortgages, a decline in the
residential real estate market would adversely affect the position of the
related Trust as a junior beneficiary or junior mortgagee before having such an
effect on the position of the related senior beneficiaries or senior mortgagees.
A rise in interest rates over a period of time, the general condition of a
Mortgaged Property and other factors may also have the effect of reducing the
value of the Mortgaged Property from the value at the time the junior lien
Mortgage Loan was originated and, as a result, may reduce the likelihood that,
in the event of a default by the borrower, liquidation or other proceeds will be
sufficient to satisfy the junior lien Mortgage Loan after satisfaction of any
senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
State and Federal Regulations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures and require
licensing of the Seller and the Servicer. In addition, most states have other
laws, public policies and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the origination, servicing and collection of the Mortgage Loans. See
"Certain Legal Aspects of the Mortgage Assets" herein.
The Mortgage Loans may also be subject to federal laws, including: (i) the
Truth in Lending Act and Regulation Z promulgated thereunder, which require
certain disclosures to the borrowers regarding the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder,
which prohibit discrimination on the basis of age, race, color, sex, religion,
marital status, national origin, receipt of public assistance or the exercise of
any right under the Consumer Credit Protection Act, in the extension of credit;
(iii) the Real Estate Settlement Procedures Act and Regulation X promulgated
thereunder, which require certain disclosures to borrowers regarding the
settlement and servicing of the Mortgage Loans; (iv) the Fair Credit Reporting
Act, which regulates the use and reporting of information related to the
borrower's credit experience; and (v) the Federal Trade Commission Preservation
of Consumer's Claims and Defense Rule, 16 C.F.R. Part 433, regarding the
preservation of a consumer's rights.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act amended the Truth in Lending Act, which in turn led to certain
additional provisions being added to Regulation Z, the implementing regulation
of the Truth in Lending Act. These provisions impose additional disclosure and
other requirements on creditors with respect to non-purchase money mortgage
loans with high interest rates on high up-front fees and changes. In general,
mortgage loans within the purview of the Riegle Act have annual percentage rates
over 10% greater than the yield on Treasury Securities of comparable maturity
and/or fees and points which exceed the greater of 8% of the total loan amount
or $400. The provisions of the Riegle Act apply on a mandatory basis to all
mortgage loans originated on or after October 1, 1995. The provisions can impose
specific statutory liabilities upon creditors who fail to comply with their
provisions and may affect the enforceability of the related loans. In addition,
any assignee of the creditor would generally be subject to all claims and
defenses that the consumer could assert against the creditor, including, without
limitation, the right to rescind the mortgage loan.
Depending on the provisions of the applicable law and the specific facts
and circumstances involved, violations of these laws, policies and principles
may limit the ability of the Servicer to collect all or part of the principal of
or interest on the Mortgage Loans, may entitle the borrower to a refund of
amounts previously paid
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and, in addition, could subject the Servicer to damages and administrative
sanctions. If the Servicer is unable to collect all or part of the principal or
interest on any Mortgage Loans because of a violation of the aforementioned
laws, public policies or general principles of equity, distributions or payments
to Owners of realized proceeds of the assets in the related Trust may be
delayed, or such proceeds may not be sufficient to repay all amounts owed to
Owners. Furthermore, depending upon whether damages and sanctions are assessed
against the Servicer, such violations may have a material impact upon the
financial ability of the Servicer to continue to act in such capacity or the
ability of the Depositor or the Issuer to withdraw or replace Mortgage Loans if
such violation breaches a representation or warranty contained in the related
Pooling and Servicing Agreement, Sale and Servicing Agreement or Indenture, as
applicable.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor who is a member of the National Guard or is in reserve status at the
time of the origination of the Mortgage Loan and is later called to active duty)
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such Mortgagor's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such action
could have an effect, for an indeterminate period of time, on the ability of the
related Servicer to collect full amounts of interest on certain of the Mortgage
Loans. In addition, the Relief Act imposes limitations that would impair the
ability of the related Servicer to foreclose on an affected Mortgage Loan during
the Mortgagor's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to realize upon the Mortgaged Property in a timely fashion.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of offered Securities be rated in one of the four
highest rating categories by one or more of Moody's, Standard & Poor's DCR or
Fitch. See "Summary of Prospectus-Ratings" herein. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time. No person is obligated to maintain the rating on any
Security, and, accordingly, there can be no assurance that the ratings assigned
to any class of Securities on the date on which such Securities are initially
issued will not be lowered or withdrawn by a Rating Agency at any time
thereafter. In the event any rating is revised or withdrawn, the liquidity of
the related Securities may be adversely affected. Issuance of any of the
Securities in book-entry form may reduce the liquidity of such Securities in the
secondary trading market because investors may be unwilling to purchase
Securities for which they cannot obtain physical certificates. The rating of
Securities credit enhanced through external credit enhancement such as a letter
of credit, financial guaranty insurance policy or mortgage pool insurance will
depend primarily on the creditworthiness of the issuer of such external credit
enhancement device (a "Credit Enhancer"). Any reduction in the rating assigned
to the claims-paying ability of the related Credit Enhancer below the rating
initially given to the related Securities would likely result in a reduction in
the rating of the Securities. The rating of Securities credit enhanced through
subordination or reserve amounts will depend on the actual performance of the
related Mortgage Loans, and a reduction in such rating could occur if defaults
and losses on the related Mortgage Loans exceed the rate assumed in determining
the original level of crdit enhancement. Reduction of a rating would adversely
affect the market value and possibly the liquidity of the related Securities.
See "Ratings" in the Prospectus Supplement.
Funds Available for Redemptions at the Request of Note Owners. With respect
to any Series of Notes for which the related Prospectus Supplement provides for
redemptions of such Notes at the request of Note Owners, there can be no
assurance that amounts available for such redemptions for such Notes will be
sufficient to permit such Notes to be redeemed within a reasonable time after
redemption is requested, for reasons including the following:
(i) Scheduled principal payments on the related Mortgage Loans
generally will be minimal in the early years and will increase in the
later years of such Mortgage Loans. As a result, funds available to be
applied to redemptions at the request of Note Owners, may be expected
to be limited in the early years and to increase during the later years
of each Series. Accordingly, the availability of funds for
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redemptions of Notes of any Series at the request of Note Owners will
depend largely upon the rates of prepayment of the related Mortgage
Loans.
(ii) Prepayments of principal on Mortgage Loans are less
likely to occur during periods of higher interest rates when it is more
likely that requests for redemption by Note Owners will be made. During
periods in which prevailing interest rates are higher than the interest
rate paid on Notes that may be redeemed at the request of Note Owners,
greater numbers of such Notes are expected to be tendered for
redemption in order to take advantage of the higher interest rates
payable on other investments then available. During such periods, there
will likely also be a reduction in the rate of prepayments on the
related Mortgage Loans, thus limiting the funds available to satisfy
requested redemption by Note Owners.
(iii) As specified in the related Prospectus Supplement,
certain Note Owners, such as personal representatives of deceased Note
Owners, may have certain priorities as to redemption at the request of
Note Owners.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee or Indenture Trustee, the Owner Trustee, if any, the
Master Servicer, if any, and the Servicer. The provisions of each Agreement will
vary depending upon the nature of the Securities to be issued thereunder and the
nature of the related Trust. Securities which represent beneficial interests in
the Trust will be issued pursuant to the Pooling and Servicing Agreement similar
to the form filed as an Exhibit to the Registration Statement of which this
Prospectus is a part. Securities which represent debt obligations of the Trust
will be issued pursuant to an Indenture between the Trust and the Indenture
Trustee. The following summaries and the summaries set forth under "The Pooling
and Servicing Agreement" and "The Indenture" describe certain provisions
relating to each Series of Securities. The Prospectus Supplement for a Series of
Securities will describe the specific provisions relating to such Series. The
Depositor will provide Owners of Securities, without charge, on written request
a copy of the Pooling and Servicing Agreement or the Indenture and the Trust
Agreement, as applicable, for the related Series. Requests should be addressed
to IMC Securities, Inc., 5901 East Fowler Avenue, Tampa, Florida 33617-2362. The
Pooling and Servicing Agreement or the Indenture and the Trust Agreement, as
applicable, relating to a Series of Securities will be filed with the Securities
and Exchange Commission within 15 days after the date of issuance of such Series
of Securities (the "Delivery Date").
The Securities of a Series will be entitled to payment only from the assets
of the Trust and any other assets pledged for the benefit of the Securities and
will not be entitled to payments in respect of the assets included in any other
trust fund established by the Depositor. The Securities will not represent
obligations of the Depositor, the Trustee or the Indenture Trustee, the Owner
Trustee, if any, the Master Servicer, if any, any Servicer or any affiliate
thereof and will not be guaranteed by any governmental agency. See "The Trusts"
herein.
The Mortgage Assets relating to a Series of Securities will not be insured
or guaranteed by any governmental entity and, to the extent that delinquent
payments on or losses in respect of defaulted Mortgage Assets, are not advanced
or paid from any applicable Credit Enhancement, such delinquencies may result in
delays in the distribution of payments on, or losses allocated to one or more
classes of Securities of such Series.
General
The Securities of each Series will be issued either in book entry form or
in fully registered form. The Securities of a given Series will evidence
undivided beneficial interests in the assets of the related Trust specified in
the related Prospectus Supplement. The Notes of a given Series will represent
non-recourse obligations of the related Issuer, secured by the assets in the
related Trust, and the proceeds of such assets will be in the sole source of
payments on such Notes. The minimum original denomination of each class of
Securities will be specified in
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the related Prospectus Supplement. The original "Security Principal Balance" of
each Security will equal the aggregate distributions or payments allocable to
principal to which such Security is entitled and distributions allocable to
interest on each Security that is not entitled to distributions allocable to
principal will be calculated based on the "Notional Principal Balance" of such
Security. The Notional Principal Balance of a Security will not evidence an
interest in or entitlement to distributions allocable to principal but will be
used solely for convenience in expressing the calculation of interest and for
certain other purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Securities, the Securities of each Series will be transferable and
exchangeable on a "Security Register" to be maintained at the corporate trust
office or such other office or agency maintained for such purposes by the
Trustee or the Indenture Trustee, as applicable. The Trustee or the Indenture
Trustee, as applicable, will be appointed initially as the "Security Registrar"
and no service charge will be made for any registration of transfer or exchange
of Securities, but payment of a sum sufficient to cover any tax or other
governmental charge may be required.
Under current law the purchase and holding of certain classes of Securities
may result in "prohibited transactions" within the meaning of ERISA and the
Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Securities of such a class will not be registered unless
the transferee (i) executes a representation letter stating that it is not, and
is not purchasing on behalf of, any such plan, account or arrangement or (ii)
provides an opinion of counsel satisfactory to the Trustee or the Indenture
Trustee and the Depositor that the purchase of Securities of such a class by or
on behalf of such plan, account or arrangement is permissible under applicable
law and will not subject the Trustee or the Indenture Trustee, the Servicer or
the Depositor to any obligation or liability in addition to those undertaken in
the Pooling and Servicing Agreement or the Indenture, as applicable.
As to each Series of Certificates, one or more elections may be made to
treat the related Trust or designated portions thereof as a REMIC for federal
income tax purposes. The related Prospectus Supplement will specify whether a
REMIC election is to be made. Alternatively, the Agreement for a Series may
provide that a REMIC election may be made at the discretion of the Depositor or
the Servicer and may only be made if certain conditions are satisfied. See
"Federal Income Tax Considerations" herein. As to any such Series, the terms and
provisions applicable to the making of a REMIC election, as well as any material
federal income tax consequences to Owners of Certificates not otherwise
described herein, will be set forth in the related Prospectus Supplement. If
such an election is made with respect to a Series, one of the classes will be
designated as evidencing the "residual interests" in the related REMIC, as
defined in the Code. All other classes of Securities in such a Series will
constitute "regular interests" in the related REMIC, as defined in the Code. As
to each Series with respect to which a REMIC election is to be made, the
Servicer, the Trustee, an Owner of Residual Securities or another person as
specified in the related Prospectus Supplement will be obligated to take all
actions required in order to comply with applicable laws and regulations and
will be obligated to pay any prohibited transaction taxes. The person so
specified will be entitled to reimbursement for any such payment.
Classes of Securities
Each Series of Securities will be issued in one or more classes which will
evidence the beneficial ownership in the assets of the Trust that are allocable
to (i) principal of such class of Securities and (ii) interest on such
Securities. If specified in the Prospectus Supplement, one or more classes of a
Series of Securities may evidence beneficial ownership interests in separate
groups of assets included in the related Trust.
The Securities will have an aggregate original Security Principal Balance
equal to or less than the aggregate unpaid principal balance of the Mortgage
Assets (plus, amounts held in a Pre-Funding Account, if any) as of the time and
day prior to creation of the Trust specified in the related Prospectus
Supplement (the "Cut-Off Date") after deducting payments of principal due or
paid, as specified in the related Prospectus Supplement, before the Cut-Off Date
and will bear interest at rates which, on a weighted basis, will be equal to the
Pass-Through Rate. The Pass-Through Rate will equal the weighted average rate of
interest borne by the related Mortgage Assets, net of the aggregate servicing
fees, amounts allocated to the residual interests and any other amounts as are
specified
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in the Prospectus Supplement. The original Security Principal Balance (or
Notional Principal Balance) of the Securities of a Series and the interest rate
on the classes of such Securities will be determined in the manner specified in
the Prospectus Supplement.
Each class of Securities that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to change
from time to time (a) in accordance with a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound Interest
Securities, any interest that has accrued but is not paid on a given Payment
Date will be added to the aggregate Security Principal Balance of such class of
Securities on that Payment Date.
A Series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below), or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A Series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the assets of the Trust, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise. The timing and amounts of such distributions or
payments may vary among classes, over time or otherwise.
A Series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities with respect to which payments of principal are to be
made in specified amounts on specified Payment Dates, to the extent of funds
available on such Payment Date. "Companion Securities" are Securities which
receive payments of all or a portion of any funds available on a given Payment
Date which are in excess of amounts required to be applied to payments on
Scheduled Amortization Securities on such Payment Date. Because of the manner of
application of payments of principal to Companion Securities, the weighted
average lives of Companion Securities of a Series may be expected to be more
sensitive to the actual rate of prepayments on the Mortgage Assets in the
related Trust than will the Scheduled Amortization Securities of such Series.
One or more Series of Securities may constitute Series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in the
related Prospectus Supplement for a Series of Special Allocation Securities, the
timing and/or priority of payments of principal and/or interest may favor one or
more classes of Securities over one or more other classes of Securities. Such
timing and/or priority may be modified or reordered upon the occurrence of one
or more specified events. Losses on Trust assets for such Series may be
disproportionately borne by one or more classes of such Series, and the proceeds
and distributions from such assets may be applied to the payment in full of one
or more classes within such Series before the balance, if any, of such proceeds
are applied to one or more other classes within such Series. For example,
Special Allocation Securities in a Series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of Subordinated Securities, as a
form of Credit Enhancement. See "Credit Enhancement Subordination" herein.
Typically, the Subordinated Securities will carry a rating by the rating
agencies lower than that of the Senior Securities. In addition, one or more
classes of Securities ("Priority Securities") may be entitled to a priority of
distributions of principal or interest from assets in the Trust over another
class of Securities ("Non-Priority Securities"), but only after the exhaustion
of other Credit Enhancement applicable to such Series. The Priority Securities
and Non-Priority Securities nonetheless may be within the same rating category.
Distributions of Principal and Interest
General. Distributions of principal and interest will be made to the extent
of funds available therefor, on the dates specified in the Prospectus Supplement
(each, a "Payment Date") to the persons in whose names the Securities are
registered (the "Owners") at the close of business on the dates specified in the
Prospectus Supplement (each, a "Record Date"). With respect to Securities other
than Book Entry Securities, distributions
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will be made by check or money order mailed to the person entitled thereto at
the address appearing in the Security Register or, if specified in the
Prospectus Supplement, in the case of Securities that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request by
the Owner of a Security, by wire transfer or by such other means as are agreed
upon with the person entitled thereto; provided, however, that the final
distribution in retirement of the Securities (other than Book Entry Securities)
will be made only upon presentation and surrender of the Securities at the
office or agency of the Trustee specified in the notice of such final
distribution. With respect to Book Entry Securities, such payments will be made
as described below under "Book Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Securities of
the related Series (the "Security Account" with respect to such Series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Security Account and may be available to make payments on the
Securities of the applicable Series on the next succeeding Payment Date or pay
after amounts owed by the Trust.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement relating to a given Series of Securities, each Class of Certificates
may bear interests at a different Security Interest Rate, which may be fixed or
adjustable. All of the Notes of a given Series will bear interest at the same
rate, which may be fixed or adjustable (the "Note Rate"). Interest will accrue
on the aggregate Security Principal Balance (or, in the case of Securities
entitled only to distributions allocable to interest, the aggregate Notional
Principal Balance (as defined below)) of each class of Securities entitled to
interest from the date, at the applicable Security Interest Rate and for the
periods (each, an "Interest Accrual Period") specified in the Prospectus
Supplement. The aggregate Security Principal Balance of any class of Securities
entitled to distributions of principal will be the aggregate original Security
Principal Balance of such class of Securities, reduced by all distributions
allocable to principal, and, in the case of Compound Interest Securities,
increased by all interest accrued but not then distributable on such Compound
Interest Securities. With respect to a class of Securities entitled only to
distributions allocable to interest, such interest will accrue on a notional
principal balance (the "Notional Principal Balance") of such class, computed
solely for purposes of determining the amount of interest accrued and payable on
such class of Securities.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Securities entitled to interest (other
than a class of Compound Interest Securities) will be distributable on the
Payment Dates specified in the Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate Notional Principal Balance of such Securities
is reduced to zero or for the period of time designated in the Prospectus
Supplement. Distributions of interest on each class of Compound Interest
Securities will commence only after the occurrence of the events specified in
the Prospectus Supplement and, prior to such time, the aggregate Security
Principal Balance (or Notional Principal Balance) of such class of Compound
Interest Securities, will increase on each Payment Date by the amount of
interest that accrued on such class of Compound Interest Securities during the
preceding Interest Accrual Period but that was not required to be distributed to
such class on such Payment Date. Any such class of Compound Interest Securities
will thereafter accrue interest on its outstanding Security Principal Balance
(or Notional Principal Balance) as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Securities on
each Payment Date will be calculated and the manner in which such amount will be
allocated among the classes of Securities entitled to distributions of
principal.
One or more classes of Securities may be entitled to receive all or a
disproportionate percentage of the payments of principal which are received on
the related Mortgage Assets in advance of their scheduled due dates and are not
accompanied by amounts representing scheduled interest due after the month of
such payments ("Principal Prepayments"). Any such allocation may have the effect
of accelerating the amortization of such Securities relative to the interests
evidenced by the other Securities.
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Unscheduled Distributions. The Securities of a Series may be subject to
receipt of distributions before the next scheduled Payment Date under the
circumstances and in the manner described below and in the related Prospectus
Supplement. If applicable, such unscheduled distributions will be made on the
Securities of a Series on the date and in the amount specified in the related
Prospectus Supplement if, due to substantial payments of principal (including
Principal Prepayments) on the related Mortgage Assets, low rates then available
for reinvestment of such payments or both, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
Account for such Series on the next related Payment Date, together with, if
applicable, any amounts available to be withdrawn from any related Reserve Fund
or from any other Credit Enhancement provided for such Series, may be
insufficient to make required distributions on the Securities on such Payment
Date. The amount of any such unscheduled distribution that is allocable to
principal will not exceed the amount that would otherwise have been required to
be distributed as principal on the Securities on the next Payment Date and will
include interest at the applicable Security Interest Rate (if any) on the amount
of the unscheduled distribution allocable to principal for the period and to the
date specified in the Prospectus Supplement.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Securities would have been made on the next Payment Date except as otherwise
stated in the related Prospectus Supplement, and, with respect to Securities of
the same class, unscheduled distributions of principal will be made on a pro
rata basis. Notice of any unscheduled distribution will be given by the Trustee
or the Indenture Trustee prior to the date of such distribution.
Book Entry Registration
Securities may be issued as Book Entry Securities and held in the name of a
Clearing Agency registered with the Securities and Exchange Commission or its
nominee. Transfers and pledges of Book Entry Securities may be made only through
entries on the books of the Clearing Agency in the name of Clearing Agency
Participants or their nominees. Clearing Agency Participants may also be
Beneficial Owners of Book Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry Securities
directly but may hold, transfer or pledge their ownership interest in the
Securities only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Securities and, if applicable, may request redemption of Securities, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Securities or be entitled to receive
definitive certificates representing their ownership interest in the Securities
except under the limited circumstances, if any, described in the related
Prospectus Supplement. See "Risk Factors - Book Entry Registration" herein.
If Securities of a Series are issued as Book Entry Securities, the Clearing
Agency will be required to make book entry transfers among Clearing Agency
Participants, to receive and transmit payments of principal and interest with
respect to the Securities of such Series, and to receive and transmit requests
for redemption with respect to such Securities. Clearing Agency Participants
with whom Beneficial Owners have accounts with respect to such Book Entry
Securities will be similarly required to make book entry transfers and receive
and transmit payments and redemption requests on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not be
registered Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
List of Owners of Securities
Upon written request of a specified number or percentage interests of
Owners of Securities of record of a Series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee or the Indenture Trustee will afford such
Owners access during business hours
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to the most recent list of Owners of Securities of that Series held by the
Trustee or the Indenture Trustee. With respect to Book Entry Securities, the
only named Owner on the Security Register will be the Clearing Agency.
The Pooling and Servicing Agreement or the Indenture, as applicable, will
not provide for the holding of any annual or other meetings of Owners of
Securities.
