PROSPECTUS SUPPLEMENT
(To Prospectus dated June 26, 1996)
$15,936,400
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
FARMER MAC
GUARANTEED AGRICULTURAL MORTGAGE-BACKED SECURITIES
The Guaranteed Agricultural Mortgage-Backed Securities offered hereby (the
"AMBS" or "Certificates") evidence beneficial ownership interests in a trust
fund (the "Trust Fund") consisting primarily of four Pools (each, a "Pool") of
fixed-rate agricultural real estate mortgage loans ("Qualified Loans") having
the characteristics set forth in ANNEX I hereto. As described herein, timely
payment of interest on and principal of the Certificates is guaranteed by the
Federal Agricultural Mortgage Corporation, a federally chartered instrumentality
of the United States ("Farmer Mac"), pursuant to Title VIII of the Farm Credit
Act of 1971, as amended. See "FARMER MAC GUARANTEE" herein. (Continued on next
page)
------------------------
THE OBLIGATIONS OF FARMER MAC UNDER ITS GUARANTEE ARE OBLIGATIONS SOLELY OF
FARMER MAC AND ARE NOT OBLIGATIONS OF, AND ARE NOT GUARANTEED BY, THE FARM
CREDIT ADMINISTRATION, THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE
UNITED STATES (OTHER THAN FARMER MAC), AND ARE NOT BACKED BY THE FULL FAITH AND
CREDIT OF THE UNITED STATES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
Prospective investors in the Certificates should consider the factors discussed
under "Risk Factors" in this Prospectus Supplement on Page S-7 and in the
Prospectus on Page 13.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Original Principal CUSIP Pass-Through Payment First Distribution Final Distribution
Class Designation (1) Amount(2) Number Rate Frequency Date Date (4)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pool AA1003 $3,881,700 31316AAC5 (3) Annual January 25, 1997 January 25, 2012
Pool AS1004 6,002,400 31316EAD5 (3) Semi-annual January 25, 1997 January 25, 2012
Pool CA1002 1,170,000 31316QAB2 (3) Annual January 25, 1997 January 25, 2002
Pool CS1002 4,882,300 31316RAB0 (3) Semi-annual January 25, 1997 January 25, 2002
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Each Class of Certificates will separately evidence the Pool of Qualified
Loans having the corresponding alpha-numerical designation. As described herein,
each Class of Certificates will be entitled to all payments of interest and
principal on the Qualified Loans included in the related Pool.
(2) Approximate, subject to a permitted variance as described herein.
(3) On each applicable Distribution Date, the Pass-Through Rate for each Class
of Certificates will be a rate per annum equal to the weighted average of the
Net Mortgage Rates (as defined herein) for the Qualified Loans in the related
Pool. It is expected that the Pass-Through Rates per annum for the initial
Interest Accrual Periods for each Class of Certificates will be approximately as
follows: Class AA1003, 8.016%; Class AS1004, 7.857%; Class CA1002, 7.547%; and
Class CS1002, 7.229%. See "DESCRIPTION OF THE CERTIFICATES -- Distributions --
Interest" herein.
(4) The Final Distribution Date for each Class of Certificates has been set to
coincide with the latest maturing Qualified Loan in the related Pool.
The Certificates will be purchased from Farmer Mac Mortgage Securities
Corporation (the "Depositor") by Bear, Stearns & Co. Inc. (the "Underwriter")
and are being offered by the Underwriter from time to time in negotiated
transactions, at varying prices to be determined at the time of sale. Proceeds
to the Depositor from the sale of the Certificates will be approximately 100.63%
of the aggregate initial Certificate Balances, plus accrued interest thereon
from the Cut-off Date, before deducting expenses payable by the Depositor. See
"METHOD OF DISTRIBUTION" herein.
The Certificates are offered subject to receipt and acceptance by the
Underwriter, to prior sale and to the Underwriter's right to reject any order in
whole or in part and to withdraw, cancel or modify the offer without notice. It
is expected that the Certificates will be available through the book-entry
system of the Federal Reserve Banks on or about November 26, 1996 (the "Closing
Date").
-------------------------
BEAR, STEARNS & CO. INC.
The date of this Prospectus Supplement is November 21, 1996.
<PAGE>
Each Class of Certificates will relate to a separate Pool. Interest
will accrue on each Class of Certificates at the respective rate per annum
(each, a "Pass-Through Rate") described herein and will be distributable on each
Distribution Date for such Class, commencing on the date specified on the cover
hereof. On each applicable Distribution Date, the amount of interest
distributable on each Certificate will equal interest accrued for the related
Interest Accrual Period at the applicable Pass-Through Rate on the Certificate
Balance thereof immediately prior to such Distribution Date.
Principal in respect of each Pool will be distributable to the related
Class of Certificates on each Distribution Date for such Class to the extent and
in the manner described herein.
The yield to maturity on the Certificates of each Class will be
affected by the rate and timing of principal payments (including voluntary
prepayments and prepayments resulting from Liquidated Qualified Loans (as
defined herein)) on the Qualified Loans in the related Pool, which may be
prepaid under the circumstances described herein. Investors in the Certificates
offered hereby should consider, in the case of any Certificates purchased at a
discount, the risk that a slower than anticipated rate of principal payments on
the related Qualified Loans could result in actual yields that are lower than
anticipated yields and, in the case of any Certificates purchased at a premium,
the risk that a faster than anticipated rate of principal payments on the
related Qualified Loans could result in actual yields that are lower than
anticipated yields.
The Certificates offered hereby constitute Guaranteed Agricultural
Mortgage-Backed Securities offered from time to time pursuant to a Prospectus
dated June 26, 1996 of which this Prospectus Supplement is a part. This
Prospectus Supplement does not contain complete information about the offering
of the Certificates. Additional information is contained in the Prospectus and
purchasers are urged to read both this Prospectus Supplement and the Prospectus
in full. Sales of the Certificates may not be consummated unless the purchaser
has received both this Prospectus Supplement and the Prospectus.
---------------------------
There is currently no secondary market for the Certificates of any
Class. The Underwriter intends to make a market in the Certificates but is not
obligated to do so. There can be no assurance that any such market for the
Certificates will develop or, if developed, will continue or will provide
investors with sufficient liquidity of investment.
---------------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and the
Prospectus to which it relates. This is in addition to the obligation of dealers
to deliver a Prospectus and Prospectus Supplement when acting as underwriters
and with respect to their unsold allotments or subscriptions.
S-2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus Supplement and the
Prospectus. Capitalized terms used herein and not otherwise defined have the
meanings assigned in the Prospectus.
Securities Offered ................. Guaranteed Agricultural Mortgage-Backed
Securities (the "Certificates").
The Certificates will be issued in four
Classes, each having a Class designation
corresponding to one of the four Pools
identified on the cover page hereof. Each
Class of Certificates will separately
evidence the right to receive
distributions alpha-numerical designation
and will be issued in an original Class
Certificate Balance equal to the original
principal amount of such Pool set forth
on the cover hereof. The initial Class
Certificate Balance of each Class of
Certificates is su "ANNEX I: DESCRIPTION
OF THE QUALIFIED LOAN POOLS" for detailed
information on the Qualified Loans in
each Pool.
The Guarantor..................... The Federal Agricultural Mortgage
Corporation ("Farmer Mac") is a federally
chartered instrumentality of the United
States established by Title VIII of the
Farm Credit Act of 1971, as amended (the
"Farmer Mac Charter"). See "FEDERAL
AGRICULTURAL MORTGAGE CORPORATION" in the
Prospectus.