THE TRUSTS
The Trust for a Series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) all payments (subject, if specified in the related Prospectus
Supplement, to certain exclusions) in respect of such Mortgage Assets, which may
be adjusted, to the extent specified in the related Prospectus Supplement, in
the case of interest payments on Mortgage Assets, to the Security Interest Rate;
(iii) if specified in the Prospectus Supplement, reinvestment income on such
payments; (iv) with respect to a Trust that includes Mortgage Loans all property
acquired by foreclosure or deed in lieu of foreclosure with respect to any such
Mortgage Loan; (v) certain rights of the Trustee or the Indenture Trustee, the
Depositor and the Servicer under any insurance policies, hazard insurance or
surety bonds required to be maintained in respect of the related Mortgage
Assets; and (vi) if so specified in the Prospectus Supplement, one or more forms
of Credit Enhancement.
The Securities of each Series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information respecting
the Mortgage Assets is not known at the time the related Series of Securities
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific information
will be set forth in a report on Form 8-K to be filed with the Securities and
Exchange Commission within fifteen days after the initial issuance of such
Securities. A copy of the Pooling and Servicing Agreement or the Indenture, the
Sale and Servicing Agreement and the Trust Agreement, as applicable, with
respect to each Series of Securities will be attached to the Form 8-K and will
be available for inspection at the corporate trust office of the Trustee or the
Indenture Trustee specified in the related Prospectus Supplement. A schedule of
the Mortgage Assets relating to each Series of Securities, will be attached to
the related Pooling and Servicing Agreement or Sale and Servicing Agreement, as
applicable delivered to the Trustee or the Indenture Trustee upon delivery of
such Securities.
Mortgage Loans
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans will
be within the broad classifications of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, the Mortgage Loans may include
cooperative apartment loans ("Cooperative Loans") secured by security interests
in shares issued by Cooperatives and in the related proprietary leases or
occupancy agreements granting exclusive rights to occupy specific dwelling units
in such Cooperatives' buildings, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including home improvement retail
installment contracts. The Mortgaged Properties securing the Mortgage Loans may
include investment properties and vacation and second homes. Each Mortgage Loan
will be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
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The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a Series of Securities
will be payable either on the first day of each month or on different scheduled
days throughout each month, and the interest will be calculated either on a
simple-interest or accrual method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally charged interest only on the days of the month
actually elapsed up to the date of such prepayment, at a daily interest rate
that is applied to the principal amount of the Mortgage Loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust for a
Series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable
from time to time in relation to an index, a rate that is fixed for a
period of time or under certain circumstances and followed by an
adjustable rate, a rate that otherwise varies from time to time, or a
rate that is convertible from an adjustable rate to a fixed rate.
Changes to an adjustable rate may be subject to periodic limitations,
maximum rates, minimum rates or a combination of such limitations.
Accrued interest may be deferred and added to the principal of a
Mortgage Loan for such periods and under such circumstances as may be
specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by
the seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to
fully amortize the Mortgage Loan over its term, may be calculated on
the basis of an amortization schedule that is longer than the original
term to maturity or on an interest rate that is different from the
interest rate on the Mortgage Loan or may not be amortized during all
or a portion of the original term. Payment of all or a substantial
portion of the principal may be due on maturity. Principal may include
interest that has been deferred and added to the principal balance of
the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed
for the life of the Mortgage Loan, may increase over a specified period
of time or may change from period to period. Mortgage Loans may include
limits on periodic increases or decreases in the amount of monthly
payments and may include maximum or minimum amounts of monthly
payments.
(d) Prepayments of principal may be subject to a prepayment
fee, which may be fixed for the life of the Mortgage Loan or may
decline over time, and may be prohibited for the life of the Mortgage
Loan or for certain periods ("lockout periods"). Certain Mortgage Loans
may permit prepayments after expiration of the applicable lockout
period and may require the payment of a prepayment fee in connection
with any such subsequent prepayment. Other Mortgage Loans may permit
prepayments without payment of a fee unless the prepayment occurs
during specified time periods. The Mortgage Loans may include
"due-on-sale" clauses which permit the mortgagee to demand payment of
the entire Mortgage Loan in connection with the sale or certain
transfers of the related mortgaged property. Other Mortgage Loans may
be assumable by persons meeting the then applicable underwriting
standards of the Servicer, or as may be required by any applicable
government program.
(e) Another type of mortgage loan described in the Prospectus
Supplement.
With respect to a Series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. The
"Principal Balance" of any Mortgage Loan will be the unpaid principal balance of
such Mortgage Loan as of the Cut-Off Date, after deducting any principal
payments due or
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paid, as specified in the related Prospectus Supplement, before the Cut-Off
Date, reduced by all principal payments, including principal payments advanced
pursuant to the related Agreement, previously distributed with respect to such
Mortgage Loan and reported as allocable to principal.
The "Loan-to-Value Ratio" of any Mortgage Loan will be determined by
dividing the amount of the Mortgage Loan by the Original Value (defined below)
of the related Mortgaged Property. The "principal amount" of the Mortgage Loan,
for purposes of computation of the Loan-to-Value Ratio of any Mortgage Loan,
will include any part of an origination fee that has been financed. In some
instances, it may also include amounts which the seller or some other party to
the transaction has paid to the mortgagee, such as minor reductions in the
purchase price made at the closing. The "Original Value" of a Mortgage Loan is
(a) in the case of any purchase money Mortgage Loan, the lesser of (i) the value
of the mortgaged property, based on an appraisal thereof and (ii) the selling
price, and (b) otherwise the value of the mortgaged property, based on an
appraisal thereof.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real estate
market should experience an overall decline in property values such that the
outstanding principal balances of the Mortgage Loans become equal to or greater
than the values of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be significantly higher than those now generally
experienced in the mortgage lending industry. In addition, adverse economic
conditions (which may or may not affect real estate values) may affect the
timely and ultimate payment by mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies, foreclosures and losses with respect to the Mortgage Loans.
Mortgage-Backed Securities
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FHLMC
or Fannie Mae or GNMA.
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an "MBS Agreement"). A seller (the "MBS Issuer") and/ or servicer (the "MBS
Servicer") of the underlying mortgage loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the "MBS
Trustee"), if any, or with the original purchaser or purchasers of the MBS.
The MBS may have been issued in one or more classes with characteristics
similar to the classes of Securities described herein. Distributions in respect
of the MBS will be made by the MBS Servicer or the MBS Trustee on the dates
specified in the related Prospectus Supplement. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Reserve funds, subordination, cross-support or other credit enhancement
similar to that described for the Securities under "Credit Enhancement" may have
been provided with respect to the MBS. The type, characteristics and amount of
such credit enhancement, if any, will be a function of the characteristics of
the underlying mortgage loans and other factors and generally will have been
established on the basis of the requirements of any rating agency that may have
assigned a rating to the MBS, or by the initial purchasers of the MBS.
The Prospectus Supplement for a Series of Securities that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics
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of the MBS, (v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable,
(vi) a description of the credit support, if any, (vii) the circumstances under
which the stated underlying mortgage loans, or the MBS themselves may be
purchased prior to their maturity, (viii) the terms on which mortgage loans may
be substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans, and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
Other Mortgage Securities
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates. Any Other Mortgage Securities
that are privately placed securities will not be included in a Trust until such
time as such privately placed securities would be freely transferrable pursuant
to Rule 144A of the Securities Act of 1933, as amended. Further (i) such
privately placed securities will have been acquired in the secondary market and
not pursuant to an initial offering thereof and (ii) the underlying issuer of
such securities will not be affiliated with the Depositor and will not have an
interest in the Trust. The Prospectus Supplement for a Series of Securities will
describe any Other Mortgage Securities to be included in the Trust for such
Series.
CREDIT ENHANCEMENT
General. Various forms of Credit Enhancement may be provided with respect
to one or more classes of a Series of Securities or with respect to the assets
in the related Trust. Credit Enhancement may be in the form of (i) the
subordination of one or more classes of the Securities of such Series, (ii) the
establishment of one or more Reserve Funds, (iii) the use of a cross-support
feature, use of a Mortgage Pool Insurance Policy, Special Hazard Insurance
Policy, bankruptcy bond, or another form of Credit Enhancement described in the
related Prospectus Supplement, or (iv) any combination of the foregoing. Credit
Enhancement may not provide protection against all risks of loss and may not
guarantee repayment of the entire principal balance of the Securities and
interest thereon. If losses occur which exceed the amount covered by Credit
Enhancement or which are not covered by the Credit Enhancement, Owners of
Securities will bear their allocable share of deficiencies.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or Series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement. Such description will include financial information on
the Financial Guaranty Insurer. In addition, the audited financial statements of
a Financial Guaranty Insurer and an auditors consent to use such financial
statements will be filed with the Securities and Exchange Commission on Form 8-K
or will be incorporated by reference to financial statements already on file
with the Securities and Exchange Commission.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to Owners that an amount equal to each full and completed insured
payment will be received by an agent of the Trustee or the Indenture Trustee, as
applicable (an "Insurance Paying Agent"), on behalf of Owners, for distribution
by the Trustee or the Indenture Trustee, as applicable, to each Owner. The
"insured payment" will be defined in the related Prospectus Supplement, and will
generally equal the full amount of the distributions of principal and interest
to which Owners are entitled under the related Agreement plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
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The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Seller or Depositor to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Pooling and Servicing Agreement or Sale
and Servicing Agreement, as applicable, the Financial Guaranty Insurer may be
subrogated to the rights of Owners to receive payments under the Securities to
the extent of any payment by such Financial Guaranty Insurer under the related
Financial Guaranty Insurance Policy.
Subordination. Distributions in respect of scheduled principal, interest or
any combination thereof otherwise payable to one or more classes of Securities
of such Series (the "Subordinated Securities") may be paid to one or more other
classes of such Series (the "Senior Securities") under the circumstances and to
the extent provided in the Prospectus Supplement. If specified in the Prospectus
Supplement, delays in receipt of scheduled payments on the Mortgage Assets and
losses on defaulted Mortgage Assets will be borne first by the various classes
of Subordinated Securities and thereafter by the various classes of Senior
Securities, in each case under the circumstances and subject to the limitations
specified in the Prospectus Supplement. The aggregate distributions in respect
of delinquent payments on the Mortgage Assets over the lives of the Securities
or at any time, the aggregate losses in respect of defaulted Mortgage Assets
which must be borne by the Subordinated Securities by virtue of subordination
and the amount of the distributions otherwise distributable to the Subordinated
Securities that will be distributable to Owners of Senior Securities on any
Payment Date may be limited as specified in the Prospectus Supplement. If
aggregate distributions in respect of delinquent payments on the Mortgage Assets
or aggregate losses in respect of such Mortgage Assets were to exceed the total
amounts payable and available for distribution to Owners of Subordinated
Securities or, if applicable, were to exceed the specified maximum amount,
Owners of Senior Securities could experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities on any Payment Date
may instead be deposited into one or more Reserve Funds (as defined below)
established by the Trustee. If so specified in the Prospectus Supplement, such
deposits may be made on each Payment Date, on each Payment Date for specified
periods, or on each Payment Date until the balance in the Reserve Fund has
reached a specified amount and, following payments from the Reserve Fund to
Owners of Senior Securities or otherwise, thereafter to the extent necessary to
restore the balance in the Reserve Fund to required levels, in each case as
specified in the Prospectus Supplement. If so specified in the Prospectus
Supplement, amounts on deposit in the Reserve Fund may be released to the
Depositor or the Owners of any class of Securities at the times and under the
circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, distributions may be allocated among such classes (i)
in the order of their scheduled final distribution dates, (ii) in accordance
with a schedule or formula, (iii) in relation to the occurrence of events, or
(iv) otherwise, in each case as specified in the Prospectus Supplement. As
between classes of Subordinated Securities, payments with respect to Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Overcollateralization. If specified in the Prospectus Supplement,
subordination provisions of a Trust may be used to accelerate to a limited
extent the amortization of one or more classes of Securities relative to the
amortization of the related Mortgage Loans. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of Securities. This acceleration feature
creates, with respect to the Mortgage Loans or groups thereof,
overcollateralization which results from the excess of the
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aggregate principal balance of the related Mortgage Loans, or a group thereof,
over the principal balance of the related class of Securities. Such acceleration
may continue for the life of the related Securities, or may be limited. In the
case of limited acceleration, once the required level of overcollateralization
is reached, and subject to certain provisions specified in the related
Prospectus Supplement, such limited acceleration feature may cease, unless
necessary to maintain the required level of overcollateralization.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
Series may be evidenced by separate classes of related Series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. The Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more separate
Trusts for a separate Series of Securities. If applicable, the Prospectus
Supplement will identify the Trusts to which such credit support relates and the
manner of determining the amount of the coverage provided thereby and of the
application of such coverage to the identified Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
will be obtained.
Any such Mortgage Pool Insurance Policy will, subject to the limitations
described below and in the Prospectus Supplement, cover loss by reason of
default in payments on such Mortgage Loans up to the amounts specified in the
Prospectus Supplement or report on Form 8-K and for the periods specified in the
Prospectus Supplement. The Trustee or the Indenture Trustee under the related
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
will agree to use its best reasonable efforts to cause to be maintained in
effect any such Mortgage Pool Insurance Policy and to supervise the filing of
claims thereunder to the issuer of such Mortgage Pool Insurance Policy (the
"Pool Insurer") for the period of time specified in the related Prospectus
Supplement. A Mortgage Pool Insurance Policy, however, is not a blanket policy
against loss, because claims thereunder may only be made respecting particular
defaulted Mortgage Loans and only upon satisfaction of certain conditions
precedent set forth in such policy as described in the related Prospectus
Supplement. The Mortgage Pool Insurance Policies, if any, will not cover loss
due to a failure to pay or denial of a claim under a primary mortgage insurance
policy, irrespective of the reason therefor. The related Prospectus Supplement
will describe the terms of any applicable Mortgage Pool Insurance Policy and
will set forth certain information with respect to the related Pool Insurer.
In general, a Mortgage Pool Insurance Policy 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 or persons involved in the origination
thereof or (ii) failure to construct a Mortgaged Property in accordance with
plans and specifications. If so specified in the related Prospectus Supplement,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation of the Seller and in such event might give rise
to an obligation on the part of the Seller to purchase the defaulted Mortgage
Loan if the breach materially and adversely affects the interests of the Owners
of the Securities and cannot be cured by the Seller.
The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced over the life of such Securities 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 properties. The amount of claims paid
will generally include certain expenses incurred with respect to the applicable
Mortgage Loans as well as accrued interest on delinquent Mortgage Loans to the
date of payment of the claim. See "Certain Legal Aspects of the Mortgage Assets
- - Foreclosure" herein. Accordingly, if aggregate net claims paid under any
Mortgage Pool Insurance Policy reach
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the original policy limit, coverage under that Mortgage Pool Insurance Policy
will be exhausted and any further losses will be borne by one or more classes of
Securities unless otherwise covered by another form of Credit Enhancement, as
specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans -- Standard Hazard Insurance", the hazard policies concerning the
Mortgage Loans typically exclude from coverage physical damage resulting from a
number of causes and even when the damage is covered, may afford recoveries
which are significantly less than the full replacement cost of such losses. Even
if special hazard insurance is applicable as specified in the Prospectus
Supplement, no coverage in respect of special hazard losses will cover all
risks, and the amount of any such coverage will be limited. See "Special Hazard
Insurance" below. As a result, certain hazard risks will not be insured against
and will therefore be borne by Owners of the Securities, unless otherwise
covered by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (i) loss by reason of
damage to Mortgaged Properties caused by certain hazards (including earthquakes
and, to a limited extent, tidal waves and related water damage) not covered by
the standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located or under flood insurance policies, if any,
covering the Mortgaged Properties, and (ii) loss caused by reason of the
application of the coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans -- Standard Hazard Insurance." Any Special
Hazard Insurance Policy may not cover losses occasioned by war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear reaction, flood (if
the Mortgaged Property is located in a federally designated flood area),
chemical contamination and certain other risks. Aggregate claims under each
Special Hazard Insurance Policy will be limited as described in the related
Prospectus Supplement. Any Special Hazard Insurance Policy may also provide that
no claim may be paid unless hazard and, if applicable, flood insurance on the
Mortgaged Property has been kept in force and other protection and preservation
expenses have been paid.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained with respect to such Mortgage Loan, the
issuer of the Special Hazard Insurance Policy (the "Special Hazard Insurer")
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the special hazard insurer, the unpaid
principal balance of such Mortgage Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred with respect to such
property. If 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 property. Any amount paid as the cost
of repair or replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described under (i) above
will satisfy the condition under any applicable Mortgage Pool Insurance Policy
that the property be restored before a claim under such Mortgage Pool Insurance
Policy may be validly presented with respect to the defaulted Mortgage Loan
secured by such property. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage Loan under any
related Mortgage Pool Insurance Policy. Therefore, so long as a Mortgage Pool
Insurance Policy remains in effect, the payment by the Special Hazard Insurer
under a Special Hazard Insurance Policy of the cost of repair or replacement or
the unpaid principal balance of the Mortgage Loan plus accrued interest and
certain expenses will not affect the total insurance proceeds but will affect
the relative amounts of coverage remaining under any related Special Hazard
Insurance Policy and any related Mortgage Pool Insurance Policy.
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Bankruptcy Bond. In the event of a bankruptcy of a borrower, the bankruptcy
court may establish the value of the property securing the related Mortgage Loan
at an amount less than the then outstanding principal balance of such 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 property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Assets" herein. If so
provided in the related Prospectus Supplement, the Depositor will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The bankruptcy
bond will cover certain losses resulting from a reduction by a bankruptcy court
of scheduled payments of principal of and interest on a Mortgage Loan or a
reduction by such court of the principal amount of a Mortgage Loan and will
cover certain unpaid interest on the amount of such a principal reduction from
the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans and
will not be restored.
If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
Reserve Funds. If specified in the Prospectus Supplement, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor on the Delivery Date in
one or more accounts (each, a "Reserve Fund") established and maintained with
the Trustee or the Indenture Trustee, as applicable. Such cash and the principal
and interest payments on such other investments will be used to enhance the
likelihood of timely payment of principal of, and interest on, or, if so
specified in the Prospectus Supplement, to provide additional protection against
losses in respect of, the assets in the related Trust, to pay the expenses of
the Trust or for such other purposes specified in the Prospectus Supplement.
Whether or not the Depositor has any obligation to make such a deposit, certain
amounts to which the Owners of Subordinated Securities, if any, would otherwise
be entitled may instead be deposited into the Reserve Fund from time to time and
in the amounts as specified in the Prospectus Supplement. Any cash in any
Reserve Fund and the proceeds of any other instrument upon maturity will be
invested in Eligible Investments. If a letter of credit is deposited with the
Trustee or the Indenture Trustee, as applicable, such letter of credit will be
irrevocable. Any instrument deposited therein will name the Trustee or the
Indenture Trustee, as applicable, as a beneficiary and will be issued by an
entity acceptable to each rating agency that rates the Securities. Additional
information with respect to such instruments deposited in the Reserve Funds may
be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution with respect to
the Securities for the purposes, in the manner and at the times specified in the
Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii) establishing
a minimum reinvestment rate on the payments made in respect of such assets or
principal payment rate on such assets, (iv) guaranteeing timely payment of
principal and interest under the Securities, or for such other purpose as is
specified in such Prospectus Supplement. Such arrangements may include
agreements under which Owners of Securities are entitled to receive amounts
deposited in various accounts held by the Trustee or the Indenture Truste, as
applicable, upon the terms specified in the Prospectus Supplement. Such
arrangements
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may be in lieu of any obligation of the Servicer or the Seller to advance
delinquent installments in respect of the Mortgage Loans. See "Servicing of
Mortgage Loans - Advances" herein.
SERVICING OF MORTGAGE LOANS
With respect to each Series of Securities, the related Mortgage Loans will
be serviced by a sole servicer or by a master servicer with various
sub-servicers pursuant to, or as provided for in, the related Pooling and
Servicing Agreement or any Sale and Servicing Agreement (a "Sale and Servicing
Agreement") entered into among the Seller, the Servicer, the Depositor, the
Issuer and the Indenture Trustee. The Prospectus Supplement for each Series will
specify the servicer and the master servicer, if any, for such Series.
The Depositor will require that the Servicer have adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth requirement of no less than $10,000,000 (to be specified in the
related Pooling and Servicing Agreement or Sale and Servicing Agreement) as well
as satisfaction of certain other criteria. The Servicer is required to be a
Fannie Mae-approved servicer of conventional mortgage loans.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers (the
"Mortgagors") and remittance of such collections to the Trustee or the Indenture
Trustee, as applicable, maintenance of applicable standard hazard insurance or
primary mortgage insurance policies, attempting to cure delinquencies,
supervising foreclosures, management of Mortgaged Properties under certain
circumstances, and maintaining accounting records relating to the Mortgage Loans
and, if specified in the related Prospectus Supplement, maintenance of escrow or
impoundment accounts of Mortgagors for payment of taxes, insurance, and other
items required to be paid by the Mortgagor pursuant to the Mortgage Loan. Each
Servicer will also be obligated to make advances in respect of delinquent
installments on Mortgage Loans as described more fully under "- Payments on
Mortgage Loans" and "- Advances" below and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be entitled
to collect and retain, as part of its servicing compensation, late payment
charges and assumption underwriting fees. Each Servicer will be reimbursed from
proceeds of one or more of the insurance policies described herein ("Insurance
Proceeds") or from proceeds received in connection with the liquidation of
defaulted Mortgage Loans ("Liquidation Proceeds") for certain expenditures
pursuant to the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. See "- Advances" and "- Servicing Compensation and
Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan pursuant to
the terms of the Pooling and Servicing Agreement or the Sale and Servicing
Agreement, as applicable, for the entire term of such Mortgage Loan unless such
Pooling and Servicing Agreement or Sale and Servicing Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
Payments on Mortgage Loans
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial Account
must be an account the deposits in which are fully insured by either the Federal
Deposit Insurance Corporation ("FDIC") or the National Credit Union
Administration ("NCUA") or are, to the extent such deposits are in excess of the
coverage provided by such insurance, continuously secured by certain obligations
issued or guaranteed by the United States of America. If at any time the amount
on deposit in such Custodial Account shall exceed the amount so insured or
secured, the applicable Servicer must remit to the Trustee or the Indenture
Trustee, as applicable, the amount on deposit in such Custodial Account which
exceeds the amount so insured or secured, less any amount such Servicer may
retain for its own account pursuant to its Sale and Servicing Agreement.
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Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Securities.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage Loans will remit to the Trustee or the Indenture
Trustee, as applicable, all funds held in its Custodial Account with respect to
each Mortgage Loan; provided, however, that Principal Prepayments may be
remitted on the Remittance Date in the month following the month of such
prepayment. Each Servicer will be required pursuant to the terms of the related
Pooling and Servicing Agreement or Sale and Servicing Agreement and as specified
in the related Prospectus Supplement, to remit with each Principal Prepayment
interest thereon at the Remittance Rate through the last day of the month in
which such Principal Prepayment is made. Each Servicer may also be required to
advance its own funds as described below.
Advances
With respect to a delinquent Mortgage Loan, the Servicer may be obligated
(but only to the extent set forth in the related Prospectus Supplement) to
advance its own funds or funds from its Custodial Account equal to the aggregate
amount of payments of principal and interest (adjusted to the applicable
Remittance Rate) which were due on a due date and which are delinquent as of the
close of business on the business day preceding the Remittance Date ("Monthly
Advance"). Generally, such advances will be required to be made by the Servicer
unless the Servicer determines that such advances ultimately would not be
recoverable under any applicable insurance policy, from the proceeds of
liquidation of the related Mortgaged Properties, or from any other source (any
amount not so reimbursable being referred to herein as a "Nonrecoverable
Advance"). Such advance obligation generally will continue through the month
following the month of final liquidation of such Mortgage Loan. Any Servicer
funds thus advanced will be reimbursable to such Servicer out of recoveries on
the Mortgage Loans with respect to which such amounts were advanced. Each
Servicer will also be obligated to make advances with respect to certain taxes
and insurance premiums not paid by Mortgagors on a timely basis. Funds so
advanced are reimbursable to the Servicers out of recoveries on the related
Mortgage Loans. Each Servicer's right of reimbursement for any advance will be
prior to the rights of the Trust to receive any related Insurance Proceeds or
Liquidation Proceeds. Failure by a Servicer to make a required Monthly Advance
will be grounds for termination under the related Pooling and Servicing
Agreement or Sale and Servicing Agreement, as applicable.
Collection and Other Servicing Procedures
Each Servicer will service the Mortgage Loans pursuant to guidelines
established in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable.
The Servicer will be responsible for making reasonable efforts to collect
all payments called for under the Mortgage Loans. The Servicer will be obligated
to follow such normal practices and procedures as it deems necessary or
advisable to realize upon a defaulted Mortgage Loan. In this regard, the
Servicer may (directly or through a local assignee) sell the property at a
foreclosure or trustee's sale, negotiate with the Mortgagor for a deed in lieu
of foreclosure or, in the event a deficiency judgment is available against the
Mortgagor or other person (see "Certain Legal Aspects of the Mortgage Assets --
Foreclosure - Anti-Deficiency Legislation and Other Limitations on Lenders" for
a description of the limited availability of deficiency judgments), foreclose
against such property and proceed for the deficiency against the appropriate
person. The amount of the ultimate net recovery (including the proceeds of any
Mortgage Pool Insurance Policy or other applicable Credit Enhancement), after
reimbursement to the Servicer of its expenses incurred in connection with the
liquidation of any such defaulted Mortgage Loan and prior unreimbursed advances
of principal and interest with respect thereto will be
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deposited in the Security Account when realized and will be distributed to
Owners of Securities on the next Payment Date following the month of receipt.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" 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's ability to sell and realize the value of
those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) 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 Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) 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-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) 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 its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may enter into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Mortgage Note, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets - Foreclosure -
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
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So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Primary Mortgage Insurance
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, the primary mortgage insurance policies will
not insure against certain losses which may be sustained in the event of a
personal bankruptcy of the mortgagor under a Mortgage Loan.
Standard Hazard Insurance
The Servicer will be required to cause to be maintained for each Mortgage
Loan a standard hazard insurance policy. The coverage of such policy is required
to be in an amount not less than the maximum insurable value of the improvements
securing such Mortgage Loan from time to time or the principal balance owing on
such Mortgage Loan from time to time, whichever is less. In all events, such
coverage shall be in an amount sufficient to ensure avoidance of the
applicability of the co-insurance provisions under the terms and conditions of
the applicable policy. The ability of each Servicer to assure that hazard
insurance proceeds are appropriately applied may be dependent on its being named
as an additional insured under any standard hazard insurance policy and under
any flood insurance policy referred to below, or upon the extent to which
information in this regard is furnished to such Servicer by Mortgagors. Each
Pooling and Servicing Agreement or Sale and Servicing Agreement, as applicable,
may provide that the related Servicer may satisfy its obligation to cause hazard
insurance policies to be maintained by maintaining a blanket policy insuring
against hazard losses on the Mortgage Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. If the
property securing a Mortgage Loan is located in a federally designated flood
area, flood insurance will be required to be maintained in such amounts as would
be required by Fannie Mae in connection with its mortgage loan purchase program.
The Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement - Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the residential properties
securing the Mortgage Loans appreciate in value over time, the effect of
coinsurance in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damaged property.
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 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.
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Title Insurance Policies
The Pooling and Servicing Agreements and the Sale and Servicing Agreements
will generally require that a title insurance policy be in effect on each of the
Mortgaged Properties and that such title insurance policy contain no coverage
exceptions, except customary exceptions generally accepted in the mortgage
banking industry.
Claims Under Primary Mortgage Insurance Policies and Standard Hazard Insurance
Policies; Other Realization Upon Defaulted Loan
Each Servicer will present claims to any primary insurer under any related
primary mortgage insurance policy and to the hazard insurer under any related
standard hazard insurance policy. All collections under any related primary
mortgage insurance policy or any related standard hazard insurance policy (less
any proceeds to be applied to the restoration or repair of the related Mortgaged
Property or to the reimbursement of Advances by the Servicer) will be remitted
to the Trustee or the Indenture Trustee, as applicable.
If any Mortgaged Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under any applicable Mortgage Pool Insurance Policy or any related
primary mortgage insurance policy, each Servicer may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but only to the extent it determines such expenditures
are recoverable from Insurance Proceeds or Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related primary mortgage insurance policy is not available, the Servicer will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. If the proceeds of any liquidation of the Mortgaged
Property securing the defaulted Mortgage Loan are less than the Principal
Balance of the defaulted Mortgage Loan plus interest accrued thereon, a loss
will be realized on such Mortgage Loan, to the extent the applicable Credit
Enhancement is not sufficient, in the amount of such difference plus the
aggregate of expenses which are incurred by the Servicer in connection with such
proceedings and are reimbursable under the Pooling and Servicing Agreement or
the Sale and Servicing Agreement, as applicable. In such case there will be a
reduction in the value of the Mortgage Loans and Trust may be unable to recover
the full amount of principal and interest due thereon.
In addition, where a Mortgaged Property securing a defaulted Mortgage Loan
can be resold for an amount exceeding the principal balance of the related
Mortgage Loan together with accrued interest and expenses, it may be expected
that, where retention of any such amount is legally permissible, the Pool
Insurer will exercise its right under the related Mortgage Pool Insurance
Policy, if any, to purchase such Mortgaged Property and realize for itself any
excess proceeds. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
Servicing Compensation and Payment of Expenses
As compensation for its servicing duties, each Servicer will be entitled to
a monthly servicing fee in the amount specified in the related Prospectus
Supplement. In addition to the primary compensation, a Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with advancing delinquent payments. No loss
will be suffered on the Securities by reason of such expenses to the extent
claims for such expenses are paid directly under any applicable Mortgage Pool
Insurance Policy, a primary mortgage insurance policy, the special hazard
insurance policy or from other forms of Credit Enhancement. In the event,
however,
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that the defaulted Mortgage Loans are not covered by a Mortgage Pool Insurance
Policy, primary mortgage insurance policies, the Special Hazard Insurance Policy
or another form of Credit Enhancement, or claims are either not made or paid
under such policies or Credit Enhancement, or if coverage thereunder has ceased,
such a loss will occur to the extent that the proceeds from the liquidation of a
defaulted Mortgage Loan or Contract, after reimbursement of the Servicer's
expenses, are less than the Principal Balance of such defaulted Mortgage Loan.
Master Servicer
A Master Servicer may be specified in the related Prospectus Supplement for
the related Series of Securities. Customary servicing functions with respect to
Mortgage Loans constituting the Mortgage Pool will be provided by the Servicer
directly or through one or more SubServicers subject to supervision by the
Master Servicer. If the Master Servicer is not directly servicing the Mortgage
Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the Pooling
and Servicing Agreement or the Sale and Servicing Agreement, as applicable, with
the Master Servicer, (ii) maintain a current data base with the payment
histories of each Mortgagor, (iii) review monthly servicing reports and data
relating to the Mortgage Pool for discrepancies and errors, and (iv) act as
backup Servicer during the term of the transaction unless the Servicer is
terminated or resigns in such case the Master Servicer shall assume the
obligations of the Servicer.
The Master Servicer will be a party to the Pooling and Servicing Agreement
or the Sale and Servicing Agreement, as applicable, for any Series for which
Mortgage Loans comprise the assets of a Trust. The Master Servicer will be
required to satisfy the standard established for the qualification of the Master
Servicer in the related Pooling and Servicing Agreement or Sale and Servicing
Agreement, as applicable. The Master Servicer will be compensated for the
performance of its services and duties under each Pooling and Servicing
Agreement or Sale and Servicing Agreement as specified in the related Prospectus
Supplement.
THE POOLING AND SERVICING AGREEMENT
The following summary describes certain provisions which will be common to
each Pooling and Servicing Agreement. The summary does not purport to be
complete and is subject to the provisions of a particular Pooling and Servicing
Agreement. Material terms of a specific Pooling and Servicing Agreement will be
further described in the related Prospectus Supplement.
Assignment of Mortgage Assets
Assignment of the Mortgage Loans. At the time of issuance of the
Securities, the Depositor will assign the Mortgage Loans to the Trustee,
together with all principal and interest adjusted to the Remittance Rate,
subject to exclusions specified in the Prospectus Supplement, due on or with
respect to such Mortgage Loans on or after the Cut-Off Date. The Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Pooling and
Servicing Agreement. Such schedule may include information as to the Principal
Balance of each Mortgage Loan as of the Cut-Off Date, as well as information
respecting the Mortgage Rate, the scheduled monthly payment of principal and
interest as of the Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver to the
Trustee the Mortgage Note and Mortgage, any assumption and modification
agreement, an assignment of the Mortgage in recordable form (but not necessarily
recorded), evidence of title insurance, if obtained, and, if applicable, the
certificate of private mortgage insurance. In instances where recorded documents
cannot be delivered due to delays in connection with recording, the Depositor
may deliver copies thereof and deliver the original recorded documents promptly
upon receipt.
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With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, the related original
Cooperative note endorsed to the order of the Trustee, the original security
agreement, the proprietary lease or occupancy agreement, the recognition
agreement, an executed financing agreement and the relevant stock certificate
and related blank stock powers. The Depositor will file in the appropriate
office an assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects: (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Pooling and Servicing Agreement was
issued on the date of origination thereof and each such policy or binder
assurance is valid and remains in full force and effect or a legal opinion
concerning title or title search was obtained or conducted in connection with
the origination of the Mortgage Loans; (iii) at the date of initial issuance of
the Securities, the Seller has good title to the Mortgage Loans and the Mortgage
Loans are free of offsets, defenses or counterclaims; (iv) at the date of
initial issuance of the Securities, each Mortgage is a valid first lien on the
property securing the Mortgage Note (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
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the date of initial issuance of
the Securities, no Mortgage Loan is 31 or more days delinquent (with such
exceptions as may be specified in the related Prospectus Supplement) and there
are no delinquent tax or assessment liens against the property covered by the
related Mortgage; (vi) at the date of initial issuance of the Securities, the
portion of each Mortgage Loan, if any, which in the circumstances set forth
below under "Servicing of Mortgage Loans - Primary Mortgage Insurance" should be
insured with a private mortgage insurer is so insured; and (vii) each Mortgage
Loan at the time it was made complied in all material respects with applicable
state and federal laws, including, with out limitation, usury, equal credit
opportunity and disclosure laws. The Depositor's rights against the Seller in
the event of a breach of its representations will be assigned to the Trustee for
the benefit of the Securities of such Series.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each Series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee (directly or through a participant in a
depository). The Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities. The
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Mortgage-Backed Security or Other Mortgage Security. Each
Mortgage-Backed Security and Other Mortgage Security will be identified in a
schedule appearing as an exhibit to the related Agreement which may specify
certain information with respect to such security, including, as applicable, the
original principal amount, outstanding principal balance as of the Cut-Off Date,
annual pass-through rate or interest rate and maturity date and certain other
pertinent information for each such security. The Depositor will represent and
warrant to the Trustee, among other things, the information contained in such
schedule is true and correct and that immediately prior to the transfer of the
related securities to the Trustee, the Depositor had good title to, and was the
sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans. The Trustee will review the
documents delivered to it with respect to the Mortgage Loans included in the
related Trust. If any document is not delivered or is found to be defective in
any material respect and the Depositor or the related Seller, if so required
cannot deliver such document or cure such defect within the period specified in
the related Prospectus Supplement after notice thereof (which the Trustee will
undertake to give within the period specified in the related Prospectus
Supplement), and
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if any other party obligated to deliver such document or cure such defect has
not done so and has not substituted or repurchased the affected Mortgage Loan or
Contract then the Depositor will cause the Seller, not later than the first date
designated for the deposit of payments into the Security Account (a "Deposit
Date") which is more than a specified number of days after such period, (a) if
so provided in the Prospectus Supplement to remove the affected Mortgage Loan
from the Trust and substitute one or more other Mortgage Loans therefor or (b)
repurchase the Mortgage Loan from the Trustee for a price equal to 100% of its
Principal Balance plus one month's interest thereon at the applicable Remittance
Rate. This repurchase and, if applicable, substitution obligation will generally
constitute the sole remedy available to the Trustee for a material defect in a
document relating to a Mortgage Loan.
The Depositor is required to cause the Seller to do either of the following
(a) cure any breach of any representation or warranty that materially and
adversely affects the interests of the Owners of the Securities in a Mortgage
Loan (each, a "Defective Mortgage Loan") within a specified number of days of
its discovery by the Depositor or its receipt of notice thereof from the
Trustee, (b) repurchase such Defective Mortgage Loan not later than the first
Deposit Date which is more than a specified number of days after such period for
a price equal to 100% of its Principal Balance plus one month's interest thereon
at the applicable Remittance Rate, or (c) if so specified in the Prospectus
Supplement, remove the affected Mortgage Loan from the Trust and substitute one
or more other mortgage loans or contracts therefor. This repurchase and, if
applicable, substitution obligation will generally constitute the sole remedies
available to the Trustee for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
as described above, whether or not the Depositor obtains such an agreement from
the Seller which sold such Mortgage Loans.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans.
Evidence as to Compliance
The Pooling and Servicing Agreement will provide that on or before a
specified date in each year, beginning the first such date that is at least a
specified number of months on and after the Cut-Off Date, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that,
based on an examination of certain specified documents and records relating to
the servicing of the Depositor's mortgage loan portfolio conducted substantially
in compliance with the audit program for mortgages serviced for Fannie Mae or
FHLMC, the United States Department of Housing and Urban Development Mortgage
Audit Standards or the Uniform Single Audit Program for Mortgage Bankers or in
accordance with other standards specified in the Agreement (the "Applicable
Accounting Standards"), such firm is of the opinion that such servicing has been
conducted in compliance with the Applicable Accounting Standards except for (a)
such exceptions as such firm shall believe to be immaterial and (b) such other
exceptions as shall be set forth in such statement.
The Trustee
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor and the
Trustee acting jointly will have the power and the responsibility for appointing
co-trustees or separate trustees of all or any part of the Trust relating to a
particular Series of Securities. In the event of such appointment, all rights,
powers, duties and obligations conferred or imposed upon the Trustee by the
Pooling and Servicing Agreement shall be conferred or imposed upon the Trustee
and such separate trustee or co-trustee jointly, or, in any jurisdiction in
which the Trustee shall be incompetent or unqualified to perform certain acts,
singly upon such separate trustee or co-trustee who shall exercise and perform
such rights, powers, duties and obligations solely at the direction of the
Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Pooling and Servicing Agreement, the Securities or of any Mortgage Asset
or related document, and will not be accountable for the use or application by
the Depositor of any funds paid to the Depositor in respect of the Securities or
the related assets,
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or amounts deposited in the Security Account or deposited into the Distribution
Account. If no Event of Default has occurred, the Trustee will be required to
perform only those duties specifically required of it under the Pooling and
Servicing Agreement. However, upon receipt of the various certificates, reports
or other instruments required to be furnished to it, the Trustee will be
required to examine them to determine whether they conform to the requirements
of the Pooling and Servicing Agreement.
The Trustee may resign at any time, and the Depositor may remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling and Servicing Agreement, if the Trustee becomes insolvent or in such
other instances, if any, as are set forth in the Agreement. Following any
resignation or removal of the Trustee, the Depositor will be obligated to
appoint a successor Trustee. Any resignation or removal of the Trustee and
appointment of a successor Trustee will not become effective until acceptance of
the appointment by the successor Trustee.
Administration of the Security Account
The Pooling and Servicing Agreement will require that the Security Account
be either (i) maintained with a depository institution the debt obligations of
which (or, in the case of a depository institution which is a part of a holding
company structure, the debt obligations of the holding company of which) have a
rating acceptable to each rating agency that was requested to rate the
Securities, or (ii) an account or accounts the deposits in which are fully
insured by either the Bank Insurance Fund (the "BIF") of the FDIC or the Savings
Association Insurance Fund (as successor to the Federal Savings and Loan
Insurance Corporation) ("SAIF") of the FDIC. The collateral eligible to secure
amounts in the Security Account is limited to United States government
securities and other investments acceptable to the rating agencies rating such
Series of Securities, and may include one or more Securities of a Series
("Eligible Investments"). If so specified in the related Prospectus Supplement,
a Security Account may be maintained as an interest bearing account, or the
funds held therein may be invested pending each succeeding Payment Date in
Eligible Investments. If so specified in the related Prospectus Supplement, the
Servicer or its designee will be entitled to receive any such interest or other
income earned on funds in the Security Account as additional compensation. The
Servicer will deposit in the Security Account from amounts previously deposited
by it into the Servicer's Custodial Account on the related Remittance Date the
following payments and collections received or made by it on and after the
Cut-Off Date (including scheduled payments of principal and interest due on and
after the Cut-Off Date but received before the Cut-Off Date):
(i) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(ii) all Mortgagor payments on account of interest, adjusted
to the Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts
reimbursed to the Servicer or other person entitled thereto, as
described above;
(iv) all Insurance Proceeds, other than proceeds to be applied
to the restoration or repair of the related property or released to the
Mortgagor and net of certain amounts reimbursed to the Servicer or
other person entitled thereto, as described above;
(v) all condemnation awards or settlements which are not
released to the Mortgagor in accordance with normal servicing
procedures;
(vi) any Advances made as described under "Servicing of
Mortgage Loans - Advances" herein and certain other amounts required
under the Pooling and Servicing Agreement to be deposited in the
Security Account;
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(vii) all proceeds of any Mortgage Loan or property acquired
in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be deposited in the
Security Account from any Credit Enhancement for the related Series;
and
(ix) all other amounts required to be deposited in the
Security Account pursuant to the related Pooling and Servicing
Agreement.
Reports
Concurrently with each distribution on the Securities, there will be mailed
to Owners a statement generally setting forth, to the extent applicable to any
Series, among other things:
(i) the aggregate amount of such distribution allocable to
principal, separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest,
separately identifying the amount allocable to each class;
(iii) the aggregate Security Principal Balance of each class
of the Securities after giving effect to distributions on such Payment
Date;
(iv) the aggregate Security Principal Balance of any class of
Compound Interest Securities after giving effect to any increase in
such Principal Balance that results from the accrual of interest that
is not yet distributable thereon;
(v) if applicable, the amount otherwise distributable to any
class of Securities that was distributed to other classes of
Securities;
(vi) if any class of Securities has priority in the right to
receive Principal Prepayments, the amount of Principal Prepayments in
respect of the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage
Loans which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans
which (a) were delinquent 30-59 days, 60-89 days, and 90 days or more,
and (b) were in foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
Forward Commitments; Pre-Funding
The Trustee of a Trust may enter into a Subsequent Transfer Agreement for
the transfer of additional Mortgage Loans to such Trust following the date on
which such Trust is established and the related Securities are issued. The
Trustee of a Trust may enter into Subsequent Transfer Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Subsequent Transfer Agreement will require that
any Mortgage Loans so transferred to a Trust conform to the requirements
specified in such Subsequent Transfer Agreement. If a Subsequent Transfer
Agreement is to be utilized, the related Trustee will be required to deposit
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in the Pre-Funding Account all or a portion of the proceeds received by the
Trustee in connection with the sale of one or more classes of Securities of the
related Series; the additional Mortgage Loans will be transferred to the related
Trust in exchange for money released from the related Pre-Funding Account. The
maximum amount deposited in the Pre-Funding Account to acquire Mortgage Loans
for transfer to a Trust will not exceed 25% of the aggregate principal amount of
the Securities offered pursuant to the related Prospectus Supplement. Each
Subsequent Transfer Agreement will set a specified period during which any such
transfers must occur, which period will not exceed 90 days from the date the
Trust is established. The Subsequent Transfer Agreement or the related Agreement
will require that, if all moneys originally deposited to such Pre-Funding
Account are not so used by the end of such specified period, then any remaining
moneys will be applied as a mandatory prepayment of the related class or classes
of Securities as specified in the related Prospectus Supplement.