The Depositor....................... Farmer Mac Mortgage Securities
Corporation, a Delaware corporation and
wholly owned subsidiary of Farmer Mac,
will act as depositor (the "Depositor")
under the Trust Agreement. See "THE
DEPOSITOR" herein.
The Guarantee ..................... As described herein, the timely payment
to Certificateholders of interest on and
principal (including any balloon
payments) of the Certificates is
guaranteed by Farmer Mac. See "FARMER MAC
GUARANTEE" herein.
Not an Obligation of
the United States ............. Farmer Mac's obligations under the Farmer
Mac Guarantee are not backed by the full
faith and credit of the United States.
The Master Servicer ................ Farmer Mac will act as Master Servicer
(the "Master Servicer") of the Qualified
Loans. The Qualified Loans will be
directly serviced by Equitable
Agri-Business, Inc., a Delaware
Corporation (the "Central Servicer")
which will act on behalf of Farmer Mac
pursuant to a Servicing Contract (as
supplemented) between such parties. See
"DESCRIPTION OF THE AGREEMENTS" herein.
The Trustee......................... First Trust National Association, a
national banking association, will act as
trustee (the "Trustee") pursuant to a
Trust Agreement as supplemented by an
Issue Supplement (collectively, the
"Trust
S-3
<PAGE>
Agreement"), each among Farmer Mac,
the Depositor and the Trustee.
Cut-off Date........................ November 1, 1996.
Closing Date........................ On or.about November 26, 1996.
Distribution Dates.................. Distributions to Holders of the
Certificates of each Class will be made
on a semi-annual or annual basis as
specified below, on each January 25 or
July 25, as applicable (unless such day
is not a Business Day, whereupon such
distribution will on the initial
Distribution Date for such Class. The
Distribution Dates for each Class are set
forth below:
Commencing
Class Frequency On
----- --------- --------------
AA1003 Annual January 25, 1997
AS1004 Semi-annual January 25, 1997
CA1002 Annual January 25, 1997
CS1002 Semi-annual January 25, 1997
Distributions on the Certificates... Interest. Interest will accrue on the
Certificates of each Class at the
respective Pass-Through Rate described
herein during each related Interest
Accrual Period. On each applicable
Distribution Date, interest will be
distributable on each Class of
Certificates in an aggregate amount equal
to the interest accrued at the applicable
Pass-Through Rate during the related
Interest Accrual Period on the Class
Certificate Balance of such Class
immediately prior to such Distribution
Date (as to each Class, the "Accrued
Certificate Interest"). As to each Class
and related Distribution Date the
"Interest Accrual Period" will be the
period from the first day of the month of
the preceding Distribution Date (or, in
the case of the first Distribution Date
for each Class, from the Cut-off Date)
through the last day of the month
preceding Distribution Date (or, in the
case of the first Distribution Date for
each Class, from the Cut-off Date)
through the last day of the month
preceding the month of such current
Distribution Date. See "DESCRIPTION OF
THE CERTIFICATES -- Distributions--
Interest" herein.
Principal. Principal in respect of each
Pool will be distributed to the related
Class of Certificates on each applicable
Distribution Date in an aggregate amount
equal to the Principal Distribution
Amount for such Distribution Date and
Pool. T each applicable Distribution Date
will equal the sum of (i) the principal
portion of all scheduled payments
(including any balloon payments) on the
Qualified Loans in such Pool due during
the preceding Due Period (as defined
herein), (ii)_the included in such Pool
which was purchased or became a
Liquidated Qualified Loan during the
preceding Due Period, and (iii) all full
or partial principal prepayments received
during the preceding Due Period. See
"DESCRIPTION OF THE CERTIFICATES --
Distributions -- Principal" herein.
S-4
<PAGE>
Yield Maintenance Charges. Each Qualified
Loan provides for the payment by the
Borrower of a Yield Maintenance Charge
(as defined herein) in connection with
any prepayments, in whole or in part. The
amount of any Yield Maintenance Charge in
re collected by the Central Servicer,
will be distributed to the Holders of the
related Class of Certificates on each
Distribution Date in the manner and to
the extent described herein. Farmer Mac
will not guarantee to Holders of the
related Clas Maintenance Charge payable
in connection with a principal prepayment
on a Qualified Loan. See "DESCRIPTION OF
THE CERTIFICATES -- Distributions --
Yield Maintenance Charges" herein.
Record Date........................ The Record Date for each Distribution
Date and Class of Certificates will be
the close of business on the last
Business Day of the month immediately
preceding the month in which such
Distribution Date occurs.
The Trust Fund..................... The Trust Fund corpus consists of: (i)
four separate Pools of fixed-rate
agricultural real estate mortgage loans
(collectively, the "Qualified Loans"),
(ii) the Farmer Mac Guarantee and (iii)
the Collection Account and Certificate
Account (each as defined in the
Prospectus). See "DESCRIPTION OF THE
QUALIFIED LOANS" herein.
Optional Termination............... On any Distribution Date for any Class of
Certificates, when the aggregate
principal balance of the Qualified Loans
in the Trust Fund is less than one
percent thereof as of the Cut-off Date,
the Master Servicer may purchase from the
Trust Fund all remaining Qualified Loans
and therby effect an early retirement of
the Certificates outstanding at such
time. See "DESCRIPTION OF THE
CERTIFICATES -- Optional Termination"
herein and in the Prospectus.
Certain Federal Income Tax
Consequences.................... The Trust Fund will be treated as a
grantor trust for federal income tax
purposes and no election will be made to
treat the Trust Fund as a real estate
mortgage investment conduit for federal
income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES" herein and in
the Prospectus.
ERISA Considerations............... The acquisition of a Certificate by a
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
("ERISA"), or any individual retirement
account ("IRA") or any other plan subject
to Code Section 4975 could, in some
instances, result in a prohibited
transaction or other violations of the
fiduciary responsibility provisions of
ERISA and Code Section 4975. Prospective
plan investors should consult with their
legal advisors concerning the impact of
ERISA and the Code, and the availability
of any exemptions thereunder prior to
making an investment in the
S-5
<PAGE>
Certificates. See "ERISA CONSIDERATIONS"
herein and in the Prospectus.
Legal Investment................... The Certificates will constitute
securities guaranteed by Farmer Mac for
purposes of the Farmer Mac Charter and,
as such, will, by statute, be legal
investments for certain types of
institutional investors to the extent
that those investors are authorized under
any applicable law to purchase, hold, or
invest in obligations issued by or
guaranteed as to principal and interest
by the United States or any agency or
instrumentality of the United States.
Investors whose investment authority is
subject to legal restrictions should
consult their own legal advisors to
determine whether and the extent to which
Certificates constitute legal investments
for them. See "LEGAL INVESTMENT" herein
and in the Prospectus.
S-6
<PAGE>
RISK FACTORS
Prospective investors in the Certificates should consider the following
factors (together with the factors set forth in "RISK FACTORS" in the
Prospectus) in connection with the purchase of such Certificates.
Collection of Yield Maintenance Charges. Farmer Mac will not guarantee
to Holders of the related Class of Certificates the collection of any yield
maintenance charge ("Yield Maintenance Charge") payable in connection with a
principal prepayment on a Qualified Loan. The amount of any Yield Maintenance
Charge in respect of the related Qualified Loan, to the extent collected by the
Central Servicer, will be distributed to Holders of the related Class of
Certificates on the related Distribution Date in the manner and to the extent
described herein.