Servicer Events of Default
"Events of Default" under the Pooling and Servicing Agreement will consist
of (i) any failure by the Servicer to duly observe or perform in any material
respect any other of its covenants or agreements in the Agreement materially
affecting the rights of Owners which continues unremedied for a specified number
of days after the giving of written notice of such failure to the Depositor by
the Trustee or to the Servicer and the Trustee by the Owners of Securities
evidencing interests aggregating not less than 25% of the affected class of
Securities; and (ii) certain events of insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings and certain actions
by the Servicer indicating its insolvency, reorganization or inability to pay
its obligations.
Rights Upon Servicer Event of Default
As long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied by the Servicer, the Trustee, or Owners of Securities may
terminate all the rights and obligations of the Servicer under the Pooling and
Servicing Agreement, whereupon the Trustee or Master Servicer, if any, or a new
Servicer appointed pursuant to the Pooling and Servicing Agreement, will succeed
to all the responsibilities, duties and liabilities of the Servicer under the
Pooling and Servicing Agreement and will be entitled to similar compensation
arrangements. Following such termination, the Depositor shall appoint any
established mortgage loan servicer satisfying the qualification standards
established in the Pooling and Servicing Agreement to act as successor to the
Servicer under the Pooling and Servicing Agreement. If no such successor shall
have been appointed within a specified number of days following such
termination, then either the Depositor or the Trustee may petition a court of
competent jurisdiction for the appointment of a successor Servicer. Pending the
appointment of a successor Servicer, the Trustee or the Master Servicer, if any,
shall act as Servicer.
The Owners of Securities will not have any right under the Pooling and
Servicing Agreement to institute any proceeding with respect to the Pooling and
Servicing Agreement, unless they previously have given to the Trustee written
notice of default and unless the Owners of the percentage of the Securities
specified in the Prospectus Supplement have made written request to the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for a specified
number of days has neglected or refused to institute any such proceedings.
However, the Trustee is under no obligation to exercise any of the trusts or
powers vested in it by the Agreement or to make any investigation of matters
arising thereunder or to institute, conduct or defend any litigation thereunder
or in relation thereto at the request, order or direction of any of the Owners,
unless such Owners have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
Amendment
A Pooling and Servicing Agreement generally may be amended by the
Depositor, the Servicer and the Trustee, without the consent of the Owners of
the Securities, to cure any ambiguity, to correct or supplement any provision
therein which may be defective or inconsistent with any other provision therein,
to take any action necessary to maintain REMIC status of any Trust as to which a
REMIC election has been made, to add any other
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provisions with respect to matters or questions arising under the Agreement
which are not materially inconsistent with the provisions of the Agreement or
for any other purpose, provided that with respect to amendments for any other
purpose such amendment will not adversely affect in any material respect the
interests of any Owners of Securities of that Series. Any such amendment shall
be deemed not to adversely affect in any material respect any Owner if there is
delivered to the Trustee written notification from each Rating Agency that such
amendment will not cause such Rating Agency to reduce its then current rating
assigned to any Class of the Securities of such Series. Notwithstanding the
foregoing, no such amendment may (i) reduce in any manner the amount of, or
delay the timing of, collections of payments received on the related Mortgage
Assets or distributions which are required to be made on any Security without
the consent of the Owner of such Security, (ii) adversely affect in any material
respect the interests of the Owners of any class of Securities in any manner
other than as described in (i), without the consent of the Owners of Securities
of such class evidencing not less than a majority of the interests of such class
or (iii) reduce the aforesaid percentage of Securities of any class required to
consent to any such amendment, without the consent of the Owners of all
Securities of such class then outstanding. Any other amendment provisions
inconsistent with the foregoing shall be specified in the related Prospectus
Supplement.
Termination
The obligations of the Depositor, the Servicer, and the Trustee created by
the Pooling and Servicing Agreement will terminate upon the payment as required
by the Pooling and Servicing Agreement of all amounts held by the Servicer or in
the Security Account and required to be paid to them pursuant to the Pooling and
Servicing Agreement after the later of (i) the maturity or other liquidation of
the last Mortgage Asset subject thereto or the disposition of all property
acquired upon foreclosure of any such Mortgage Loan or (ii) the repurchase by
the Depositor from the Trust of all the outstanding Securities or all remaining
assets in the Trust. The Pooling and Servicing Agreement will establish the
repurchase price for the assets in the Trust and the allocation of such purchase
price among the classes of Securities. The exercise of such right will effect
early retirement of the Securities of that Series, but the Depositor's right so
to repurchase will be subject to the conditions described in the related
Prospectus Supplement. If a REMIC election is to be made with respect to all or
a portion of a Trust, there may be additional conditions to the termination of
such Trust which will be described in the related Prospectus Supplement. In no
event, however, will the trust created by the Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in the Pooling and Servicing Agreement. The Trustee will
give written notice of termination of Pooling and Servicing the Agreement to
each Owner, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency of the Trustee specified
in such notice of termination.
THE INDENTURE
General
Each Series of Notes will be issued pursuant to an Indenture to be entered
into between the related Issuer and the related Trustee. Where provisions or
terms used in a particular Indenture differ from those provided herein, a
description of such provisions or terms will be included in the related
Prospectus Supplement.
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. Where particular provisions or terms
used in the Indenture are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The description set forth below is subject to modification in the Prospectus
Supplement for a Series of Notes to describe the terms and provisions of the
particular Indenture relating to such Series of Notes.
Modification of Indenture
With the consent of the holders of not less than a majority of the
aggregate principal amount of the outstanding Notes of any Series issued under
an Indenture, the related Indenture Trustee and the related Issuer may
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execute a supplemental indenture to add provisions to, or change in any manner
or eliminate any provisions of, the Indenture with respect to such Series or
modify (except as provided below) in any manner the rights of the holders of
such Notes.
Without the consent of the holders of the Notes of such Series affected
thereby, however, no supplemental indenture shall (a) change the Payment Date of
the principal of, or interest on, any Note of such series or reduce the
principal amount thereof the Note Rate specified thereon, change the provisions
relating to the application of collections on, or the proceeds of the Mortgage
Assets to the payment of principal of or interest on the Notes, or change any
place of payment where, or the coin or currency in which, any Note of such
Series or any interest thereon is payable, or impair the right to institute suit
for the enforcement of certain provisions of the Indenture regarding payment,
(b) reduce the percentage of the aggregate principal amount of the outstanding
Notes of such Series, the consent of the holders of which is required for any
such a supplemental indenture, or the consent of the holders of which is
required for any waiver of compliance with certain provisions of the Indenture
or of certain defaults thereunder and their consequences as provided for in the
Indenture, (c) reduce the percentage of the aggregate principal amount of the
outstanding Notes of any Series to direct the Issuer to liquidate upon a Note
Event of Default (as described below), (d) modify or alter the provisions for
the Indenture except to increase any percentage specified therein or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the holder of each outstanding Note affected thereby, (e)
modify any of the provisions of the Indenture in such manner as to affect the
calculation of the amount any payment of the interest and principal due on any
Note on any Payment Date or to affect the rights of the holders of Notes of such
Series to the benefits of any provisions for the mandatory redemption of the
Notes of such Series contained therein, or (f) permit the creation of any lien
ranking prior to or on the parity with the lien of the Indenture with respect to
any part of the property subject to a lien under the Indenture or terminate the
lien of the Indenture on any property at any time subject thereto or deprive the
holder of any Note of such Series of the security afforded by the lien of the
Indenture.
The related Issuer and the respective Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of the Owners of the
Notes of such Series, to cure ambiguities or make minor corrections, to evidence
the succession of another person to the Issuer or the acceptance of a successor
trustee, each in accordance with the Indenture, and to do such other things as
would not adversely affect the interests of the Owners of the Notes of such
Series.
Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, a "Note Event of Default" with respect to any Series of Notes
will be defined in the respective Indenture under which such Notes are issued
as: (a) unless otherwise specified in the Prospectus Supplement for such Series,
a default in the payment of interest on any Note of such Series when due and
payable; (b) unless otherwise specified in the Prospectus Supplement for such
Series, a default in the payment of principal on any Note of such Series when
due and payable; (c) a default in the observance of any covenants or agreements
of the Issuer made in the Indenture or any representations and warranties of the
Issuer made in the Indenture, the Sale and Servicing Agreement or certain other
documents, and the continuation of any such default for a specified period after
notice to the related Issuer by the Indenture Trustee or to the related Issuer
and the Indenture Trustee by the holders of a majority of the principal amount
of the Notes of such Series then outstanding; or (d) certain events of
bankruptcy, insolvency, receivership or reorganization of the related Issuer,
whether voluntary or involuntary.
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Rights Upon Note Events of Default
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, in case a Note Event of Default should occur and be continuing
with respect to a Series of Notes, the Indenture Trustee may, and on request of
holders of not less than a majority in principal amount of the Notes of such
Series then outstanding shall, declare the principal of such Series of Notes to
be due and payable. Such declaration may under certain circumstances be
rescinded by the holders of a majority in principal amount of the Notes of such
Series then outstanding.
If, following a Note Event of Default, a Series of Notes has been declared
to be due and payable, the holders representing a majority in principal amount
of the Notes may, by written notice to the Issuer and Indenture Trustee, rescind
and annul the acceleration of the maturity of such Notes if the Issuer has paid
or deposited with the Indenture Trustee a sum sufficient to pay: (i) all
payments of principal of and interest on all Notes and all other amounts that
would then be due upon such Notes if the Note Event of Default giving rise to
such acceleration had not occurred; (ii) all sums paid or advanced by the
Indenture Trustee and the reasonable compensation, expenses, disbursements and
advances of the Indenture Trustee and its agents and counsel; and (iii) all Note
Events of Default, other than the nonpayment of the principal of the Notes that
has become due solely by such acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case a Note Event of Default shall occur and be
continuing, the Indenture Trustee may and at the direction of the holders of the
Notes representing a majority in principal amount of the Notes shall, upon
receipt of satisfactory indemnity and assurances, do one or more of the
following: (i) institute proceedings in its own name and as trustee of an
express trust for the collection of all amounts then payable on the Notes or
under the Indenture, whether by declaration or otherwise, enforce any judgment
obtained, and collect from the Issuer and any other obligor upon such Notes
moneys adjudged due; (ii) institute proceedings from time to time for the
complete or partial foreclosure of the Indenture with respect to the Mortgage
Assets; (iii) exercise any remedies of a secured party under the UCC and take
any other appropriate action to protect and enforce the rights and remedies of
the Indenture Trustee or the holders of the Notes; and (iv) sell the Mortgage
Assets or any portion thereof or rights or interest therein in a commercially
reasonable manner, at one or more public or private sales called and conducted
in any manner permitted by law; provided, however, that the Indenture Trustee
may not sell or otherwise liquidate the Mortgage Assets following a Note Event
of Default, unless (A) all holders of the Notes consent thereto, (B) the
proceeds of such sale or liquidation distributable to the holders of the Notes
are sufficient to discharge in full all amounts then due and unpaid upon such
Notes for principal and interest or (C) the Indenture Trustee determines that
the Mortgage Assets will not continue to provide sufficient funds for the
payment of principal of and interest on the Notes as they would have become due
if the Notes had not been declared due and payable, and the Indenture Trustee
obtains the consent of holders of 66-2/3% in principal amount of the Notes.
List of Note Owners
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, three or more holders of the Notes of any Series (each of whom
has owned a Note of such Series for at lease six months) may, by written request
to the Indenture Trustee, obtain access to the list of all Note Owners of such
Series maintained by the Indenture Trustee for the purpose of communicating with
other such Note Owners with respect to their rights under the Indenture. The
Indenture Trustee may elect not to afford the requesting Note Owners access to
the list of Note Owners if it agrees to mail the desired communication or proxy,
on behalf of the requesting Note Owners, to all Note Owners.
Annual Compliance Statement
The related Issuer will be required to file annually with the Indenture
Trustee a written statement as to the fulfillment of its obligations under the
Indenture.
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Indenture Trustee's Annual Report
The Indenture Trustee will be required to mail each year to all Owners of
Notes a brief report relating to its eligibility and qualifications to continue
as the Indenture Trustee under the Indenture, any amounts advanced by it under
the Indenture, the amount, interest rate and maturity date of certain
indebtedness owing by the related Issuer to it in the Indenture Trustee's
individual capacity, the property and funds physically held by the Indenture
Trustee as such, any release, or release and substitution, of property subject
to the lien of the Indenture that has not been previously reported, any
additional Series of Notes not previously reported and any action taken by it
which materially affects the Notes and which has not been previously reported.
Satisfaction and Discharge of Indenture
The Indenture will be discharged with respect to the assets securing the
Notes of a Series upon the delivery to the Indenture Trustee for cancellation of
all of the Notes of such Series or, with certain limitations, upon deposit with
the Indenture Trustee of funds sufficient for the payment in full of all of the
Notes of such Series.
Redemption of Notes
To the extent provided in the related Prospectus Supplement, the Notes of
any Series may be (i) redeemed at the request of holders of such Notes; (ii)
redeemed at the option of the related Issuer or another party specified in the
related Prospectus Supplement; or (iii) subject to special redemption under
certain circumstances. The circumstances and terms under which the Notes of a
Series may be redeemed will be described in the related Prospectus Supplement.
Reports by Indenture Trustee to Note Owners
On each Payment Date, the Indenture Trustee will send a report to each Note
Owner setting forth, among other things, the amount of such payment representing
interest, the amount thereof, if any, representing principal and the outstanding
principal amount of an individual Note after giving effect to the payments made
on such Payment Date.
Limitation on Suits
Unless otherwise specified in the Prospectus Supplement relating to a given
Series of Notes, no Note Owners of any Series will have any right to institute
any proceedings with respect to the Indenture unless (1) such holder has
previously given written notice to the Indenture Trustee of a continuing Note
Event of Default with respect to such Series; (2) the holders of a majority of
the principal amount of the Notes of such Series then outstanding have made
written requests to the Indenture Trustee to institute proceedings in respect to
such Note Event of Default in its own name as Indenture Trustee; (3) such
holders have offered to the Indenture Trustee reasonable indemnity satisfactory
to it against the costs, expenses and liabilities to be incurred in compliance
with such request; (4) for a specified period after its receipt of such notice,
request and offer of indemnity the Indenture Trustee has failed to institute any
proceedings; and (5) no direction inconsistent with such written request has
been given to the Indenture Trustee during such period by the holders of not
less than a majority in principal amount of the Notes of such Series then
outstanding.
The Sale and Servicing Agreement
General. The conveyance and servicing of the Mortgage Loans related to the
issuance of a Series of Notes will be pursuant to a Sale and Servicing Agreement
to be entered into between the Issuer, the Seller, the Servicer, the Depositor
and the Indenture Trustee. Where provisions or terms used in a particular Sale
and Servicing Agreement differ from those provided herein, a description of such
provisions or terms will be included in the related Prospectus Supplement.
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Assignment of Mortgage Assets. The Mortgage Loans to be included in the
related Trust will be assigned to the Indenture Trustee on behalf of the holders
of the Notes pursuant to provisions included in the related Sale and Servicing
Agreement that are substantially the same as and the Indenture Trustee with
respect to the Mortgage Loans so conveyed will be substantially similar to,
those described under "The Pooling and Servicing Agreement - Assignment of
Mortgage Assets" herein.
Evidence as to Compliance. The Indenture Trustee will receive an opinion
from a firm of independent public accountants regarding the servicing of the
Mortgage Loans which is substantially the same as described under "The Pooling
and Servicing Agreement - Evidence as to Compliance" herein.
The Indenture Trustee. The Indenture Trustee will be subject to rights and
duties under the Sale and Servicing Agreement substantially the same as those of
the Trustee described under "The Pooling and Servicing Agreement - The Trustee."
Administration of the Security Account. The Sale and Servicing Agreement
will require that a Security Account be maintaind and used in substantially the
same manner as described under "The Pooling and Servicing Agreement -
Administration of the Security Account."
Reports. The Sale and Servicing Agreement will provide that holders of the
Notes will receive reports substantially the same as those described under "The
Pooling and Servicing Agreement - Reports."
Forward Commitments; Pre-Funding. Under the Sale and Servicing Agreement,
the Indenture Trustee of a Trust may enter into Subsequent Transfer Agreements
for the transfer of additional Mortgage Loans to such Trust following the date
on which such Trust is established and the related Notes are issued in
substantially the same manner as described under "The Pooling and Servicing
Agreement - Forward Committments; Pre-Funding."
Servicer Events of Default. The "Events of Default" under the Sale and
Servicing Agreement will be substantially the same as those described under "The
Pooling and Servicing Agreement - Servicer Events of Default."
Rights Upon Servicer Event of Default. The rights upon an Event of Default
under the Sale and Servicing Agreement will be substantially the same as
described under "The Pooling and Servicing Agreement - Rights Upon Servicer
Event of Default."
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
Series of Securities will be applied to the simultaneous purchase of the
Mortgage Assets related to such Series (or to reimburse the amounts previously
used to effect such a purchase), the establishment of any Reserve Fund or
Pre-Funding Account the costs of carrying such Mortgage Assets until sale of the
Securities and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Pool. The Depositor does not have,
nor is it expected in the future to have, any significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate. The Depositor will not receive any fees or other commissions in
connection with its acquisition of Mortgage Assets or its sale of such Mortgage
Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Securities of any Series.
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CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts which are general in nature.
Because such legal aspects are governed primarily 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 is situated. The summaries
are qualified by reference to the applicable federal and state laws governing
the Mortgage Loans.
General
Mortgages. The Mortgage Loans will be secured either by deeds of trust or
mortgages. A mortgage creates a lien upon the real property encumbered by the
mortgage. It is not prior to liens for real estate taxes and assessments.
Priority between mortgages depends on their terms and generally on the order of
filing with a state or county office. There are two parties to a mortgage: the
mortgagor, who is the borrower and homeowner or the land trustee (as described
below), and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgager), a
lender (similar to a mortgagee) called the beneficiary, 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 and generally with a
power of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage
and, in some cases, the directions of the beneficiary.
Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is directly responsible for project
management and, in most cases, payment of real estate taxes and hazard and
liability insurance. If there is a blanket mortgage on the cooperative apartment
building and or underlying land, as is generally the case, the cooperative, as
project mortgagor, is also responsible for meeting these mortgage obligations. A
blanket mortgage is ordinarily incurred by the cooperative in connection with
the construction or purchase of the cooperative's apartment building. The
interest of the occupant under proprietary leases or occupancy agreements to
which that cooperative is a party are generally subordinate to the interest of
the holder of the blanket mortgage in that building. If the cooperative is
unable to meet the payment obligations arising under its blanket mortgage, the
mortgagee holding the blanket mortgage could foreclose on that mortgage and
terminate all subordinate proprietary leases and occupancy agreements. In
addition, the 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 lump sum at final maturity. The inability of the
cooperative to refinance this mortgage and its consequent inability to make such
final payment could lead to foreclosure by the mortgagee providing the
financing. A foreclosure in either event by the holder of the blanket mortgage
could eliminate or significantly diminish the value of any collateral held by
the lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or in the case of a Trust including Cooperative Loans, the
collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates 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 is 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 lenders interest
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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.
Foreclosure
Mortgages. Foreclosure of a deed of trust is generally accomplished by a
non-judicial trustee's sale under a specific provision in the deed of trust that
authorizes the trustee to sell the property to a third party upon any default by
the borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
or and 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. 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. Generally, state law controls the amount
of foreclosure expenses and costs, including attorney's fees' which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specific
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property and sent to all
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
Judicial foreclosure proceedings are often not protested by any of the parties
defendant. However, when the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of judicial foreclosure, the court generally issues a judgment of
foreclosure and appoints a referee or other court officer to conduct the sale of
the property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during 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 referee for
an amount equal to the principal amount of the mortgage or deed of trust,
accrued and unpaid interest and expenses of foreclosure. Thereafter, the lender
will assume the burdens of ownership, including paying real estate taxes,
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. Any loss may be reduced by the receipt of any
mortgage insurance proceeds.
When the junior mortgagee or beneficiary under a junior deed of trust cures
the default and state law allows it to reinstate or redeem by paying the full
amount of the senior mortgage or deed of trust, then in those states the amount
paid so to cure or redeem generally becomes a part of the indebtedness secured
by the junior mortgage or deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is, however,
subject to all senior liens, encumbrances and mortgages and may be subject to
mechanic's and materialman's liens in some states. Thus, if the mortgage or deed
of trust being foreclosed is a junior mortgage or deed of trust, the sheriff or
trustee
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will convey title to the purchaser of the real property, subject to any existing
first mortgage or deed of trust and any other prior liens and claims. The
foreclosure of a junior mortgage or deed of trust, generally, will have an
effect on the first mortgage or deed of trust, if the senior mortgage or deed of
trust grants to the senior mortgagee or beneficiary the right to accelerate its
indebtedness under a "due-on-sale" clause or "due on further encumbrance" clause
contained in the senior mortgage or deed of trust. See "Anti-Deficiency
Legislation and Other Limitations on Lenders" below.
The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustee is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent or
other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided 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. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the cooperative loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article 9
of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor and
the method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted. Article 9 of the UCC provides that the
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proceeds of the sale will be applied first to pay the costs and expenses of the
sale and then to satisfy the indebtedness secured by the lender's security
interest. The recognition agreement, however, generally provides that the
lender's right to reimbursement is subject to the right of the cooperative
corporation to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-Deficiency Legislation and Other Limitations on Lenders"
below.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans may be secured by mortgages or deeds of trust providing for
junior (i.e., second, third, etc.) liens on the related Mortgaged Properties
which are junior to the other mortgages or deeds of trust held by other lenders
or institutional investors. The rights of the beneficiary under a junior deed of
trust or as mortgagee under a junior mortgage are subordinate to those of the
mortgagee or beneficiary under the senior mortgage or deed of trust, including
the prior rights of the senior mortgagee or beneficiary to receive hazard
insurance and condemnation proceeds and to cause the property securing the
Mortgage Loans to be sold upon default of the mortgagor or trustor. As discussed
more fully below, a junior mortgagee or beneficiary in some states may satisfy a
defaulted senior loan in full and in some states may cure such default and bring
the senior loan current, in either event adding the amounts expended to the
balance due on the junior loan. In most states, absent a provision in the senior
mortgage or deed of trust, no notice of default is required to be given to a
junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the bankruptcy is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary typically is given the
right under the mortgage or deed of trust to perform the obligation itself at
its election, with the mortgagor or trustor agreeing to reimburse the mortgagee
or beneficiary for any sums expended by the mortgagee or beneficiary on behalf
of the trustor. All sums so expended by the mortgagee or beneficiary generally
become part of the indebtedness secured by the mortgage or deed of trust
Right of Redemption. In some states, after sale pursuant to a deed of trust
or foreclosure of a mortgage, the borrower and foreclosed junior lienors are
given a statutory period in which to redeem the property following foreclosure.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser 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.
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Anti-Deficiency Legislation and Other Limitations on Lenders. Certain
states have imposed statutory prohibitions 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 sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender. Other statutes require the beneficiary or mortgagee to exhaust the
security afforded under a deed of trust or mortgage by foreclosure in an attempt
to satisfy the full debt before bringing a personal action against the borrower.
Finally, other statutory provisions limit any deficiency judgment against the
former borrower following a judicial sale to the excess of the outstanding debt
over the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
fact of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modifications may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. 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 cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
Enforceability of Certain Provisions
Certain of the Mortgage Loans will contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of a loan if the borrower
sells, transfers, or conveys the property. The enforceability of these clauses
was the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-St.
Germain Depository Institutions Act of 1982 (the
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"Garn-St. Germain Act") preempts state constitutional, statutory and case law
prohibiting 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 (including federal savings
and loan associations and federal savings banks) 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. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor to enforce due-on-sale clauses may affect the average life of the
Mortgage Loans and the number of Mortgage Loans that may be outstanding until
maturity.
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include requirements that the lender undertake
affirmative and expensive actions to determine the causes for the borrower's
default and the likelihood that the borrower will be able to reinstate the loan.
In some cases, courts have substituted their judgment for the lender's judgment
and have required that lenders reinstate loans or recast payment schedules in
order to accommodate borrowers who are suffering from temporary financial
disability. In other cases, courts have limited the right of the lender to
foreclose if the default under the mortgage instrument is not monetary, such as
the borrower falling to adequately maintain the property or the borrower
executing a second mortgage or deed of trust affecting the property. Finally,
some courts have been faced with the issue of whether or not federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutory-prescribed minimum. For the most part, these cases
have upheld the notice provisions as being reasonable or have found that the
sale by a trustee under a deed of trust, or under a mortgage having a power of
sale, does not involve sufficient state action to afford constitutional
protections to the borrower.
The standard forms of note, mortgage and deed of trust generally contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon late charges which a lender may collect
from a borrower for delinquent payments. Certain states also limit the amounts
that a lender may collect from a borrower as an additional charge if the loan is
prepaid. Under any Pooling and Servicing Agreement or Sale and Servicing
Agreement, late charges (to the extent permitted by law and not waived by the
Servicer) will be retained by the Servicer as additional servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that mortgage
notes relating to adjustable rate loans are not negotiable instruments under the
UCC. In such event, the Trustee or the Indenture Trustee, as applicable, will
not be deemed to be a "holder in due course," within the meaning of the UCC and
may take such a mortgage note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a mortgagor.
Environmental Legislation. Certain states impose a statutory lien for
associated costs on property that is the subject of a cleanup action by the
state on account of hazardous wastes or hazardous substances released or
disposed of on the property. Such a lien will generally have priority over all
subsequent liens on the property and, in certain of these states, will have
priority over prior recorded liens including the lien of a mortgage. In
addition, under federal environmental legislation and under state law in a
number of states, a secured party which takes a deed in lieu of foreclosure or
acquires a mortgaged property at a foreclosure sale or assumes active control
over the operation or management of a property so as to be deemed an "owner" or
"operator" of the property may be liable for the costs of cleaning up a
contaminated site. Although such costs could be substantial, it is unclear
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whether they would be imposed on a secured lender (such as a Trust) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
Soldiers' and Sailors' Civil Relief Act
Generally, under the terms of the Relief Act, a borrower who enters
military service after the origination of a Mortgage Loan by such borrower
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest rate
limitation or similar limitations under state law could have an effect, for an
indeterminate period of time, on the ability of the Servicer to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicer to
foreclose on an affected Mortgage Loan during the borrower's period of active
duty status. Thus, in the event that such a Mortgage Loan goes into default
there may be delays and losses occasioned by the inability to realize upon the
Mortgaged Property in a timely fashion.
Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Securities.
LEGAL INVESTMENT MATTERS
The Securities may constitute "mortgage related securities" for purposes of
SMMEA, so long as they are rated in one of the two highest rating categories by
the Rating Agency or Agencies identified in the related Prospectus Supplement
and, as such, would be legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including but
not limited to state-chartered savings banks, commercial banks, saving and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or 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. Under SMMEA, in all
States which enacted legislation prior to October 4, 1991 specifically limiting
the legal investment authority of any of such entities with respect to "mortgage
related securities," the Securities will constitute legal investments for
entities subject to such legislation only to the extent provided in such
legislation SMMEA provides, however, that in no event will the enactment of any
such legislation affect the validity of any contractual commitment to purchase,
bold or invest in any securities or require the sale or over disposition of any
securities, so long as such contractual commitment was made or such securities
were acquired prior to the enactment of such legislation. Alaska, Arkansas,
Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas, Louisiana,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia each enacted legislation
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of the Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the FDIC,
the OTS, the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing the certificates. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the "Policy Statement"). The Policy
Statement has been adopted by the Comptroller of the Currency, the Federal
Reserve Board, the FDIC and the OTS with respect to the depository institutions
that they regulate. The Policy Statement prohibits depository institutions from
investing
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in certain "high-risk mortgage securities" except under limited circumstances,
and sets forth certain investment practices deemed to be unsuitable for
regulated institutions. The NCUA issued final regulations effective December 2,
1991 that restrict and in some instances prohibit the investment by federal
credit unions in certain types of mortgage related securities.
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 and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying," or in securities which are issued in bookentry
form.
Investors should consult their own legal advisors in determining whether
and to what extent the Securities constitute legal investments for such
investors.
ERISA CONSIDERATIONS
ERISA imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts and
annuities, Keogh plans and collective investment funds and separate accounts in
which such plans, accounts or arrangements are invested) (collectively, "Plans")
subject to ERISA and on persons who are fiduciaries with respect to such Plans.
Among other things, ERISA requires that the assets of Plans be held in trust and
that the trustee, or other duly authorized fiduciary, have exclusive authority
and discretion to manage and control the assets of such Plans. ERISA also
imposes certain duties on persons who are fiduciaries of Plans. Under ERISA, any
person who exercises any authority or control respecting the management or
disposition of the assets of a Plan is considered to be a fiduciary of such Plan
(subject to certain exceptions not here relevant). In addition to the imposition
of general fiduciary standards of investment prudence and diversification, ERISA
prohibits a broad range of transactions involving Plan assets and persons
("Parties in Interest") having certain specified relationships to a Plan and
imposes additional prohibitions where Parties in Interest are fiduciaries with
respect to such Plan.
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg
Section 2510.3-101). Under this regulation, the underlying assets and properties
of corporations, partnerships and certain other entities in which a Plan makes
an "equity" investment could be deemed for purposes of ERISA to be assets of the
investing Plan in certain circumstances. In such case, the fiduciary making such
an investment for the Plan could be deemed to have delegated his or her asset
management responsibility, and the underlying assets and properties could be
subject to ERISA reporting and disclosure. Certain exceptions to the regulation
may apply in the case of a Plan's investment in the Securities, but the
Depositor cannot predict in advance whether such exceptions apply due to the
factual nature of the conditions to be met. Accordingly, because the Mortgage
Loans may be deemed Plan assets of each Plan that purchases Securities, an
investment in the Securities by a Plan might give rise to a prohibited
transaction under ERISA Sections 406 and 407 and be subject to an excise tax
under Code Section 4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Exemption 83-1 ("PTE 83-1") exempts from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage investment trusts and the purchase, sale and holding of
"mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 83-1 permits, subject to certain conditions, transactions
which might otherwise be prohibited between Plans and Parties in Interest with
respect to those Plans involving the origination, maintenance and termination of
mortgage pools consisting of mortgage loans secured by first or second mortgages
or deeds of trust on single-family residential property, and the acquisition and
holding of certain mortgage pool pass-through certificates representing an
interest in such mortgage pools by PTE.
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PTE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying Owners against reductions in
pass-through payments due to property damage or defaults in loan payments in an
amount not less than the greater of one percent of the aggregate principal
balance of all covered pooled mortgage loans or the principal balance of the
largest covered pooled mortgage loan, (ii) the existence of a pool trustee who
is not an affiliate of the sponsor, and (iii) a limitation on the amount of the
payments retained by the pool sponsor, together with other funds inuring to its
benefit, to not more than adequate consideration for selling the mortgage loans
plus reasonable compensation for services provided by the pool sponsor.
Although the Trustee or the Indenture Trustee, as applicable, for any
Series of Securities will be unaffiliated with the Depositor, there can be no
assurance that the system of insurance or subordination will meet the general or
specific conditions referred to above. In addition, the nature of a Trust's
assets or the characteristics of one or more classes of the related Series of
Securities may not be included within the scope of PTE 83-1 or any other class
exemption under ERISA. The Prospectus Supplement will provide additional
information with respect to the application of ERISA and the Code to the related
Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as a
selling or placement agent. Several other underwriters have applied for similar
exemptions. If such an exemption might be applicable to a Series of Securities,
the related Prospectus Supplement will refer to such possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Securities must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions Each Plan fiduciary should also determine whether, under
the general fiduciary standards of investment prudence and diversification, an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio.
Any Plan proposing to invest in Securities should consult with its counsel
to confirm that such investment will not result in a prohibited trans action and
will satisfy the other requirements of ERISA and the Code.
FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden LLP, special
counsel to the Depositor ("Special Counsel"), with respect to the material
federal income tax consequences of the purchase, ownership and disposition of
Securities. Opinions of counsel are not binding on the IRS, however, and there
is no assurance that the IRS could not challenge successfully the opinions of
counsel. The discussion below does not purport to address all federal income tax
consequences that may be applicable to particular categories of investors, some
of which may be subject to special rules. The authorities on which this
discussion is based are subject to change or differing interpretations, and any
such change or interpretation could apply retroactively. This discussion
reflects the applicable provisions of the Code, as well as final regulations
concerning REMICs (the "REMIC Regulations") and final regulations under Sections
1271 through 1273 and 1275 of the Code concerning debt instruments (the "OID
Regulations"). The Depositor intends to rely on the OID Regulations for all
Securities offered pursuant to this Prospectus; however, investors should be
aware that the OID Regulations do not adequately address certain issues relevant
to prepayable securities, such as the Securities. Investors should consult their
own tax advisors in determining the federal, state, local and any other tax
consequences to them of the purchase, ownership and disposition of Securities.
The Prospectus Supplement for each Series of Securities will discuss any special
tax consideration applicable to any class of Securities of such Series, and the
discussion below is qualified by any such discussion in the related Prospectus
Supplement.
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For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a Series of Securities, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
Federal Income Tax Consequences For REMIC Securities
General. With respect to a particular Series of Securities, an election may
be made to treat the Trust or one or more trusts or segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
or a portion or portions thereof as to which one or more REMIC elections will be
made will be referred to as a "REMIC Pool." For purposes of this discussion,
Securities of a Series as to which one or more REMIC elections are made are
referred to as "REMIC Securities" and will consist of one or more classes of
"Regular Securities" and one class of "Residual Securities" in the case of each
REMIC Pool. Qualification as a REMIC requires ongoing compliance with certain
conditions. With respect to each Series of REMIC Securities, Special Counsel has
advised the Depositor that in their opinion, assuming (i) the making of an
appropriate election, (ii) compliance with the Agreement and (iii) compliance
with any changes in the law, including any amendments to the Code or applicable
Treasury regulations thereunder, each REMIC Pool will qualify as a REMIC and
that if a Trust qualifies as a REMIC, the tax consequences to the Owners will be
as described below. In such case, the Regular Securities will be considered to
be "regular interests" in the REMIC Pool and generally will be treated for
federal income tax purposes as if they were newly originated debt instruments,
and the Residual Securities will be considered to be "residual interests" in the
REMIC Pool. The Prospectus Supplement for each Series of Securities will
indicate whether one or more REMIC elections with respect to the related Trust
will be made, in which event references to "REMIC" or "REMIC Pool" herein shall
be deemed to refer to each such REMIC Pool.
Status of REMIC Securities. REMIC Securities held by a mutual savings bank
or a domestic building and loan association (a "Thrift Institution") will
constitute "qualifying real property loans" within the meaning of Code Section
593(d)(1) in the same proportion that the assets of the REMIC Pool would be so
treated. REMIC Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of the
REMIC Pool would be treated as "loans secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v) or as other assets
described in Code Section 7701(a)(19)(C). REMIC Securities held by a real estate
investment trust (a "REIT") will constitute "real estate assets" within the
meaning of Code Section 856(c)(5)(A), and interest on the REMIC Securities will
be considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Code Section 856(c)(3)(B)
in the same proportion that, for both purposes, the assets of the REMIC Pool
would be so treated. If at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Securities will be treated entirely as qualifying assets for such entities.
Moreover, the REMIC Regulations provide that, for purposes of Code Sections
593(d)(1) and 856(c)(5)(A), payments of principal and interest on the Mortgage
Assets that are reinvested pending distribution to holders of REMIC Securities,
constitute qualifying assets for such entities. Where two REMIC Pools are part
of a tiered structure they will be treated as one REMIC for purposes of the
tests described above respecting asset ownership of more or less than 95%.
Notwithstanding the foregoing, however, REMIC income received by a REIT owning a
residual interest in a REMIC Pool could be treated in part as non-qualifying
REIT income if the REMIC Pool holds Mortgage Assets with respect to which income
is contingent on mortgagor profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Assets, it is possible that the
percentage of such assets constituting "qualifying real property loans" or
"loans secured by an interest in real property" for purposes of Code Sections
593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required to be reduced by
the amount of the related buy-down funds. REMIC Securities held by a regulated
investment company will not constitute "government securities" within the
meaning of Code Section 851(b)(4)(A)(i). REMIC Securities held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(i). REMIC Securities representing interests in
obligations secured by manufactured housing treated as single family residences
under Code Section 25(e)(10) will be considered interests in "qualified
mortgages" as defined in Code Section 860E(a)(3).
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Qualification as a REMIC. In order for the REMIC Pool to qualify as a
REMIC, there must be ongoing compliance on the part of the REMIC Pool with the
requirements set forth in the Code. The REMIC Pool must fulfill an asset test,
which requires that no more than a de minimis amount of the assets of the REMIC
Pool, as of the close of the third calendar month beginning after the Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The REMIC Regulations provide
a "safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e., assets
other than qualified mortgages and permitted investments) is less than 1% of the
aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the requirements of the
Code for REMIC status during any taxable year, the REMIC Pool will not be
treated as a REMIC for such year and thereafter. In this event, the
classification of the REMIC Pool for federal income tax purposes is uncertain.
The REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Securities as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Securities may continue to be treated
as debt instruments for federal income tax purposes; but the REMIC Pool could be
treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a
TMP, any residual income of the REMIC Pool (income from the Mortgage Assets less
interest and original issue discount expense allocable to the Regular Securities
and any administrative expenses of the REMIC Pool) would be subject to corporate
income tax at the REMIC Pool level. On the other hand, an entity with multiple
classes of ownership interests may be treated as a separate association taxable
as a corporation under Treasury regulations, and the Regular Securities may be
treated as equity interests therein. The Code, however, authorizes the Treasury
Department to issue regulations that address situations where failure to meet
one or more of the requirements for REMIC status occurs inadvertently and in
good faith, and disqualification of the REMIC Pool would occur absent regulatory
relief. Investors should be aware, however, that the Conference Committee Report
to the Tax Reform Act of 1986 (the "1986 Act") indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
Taxation of Regular Securities
General. Payments received by holders of Regular Securities generally
should be accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular Owner") as
they accrue, and principal payments on a Regular Security will be treated as a
return of capital to the extent of the Regular Owner's basis in the Regular
Security allocable thereto. Regular Owners must use the accrual method of
accounting with regard to Regular Securities, regardless of the method of
accounting otherwise used by such Regular Owners.
Original Issue Discount. Regular Securities may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
of Regular Securities having original issue discount generally must include
original issue discount in ordinary income for federal income tax purposes as it
accrues, in accordance with a constant interest method that takes into account
the compounding of interest, in advance of receipt of the cash attributable to
such income. The Depositor anticipates that the amount of original issue
discount required to be included in a Regular Owner's income in any taxable year
will be computed as described below.
Each Regular Security (except to the extent described below with respect to
a Regular Security on which distributions of principal are made in a single
installment or upon an earlier distribution by lot of a specified principal
amount upon the request of a Regular Owner or by random lot (a "Retail Class
Security")) will be treated as a single installment obligation for purposes of
determining the original issue discount includible in a Regular Owner's income.
The total amount of original issue discount on a Regular Security is the excess
of the "stated redemption price at maturity" of the Regular Security over its
"issue price." The issue price of a Regular Security is the first price at which
a substantial amount of Regular Securities of that class are first sold to the
public. The
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Depositor will determine original issue discount by including the amount paid by
an initial Regular Owner for accrued interest that relates to a period prior to
the issue date of the Regular Security in the issue price of a Regular Security
and will include in the stated redemption price at maturity any interest paid on
the first Payment Date to the extent such interest is attributable to a period
in excess of the number of days between the issue date and such first Payment
Date. The stated redemption price at maturity of a Regular Security always
includes the original principal amount of the Regular Security, but generally
will not include distributions of stated interest if such interest distributions
constitute "qualified stated interest." Qualified stated interest generally
means stated interest that is unconditionally payable in cash or in property
(other than debt instruments of the issuer) at least annually at (i) a single
fixed rate, (ii) one or more qualified floating rates (as described below),
(iii) a fixed rate followed by one or more qualified floating rates, (iv) a
single objective rate (as described below) or (v) a fixed rate and an objective
rate that is a qualified inverse floating rate. The OID Regulations state that
interest payments are unconditionally payable only if reasonable legal remedies
exist to compel timely payment or the debt instrument otherwise provides terms
and conditions that make the likelihood of late payment (other than a late
payment that occurs within a reasonable grace period) or nonpayment a remote
contingency. Certain debt securities may provide for default remedies in the
event of late payment or nonpayment of interest. The interest on such debt
securities will be unconditionally payable and constitute qualified stated
interest, not OID. However, absent clarification of the OID Regulations, where
debt securities do not provide for default remedies or the likelihood of late
payment or nonpayment is a remote contingency, the interest payments will be
included in the debt security's stated redemption price at maturity and taxed as
OID. Any stated interest in excess of the qualified stated interest is included
in the stated redemption price at maturity. If the amount of original issue
discount is "de minimis" as described below, the amount of original issue
discount is treated as zero, and all stated interest is treated as qualified
stated interest. Distributions of interest on Regular Securities with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Regular
Securities includes all distributions of interest as well as principal thereon.
Moreover, if the interval between the issue date and the first Payment Date on a
Regular Security is longer than the interval between subsequent Payment Dates
(and interest paid on the first Payment Date is less than would have been earned
if the stated interest rate were applied to outstanding principal during each
day in such interval), the stated interest distributions on such Regular
Security technically do not constitute qualified stated interest. In such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Payment Date for each day the Regular Security was
outstanding) is treated as made at a fixed rate if the value of the rate on
which the payment is based is adjusted in a reasonable manner to take into
account the length of the interval. Regular Owners should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security is computed as the sum of the amounts
determined by multiplying the number of full years (i.e., rounding down partial
years) from the issue date until each distribution in reduction of stated
redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Securities (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a Series of Regular Securities will be set forth in the related
Prospectus Supplement. The holder of a debt instrument includes any de minimis
original issue discount in income pro rata as stated principal payments are
received.