Under the Servicing Contract, the Central Servicer may not waive the
collection of any Yield Maintenance Charge without the consent of Farmer Mac, as
Master Servicer. It is Farmer Mac's policy generally not to consent to the
waiver of the collection of a Yield Maintenance Charge unless the amount of such
charge is unduly large relative to the unpaid principal balance of the related
Qualified Loan. In such cases, and other circumstances that raise similar
equitable concerns, Farmer Mac's policy is to require Central Servicers to
attempt to collect a portion of such Yield Maintenance Charge in connection with
any prepayment of principal; however, there may be situations in which Farmer
Mac may consider it appropriate to waive any collection of a Yield Maintenance
Charge. Generally, a principal prepayment resulting from the condemnation of, or
casualty on, the related Mortgaged Property (as defined herein) will not be
accompanied by a Yield Maintenance Charge. Because Farmer Mac does not guarantee
the collection of such charges, the expected yield to investors in the
Certificates may be sensitive to the extent such amounts are not collected. See
"FARMER MAC GUARANTEE" herein.
Relative Loan Sizes. As of the Cut-off Date, Pool AA1003, Pool CA1002
and Pool CS1002 each includes a single Qualified Loan which constitutes
approximately 32%, 66% and 47% (by principal balance), respectively, of the
aggregate principal balance of such Pool. As a result, principal payments
(including voluntary prepayments and prepayments due to defaults, liquidations
and Guarantee Payments) on such Qualified Loans will have a disproportionate
effect on the Pass-Through Rates and yields of the related Classes of
Certificates. To the extent any such Qualified Loan bears interest at a Net
Mortgage Rate in excess of the then applicable Pass-Through Rate for such Pool,
principal payments on such loan will subsequently result in a lower Pass-Through
Rate for such Pool. See "ANNEX I: DESCRIPTION OF THE QUALIFIED LOAN POOLS" at
the end of this Prospectus Supplement for detailed information regarding such
high balance loans.
Limited Number of Loans. As of the Cut-off Date, Pool AA1003, Pool
AS1004, Pool CA1002 and Pool CS1002 include 7, 13, 2 and 7 Qualified Loans,
respectively. As a result of the relatively low number of Qualified Loans in
each such Pool, the payment experience of one or more Qualified Loans in each
Pool may have a disproportionate effect on the Pass-Through Rates and yields of
the related Classes of Certificates. Due to the relative lack of geographic
diversity which results from the limited number of Qualified Loans in each Pool,
a natural disaster or local economic conditions may adversely impact a
significant number of Qualified Loans in a Pool. As a result, Holders may
receive distributions of principal due to liquidation, condemnation or casualty
of the related Mortgaged Property earlier than anticipated. Any such early
receipt of principal may affect Holders' yields adversely. In particular,
because Pool CA1002 includes only 2 Qualified Loans, the Pass-Through Rate and
yield on the related Class of Certificates may be materially affected by any
default or voluntary prepayment of either of such Qualified Loans. See "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
S-7
<PAGE>
DESCRIPTION OF THE QUALIFIED LOANS
The Trust Fund will consist primarily of approximately 29 Qualified
Loans assigned to the Trust Fund by the Depositor. As described herein, the
Qualified Loans will be divided into four separate Pools. For a more detailed
description of certain characteristics of the Qualified Loans of each Pool, see
"ANNEX I: DESCRIPTION OF THE QUALIFIED LOAN POOLS" at the end of this Prospectus
Supplement. The aggregate outstanding principal balance of the Qualified Loans
in the Trust Fund as of the Cut-off Date is $15,936,400 (subject to the
permitted variance per Pool as described herein). Each Qualified Loan is secured
by a first-lien on Agricultural Real Estate (the "Mortgaged Properties"). The
principal amount of any Qualified Loan in any Pool does not exceed $2,300,000.
"Agricultural Real Estate" is a parcel or parcels of land, which may be improved
by buildings and machinery, fixtures and equipment or other structures
permanently affixed to the parcel or parcels, that (a) are used for the
production of one or more agricultural commodities and (b) consist of a minimum
of five acres or are used in producing minimum annual receipts of $5,000.
The Qualified Loans have original terms to maturity of either 5 or 15
years and current loan-to-value ratios of not more than 70%. All of the
Qualified Loans meet Farmer Mac's Underwriting and Appraisal Standards (the
"Underwriting Standards") with respect to newly originated loans. As used
herein, a "current" loan-to-value ratio is based on an appraisal performed
within one year prior to the acquisition of the related Qualified Loan by the
Depositor. See "DESCRIPTION OF THE TRUST FUNDS -- Qualified Loans -- General" in
the Prospectus.
The description of the Qualified Loans and the related Mortgaged
Properties is based upon each Pool as constituted at the close of business on
the Cut-off Date, as adjusted for any scheduled principal payments due on or
before such date. Prior to the issuance of the Certificates, Qualified Loans may
be removed from a Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate, or as a result of
prepayments in full. A limited number of other Qualified Loans may be added to
any Pool prior to the issuance of the Certificates unless including such
Qualified Loans would materially alter the characteristics of such Pool as
described herein. The Depositor believes that the information set forth herein
will be representative of the characteristics of each Pool as it will be
constituted at the time the Certificates are issued although the range of
Mortgage Interest Rates and maturities and certain other characteristics of the
Qualified Loans in such Pool may vary. Pursuant to the Sale Agreement, the
Seller (as defined herein) has made certain representations and warranties with
respect to the Qualified Loans and their origination in accordance with the
Underwriting Standards. See "DESCRIPTION OF THE AGREEMENTS -- Representations
and Warranties; Repurchases" in the Prospectus.
As described herein, the composition of the Qualified Loans in the
Trust Fund is subject to adjustment, with the amount of such variance restricted
as stated herein. The information set forth as to the Qualified Loans will be
revised to reflect such adjustments, if any, and included in a Form 8-K to be
filed with the Commission within 15 days after the Closing Date and be available
to Holders of Certificates promptly thereafter through the facilities of the
Commission as described under "AVAILABLE INFORMATION" in the Prospectus.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to a Trust Agreement dated as
of June 1, 1996 as supplemented by an Issue Supplement dated as of November 1,
1996 (collectively, the "Trust Agreement"), each among Farmer Mac, the Depositor
and the Trustee. Reference is made to the Prospectus for important additional
information regarding the terms and conditions of the Trust Agreement and the
Certificates. See "DESCRIPTION OF THE CERTIFICATES" and "DESCRIPTION OF THE
AGREEMENTS" in the Prospectus. The Certificates are issued as a separate series
under the Trust Agreement with a series designation corresponding to their date
of issuance. The
S-8
<PAGE>
Certificates will be issued in the aggregate original Certificate Balance
specified on the cover page hereof and each Class of Certificates will be issued
in an initial Class Certificate Balance corresponding to the original principal
amount of the related Pool set forth on the cover. Each Class of Certificates is
subject to a permitted variance of plus or minus 5%. The Certificates will
evidence beneficial ownership interests in a trust fund (the "Trust Fund")
consisting primarily of (i) four separate Pools described in ANNEX I hereto;
(ii) the Farmer Mac Guarantee; and (iii) the Collection Account and Certificate
Account. Each Pool is evidenced by a single Class of Certificates bearing the
same alpha-numerical designation as the underlying Pool. Distributions of
interest and principal on each Class of Certificates will be calculated with
reference to the Qualified Loans in the related Pool.