Of the total amount of original issue discount on a Regular Security, the
Regular Owner generally must include in gross income for any taxable year the
sum of the "daily portions," as defined below, of the original issue discount on
the Regular Security accrued during an accrual period for each day on which he
holds the Regular Security, including the date of purchase but excluding the
date of disposition. Although not free from doubt, the
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Depositor intends to treat the monthly period ending on the day before each
Payment Date as the accrual period, rather than the monthly period corresponding
to the prior calendar month. With respect to each Regular Security, a
calculation will be made of the original issue discount that accrues during each
successive full accrual period (or shorter period from the date of original
issue) that ends on the day before the related Payment Date on the Regular
Security. For a Regular Security, original issue discount is to be calculated
initially based on a schedule of maturity dates that takes into account the
level of prepayments and an anticipated reinvestment rate that are most likely
to occur, which is expected to be based on the Prepayment Assumption. The
original issue discount accruing in a full accrual period would be the excess,
if any, of (i) the sum of (a) the present value of all of the remaining
distributions to be made on the Regular Security as of the end of that accrual
period that are included in the Regular Security's stated redemption price at
maturity and (b) the distributions made on the Regular Security during the
accrual period that are included in the Regular Security's stated redemption
price at maturity over (ii) the adjusted issue price of the Regular Security at
the beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Security at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Security at the beginning of any accrual
period equals the issue price of the Regular Security, increased by the
aggregate amount of original issue discount with respect to the Regular Security
that accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Security's stated redemption price at
maturity that were made on the Regular Security in such prior period. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Owner generally will
increase to take into account prepayments on the Regular Securities as a result
of prepayments on the Mortgage Assets or that exceed the Prepayment Assumption,
and generally will decrease (but not below zero for any period) if the
prepayments are slower than the Prepayment Assumption. In the event of a change
in circumstances that does not result in a substantially contemporaneous pro
rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a Series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
A purchaser of a Regular Security at a price greater than the issue price
also will be required to include in gross income the daily portions of the
original issue discount on the Regular Security. With respect to such a
purchaser, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such purchaser for the Regular Security exceeds the
sum of the issue price and the aggregate amount of original issue discount that
would have been includible in the gross income of an original holder of the
Regular Security who purchased the Regular Security at its issue price, less any
prior distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular Security
(computed in accordance with the rules set forth above) for all days after the
date of purchase and ending on the date on which the remaining principal amount
of such Regular Security is expected to be reduced to zero under the Prepayment
Assumption.
A Owner may elect to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described below under "Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues using the constant yield to maturity method. If
this election is made, the holder is treated as satisfying the requirements for
making the elections with respect to amortization of premium and current
inclusion of market discount, each as described under "Premium" and "Market
Discount" below.
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Variable Rate Regular Securities. Regular Securities may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the noncontingent
principal payments may not exceed the instrument's issue price by more than a
specified amount equal to the lesser of (i) .015 multiplied by the product of
the total noncontingent payments and the weighted average maturity or (ii) 15%
of the total noncontingent principal payments. Second, the instrument must
provide for stated interest (compounded or paid at least annually) at (i) one or
more qualified floating rates, (ii) a single fixed rate followed by one or more
qualified floating rates, (iii) a single objective rate or (iv) a single fixed
rate and a single objective rate that is a qualified inverse floating rate.
Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period is set at a current value of
that rate (one occurring in the interval beginning three months before and
ending one year after the rate is first in effect on the Regular Security). A
rate is a qualified floating rate if variations in the rate can reasonably be
expected to measure contemporaneous variations in the cost of newly borrowed
funds. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security and is based on objective financial
information or economic information; however, a objective rate does not include
a rate based on information that is in the control of the issuer or that is
unique to the circumstances of a related party. Stated interest on a variable
rate debt instrument is qualified stated interest if the interest is
unconditionally payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable rate
debt instruments, the amount of interest and original issue discount accruals
are determined using the following steps. First, a fixed rate substitute for
each variable rate under the debt instrument is determined. In general, the
fixed rate substitute is a fixed rate equal to the rate of the applicable type
of variable rate as of the issue date. Second, an equivalent fixed rate debt
instrument is constructed using the fixed rate substitute(s) in lieu of the
variable rates and keeping all other terms identical. Third, the amount of
qualified stated interest and original issue discount with respect to the
equivalent fixed rate debt instrument are determined under the rules for fixed
rate debt instruments. Finally, appropriate adjustments for actual variable
rates are made during the term by increasing or decreasing the qualified stated
interest to reflect the amount actually paid during the applicable accrual
period as compared to the interest assumed to be accrued or paid under the
equivalent fixed rate debt instrument. If there is no qualified stated interest
under the equivalent fixed rate debt instrument, the adjustment is made to the
original issue discount for the period.
The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Securities having variable rates. In
that event, the provisions of regulations issued on June 11, 1996, applicable to
instruments having contingent payments, may apply to those Regular Securities.
The application of those provisions to instruments such as variable rate Regular
Securities is subject to varying interpretations. Prospective purchasers of
variable rate Regular Securities are advised to consult their tax advisers
concerning the tax treatment of such Regular Securities.
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Market Discount. A purchaser of a Regular Security also may be subject to
the market discount rules of Code Sections 1276 through 1278. Under these
sections and the principles applied by the OID Regulations in the context of
original issue discount, "market discount" is the amount by which a subsequent
purchaser's initial basis in the Regular Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Owner (who
purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. Such purchaser generally will be required to recognize accrued
market discount as ordinary income as distributions includible in the stated
redemption price at maturity of such Regular Security are received in an amount
not exceeding any such distribution. That recognition rule would apply
regardless of whether the purchaser is a cash-basis or accrual-basis taxpayer.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular Security as ordinary
income to the extent of the market discount accrued to the date of disposition
under one of the foregoing methods, less any accrued market discount previously
reported as ordinary income as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Owner may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Owner in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the Internal Revenue
Service set forth procedures for taxpayers (1) electing under Code Section
1278(b) to include market discount in income currently, (2) electing under rules
of Code Section 1276(b) to use a constant interest rate to determine accrued
market discount on a bond where the holder of the bond is required to determine
the amount of accrued market discount at a time prior to the holder's
disposition of the bond, and (3) requesting consent to revoke an election under
Code Section 1278(b).
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above under "Original Issue Discount") remaining after
the date of purchase. Treasury regulations implementing the market discount
rules have not yet been issued, and therefore investors should consult their own
tax advisors regarding the application of these rules as well as the
advisability of making any of the elections with respect thereto.
Premium. A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Owner holds such Regular Security as a "capital asset"
within the meaning of Code Section 1221, the Regular Owner may elect under Code
Section 171 to amortize such premium under a constant yield method that reflects
compounding based on the interval between payments on the Regular Securities.
This election, once made, applies to all obligations held by the taxpayer at the
beginning of the first taxable year to which such section applies and to all
taxable debt obligations thereafter acquired and is binding on such taxpayer in
all subsequent years. The Conference Committee Report to the 1986 Act indicates
a Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment
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obligations such as the Regular Securities. The IRS recently published final
regulations (the "Premium Regulations") covering the amortization of bond
premiums. The Premium Regulations describe the constant yield method for
amortizing premium and provide the Regular Owner may offset the premium against
corresponding interest income only as that interest income is taken into account
under the Regular Owner's method of accounting. For instruments that may be
called or prepaid prior to maturity, a Regular Owner will be deemed to exercise
its option and an issuer will be deemed to exercise its redemption right in a
manner that maximizes the Regular Owner's yield. The Premium Regulations are
effective for debt instruments acquired on or after March 2, 1998. A Regular
Owner may elect to amortize bond premium under the Premium Regulations for 1998,
with the election applying to all the Regular Owner's debt instruments held on
January 1, 1998. Purchasers who pay a premium for their Regular Securities
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Owner sells or
exchanges a Regular Security, the Regular Owner will recognize gain or loss
equal to the difference, if any, between the amount received and his adjusted
basis in the Regular Security. The adjusted basis of a Regular Security
generally will equal the cost of the Regular Security to the seller, increased
by any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss. Gain from the disposition of a
Regular Security that might otherwise be 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 the gross income of the
holder if his yield on such Regular Security were 110% of the applicable Federal
rate under Code Section 1274(d) as of the date of purchase over (ii) the amount
of income actually includible in the gross income of such holder with respect to
the Regular Security. In addition, gain or loss recognized from the sale of a
Regular Security by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c). Net capital gains of
individuals are subject to varying tax rates depending upon the holding period
of the Regular Security.
Taxation of Residual Securities
Taxation of REMIC Income. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Securities ("Residual Owners")
and will not be taxed separately to the REMIC Pool. The daily portions of REMIC
taxable income or net loss of a Residual Owner are determined by allocating the
REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Owners in proportion to their respective holdings of Residual Securities in the
REMIC Pool on such day. REMIC taxable income is generally determined in the same
manner as the taxable income of an individual using a calendar year and the
accrual method of accounting, except that (i) the limitation on deductibility of
investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to taxexempt
income will apply. REMIC taxable income generally means the REMIC Pool's gross
income, including interest, original issue discount income and market discount
income, if any, on the Mortgage Assets, plus income on reinvestment of cashflows
and reserve assets, minus deductions, including interest and original issue
discount expense on the Regular Securities, servicing fees on the Mortgage
Assets and other administrative expenses of the REMIC Pool, amortization of
premium, if any, with respect to the Mortgage Assets, and any tax imposed on the
REMIC's income from foreclosure property. The requirement that Residual Owners
report their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Securities of any class of the related Series
outstanding.
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The taxable income recognized by a Residual Owner in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest and original issue discount or market discount income or
amortization of premium with respect to the Mortgage Assets, on the one hand,
and the timing of deductions for interest (including original issue discount) on
the Regular Securities, on the other hand. Because of the way REMIC taxable
income is calculated, a Residual Owner may recognize "phantom" income (i.e.,
income recognized for tax purposes in excess of income as determined under
financial accounting or economic principles) which will be matched in later
years by a corresponding tax loss or reduction in taxable income, but which
could lower the yield to Residual Owners due to the lower present value of such
future loss or reduction. For example, if an interest in the Mortgage Assets is
acquired by the REMIC Pool at a discount, and one or more of such Mortgage
Assets is prepaid, the Residual Owner may recognize taxable income without being
entitled to receive a corresponding amount of cash because (i) the prepayment
may be used in whole or in part to make distributions in reduction of principal
on the Regular Securities and (ii) the discount income on the Mortgage Loan
which is includible in the REMIC's taxable income may exceed the discount
deduction allowed to the REMIC upon such distributions on the Regular
Securities. When there is more than one class of Regular Securities that
distribute principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Securities when distributions in reduction of principal are being made
in respect of earlier maturing classes of Securities to the extent that such
classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized in general, losses would be allowed in later
years as distributions on the later classes of Regular Securities are made.
Taxable income may also be greater in earlier years than in later years as a
result of the fact that interest expense deductions, expressed as a percentage
of the outstanding principal amount of such a Series of Regular Securities, may
increase over time as distributions in reduction of principal are made on the
lower yielding classes of Regular Securities, where interest income with respect
to any given Mortgage Loan will remain constant over time as a percentage of the
outstanding principal amount of that loan. Consequently, Residual Owners must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Prospective investors should be aware, however, that a
portion of such income may be ineligible for offset by such investor's unrelated
deductions. See the discussion of "excess inclusions" below under "Limitations
on Offset or Exemption of REMIC Income; Excess Inclusions." The timing of such
mismatching of income and deductions described in this paragraph, if present
with respect to a Series of Securities, may have a significant adverse effect
upon the Residual Owners aftertax rate of return. In addition, a Residual
Owner's taxable income during certain periods may exceed the income reflected by
such Owner for such periods in accordance with generally accepted accounting
principles. Investors should consult their own advisors concerning the proper
tax and accounting treatment of their investment in Residual Securities.
Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Owner is limited to the adjusted basis of the
Residual Security as of the close of the quarter (or time of disposition of the
Residual Security if earlier), determined without taking into account the net
loss for the quarter. The initial adjusted basis of a purchaser of a Residual
Security is the amount paid for such Residual Security. Such adjusted basis will
be increased by the amount of taxable income of the REMIC Pool reportable by the
Residual Owner and decreased by the amount of loss of the REMIC Pool reportable
by the Residual Owner. A cash distribution from the REMIC Pool also will reduce
such adjusted basis (but not below zero). Any loss that is disallowed on account
of this limitation may be carried over indefinitely with respect to the Residual
Owner as to whom such loss was disallowed and may be used by such Residual Owner
only to offset any income generated by the same REMIC Pool. Residual Owners
should consult their tax advisors about other limitations on the deductibility
of net losses that may apply to them.
A Residual Owner will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, such taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
However, in view of the possible acceleration of the income of Residual Owners
described above under "Taxation of REMIC Income," the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Securities.
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If a Residual Security has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC Pool's basis in its assets. The REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of Residual
Securities as having a value of less than zero for purposes of determining the
bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of Residual Owner
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Assets, the
Residual Owner will not recover a portion of such basis until termination of the
REMIC Pool unless Treasury regulations yet to be issued provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations do not so provide. See "Treatment of Certain Items of REMIC Income
and Expense - Market Discount" below regarding the basis of Mortgage Assets to
the REMIC Pool and "Sale or Exchange of Residual Securities" below regarding
possible treatment of a loss upon termination of the REMIC Pool as a capital
loss.
Mark to Market Rules. Prospective purchasers of a Residual Security should
be aware that final regulations (the "Mark to Market Regulations") relating to
the requirement that a securities dealer mark to market securities held for sale
to customers apply to all securities of a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The Mark
to Market Regulations provide that for purposes of this mark to market
requirement, a Residual Security acquired after January 4, 1995, is not treated
as a security and thus may not be marked to market.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Securities as described above under "Taxation of
Regular Securities - Original Issue Discount" and "Variable Rate Regular
Securities," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Assets if, in general, the basis of the REMIC Pool in such Mortgage
Assets is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Assets is generally the fair market value of the Mortgage Assets
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. In respect of Mortgage Assets
that have market discount to which Code Section 1276 applies, the accrued
portion of such market discount would be recognized currently by the REMIC as an
item of ordinary income. Market discount income generally should accrue in the
manner described above under "Taxation of Regular Securities - Market Discount."
However, the rules of Code Section 1276 concerning market discount income will
not apply in the case of Mortgage Assets originated on or prior to July 18,
1984, if any. With respect to such Mortgage Assets market discount is generally
includible in REMIC taxable income or ordinary gross income pro rata as
principal payments are received. Under another interpretation of the Code and
relevant legislative history, market discount on such Mortgage Assets might be
required to be recognized currently by the REMIC, in the same manner that market
discount would be recognized with respect to Mortgage Assets originated after
July 18, 1984. Under that method, a REMIC would tend to recognize market
discount more rapidly than it would otherwise. In either case, the deduction of
a portion of the interest expense on the Regular Securities allocable to such
discount may be deferred until such discount is included in income, and any gain
on the sale or exchange thereof will be treated as ordinary income to the extent
of the deferred interest deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above,the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, based on the aggregate of the issue
prices of the regular and residual interests in the REMIC Pool immediately after
the transfer thereof to the REMIC Pool. In a manner analogous to the discussion
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above under "Taxation of Regular Securities - Premium," a person that holds a
Mortgage Loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets originated after September
27, 1985 under a constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the Mortgage Assets, rather than as a
separate deduction item. Because substantially all the mortgagors with respect
to the Mortgage Assets are expected to be individuals, Code Section 171 will not
be available. Premium on Mortgage Assets may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Internal Revenue Service may argue that such premium should
be allocated in a different manner, such as allocating such premium entirely to
the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions. A
portion of the income allocable to a Residual Security (referred to in the Code
as an "excess inclusion") for any calendar quarter, with an exception discussed
below for certain thrift institutions, will be subject to federal income tax in
all events. Thus, for example, an excess inclusion (i) cannot, except as
described below, be offset by any unrelated losses or loss carryovers of a
Residual Owner, (ii) will be treated as "unrelated business taxable income"
within the meaning of Code Section 512 if the Residual Owner is a pension fund
or any other organization that is subject to tax only on its unrelated business
taxable income and (iii) is not eligible for any reduction in the rate of
withholding tax in the case of a Residual Owner that is a foreign investor, as
further discussed in "Taxation of Certain Foreign Investors - Residual
Securities" below. Except as discussed below with respect to excess inclusions
from Residual Securities without "significant value." Members of an affiliated
group are treated as one corporation for purposes of applying the limitation on
offset of excess inclusion income. The Small Business Protection Act of 1996
(the "1996 Act") eliminated a special rule that permitted thrift institutions to
use net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Securities with significant value for taxable
years beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative maximum taxable
income ("AMTI") of a Residual Owner. First, AMTI is calculated without regard to
the special rule that taxable income cannot be less than excess inclusion income
for the year. Second, AMTI cannot be less than excess inclusion income for the
year. Finally, any AMTI net operating loss deduction is computed without regard
to excess inclusion income. These new rules are effective for tax years
beginning after December 31, 1986, unless a Residual Owner elects to have the
rules apply only to tax years ending after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Owner, the excess inclusion for any calendar quarter is the excess, if
any, of (i) the income of such Residual Owner for that calendar quarter from its
Residual Security over (ii) the sum of the "daily accruals" (as defined below)
for all days during the calendar quarter on which the Residual Owner holds such
Residual Security. For this purpose, the daily accruals with respect to a
Residual Security are determined by allocating to each day in the calendar
quarter its ratable portion of the product of the "adjusted issue price" (as
defined below) of the Residual Security at the beginning of the calendar quarter
and 120 percent of the "Federal long-term rate" in effect at the time the
Residual Security is issued. For this purposes the "adjusted issue price" of a
Residual Security at the beginning of any calendar quarter equals the issue
price of the Residual Security (adjusted for contributions), increased by the
amount of daily accruals for all prior quarters, and decreased (but not below
zero) by the aggregate amount of payments made on the Residual Security before
the beginning of such quarter. The Federal long-term rate is an average of
current yields on Treasury securities with a remaining term of greater than nine
years, computed and published monthly by the IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Securities do not have significant value. Under the REMIC
Regulations, the Residual Securities will have significant value if: (i) the
aggregate of the issue prices of the Residual Securities is at least two percent
of the aggregate issue prices of all Regular Securities and Residual Securities
in the REMIC and (ii) the anticipated weighted average life of
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the Residual Securities is at least 20 percent of the REMIC's anticipated
weighted average life based on the prepayment and reinvestment assumptions used
in pricing the transaction and any recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Security
with a principal balance and a market rate of interest is computed by
multiplying the amount of each expected principal payment by the number of years
(or portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Security based on the
relevant prepayment assumption and expected reinvestment income. The anticipated
weighted average life of a Residual Security with either no specified principal
balance or a principal balance and rights to interest payments disproportionate
to such principal balance, would be computed under the formula described above
but would include all payments expected on the Residual Security instead of only
the principal payments. The anticipated weighted average life of a REMIC is a
weighted average of the anticipated weighted average lives of all classes of
interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security's allocable share
of the excess inclusions. Similar rules apply in the case of regulated
investment companies, common trust funds and cooperatives. Thus, investors in
such entities which own a Residual Security will be subject to the limitations
on excess inclusions described above. The REMIC Regulations do not provide
guidance on this issue.
Tax-Related Restrictions on Transfer of Residual Securities
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusions are based on actual prepayment experience to the
date of the transfer and projected payments based on the Prepayment Assumption.
The present value discount rate equals the applicable Federal rate under Code
Section 1274(d) that would apply to a debt instrument that was issued on the
date the Disqualified Organization acquired the Residual Security and whose term
ended on the close of the last quarter in which excess inclusion was expected to
accrue with respect to the Residual Security. Such a tax generally would be
imposed on the transferor of the Residual Security, except that where such
transfer is through an agent (including a broker, nominee, or other middleman)
for a Disqualified Organization, the tax would instead be imposed on such agent.
However, a transferor of a Residual Security would in no event be liable for
such tax with respect to a transfer if the transferee furnishes to the
transferor an affidavit that the transferee is not a Disqualified Organization
and, as of the time of the transfer, the transferor does not have actual
knowledge that such affidavit is false. The tax also may be waived by the
Treasury Department if the Disqualified Organization promptly disposes of the
Residual Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security is actually
held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on the Pass-Through Entity equal to the product of
(i) the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that (i) states
under penalty of perjury that it is not a Disqualified Organization or (ii)
furnishes a social security number and states under penalties of perjury that
the social security number is that of the transferee, provided that during the
period such person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that such affidavit is false.
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For these purposes, (i) "Disqualified Organization" means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511 and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be treated
as a Pass-Through Entity.
The Agreement with respect to a Series of Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Securities on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof) and is not an entity that holds REMIC residual securities as nominee to
facilitate the clearance and settlement of such securities through electronic
book-entry changes in accounts of participating organizations and (ii) the
transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that such affidavit is false. Moreover, the Agreement
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Security with respect to a Series will have
a legend referring to such restrictions on transfer, and each Residual Owner
will be deemed to have agreed, as a condition of ownership thereof, to any
amendments to the related Agreement required under the Code or applicable
Treasury regulations to effectuate the foregoing restrictions. Information
necessary to compute an applicable excise tax must be furnished to the Internal
Revenue Service and to the requesting party within 60 days of the request, and
the Depositor or the Trustee may charge a fee for computing and providing such
information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a Noneconomic Residual
Interest (defined below) to a Residual Owner (other than a Residual Owner who is
not a U.S. Person, as defined below under "Foreign Investors") is disregarded
for all federal income tax purposes unless no significant purpose of the
transfer is to impede the assessment or collection of tax. A residual interest
in a REMIC (including a residual interest with a positive value at issuance) is
a "Noneconomic Residual Interest" unless, at the time of the transfer, (i) the
present value of the expected future distributions on the residual interest at
least equals the product of the present value of the anticipated excess
inclusions and the highest federal corporate income tax rate in effect for the
year in which the transfer occurs, and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. The anticipated excess inclusions and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the REMIC Regulations, a transferor is
presumed not to have improper knowledge if (i) the transferor conducted, at the
time of the transfer, a reasonable investigation of the financial condition of
the transferee and, as a result of the investigation, the transferor found that
the transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferor will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the Noneconomic
Residual Interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of residual interest as they become due. The
Agreement will require the transferee of a Residual Security to state as part of
the affidavit
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described above under the heading "Disqualified Organizations" that such
transferee (i) has historically paid its debts as they come due, (ii) intends to
continue to pay its debts as they come due in the future, (iii) understands
that, as the holder of a Noneconomic Residual Interest, it may incur tax
liabilities in excess of any cash flows generated by the Residual Security, and
(iv) intends to pay any and all taxes associated with holding the Residual
Security as they become due. The transferor must have no reason to believe that
such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a "U.S. Person" (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC Pool will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount 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. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to a Series of Securities may provide
that a Residual Security may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership 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.
Sale or Exchange of a Residual Security
Upon the sale or exchange of a Residual Security, the Residual Owner will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under "Taxation of Residual Securities -
Basis and Losses") of such Residual Owner in such Residual Security at the time
of the sale or exchange. In addition to reporting the taxable income of the
REMIC Pool, a Residual Owner will have taxable income to the extent that any
cash distribution to the Residual Owner from the REMIC Pool exceeds such
adjusted basis on that Payment Date. Such income will be treated as gain from
the sale or exchange of the Residual Security. It is possible that the
termination of the REMIC Pool may be treated as a sale or exchange of a Residual
Owner's Residual Security, in which case, if the Residual Owner has an adjusted
basis in the Residual Security remaining when the Residual Owner's interest in
the REMIC Pool terminates, and if the Residual Owner holds such Residual
Security as a capital asset under Code Section 1221, then the Residual Owner
will recognize a capital loss at that time in the amount of such remaining
adjusted basis.
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to disposition of Residual Securities. Consequently,
losses on dispositions of Residual Securities will be disallowed where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Security.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the REMIC
Pool, called "prohibited transactions", will not be part of the calculation of
income or loss includible in the federal income tax returns of Residual Owners,
but rather will be taxed directly to the REMIC Pool at a 100% rate. Prohibited
transactions
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generally include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Securities as a result of a default on qualified mortgages or to facilitate a
cleanup call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Regular Securities is outstanding).
The REMIC Regulations indicate that the modification of a Mortgage Loan
generally will not be treated as a disposition if it is occasioned by a default
or reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or encumbrance clause or the conversion of an interest
rate by a mortgagor pursuant to the terms of a convertible adjustable rate
Mortgage Loan. The REMIC Regulations also provide that the modification of
mortgage loans underlying Mortgage-Backed Securities will not be treated as a
modification of the Mortgage-Backed Securities, provided that the trust
including the Mortgage-Backed Securities was not created to avoid prohibited
transaction rules.
Contributions to the REMIC Pool After the Startup Day. In general, the
REMIC Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided for
cash contributions to the REMIC Pool (i) during the three months following the
Startup Day, (ii) made to a qualified reserve fund by a Residual Owner, (iii) in
the nature of a guarantee, (iv) made to facilitate a qualified liquidation or
clean-up call and (v) as otherwise permitted in Treasury regulations yet to be
issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by the REMIC Pool through
foreclosure or deed in lieu of foreclosure would be treated as "foreclosure
property" for a period of three years, with possible extensions. Net income from
foreclosure property generally means (i) gain from the sale of a foreclosure
property that is inventory property and (ii) gross income from foreclosure
property other than qualifying rents and other qualifying income for a real
estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation,
within the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC
Pool's assets (other than cash) within a 90-day period beginning on the date of
the adoption of the plan of liquidation, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all of the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Owners within the 90-day period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Owner for an entire
taxable year, the REMIC Pool generally will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction or credit in a unified
administrative proceeding. The Depositor or other designated Residual Owners
will be obligated to act as "tax matters person," as defined in applicable
Treasury regulations, with respect to the REMIC Pool. If the Code or Treasury
regulations do not permit the Depositor to act as tax matters person in its
capacity as agent of
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the Residual Owners, the Residual Owner chosen by the Residual Owners or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
Treasury regulations provide that a holder of a Residual Security is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The Internal Revenue
Service may assess a deficiency resulting from a failure to comply with the
consistency requirement without instituting an administrative proceeding at the
REMIC Pool level.
Limitations on Deduction of Certain Expenses
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000, adjusted yearly for inflation
($50,000, adjusted yearly for inflation, in the case of a married individual
filing a separate return), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. In the case of a REMIC Pool, such deductions
may include deductions under Code Section 212 for servicing fees and all
administrative and other expenses relating to the REMIC Pool or any similar
expenses allocated to the REMIC Pool with respect to a regular interest it holds
in another REMIC. Such investors who hold REMIC Securities either directly or
indirectly through certain pass-through entities may have their pro rata share
of such expenses allocated to them as additional gross income, but may be
subject to such limitation on deductions. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Treasury regulations provide that the additional gross income and corresponding
amount of expenses generally are to be allocated entirely to the holders of
Residual Securities in the case of a REMIC Pool that would not qualify as a
fixed investment trust in the absence of a REMIC election. However, such
additional gross income and limitation on deductions will apply to the allocable
portion of such expenses to holders of Regular Securities, as well as holders of
Residual Securities, where such Regular Securities are issued in a manner that
is similar to passthrough certificates in a fixed investment trust. In general,
such allocable portion will be determined based on the ratio that a REMIC
Owner's income, determined on a daily basis, bears to the income of all holders
of Regular Securities and Residual Securities with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Securities (either directly
or indirectly through a grantor trust, partnership, S corporation, REMIC, or
certain other pass-through entities described in the foregoing Treasury
regulations) may have taxable income in excess of the interest income at the
pass-through rate on Regular Securities that are issued in a single class or
otherwise consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
Taxation of Certain Foreign Investors
Regular Securities. Interest, including original issue discount,
distributable to Regular Owners who are nonresident aliens, foreign
corporations, or other Non-U.S. Persons (as defined below), will be considered
"portfolio interest" and therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) and (ii)
provides the Trustee, or the person who would otherwise be required to withhold
tax from such distributions under Code Sections 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a Non-U.S. Person. If such statement, or any other
required statement, is not provided, 30% withholding will apply unless reduced
or eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct
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of a trade or business within the United States by such Non-U.S. Person. In the
latter case, such Non-U.S. Person will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
a Regular Security. The term "Non-U.S. Person" means any person who is not a
U.S. Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Owners who are Non-U.S. Persons are
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amounts distributed to
Residual Owners qualify as "portfolio interest," subject to the conditions
described in "Regular Securities" above, but only to the extent that (i) the
Mortgage Assets were issued after July 18, 1984 and (ii) the Trust fund or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
"registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Assets will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Owner will not be entitled to any exemption from the 30% withholding tax (or
lower treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an "excess inclusion." See "Taxation of Residual Securities -
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If the
amounts paid to Residual Owners who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
"Tax-Related Restrictions on Transfer of Residual Securities - Foreign
Investors" above concerning the disregard of certain transfers having "tax
avoidance potential." Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
On October 6, 1997, the IRS issued final regulations which could have an
effect on the United States' taxation of foreign investors in Regular Securities
or Residual Securities. The regulations would apply to payments after December
31, 1999. Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Securities.
Backup Withholding
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable payments"
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Owner complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Owner is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Owner's federal
income tax liability.
Reporting Requirements
Reports of accrued interest and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and noncharitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee. Treasury regulations provide that information necessary to compute the
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accrual of any market discount on the Regular Securities must be furnished for
calendar years beginning after 1990.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Owner by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Owners,
furnished annually, if applicable, to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see "Limitations on Deduction of Certain Expenses" above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Owners, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "Federal Income Tax Consequences for REMIC Securities,"
above."
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is
Made
Special Counsel is of the opinion that if a Trust does not elect REMIC or
FASIT status and is not treated as a partnership, and if the Securities are not
treated as debt for federal tax purposes, the tax consequences to the Owners
will be as described below.
Standard Securities
General. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a Series of Securities as a REMIC, the Trust may
be classified as a grantor trust under subparagraph E, Part 1 of subchapter J of
the Code and not as a partnership or an association taxable as a corporation.
Where there is no fixed retained yield with respect to the Mortgage Assets
underlying the Securities of a Series, and where such Securities are not
designated as Debt Certificates, as described under "Debt Certificates,"as
Stripped Securities, as described below under "Stripped Securities" or as
Partnership Interests described under "Taxation of Securities Classified as
Partnership Interests,"the holder of each such "Standard Security" in such
Series will be treated as the owner of a pro rata undivided interest in the
ordinary income and corpus portions of the Trust represented by his Security and
will be considered the beneficial owner of a pro rata undivided interest in each
of the Mortgage Assets, subject to the discussion below under
"Recharacterization of Servicing Fees." Accordingly, the Owner of a Security of
a particular Series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Assets, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by or on behalf of the Trust, in accordance with such Owner's method of
accounting. A Owner generally will be able to deduct its share of servicing fees
and all administrative and other expenses of the Trust in accordance with his
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Trust. However, investors who are individuals, estates
or trusts who own Securities, either directly or indirectly through certain
passthrough entities, will be subject to limitation with respect to certain
itemized deductions described in Code Section 67, including deductions under
Code Section 212 for servicing fees and all such administrative and other
expenses of the Trust, to the extent that such deductions, in the aggregate, do
not exceed two percent of an investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $100,000, adjusted yearly for
inflation ($50,000, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors holding
Securities, directly or indirectly through a passthrough entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Securities with respect to interest at the passthrough rate on such
Securities or discount thereon. In addition, such expenses are not deductible at
all for purposes of computing the alternative minimum tax and may cause such
investors to be subject to significant additional tax liability.
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Moreover, where there is fixed retained yield with respect to the Mortgage
Assets underlying a Series of Securities or where the servicing fees are in
excess of reasonable servicing compensation, the transaction will be subject to
the application of the "stripped bond" and "stripped coupon" rules of the Code,
as described below under "Stripped Securities" and "Premium and Discount -
Recharacterization of Servicing Fees,"respectively.
Tax Status. Subject to the discussion below, Special Counsel is of the
opinion that:
1. A Standard Security 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), provided
that the real property securing the Mortgage Assets represented by that
Security is of the type described in such section.
2. A Standard Security 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 592(d)(1), provided that
the real property securing the Mortgage Assets represented by that Security
is of the type described in such section.
3. A Standard Security owned by a real estate investment trust will
be considered to represent "real estate assets" within the meaning of Code
Section 856(C) (5) (A) to the extent that the assets of the related Trust
consist of qualified assets, and interest income on such assets will he
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B).
4. A Standard Security owned by a REMIC will be considered to
represent an "obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property" within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Trust consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. Code Section 593(d)(l)(C) provides that the term "qualifying real
property loan" does not include a loan "to the extent secured by a deposit in or
share of the taxpayer."The application of this provision to a buy-down fund with
respect to a buydown Mortgage Loan is uncertain, but may require that a
taxpayer's investment in a buy-down Mortgage Loan be reduced by the buy-down
fund. As to the treatment of buydown Mortgage Assets as "qualifying real
property loans" under Code Section 593(d)(i) if the exception of Code Section
593(d)(1)(C) is inapplicable, as "loans . . . secured "by an interest in real
property" under Code Section 7701(a)(19)(C)(v), as "real estate assets" under
Code Section 856(c)(5)(A), and as "obligation[s] principally secured by an
interest in real property" under Code Section 860G(a)(3)(A), there is indirect
authority supporting treatment of an investment in a buy-down Mortgage Loan as
entirely secured by real property if the fair market value of the real property
securing the loan exceeds the principal amount of the loan at the time of
issuance or acquisition, as the case may be. There is no assurance that the
treatment described above is proper. Accordingly, Owners are urged to consult
their own tax advisors concerning the effects of such arrangements on the
characterization of such Owner's investment for federal income tax purposes.
Premium and Discount
Owners are advised to consult with their tax advisors as to the federal
income tax treatment of premium and discount arising either upon initial
acquisition of Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Security
will be determined generally as described above under "- Taxation of Regular
Securities - Premium."
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Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein, the
original issue discount rules will be applicable to an Owner's interest in those
Mortgage Assets as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July l, 1982, and mortgages of individuals originated after March 2, 1984. Such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than a statutory de minimis exception, to
the extent that the points are not currently deductible under applicable Code
provisions or are not for services provided by the lender. It is generally not
anticipated that adjustable rate Mortgage Assets will be treated as issued with
original issue discount. However, the application of the OID Regulations to
adjustable rate mortgage loans with incentive interest rates or annual or
lifetime interest rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provide for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage Assets
acquired by an Owner are purchased at a price equal to the then unpaid principal
amount of such Mortgage Assets, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Assets (i.e., points) will be includible by such holder.
Market Discount. Owners also will be subject to the market discount rules
to the extent that the conditions for application of those sections are met.
Market discount on the Mortgage Assets will be determined and will be reported
as ordinary income generally in the manner described above under "- Taxation of
Regular Securities - Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount of
such excess would be nondeductible under Code Section 162 or 212. In this
regard,there are no authoritative guidelines for federal income tax purposes as
to either the maximum amount of servicing compensation that may be considered
reasonable in the context of this or similar transactions or whether, in the
case of the Securities, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Assets would be increased.
Recently issued Internal Revenue Service guidance indicates that a servicing fee
in excess of reasonable compensation ("excess servicing") will cause the
Mortgage Assets to be treated under the "stripped bond" rules. Such guidance
provides safe harbors for servicing deemed to be reasonable and requires
taxpayers to demonstrate that the value of servicing fees in excess of such
amounts is not greater than the value of the services provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some or all of the interest payments on an obligation from the right to receive
some or all of the principal payments on the obligation would result in
treatment of such Mortgage Assets as "stripped coupons" and "stripped
bonds."While Owners would still be treated as owners of beneficial interests in
a grantor trust for federal income tax purposes, the corpus of such trust could
be viewed as excluding the portion of the Mortgage Assets the ownership of which
is attributed to a servicer, or as including such portion as a second class of
equitable interest. Applicable Treasury regulations treat such an arrangement as
a fixed investment trust, since the multiple classes of trust interests should
be treated as merely facilitating direct investments in the trust assets and the
existence of multiple classes of ownership interests is incidental to that
purpose. In general, such a recharacterization should not have any significant
effect upon the timing or amount of income reported by an Owner, except that the
income reported by a cash method holder may
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be slightly accelerated. See "Stripped Securities" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Owners to purchase an
undivided interest in the Mortgage Assets. In such event, the present value of
such additional payments might be included in the Owner's basis in such
undivided interests for purposes of determining whether the Security was
acquired at a discount, at par, or at a premium. Under this alternative, Owners
may also be entitled to a deduction for unstated interest with respect to each
deferred payment. The Internal Revenue Service may take the position that the
specific statutory provisions of Code Section 1286 described above override the
alternative described in this paragraph. Owners are advised to consult their tax
advisors as to the proper treatment of the amounts paid to the servicers as set
forth herein as servicing compensation or under either of the alternatives set
forth above.
Sale or Exchange of Securities. Upon sale or exchange of a Security, a
Owner will recognize gain or loss equal to the difference between the amount
realized on the sale and its aggregate adjusted basis in the Mortgage Assets and
other assets represented by the Security. In general, the aggregate adjusted
basis will equal the Owner's cost for the Security, increased by the amount of
any income previously reported with respect to the Security and decreased by the
amount of any losses previously reported with respect to the Security and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Assets, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Security was held as a
capital asset.
Stripped Securities
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor or any of its affiliates retains (for its own account or for purposes
of resale), in the form of fixed retained yield or otherwise, an ownership
interest in a portion of the payments on the Mortgage Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities - Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities are issued in two or more
classes or subclasses representing the right to non pro rata percentages of the
interest and principal payments on the Mortgage Assets.
In general, a holder of a Stripped Security (a "Stripped Owner") will be
considered to own "stripped bonds" with respect to its pro rata share of all or
a portion of the principal payments on each Mortgage Loan and/or "stripped
coupons" with respect to its pro rata share of all or a portion of the interest
payments on each Mortgage Loan, including the Stripped Security's allocable
share of the servicing fees paid, to the extent that such fees represent
reasonable compensation for services rendered. See discussion above under
"Standard Securities - Recharacterization of Servicing Fees." For this purpose
the servicing fees will be allocated to the Stripped Securities in proportion to
the respective offering price of each class (or subclass) of Stripped
Securities. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"- Federal Income Tax Consequences for Securities as to Which No REMIC Election
is Made - Standard Securities - General, "subject to the limitation described
therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation issued (i) on the date that the stripped interest is purchased
and (ii) at a price equal to its purchase price or, if more than one stripped
interest is purchased, the share of the purchase price allocable to such
stripped interest. Each stripped interest generally will have original issue
discount equal to the excess of its stated redemption price at maturity
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(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped Securities
for federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Securities are issued with respect to a Trust
containing variablerate Mortgage Assets, the Depositor has been advised by
counsel that (i) the Trust will be treated as a grantor trust under subpart E,
Part 1 of subchapter J of the Code and not as an association taxable as a
corporation, and (ii) each Stripped Security should be treated as a single
installment obligation for purposes of calculating original issue discount and
gain or loss on disposition. This treatment is based on the interrelationship of
Code Section 1286 and the regulations thereunder, Code Sections 1272 through
1275, and the OID Regulations. While under Code Section 1286 computations with
respect to Stripped Securities arguably should be made in one of the ways
described below, the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as a
single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Security as a single debt instrument issued on the date it is
originated for purposes of calculating any original issue discount. The preamble
to such regulations state that such regulations are premised on the assumption
that an aggregation approach is appropriate in determining whether original
issue discount on a stripped bond or stripped coupon is de minimis. In addition,
under these regulations, a Stripped Security that represents a right to payments
of both interest and principal may be viewed either as issued with original
issue discount or market discount (as described below), at a de minimis original
issue discount, or presumably, at a premium. The preamble to such regulations
also provide that such regulations are premised on the assumption that generally
the interest component of such a Stripped Security would be treated as stated
interest under the original issue discount rules. Further, the regulations
provide that the purchaser of such a Stripped Security may be required to
account for any discount as market discount rather than original issue discount
if either (i) the initial discount with respect to the Strip Security was
treated as zero under the de minimis rule or (ii) no more than 100 basis points
in excess of reasonable servicing is stripped off the related Mortgage Assets.
Any such market discount would be reportable as described above under "Federal
Income Tax Consequences for REMIC Securities - Taxation of Regular Securities -
Market Discount,"without regard to the de minimis rule therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Although the issue is
not free from doubt, counsel has advised the Depositor that Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or Code Section 593(d)(1), "real estate
assets" within the meaning of Code Section 856(c)(A), "obligations(s) . . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans . . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest (including
original issue discount) income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See "- Federal Income Tax Consequences for Securities as to Which
No REMIC Election is Made" and "- Standard Securities - Tax Status" above.
Original Issue Discount. Except as described above under "- General," each
Stripped Security will be considered to have been issued (i) on the date that
the stripped interest is purchased and (ii) at a price equal to its purchase
price or, if more than one stripped interest is purchased, the share of the
purchase price allocable to such stripped interest. Each stripped interest
generally will have original issue discount equal to the excess of its stated
redemption price at maturity (or, in the case of a stripped coupon, the amount
payable on the due date of such coupon) over its issue price. Original issue
discount with respect to a Stripped Security must be included in ordinary income
as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to such income. Counsel has advised the Depositor that the
amount of original issue discount required to be included in the income of a
Stripped Owner in any taxable year likely will be computed generally as
described above under "Federal Income Tax Consequences for REMIC Securities -
Taxation of Regular Securities - Original Issue Discount" and "- Variable
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Rate Regular Securities." However, with the apparent exception of a Stripped
Security issued with de minimis original issue discount, as described above
under "- General,"the issue price of a Stripped Security will be the purchase
price paid by each holder thereof, and the stated redemption price at maturity
will include the aggregate amount of the payments to be made on the Stripped
Security to such Stripped Owner, presumably under the Prepayment Assumption,
other than amounts treated as qualified stated interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Owner's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Stripped Owner's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of or
all the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the aggregate principal payments are greater
than or equal to the issue price, the principal payments would be treated as a
separate installment obligation issued at a price equal to the purchase price
for the Stripped Security. In such case, original issue discount would be
calculated and accrued under the method described above without consideration of
the interest payments with respect to the Stripped Security. Such payments of
interest would be includible in the Stripped Owner's gross income in the taxable
year in which the amounts become fixed. If the aggregate amount of principal
payments to be made on the Stripped Security is less than its issue price, each
payment of principal would be treated as a return of basis. Each payment of
interest would be treated as includible in gross income to the extent of the
applicable Federal rate under Code Section 1274(d), as applied to the adjusted
basis of the Stripped Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, would be characterized as a return of basis until the total amount of
interest payments treated as a return of basis equalled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped Owner's
adjusted basis in such Stripped Security, as described above under "Federal
Income Tax Consequences for REMIC Securities - Taxation of Regular Securities -
Sale or Exchange of Regular Securities." To the extent that a subsequent
purchaser's purchase price is exceeded by the remaining payments on the Stripped
Securities, such subsequent purchaser will be required for federal income tax
purposes to accrue and report such excess as if it were original issue discount
in the manner described above. It is not clear for this purpose whether the
assumed prepayment rate that is to be used in the case of a Stripped Owner other
than by original Stripped Owner should be the Prepayment Assumption or a new
rate based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. Where an investor
purchases more than one class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Stripped Owners are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
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Reporting Requirements and Backup Withholding
The Trustee or the Indenture Trustee, as applicable, will furnish, within a
reasonable time after the end of each calendar year, to each Owner or Stripped
Owner at any time during such year, such information (prepared on the basis
described above) as the Trustee or the Indenture Trustee, as applicable, deems
to be necessary or desirable to enable such Owners to prepare their federal
income tax returns. Such information will include the amount of original issue
discount accrued on Securities held by persons other than Owners exempted from
the reporting requirements. The amounts required to be reported by the Trustee
or the Indenture Trustee, as applicable, may not be equal to the proper amount
of original issue discount required to be reported as taxable income by an
Owner, other than an original Owner. The Trustee or the Indenture Trustee, as
applicable, will also file such original issue discount information with the
Internal Revenue Service. If an Owner fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
Owner has not reported all interest and dividend income required to be shown on
his federal income tax return, 31% backup withholding may be required in respect
of any reportable payments, as described above under "- Backup Withholding."