Farmer Mac has established a six-digit alpha-numerical pool numbering
system to identify certain characteristics of the Qualified Loans in each Pool
and to facilitate Certificateholders' access to the factor and other loan
information to be published periodically by Farmer Mac with respect to the
Pools. The first three digits are "loan identifiers." The first digit is a
letter that denotes the maximum original term to maturity of the Qualified Loans
in the Pool. The second digit is a letter that denotes the scheduled payment
frequency with respect to the Qualified Loans in the Pool. The third digit is a
number that denotes the first month in a calendar year in which a Distribution
Date for such Pool occurs. The last three digits sequentially designate Pools
with the same three loan identifiers. The table below summarizes Farmer Mac's
pool numbering system:
1st Digit 2nd Digit 3rd Digit
--------- --------- ---------
A=15 year A=Annual 1=January
B=7 year S=Semi-annual 2=April
C=5 year Q=Quarterly 3=July
4=October
Book-Entry Certificates
The Certificates will be issued in book-entry form, and beneficial
interests therein will be held by investors through the book-entry system of the
Federal Reserve Banks (the "Fed book-entry system"), in minimum denominations in
Certificate Balances of $1,000 and integral multiples of $1 in excess thereof.
The Certificates will be maintained on the Fed book-entry system in a
manner that permits separate trading and ownership. Each Class of Certificates
has been assigned a CUSIP number and will be tradable separately under such
CUSIP number. The CUSIP number for each Class is specified on the cover hereof.
In accordance with the procedures established for the Fed book-entry
system, the Federal Reserve Banks will maintain book-entry accounts with respect
to the Certificates and make distributions on the Certificates on behalf of the
Master Servicer on the applicable Distribution Dates by crediting Holders'
accounts at the Federal Reserve Banks.
Such entities whose names appear on the book-entry records of a Federal
Reserve Bank as the entities for whose accounts such Certificates have been
deposited are herein referred to as "Certificateholders" or "Holders." A Holder
is not necessarily the beneficial owner of a Certificate. Beneficial owners will
ordinarily hold Certificates through one or more financial intermediaries, such
as banks, brokerage firms and securities clearing organizations. See
"DESCRIPTION OF THE CERTIFICATES -- The Fed System" in the Prospectus.
Issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market since certain investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "RISK FACTORS -- Limited Liquidity" in the Prospectus.
S-9
<PAGE>
Distributions
General. Distributions of principal and interest on the Certificates
will be made on a semi-annual or annual basis as specified for such Class, on
each January 25 or July 25 commencing on January 25, 1997. If any such day is
not a Business Day (that is, a day other than Saturday, Sunday or a day on which
the Federal Reserve Bank of New York authorizes banking institutions in the
Second Federal Reserve District to be closed, or banking institutions in New
York are authorized or obligated by law to be closed or Farmer Mac is closed),
distributions will be made on the next succeeding Business Day to persons in
whose names the Certificates are registered on the applicable Record Date. The
"Record Date" for any Class and related Distribution Date will be the close of
business on the last Business Day of the month preceding the month in which such
Distribution Date occurs.
The "Distribution Dates" for each Class of Certificates are as follows:
Payment Frequency
Class (Accrual Period) Commencing On
- ----- ----------------- -------------
AA1003 Annual January 25, 1997
AS1004 Semi-annual January 25, 1997
CA1002 Annual January 25, 1997
CS1002 Semi-annual January 25, 1997
Interest. Interest on the Certificates of each Class will be
distributed on each Distribution Date for such Class in an aggregate amount
equal to the Accrued Certificate Interest for such Distribution Date and Class.
"Accrued Certificate Interest" for each Distribution Date and Class will equal
the amount of interest accrued during the related Interest Accrual Period at the
applicable Pass-Through Rate on the Class Certificate Balance of such Class
immediately prior to such Distribution Date. Interest on the Certificates will
be calculated on the basis of a 360-day year consisting of twelve 30-day months.
As of any date of determination, the "Class Certificate Balance" of any Class of
Certificates will equal the sum of the Certificate Balances of all Certificates
of the same Class and the "Certificate Balance" of any Certificate as of any
date of determination will equal the original Certificate Balance thereof less
all amounts distributed thereon in respect of principal on preceding
Distribution Dates.
The Interest Accrual Periods for each Class will depend on the payment
frequency of such Class. As to any Class and related Distribution Date, the
"Interest Accrual Period" will be the period from the first day of the month of
the month of the preceding Distribution Date (or, in the case of the first
Distribution Date for each Class, from the Cut-off Date) through the last day of
the month preceding the month of such current Distribution Date.
Interest will accrue on the Certificates of each Class at a variable
rate per annum (the "Pass-Through Rate") equal to the weighted average of the
Net Mortgage Rates of the Qualified Loans included in the related Pool. For
purposes hereof, the "Net Mortgage Rate" for each Qualified Loan will equal the
interest rate thereon (the "Mortgage Interest Rate") less a rate representing
the combined fees of the Central Servicer, Master Servicer, Field Servicer and
Farmer Mac as guarantor (such amount, the "Administrative Fee Rate"). The
weighted average Administrative Fee Rate as of the Cut-off Date for each Pool is
set forth in ANNEX I hereto. The Pass-Through Rate for each Pool and
Distribution Date is calculated by (1) multiplying the outstanding balance of
each Qualified Loan in such Pool by its Net Mortgage Rate to derive such
Qualified Loan's weighted interest amount (" Weighted Interest Amount"); (2)
dividing the sum of all such Pool's Weighted Interest Amounts by the Class
Certificate Balance of the related Class of Certificates, before giving effect
to the distribution of principal on the related Distribution Date; and (3)
truncating such interest rate to three decimal places. It is expected that the
Pass-Through Rates per annum for the initial Interest Accrual Periods for each
Class of Certificates will be approximately as follows: Class AA1003, 8.016%;
Class AS1004, 7.857%; Class CA1002, 7.547%; and Class CS1002, 7.229%.
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Principal. Principal in respect of each Class will be distributed on
each applicable Distribution Date in an aggregate amount equal to the Principal
Distribution Amount for the related Pool on such Distribution Date. On each
Distribution Date, the "Principal Distribution Amount" for each Pool as of each
applicable Distribution Date will equal the sum of (i) the principal portion of
all scheduled payments (including any balloon payments) on the Qualified Loans
in such Pool due during the preceding Due Period, (ii) the scheduled principal
balance of each Qualified Loan included in such Pool which was repurchased or
became a Liquidated Qualified Loan during the preceding Due Period, and (iii)
all full or partial principal prepayments received during the preceding Due
Period. The "Due Period" for each Pool and Distribution Date will commence on
the second day of the month of the preceding Distribution Date (or, in the case
of the first Distribution Date for each Class, on the day following the Cut-off
Date) and will end on the first day of the month of such current Distribution
Date. A "Liquidated Qualified Loan" is generally any defaulted Qualified Loan as
to which it has been determined that all amounts to be received thereon have
been recovered.
Certificate Pool Factors. As soon as practicable following the fifth
Business Day of each month of a Distribution Date, Farmer Mac will publish or
otherwise make available for each applicable Pool of Qualified Loans, among
other things, the factor (carried to eight decimal places) which, when
multiplied by the original Certificate Balance of a Certificate evidencing an
interest in such Pool, will equal the remaining principal balance of such
Certificate after giving effect to the distribution of principal to be made on
the Distribution Date in such month.