Taxation of Certain Foreign Investors
To the extent that a Security evidences ownership in Mortgage Assets that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442, which
apply to nonresident aliens, foreign corporations, or other Non-U.S. Persons
generally will be subject to 30% United States withholding tax, or such lower
rate as may be provided for interest by an applicable tax treaty. Accrued
original issue discount or market discount recognized by the Owner on the sale
or exchange of such a Security also will be subject to federal income tax at the
same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Assets issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements described above under "- Taxation
of Certain Foreign Investors - Regular Securities."
Owners should be aware that the IRS issued final regulations on October 20,
1997 which could affect the United States' taxation of foreign investors in
Securities. The regulations would apply to payments after December 31, 1999.
Investors who are non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning Securities.
Debt Certificates
General. Certain Certificates ("Debt Certificates") may be issued with the
intention to treat them, for federal income tax purposes, either as (i)
non-recourse debt of the Depositor secured by the related Mortgage Assets, in
which case the related Trust will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust will constitute a partnership for federal income tax
purposes. Special Counsel is of the opinion that (unless otherwise limited in
the related Prospectus Supplement), for federal income tax purposes, assuming
compliance with all the provisions of the related Indenture, (i) Debt
Certificates will be characterized as debt issued by, and not equity in, the
related Trust and (ii) the related Trust will not be characterized as an
association (or publicly traded partnership within the meaning of Code Section
7704) taxable as a corporation or as a taxable mortgage pool within the meaning
of Code Section 7701(i). Since different criteria are used to determine the
non-tax accounting treatment of the issuance of Debt Certificates, however, the
Depositor expects to treat such transactions, for financial accounting purposes,
as a transfer of an ownership interest in the related Mortgage Assets to the
related Trust and not as the issuance of debt obligations. In this regard, it
should be noted that the IRS has issued a notice stating that, upon examination,
it will scrutinize instruments treated as debt for federal income tax purposes
but as equity for regulatory, rating agency or financial accounting purposes to
determine if their purported status as debt for federal income tax purposes is
appropriate.
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Assuming, as Special Counsel advises, that Debt Certificates will be treated as
indebtedness for federal income tax purposes, holders of Debt Certificates,
using their method of tax accounting, will follow the federal income tax
treatment hereinafter described.
Original Issue Discount. It is likely that the Debt Certificates will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Certificates may,
in the event of certain shortfalls, be deferred for periods exceeding one year.
As a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Certificate having original issue discount
must include original issue discount in ordinary income as it accrues in advance
of receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Certificate will be computed generally as described under "- Federal Income Tax
Consequences for REMIC Securities" and "Taxation of Regular Securities -
Original Issue Discount" and "- Variable Rate Regular Securities." The Depositor
intends to report any information required with respect to the Debt Certificates
based on the OID Regulations.
Market Discount. A purchaser of a Debt Certificate may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Certificate issued with original issue discount, the adjusted
issue price) of the Debt Certificate exceeds the purchaser's basis in a Debt
Certificate. The holder of a Debt Certificate that has market discount generally
will be required to include accrued market discount in ordinary income to the
extent payments includible in the stated redemption price at maturity of such
Debt Certificate are received. The amount of market discount on a Debt
Certificate will be computed generally as described under "Federal Income Tax
Consequences for REMIC Securities" and "- Taxation of Regular Securities -
Market Discount."
Premium. A Debt Certificate purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Certificate who holds a Debt Certificate as a
"capital asset" within the meaning of Code Section 1221 may elect under Code
Section 171 to amortize the premium under the constant interest method. That
election will apply to all premium obligations that the holder of a Debt
Certificate acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Certificates. The treatment of
premium incurred upon the purchase of a Debt Certificate will be determined
generally as described above under "- Taxation of Regular Securities - Premium."
Sale or Exchange of Debt Certificates. If a holder of a Debt Certificate
sells or exchanges a Debt Certificate, the holder of a Debt Certificate will
recognize gain or loss equal to the difference, if any, between the amount
received and the holder of a Debt Certificate's adjusted basis in the Debt
Certificate. The adjusted basis in the Debt Certificate generally will equal its
initial cost, increased by any original issue discount or market discount
previously included in the seller's gross income with respect to the Debt
Certificate and reduced by the payments previously received on the Debt
Certificate, other than payments of qualified stated interest, and by any
amortized premium.
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Certificate recognized by an
investor who holds the Debt Certificate as a capital asset (within the meaning
of Code Section 1221), will be capital gain or loss and will be longterm or
shortterm depending on whether the Debt Certificate has been held for more than
one year. For corporate taxpayers, there is no preferential rate afforded to
long-term capital gains. For individual taxpayers, net capital gains are subject
to varying tax rates depending upon the holding period of the Debt Certificates.
72
<PAGE>
Backup Withholding. Holders of Debt Certificates will be subject to backup
withholding rules identical to those applicable to REMIC Regular Securities. See
"- Federal Income Tax Consequences For REMIC Securities" and "Backup
Withholding."
Tax Treatment of Foreign Investors. Holders of Debt Certificates who are
foreign investors will be subject to taxation in the same manner as foreign
holders of REMIC Regular Securities. See "- Federal Income Tax Consequences For
REMIC Securities Taxation of Certain Foreign Investors Regular Securities."
Notes
With respect to those Securities issued as Notes, no regulations, published
rulings or judicial decisions exist that discuss the characterization for
federal income tax purposes of instruments with terms substantially the same as
the Notes. However, Special Counsel is of the opinion that (unless otherwise
limited in the related Prospectus Supplement), for federal income tax purposes,
assuming compliance with all the provisions of the related Indenture, (i) Notes
will be characterized as debt issued by, and not equity in, the related Trust
and (ii) the related Trust will not be characterized as an association (or
publicly traded partnership within the meaning of Code Section 7704) taxable as
a corporation or as a taxable mortgage pool within the meaning of Code Section
7701(i). Assuming, as Special Counsel advises, that Notes are treated as
indebtedness for federal income tax purposes, holders of Notes, using their
method of tax accounting, will follow the same federal income tax treatment as
Debt Certificates, as described above under "Federal Income Tax Consequences
Federal Income Tax Consequences for Securities as to Which No REMIC Election Is
Made - Debt Certificates."
For federal income tax purposes, (i) Notes held by a thrift institution
taxed as a "mutual savings bank" or "domestic building and loan association"
will not represent interests in "qualifying real property loans" within the
meaning of Code Section 593(d)(1); (ii) Notes held by a thrift institution taxed
as a domestic building and loan association will not constitute "loans ...
secured by an interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v); (iii) interest on Notes held by a real estate investment
trust will not be treated as "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); (iv) Notes held be a real estate investment trust will not
constitute "real estate assets" or "Government securities" within the meaning of
Code Section 856(c)(5)(A); and (v) Notes held by a regulated investment company
will not constitute "Government securities" within the meaning of Code Section
851(b)(4)(A)(i).
Taxation of Certificates Classified as Partnership Interests
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement. With
respect to such Series of Partnership Interests, Special Counsel is of the
opinion that (unless otherwise limited in the related Prospectus Supplement) the
Trust will be characterized as a partnership and not an association taxable as a
corporation or taxable mortgage pool for federal income tax purposes. The
related Prospectus Supplement will also cover any material federal income tax
consequences applicable to the Owners.
Federal Income Tax Consequences For FASIT Securities
With respect to a particular Series of Securities, an election may be made
to treat the Trust or one or more trusts or segregated pools of assets therein
as one or more FASITs within the meaning of Code Section 860L. A Trust or a
portion or portions thereof as to which one or more FASIT elections will be made
will be referred to as a "FASIT Pool." For purposes of this discussion,
Securities of a Series as to which one or more FASIT elections are made are
referred to as "FASIT Securities" and will consist of one or more classes of
"FASIT Regular Securities" and one "Ownership Interest Security" in the case of
each FASIT Pool. Qualification as a FASIT requires ongoing compliance with
certain conditions. With respect to each Series of FASIT Securities, Special
Counsel has advised the Depositor that in their opinion (unless otherwise
limited in the related Prospectus Supplement), assuming (i) the making of an
appropriate election, (ii) compliance with all provisions of the related
73
<PAGE>
Indenture and (iii) compliance with the applicable provisions of the law,
including any amendments to the Code or applicable Treasury regulations
thereunder, each FASIT Pool will qualify as a FASIT. In such case, the FASIT
Regular Securities will be considered to be "regular interests" in the FASIT
Pool and generally will be treated for federal income tax purposes as if they
were newly originated debt instruments, and the Ownership Interest Security will
be considered to be the "ownership interest" in the FASIT Pool. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections with respect to the related Trust will be made and will also cover any
material federal income tax consequences applicable to the holders of FASIT
Securities.
PLAN OF DISTRIBUTION
Securities are being offered hereby in Series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the Series of Securities,
including the public offering or purchase price of each class of Securities of
such Series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Securities will be acquired by the Underwriters for their own
account or may be offered by the Underwriters on a best efforts basis. The
Underwriters may resell such Securities from time to time in one or more
transactions including negotiated transactions, at fixed public offering prices
or at varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular Series of Securities will be set forth on the
cover of the Prospectus Supplement relating to such Series and the members of
the underwriting syndicate, if any, will be named in such Prospectus Supplement
In connection with the sale of the Securities, Underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended. The Prospectus Supplement will describe any such
compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any Series of Securities will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters will be
obligated to purchase all such Securities if any are purchased and that the
Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
74
<PAGE>
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning Rating
Agency. No person is obligated to maintain the rating on any Security, and,
accordingly, there can be no assurance that the ratings assigned to a Security
upon initial issuance will not be lowered or withdrawn by a Rating Agency at any
time thereafter. In general, ratings address credit risk and do not represent
any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities of each Series including insolvency issues and certain federal income
tax matters concerning the Securities will be passed upon for the Depositor by
Arter & Hadden LLP, Washington, D.C.
FINANCIAL INFORMATION
A Trust will be formed with respect to each Series of Securities. No Trust
will have any assets or obligations prior to the issuance of the related Series
of Securities. No Trust will engage in any activities other than those described
herein or in the Prospectus Supplement. Accordingly, no financial statement with
respect to any Trust is included in this Prospectus or will be included in the
Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
Although the Notes of any Series will represent obligations of the related
Issuer, such obligations will be nonresource and the proceeds of the assets
included in the related Trust will be the sole source of payments on the Notes
of such Series. The Issuer for any Series of Notes will not have, nor be
expected in the future to have, any significant assets available for payments on
such Series of Notes other than the assets included in the related Trust.
Accordingly, the investment characteristics of a Series of Notes will be
determined by the assets included in the related Trust and will not be affected
by the identity of the obligor with respect to such Series of Notes.
Accordingly, no capitalization information or any historical or pro forma ratio
of earnings to fixed charges or any other financial information with respect to
any trust, partnership, limited liability company or corporation formed for the
purpose of issuing a Series of Notes has been or will be included herein or in
the related Prospectus Supplement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
75
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Page
1986 Act............................................................... 50
1996 Act............................................................... 58
Agreement.............................................................. 1
AMTI................................................................... 58
Applicable Accounting Standards........................................ 31
Balloon Loans.......................................................... 7
Beneficial Owners...................................................... 5
BIF.................................................................... 32
Book Entry Registration................................................ 12
Book Entry Securities.................................................. 4
Certificates........................................................... 1
Clearing Agency........................................................ 4
Clearing Agency Participants........................................... 5
Code................................................................... 5
Companion Securities................................................... 13
Compound Interest Securities........................................... 13
Cooperative Loans...................................................... 16
Cooperatives........................................................... 2
Credit Enhancement..................................................... 4
Credit Enhancer........................................................ 10
Custodial Account...................................................... 24
Cut-Off Date........................................................... 12
DCR.................................................................... 6
Debt Certificates...................................................... 71
Defective Mortgage Loan................................................ 31
Delivery Date.......................................................... 11
Deposit Date........................................................... 31
Depositor.............................................................. 1
Disqualified Organization.............................................. 60
DOL.................................................................... 47
Eligible Investments................................................... 32
Equity Certificates.................................................... 2
ERISA.................................................................. 5
Events of Default...................................................... 34
FASIT.................................................................. 5
FASIT Pool............................................................. 73
FASIT Regular Securities............................................... 73
FASIT Securities....................................................... 73
FDIC................................................................... 24
FHLMC.................................................................. 2
Financial Guaranty Insurance Policy.................................... 19
Financial Guaranty Insurer............................................. 19
Fitch.................................................................. 6
FNMA................................................................... 2
Garn-St. Germain Act................................................... 45
GNMA................................................................... 2
Indenture.............................................................. 1
Indenture Trustee...................................................... 1
Insurance Paying Agent................................................. 19
Insurance Proceeds..................................................... 24
Insured Payment........................................................ 19
Interest Accrual Period................................................ 14
Issuer................................................................. 1
Liquidation Proceeds................................................... 24
Loan-to-Value Ratio.................................................... 18
Mark to Market Regulations............................................. 57
Master Servicer........................................................ 1
MBS.................................................................... 2
MBS Agreement.......................................................... 18
MBS Issuer............................................................. 18
MBS Servicer........................................................... 18
MBS Trustee............................................................ 18
Monthly Advance........................................................ 25
Moody's................................................................ 6
Mortgage Assets........................................................ 2
Mortgage Loans......................................................... 2
Mortgage Notes......................................................... 16
Mortgage Pool Insurance Policy......................................... 21
Mortgage Rates......................................................... 17
Mortgaged Properties................................................... 16
Mortgages.............................................................. 16
Mortgage-Backed Securities............................................. 2
Mortgagors............................................................. 24
NCUA................................................................... 24
Non-Priority Securities................................................ 13
Non-U.S. Person........................................................ 64
Noneconomic Residual Interest.......................................... 60
Nonrecoverable Advance................................................. 25
Note Event of Default.................................................. 36
Note Rate.............................................................. 14
Notes.................................................................. 1
Notional Principal Balance............................................. 14
OID Regulations........................................................ 48
Original Value......................................................... 18
OTS.................................................................... 45
Owner Trustee.......................................................... 1
Owners................................................................. 3
Ownership Interest Security............................................ 73
Partnership Interests.................................................. 73
Pass-Through Entity.................................................... 60
Pass-Through Rate...................................................... 3
Payment Date........................................................... 13
Plans.................................................................. 47
Policy Statement....................................................... 46
Pool Insurer........................................................... 21
Pooling and Servicing Agreement........................................ 1
Premium Regulations.................................................... 55
Prepayment Assumption.................................................. 51
Pre-Funding Account.................................................... 3
Principal Balance...................................................... 17
Principal Prepayments.................................................. 14
Priority Securities.................................................... 13
PTE 83-1............................................................... 47
Rating Agency.......................................................... 6
REIT................................................................... 49
REMIC.................................................................. 5
REMIC Pool............................................................. 49
REMIC Regulations...................................................... 48
REMIC Securities....................................................... 49
Record Date............................................................ 13
Regular Owner.......................................................... 50
Regular Securities..................................................... 49
Relief Act............................................................. 10
Remittance Date........................................................ 25
Remittance Rate........................................................ 25
Reserve Fund........................................................... 23
Residual Owners........................................................ 55
Residual Securities.................................................... 49
Retail Class Security.................................................. 50
Riegle Act............................................................. 9
SAIF................................................................... 32
Sale and Servicing Agreement........................................... 24
Scheduled Amortization Securities...................................... 13
Securities............................................................. 1
Securities Interest Rate............................................... 13
Security Account....................................................... 14
Security Principal Balance............................................. 12
Security Register...................................................... 12
Security Registrar..................................................... 12
Seller................................................................. 1
Senior Securities...................................................... 20
Servicer............................................................... 1
SMMEA.................................................................. 5
Special Allocation Securities.......................................... 13
Special Counsel........................................................ 48
Special Hazard Insurance Policy........................................ 22
Special Hazard Insurer................................................. 22
Standard & Poor's...................................................... 6
Standard Certificate................................................... 65
Stripped Owner......................................................... 68
A-1
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Page
----
Stripped Securities................................................... 68
Subordinated Securities............................................... 20
Subsequent Transfer Agreement......................................... 3
Thrift Institution.................................................... 49
TMP................................................................... 50
Trust................................................................. 1
Trust Agreement....................................................... 1
Trustee............................................................... 1
U.S. Person........................................................... 61
UCC................................................................... 42
Underwriters.......................................................... 74
A-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses in connection with
the issuance and distribution of the Certificates, other than underwriting
discounts and commissions.*
Filing Fee for Registration Statement.................. $1,475,000.00
Legal Fees and Expenses*............................... 420,000.00
Accounting Fees and Expenses*.......................... 210,000.00
Trustee's Fees and Expenses (including counsel fees)*.. 70,000.00
Printing and Engraving Fees*........................... 140,000.00
Rating Agency Fees*.................................... 1,400,000.00
Miscellaneous*......................................... 1,285,000.00
-------------
Total........................................... $5,000,000.00
=============
- ---------------------
* Estimated in accordance with Item 511 of Regulation S-K.
** To be filed by Amendment.
Item 15. Indemnification of Directors and Officers.
The form of Underwriting Agreement filed as Exhibit hereto, will
provide for indemnification by each Underwriter of any officer, director or
controlling person of the Registrant who becomes subject to liability arising
out of an untrue or alleged untrue statement of a material fact contained in
this Registration Statement, the Prospectus filed herewith or any Preliminary
Prospectus, related Prospectus Supplement or related Preliminary Prospectus
Supplement, or omission or alleged omission, that was made in reliance on
written information provided to the Registrant by such Underwriter.
The Certificate of Incorporation and Bylaws for the Registrant (Exhibits
3.1 and 3.2 to the Form S-3, Registration No. 333-4911 filed by the Registrant
on May 30, 1996) provide for indemnification of directors and officers to the
full extent permitted by Delaware law. Section 145 of the Delaware General
Corporation Law provides, in substance, that Delaware corporations shall have
the power, under specified circumstances, to indemnify their directors,
officers, employees and agents in connection with actions, suits or proceedings
brought against them by a third party or in the right of the corporation, by
reason of the fact that they were or are such directors, officers, employees or
agents, against expenses incurred in any such action, suit or proceeding.
The Bylaws also provide that the Registrant may, to the full extent
permitted by law, purchase and maintain insurance on behalf of any corporate
agent against any liability which may be asserted against him.
II-i
<PAGE>
Item 16. Exhibits.
1.1 * -- Form of Underwriting Agreement.
3.1 * -- Certificate of Incorporation of IMC Securities, Inc.
3.2 * -- Bylaws of IMC Securities, Inc.
4.1 * -- Form of Pooling and Servicing Agreement.
4.2 ** -- Form of Indenture.
5.1 ** -- Opinion of Arter & Hadden LLP regarding the legality
of the securities (Asset Backed Certificates and
Asset Backed Notes).
8.1 ** -- Opinion of Arter & Hadden LLP regarding tax matters.
10.1 ** -- Form of Sale and Servicing Agreement.
10.2 ** -- Form of Trust Agreement.
23.1 ** -- Consent of Arter & Hadden LLP (included as part of
Exhibit 5.1, 5.2 and 8.1).
24.1 ** -- Powers of Attorney (included on the signature page
of this Registration Statement).
25.1 *** -- Form T-1 Statement of Eligibility of the Indenture
Trustee.
99.1 ** -- Form of Prospectus Supplement (Certificates -
Insured Transaction).
99.2 ** -- Form of Prospectus Supplement (Certificates - Senior
/Subordinate Transaction).
99.3 ** -- Form of Prospectus Supplement (Notes).
- -----------------
* Incorporated by reference from the filing of May 30, 1996 made by the
Registrant on Form S-3, Registration No. 333-4911.
** Incorporated by reference from the filing of March 20, 1998 made by the
Registrant on Form S-3, Registration No. 333-48429.
*** To be filed by amendment.
II-ii
<PAGE>
Item 17. Undertakings
A. Undertaking pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement;
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events
arising after the effective date of this Registration Statement (or the
more recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in this Registration Statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which is
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
Registration Statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed or furnished to
the Commission by the Registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are incorporated by
reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
B. Undertaking pursuant to Securities Exchange Act of 1934.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing
of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to
section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be
deemed to be a new
II-iii
<PAGE>
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
C. Undertaking for Equity Offerings.
The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as
required by the underwriter to permit prompt delivery to each
purchaser.
D. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
E. Undertaking pursuant to Rule 430A.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(l) or (4) or 497(h) under the Securities Act of 1933 shall
be deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
F. Undertaking pursuant to the Trust Indenture Act of 1939.
The undersigned Registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the Indenture Trustee to
act under subsection (a) of Section 310 of the Trust Indenture Act
("Act") in accordance with the rules and regulations prescribed by the
Securities and Exchange Commission under Section 305(b)(2) of the Act.
[Remainder of Page Intentionally Left Blank]
II-iv
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
hereby certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Tampa, State of Florida, on the 28th
day of April, 1998.
IMC SECURITIES INC.
By: /S/ George Nicholas
--------------------
Name: George Nicholas
Title: Chairman, Chief Executive Officer
and Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ George Nicholas
- ------------------------ Chairman, Chief Executive Officer and April 28, 1998
George Nicholas Assistant Secretary
/s/ Thomas Middleton*
- ------------------------ Chief Operating Officer April 28, 1998
Thomas Middleton Chief Financial Officer),
Assistant Secretary and Director
/s/ Timothy Griffin*
- ------------------------ Director April 28, 1998
Timothy Griffin
/s/ Mitchell W. Legler*
- ------------------------ Director April 28, 1998
Mitchell W. Legler
- ------------------------ Director
Charles Hedrick
- ------------------------
*Executed by attorney-in-fact.
</TABLE>