Yield Maintenance Charges. In the event a Borrower is required to pay a
Yield Maintenance Charge, to the extent such payment is collected by the Central
Servicer, the Master Servicer will distribute such amount, adjusted to the
related Net Mortgage Rate as described below, to Holders of the related Class of
Certificates. Each Yield Maintenance Charge has been designed to mitigate
reinvestment losses to the noteholder on the prepaid amount of any Qualified
Loan. Generally, such charge represents the excess of reinvestment earnings at
the related Mortgage Interest Rate (net of servicing fee rates) on such prepaid
amount (i.e., the amount that would have been received by the related noteholder
in the absence or prepayment) over earnings calculated at a prevailing interest
rate (a specified Treasury yield) on such prepaid amount. Amounts passed through
to Certificateholders in respect of Yield Maintenance Charges will be calculated
on the basis of the related Net Mortgage Rate rather than the Mortgage Interest
Rate. The distribution of any Yield Maintenance Charge to Certificateholders
will not reduce the Certificate Balance of the related Certificates. Farmer Mac
will not guarantee to Holders of the related Class of Certificates the
collection of any Yield Maintenance Charge payable in connection with a
principal payment on a Qualified Loan. See "FARMER MAC GUARANTEE" herein.
Advances
The Central Servicer will not be required to advance its own funds with
respect to delinquent Qualified Loans. Because Farmer Mac guarantees timely
distributions to Holders of interest on the Certificates and the full Principal
Distribution Amount (including any balloon payments), the fact that the Central
Servicer is not required to make any such advance will not affect distributions
of interest and principal to such Holders.
FARMER MAC GUARANTEE
Pursuant to the Trust Agreement, Farmer Mac will guarantee (the "Farmer
Mac Guarantee") the timely distribution of interest accrued on the Certificates
and the distribution of the full Principal Distribution Amount (including any
balloon payments) for the related Pool and Distribution Date. In addition,
Farmer Mac is obligated to distribute on a timely basis the outstanding Class
Certificate Balance of each Class of Certificates in full no later than the
related Final Distribution Date (as set forth on the cover hereof), whether or
not sufficient funds are available in the Certificate Account. The Farmer Mac
Guarantee will not cover the distribution to Holders of the related Class of
Certificates of any uncollected Yield Maintenance Charge. See "RISK FACTORS"
herein.
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Farmer Mac's obligations under the Farmer Mac Guarantee are obligations
solely of Farmer Mac and are not backed by the full faith and credit of the
United States. Furthermore, Farmer Mac anticipates that its future contingent
liabilities in respect of guarantees of outstanding securities backed by
agricultural mortgage loans will greatly exceed its resources, including its
limited ability to borrow from the United States Treasury. See "OUTSTANDING
GUARANTEES" herein and "FEDERAL AGRICULTURAL MORTGAGE CORPORATION" in the
Prospectus.
OUTSTANDING GUARANTEES
As of November 1, 1996, Farmer Mac had outstanding guarantees on
approximately $611.5 million aggregate principal amount of securities (including
approximately $197.3 of securities evidencing assets which are guaranteed by the
Secretary of the United States Department of Agriculture). Farmer Mac is
authorized to borrow up to $1,500,000,000 from the Secretary of the Treasury,
subject to certain conditions, to enable Farmer Mac to fulfill its guarantee
obligations. See "FEDERAL AGRICULTURAL MORTGAGE CORPORATION" in the Prospectus.
As of November 1, 1996, Farmer Mac had not borrowed any amounts from the
Secretary of the Treasury to fund guarantee payments.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rate of payment of principal on a Class of Certificates and the
yield to maturity of such Class will correspond directly to the rate of payments
of principal on the Qualified Loans in the related Pool. The rate of payments of
principal of the Qualified Loans will in turn be affected by the rate of
principal prepayments thereon by Borrowers, by liquidations of defaulted
Qualified Loans, by repurchases as a result of defective documentation and
breaches of representations and warranties or for certain other reasons. There
is little or no historical data available to provide assistance in estimating
the rate of prepayments and defaults on loans secured by Agricultural Real
Estate generally or the Qualified Loans particularly.
In the case of Qualified Loans, social, economic, political, trade,
geographic, climatic, demographic, legal and other factors may influence
prepayments and defaults, including the age of the Qualified Loans, the
geographic distribution of the related Mortgaged Properties, the payment terms
of the Qualified Loans, the characteristics of the borrowers, weather, economic
conditions generally and in the geographic area in which the Mortgaged
Properties are located, enforceability of due-on-sale clauses, servicing
decisions, the availability of mortgage funds, the extent of the borrowers' net
equity in the Mortgaged Properties, mortgage market interest rates in relation
to the effective interest rates on the Qualified Loans and other unforeseeable
variables, both domestic and international, affecting particular commodity
groups and the farming industry in general. Generally, if prevailing interest
rates fall significantly below the interest rates on the Qualified Loans, the
Qualified Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on such Qualified Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Qualified Loans, the rate of prepayment would be expected to decrease. There can
be no certainty as to the rate or prepayments on the Qualified Loans during any
period or over the lives of the Certificates. The rate of default on the
Qualified Loans will also affect the rate of payment of principal on the
Qualified Loans. Prepayments, liquidations and repurchases of the Qualified
Loans will result in distributions to Holders of the related Class of
Certificates of amounts which would otherwise be distributed over the remaining
terms of the Qualified Loans.
All of the Qualified Loans impose Yield Maintenance Charges that, if
enforced by the Central Servicer, could be a deterrent to prepayments. Under the
Servicing Contract (as defined herein), the Central Servicer may not waive the
collection of any Yield Maintenance Charge without the consent of Farmer Mac, as
Master Servicer. It is Farmer Mac's policy generally not to consent to the
waiver of the collection of a Yield Maintenance Charge unless the amount of such
charge is unduly large relative to the unpaid principal balance of the related
Qualified Loan. In such cases, and other circumstances that raise similar
equitable concerns, Farmer Mac's policy is to require Central Servicers to
attempt to collect a portion of such Yield Maintenance Charge in connection with
any prepayment of
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principal; however, there may be situations in which Farmer Mac may consider it
appropriate to waive any collection of a Yield Maintenance Charge. With respect
to each Qualified Loan, any Yield Maintenance Charge payable in connection with
a prepayment thereon, whether in whole or in part, will be calculated with
reference to United States Treasury securities in a manner designed to mitigate
reinvestment losses, if any, that would otherwise be incurred by the noteholder
in connection with such prepayment.
Because Farmer Mac does not guarantee the collection of any Yield
Maintenance Charge, the expected yield to investors in the Certificates may be
sensitive in varying degrees to the extent such amounts are not collected.
The required payment of any Yield Maintenance Charge may not be a
sufficient disincentive to prevent the voluntary prepayment of the related
Qualified Loan and, even if collected, may be insufficient to offset fully the
adverse effects on the anticipated yield thereon arising out of the
corresponding principal payment.
In addition, all of the Qualified Loans include "due-on-sale" clauses;
however, it is generally the policy of the Central Servicer not to enforce such
clauses unless the transferor of the related Mortgaged Property does not meet
the Underwriting Standards of Farmer Mac. The Servicing Contract does not
require any such enforcement. In addition, at the request of the Borrower, the
Central Servicer may allow the partial release of a Mortgaged Property provided
the collateral property is reappraised and a partial prepayment is made such
that the resulting loan-to-value ratio is no greater than 70% and the cash flows
from the remaining property are sufficient to service the remaining debt. Such
partial release may result in a prepayment in part (together with any required
Yield Maintenance Charge, calculated as described herein) on the related
Qualified Loan and a corresponding reamortization of the unpaid principal
balance of such Qualified Loan to the maturity date for such loan. Any Qualified
Loan as to which a partial release occurs will remain in the Trust Fund.
The yield to investors in the Certificates of a Class will be sensitive
to the rate and timing of principal payments (including prepayments) of the
Qualified Loans in the related Pool, which generally can be prepaid at any time,
subject to the restrictions and prepayment penalties described above. In
addition, the yield to maturity on a Certificate may vary depending on the
extent to which such Certificate is purchased at a discount or premium. Holders
of the Certificates should consider, in the case of any Certificates purchased
at a discount, the risk that a slower than anticipated rate of principal
payments on the related Qualified Loans could result in an actual yield that is
lower than the anticipated yield and, in the case of any Certificates purchased
at a premium, the risk that a faster than anticipated rate of principal payments
on the related Qualified Loans could result in an actual yield that is lower
than the anticipated yield, particularly if any Yield Maintenance Charge is not
distributed to such Holders.
The timing of changes in the rate of prepayments on the Qualified Loans
may significantly affect an investor's actual yield to maturity, even if the
average rate of principal payments is consistent with an investor's expectation.
In general, the earlier a prepayment of principal of the related Qualified
Loans, the greater the effect on an investor's yield to maturity. The effect on
an investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates may not be offset by a subsequent
like decrease (or increase) in the rate of principal payments. An investor must
make an independent decision as to the appropriate prepayment scenario to be
used in deciding whether to purchase the Certificates.
Investors should consider the risk that rapid rates of prepayments on
the Qualified Loans, and therefore of principal payments on the related Class of
Certificates, may coincide with periods of low prevailing interest rates. During
such periods, the effective interest rates on securities in which an investor
may choose to reinvest amounts received as principal payments on such investor's
Certificate may be lower than the applicable Pass-Through Rate. Conversely, slow
rates of prepayments on the Qualified Loans, and therefore of principal payments
on the related Class of Certificates, may coincide with periods of high
prevailing interest rates. During such periods, the amount of principal payments
available to an investor for reinvestment at such high prevailing interest rates
may be relatively low.
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The Pass-Through Rate for each Class of Certificates will equal the
weighted average of the Net Mortgage Rates of the Qualified Loans in the related
Pool. Prepayments of Qualified Loans with relatively higher Mortgage Interest
Rates, particularly if such Qualified Loans have larger unpaid principal
balances, will reduce the Pass-Through Rate for the related Class of
Certificates from that which would have existed in the absence of such
prepayments. In addition, the Qualified Loans in a Pool will not prepay at the
same rate or at the same time. Qualified Loans with relatively higher Mortgage
Interest Rates may prepay at faster rates than Qualified Loans with relatively
lower Mortgage Interest Rates in response to a given change in market interest
rates. If such differential prepayments were to occur, the yield on the related
Class of Certificates would be adversely affected.
The effective yield to the holders of the Certificates will be lower
than the yield otherwise produced by the applicable purchase price and
Pass-Through Rate because the distributions of principal, if any, and interest
will not be payable to such holders until the 25th day of the month following
the period in which interest accrues (without any additional distribution of
interest or earnings thereon in respect of such delay).
DESCRIPTION OF THE AGREEMENTS
The Certificates will be issued pursuant to the Trust Agreement. Farmer
Mac will act as Master Servicer of the Qualified Loans. The Qualified Loans will
be directly serviced by Equitable Agri-Business, Inc., a Delaware corporation,
(the "Central Servicer"), acting on behalf of Farmer Mac pursuant to a Servicing
Contract (as supplemented) between it and Farmer Mac (the "Servicing Contract").
The Central Servicer may subcontract the performance of certain of its servicing
duties to a subservicer. In addition, each of the sellers (the "Sellers") of the
Qualified Loans has transferred and assigned its respective Qualified Loans to
the Depositor pursuant to a separate Selling and Servicing Agreement (a "Sale
Agreement"). The Sale Agreement includes certain representations and warranties
of the related Seller respecting the related Qualified Loans which
representations and warranties and the remedies for their breach will be
assigned by Farmer Mac to the Trustee for the benefit of Certificateholders
pursuant to the Trust Agreement. See "DESCRIPTION OF THE AGREEMENTS --
Representations and Warranties; Repurchases" in the Prospectus.
Trustee
The Trustee for the Certificates will be First Trust National
Association, a national banking association organized and existing under the
federal laws of the United States with an office at 180 East Fifth Street, St.
Paul, Minnesota 55101.
Servicing and Other Compensation And Payment of Expenses
The Central Servicer will be paid a servicing fee calculated on a
loan-by-loan basis. Additional servicing compensation in the form of assumption
fees or similar fees (other than late payment charges) will be retained by the
Central Servicer. The Depositor, the Master Servicer and the Central Servicer
are obligated to pay all expenses incurred in connection with their respective
responsibilities under the Trust Agreement and the Servicing Contract (subject
to reimbursement for liquidation expenses), including the fees of the Trustee,
and also including, without limitation, the various other items of expense
enumerated in the Prospectus. See "DESCRIPTION OF THE CERTIFICATES" in the
Prospectus.
Optional Termination
The Master Servicer may effect an early termination of the Trust Fund
on any Distribution Date after the date on which the aggregate principal balance
of Qualified Loans in the Trust Fund is reduced to less than one percent thereof
as of the Cut-off Date by repurchasing all the Qualified Loans at a price equal
to 100% of the principal balance of the Qualified Loans plus accrued interest
thereon at the applicable Mortgage Interest Rate,
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determined as provided in the Trust Agreement. The Master Servicer will
distribute the proceeds thereof to Holders of the then outstanding Classes of
Certificates on the next succeeding Distribution Date for any Class whether or
not such Distribution Date is a Distribution Date for all such Classes of
Certificates. See "DESCRIPTION OF CERTIFICATES -- Termination" in the
Prospectus.
Servicing Contract
The Central Servicer has agreed to service the Qualified Loans pursuant
to a Master Central Servicing Contract between Farmer Mac and the Central
Servicer. See "DESCRIPTION OF THE AGREEMENTS" in the Prospectus.
Repurchases of Qualified Loans
Under the Trust Agreement, Farmer Mac, as Master Servicer, will have
the right (without obligation and in its discretion) to repurchase from the
Trust Fund, upon payment of the purchase price provided in the Trust Agreement,
any Qualified Loan at any time after such loan becomes and remains delinquent as
to any scheduled payment for a period of ninety days. Farmer Mac will also have
a similar right to purchase from the Trust Fund any property acquired by the
Trust Fund upon foreclosure or comparable conversion of any Qualified Loan. See
also "DESCRIPTION OF THE AGREEMENTS -- Representations and Warranties;
Repurchases" in the Prospectus.
THE DEPOSITOR
Farmer Mac Mortgage Securities Corporation, the Depositor, is a wholly
owned subsidiary of Farmer Mac and was incorporated in the State of Delaware in
May 1992. The principal executive offices of the Depositor are located at 919
18th Street, N.W., Washington, D.C. 20006.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
No election will be made to treat the Trust Fund as a "real estate
mortgage conduit" ("REMIC") for federal income tax purposes. In the opinion of
Brown & Wood LLP, counsel for the Depositor, (i) the Trust Fund will be treated
as a grantor trust for federal income tax purposes; (ii) a Certificate owned by
a real estate investment trust representing an interest in Qualified Loans will
be considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A), and interest income on the Qualified Loans will be
considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), to the extent that the
Qualified Loans represented by that Certificate are of a type described in such
Code section; and (iii) a Certificate owned by a REMIC will represent
"obligation[s] ... which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3) to the extent that the
Qualified Loans represented by that Certificate are of a type described in such
Code section. The Holders of the Certificates will be treated as owners of their
pro rata interest in the assets of the Trust Fund with respect to the related
Pool. If the value of the real property securing a Qualified Loan is lower than
the amount of such Qualified Loan, any such Qualified Loan may not qualify in
its entirety under the foregoing Code sections. See "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus. Investors should consult their tax advisors
before acquiring the Certificates.
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<PAGE>
ERISA CONSIDERATIONS
The acquisition of Certificates by a plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or any individual
retirement account ("IRA") or any other plan subject to Code Section 4975 could,
in some instances, result in a prohibited transaction or other violations of the
fiduciary responsibility provisions of ERISA and Code Section 4975.
As discussed under the caption "ERISA CONSIDERATIONS" in the
Prospectus, applicable regulations provide a broad ERISA plan asset exception
for a Plan's (as defined in the Prospectus) purchase and holding of "government
guaranteed mortgage pool certificates." The term "guaranteed governmental
mortgage pool certificate" is defined as a certificate backed by, or evidencing
an interest in, specified mortgages or participation interests therein, and with
respect to which interest and principal payable pursuant to the certificate is
guaranteed by the United States or an agency or instrumentality thereof.
Representatives of the United States Department of Labor (the "DOL") have stated
informally that the governmental mortgage pool provision was not intended to
cover securities guaranteed by entities other than the three entities mentioned
in the exemption (which do not include Farmer Mac) and that they do not
interpret this provision to include securities guaranteed by Farmer Mac.
Nevertheless, Brown & Wood LLP, counsel to Farmer Mac, has advised Farmer Mac
that the Certificates satisfy the conditions set forth in the Final Regulations
(as defined in the Prospectus) and thus will qualify as "guaranteed governmental
mortgage pool certificates" as defined therein.
If the government guaranteed mortgage pool exception does not apply,
one of five other prohibited transaction class exemptions issued by the DOL,
which are based on the status of the Plan fiduciary making the decision to
acquire the Certificates and the circumstances under which such decision is
made, might provide a prohibited transaction exemption for a particular Plan
desiring to invest in the Certificates, i.e., PTCE 84-14 (Class Exemption for
Plan Asset Transactions Determined by Independent Qualified Professional Asset
Managers), PTCE 96-23 (Class Exemption for Plan Asset Transactions Determined by
In-House Asset Managers), PTCE 91-38 (Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds), PTCE 90-1 (Class Exemption for
Certain Transactions Involving Insurance Company Pooled Separate Accounts) or
PTCE 95-60 (Class Exemption for Certain Transactions Involving Insurance Company
General Accounts). There can be no assurance that any of these class exemptions
will apply with respect to any particular Plan desiring to invest in the
Certificates or, even if it were to apply, that the exemption would apply to all
transactions involving the Trust Fund.
Before purchasing a Certificate in reliance on either the government
guaranteed mortgage pool exception or any of the above referenced class
exemptions, a fiduciary of a Plan should itself confirm that the requirements
set forth in such exception and/or class exemptions would be satisfied.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, and the potential consequences in
their specific circumstances, prior to making an investment in the Certificates.
Moreover, each Plan fiduciary should determine whether under the general
fiduciary standards of investment prudence and diversification, an investment in
the Certificates is appropriate for the Plan, taking into account the overall
investment policy of the Plan and the composition of the Plan's investment
portfolio. See "ERISA CONSIDERATIONS" in the Prospectus.
LEGAL INVESTMENT
The Certificates will constitute securities guaranteed by Farmer Mac
for purposes of the Farmer Mac Charter and, as such, will, by statute, be legal
investments for certain types of institutional investors to the extent that
those investors are authorized under any applicable law to purchase, hold, or
invest in obligations issued by or guaranteed as to principal and interest by
the United States or any agency or instrumentality of the United States.
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Investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether and the extent to which
specific Classes of the Certificates constitute legal investments for them.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement among Farmer Mac, the Depositor and Bear, Stearns & Co. Inc. (the
"Underwriter"), the Certificates offered hereby are being purchased from the
Depositor by the Underwriter upon issuance. Distribution of the Certificates
will be made by the Underwriter from time to time in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Certificates will be approximately 100.63% of
the aggregate initial Certificate Balance of the Certificates, plus accrued
interest thereon from the Cut-off Date to the Closing Date, but before deducting
issuance expenses payable by the Depositor. To the extent provided in the
Underwriting Agreement, if proceeds to the Underwriter from the offering of the
Certificates exceed certain levels, the purchase price for the Certificates
payable to the Depositor by the Underwriter will be increased. Any such increase
to the proceeds to the Depositor will be included on a Form 8-K to be filed with
the Commission within 15 days after the Closing Date and be available to Holders
of Certificates promptly thereafter through the facilities of the Commission as
described under "AVAILABLE INFORMATION" in the Prospectus. In connection with
the purchase and sale of the Certificates offered hereby, the Underwriter may be
deemed to have received compensation from the Depositor in the form of
underwriting discounts.
In addition to purchasing the Certificates pursuant to the Underwriting
Agreement, the Underwriter and its affiliates have several business
relationships with Farmer Mac. Michael C. Nolan, a Managing Director of Bear,
Stearns & Co. Inc., is a director of Farmer Mac.
The Underwriting Agreement provides that Farmer Mac and the Depositor
will indemnify the Underwriter against certain civil liabilities under the
Securities Act of 1933 or contribute to payments the Underwriter may be required
to make in respect thereof.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The consolidated financial statements of Farmer Mac for the year ended
December 31, 1995 included as an exhibit to its Annual Report on Form 10-K for
the year ended December 31, 1995, and the unaudited financial statements of
Farmer Mac for the nine-month period ended September 30, 1996 included as an
exhibit to its Quarterly Report on Form 10-Q for the period ended September 30,
1996, each of which has been filed with the Commission by Farmer Mac, are hereby
incorporated by reference in this Prospectus Supplement.
All financial statements of Farmer Mac included in documents filed by
Farmer Mac pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Certificates shall be deemed to
be incorporated by reference into this Prospectus Supplement and to be a part
hereof.
EXPERTS
The consolidated balance sheets of Farmer Mac as of December 31, 1995
and 1994 and related consolidated statements of operations and cash flows for
each of the years in the three-year period ended December 31, 1995, have been
incorporated by reference herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
covering the December 31, 1995 financial statements contains an explanatory
paragraph regarding regulatory capital as described in Note 3 to such financial
statements.
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LEGAL MATTERS
Certain legal matters relating to the Certificates will be passed upon
for the Depositor by the General Counsel of Farmer Mac and by Brown & Wood LLP,
Washington, D.C. and for the Underwriter by Stroock & Stroock & Lavan, New York,
New York. Brown & Wood LLP has also acted as special tax counsel to the Trust
Fund.
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INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the pages indicated below:
Accrued Certificate Interest.......................................... S-10
Administrative Fee Rate............................................... S-10
Agricultural Real Estate.............................................. S-8
AMBS.................................................................. cover
Balloon Payment....................................................... A-1
Central Servicer...................................................... S-3
Certificate Balance................................................... S-10
Certificateholders.................................................... S-9
Certificates.......................................................... cover
Class Certificate Balance ............................................ S-10
Closing Date.......................................................... cover
Dealer................................................................ cover
Depositor............................................................. S-3
Distribution Dates.................................................... S-4
DOL................................................................... S-16
Due Period............................................................ S-11
ERISA................................................................. S-6
Farmer Mac............................................................ cover
Farmer Mac Charter.................................................... S-3
Farmer Mac Guarantee.................................................. S-11
Fed book-entry system................................................. S-9
Holders............................................................... S-9
Interest Accrual Period............................................... S-4
loan identifiers...................................................... S-9
IRA................................................................... S-6
Liquidated Qualified Loan............................................. S-11
Master Servicer....................................................... S-3
Mortgage Interest Rate................................................ S-10
Mortgaged Properties.................................................. S-8
Net Mortgage Rate..................................................... S-10
Pass-Through Rate..................................................... S-10
Principal Distribution Amount ........................................ S-4
Pool.................................................................. cover
Qualified Balloon Loan................................................ A-1
Qualified Loan........................................................ cover
Record Date........................................................... S-5
REMIC................................................................. S-15
Sale Agreement........................................................ S-14
Sellers............................................................... S-14
Servicing Contract.................................................... S-15
Trust Agreement....................................................... S-4
Trust Fund............................................................ cover
Trustee............................................................... S-4
Underwriter........................................................... cover
Underwriting Standards................................................ S-8
Weighted Interest Amount.............................................. S-10
Yield Maintenance Charge ............................................. S-7
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<PAGE>
ANNEX I: DESCRIPTION OF QUALIFIED LOAN POOLS
The description of the Qualified Loans and the related Mortgaged Properties
set forth below is based upon each Pool as constituted at the close of business
on the Cut-off Date, as adjusted for the scheduled principal payments due before
such date. Prior to the issuance of the Certificates, Qualified Loans may be
removed from each Pool as a result of incomplete documentation or otherwise, if
the Depositor deems such removal necessary or appropriate, or as a result of
prepayments in full. A limited number of other Qualified Loans may be added to
each Pool prior to the issuance of the Certificates unless including such
Qualified Loans would materially alter the characteristics of such Pool as
described herein. The Depositor believes that the information set forth herein
will be representative of the characteristics of the related Pool as it will be
constituted at the time the Certificates are issued although the range of
Mortgage Interest Rates and maturities and certain other characteristics of the
Qualified Loans in such Pool may vary.
The composition of each Qualified Loan Pool is subject to adjustment, with
the amount of such variance restricted to no more than 5% of the aggregate
principal balance of the Qualified Loans in such Pool, as stated herein. The
information set forth as to the Qualified Loans will be revised to reflect such
adjustments and included on a Form 8-K to be filed with the Commission within 15
days after the Closing Date and be available to Holders of Certificates promptly
thereafter through the facilities of the Commission as described under
"AVAILABLE INFORMATION" in the Prospectus.
Percentages in the following tables have been rounded and, therefore, the
total of the percentages in any given column may not add to 100%.
DESCRIPTION OF POOL AA1003
The Qualified Loans in Pool AA1003 will have had individual principal
balances as of the Cut-off Date of not less than $250,000 and not more than
$1,250,000. None of the Qualified Loans in Pool AA1003 will have been originated
prior to July 1, 1996 and all have a scheduled maturity of January 1, 2012. The
Qualified Loans in Pool AA1003 will have a weighted average Administrative Fee
Rate as of the Cut-off Date of approximately 1.251%.
All of the Qualified Loans in Pool AA1003 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to the maturity date of each such Qualified Loan.
Two of the Qualified Loans in Pool AA1003 (approximately 18% by aggregate
outstanding principal balance as of the Cut-off Date) provide for the annual
payment of principal and interest on a level basis to fully amortize each such
Qualified Loan over its stated term. All of the remaining Qualified Loans in
Pool AA1003 are balloon loans which provide for regular annual payments of
principal and interest computed on the basis of an amortization term that is
longer than the related term to stated maturity, with a "balloon" payment (each,
a "Balloon Payment") due at stated maturity that will be significantly larger
than the annual payments (each, a "Qualified Balloon Loan").
One Qualified Loan included in Pool AA1003 constitutes 32% (by principal
balance as of the Cut-off Date) of the aggregate principal amount of such Pool.
Such Qualified Loan has the following additional characteristics (in each case,
as of the Cut-off Date):
A-1
<PAGE>
Principal Balance......................... $1,250,000
Mortgage Interest Rate ................... 9.150%
Net Mortgage Rate......................... 7.860%
Year of Maturity.......................... 2012
Loan-to-Value Ratio....................... 58%
Original term to Maturity................. 15 years
The Mortgaged Property securing such Qualified Loan is located in the State
of Montana; the primary commodities produced on such property are hay, wheat and
beef cattle and calves. The loan is a Qualified Balloon Loan, with an
amortization schedule of 25 years. The total debt service coverage ratio (which
ratio gives effect to all sources of income) for such loan is 2.51. See "RISK
FACTORS -- "Relative Loan Sizes."
The following tables set forth additional information with respect to the
Qualified Loans included in Pool AA1003, in each case as of the Cut-off Date.
Percentages are based on the aggregate principal balance of Qualified Loans in
Pool AA1003.
Pool - AA1003
Distribution by Cut-off Date Principal Balance
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number Balance As of Cut-off Aggregate Principal
Cut-off Date Principal Balance of Loans Date Balance As of Cut-Off
Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 200,001 to $ 300,000 ............... 2 $ 530,000 14%
300,001 to 400,000 ............... 1 341,700 9
400,001 to 500,000 ............... 1 450,000 12
500,001 to 600,000 ............... 1 510,000 13
700,001 to 800,000 ............... 1 800,000 21
1,200,001 to 1,300,000 ............... 1 1,250,000 32
- ------------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- ------------------------------------------------------------------------------------------------------------------------------------
Average Loan Amount $ 554,529
Minimum Amount $ 250,000
Maximum Amount $ 1,250,000
</TABLE>
A-2
<PAGE>
Pool - AA1003
Distribution by Mortgage Interest Rate
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Mortgage Interest Rate of Loans As of Cut-off Date Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9.001 % to 9.250 % ........ 4 $ 2,121,700 55%
9.251 to 9.500 .......... 3 1,760,000 45
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Mortgage Interest Rate 9.267%
Minimum Mortgage Interest Rate 9.050%
Maximum Mortgage Interest Rate 9.450%
</TABLE>
Pool - AA1003
Distribution by Net Mortgage Rate
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Net Mortgage Rate of Loans As of Cut-off Date Cut-off Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.751 % to 8.000 % .......... 4 $ 2,490,000 64%
8.001 to 8.250 ........... 2 591,700 15
8.251 to 8.500 ........... 1 800,000 21
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Net Mortgage Rate 8.016%
Minimum Net Mortgage Rate 7.860%
Maximum Net Mortgage Rate 8.340%
</TABLE>
A-3
<PAGE>
Pool - AA1003
Distribution by Remaining Amortization Term
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Remaining Amortization Term of Loans As of Cut-off Date Cut-off Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
168 to 180................. 2 $ 700,000 18%
288 to 300................. 5 3,181,700 82
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Remaining Amortization Term 278 months
Minimum Remaining Amortization Term 180 months
Maximum Remaining Amortization Term 300 months
</TABLE>
Pool - AA1003
Distribution by Amortization Type
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Weighted Weighted
Principal of Aggregate Average Cut- Average
Year of Number Balance As of Principal Balance Off Date Loan- Balloon-to
Maturity of Loans Cut-off Date As of Cut-off Date to-Value Ratio Value Ratio (1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fully Amortizing 2012 ......... 2 $ 700,000 18% 59% 0%
Balloon Loans 2012 ......... 5 3,181,700 82 60 42
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100% 60%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Weighted Average Balloon-to-Value Ratio represents the percentage of
the weighted average of the Balloon Payments of the Qualified Balloon Loans
in the Pool to the weighted average appraised value of the related
Mortgaged Properties
A-4
<PAGE>
Pool - AA1003
Distribution by Cut-off Date Loan-to-Value Ratio
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance Cumulative
Loan-to-Value Ratio of Loans As of Cut-off Date As of Cut-off Date Percentage
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
45.01% to 50.00% ......... 1 $ 341,700 9% 9%
55.01 to 60.00 ......... 3 2,210,000 57 66
60.01 to 65.00 ......... 2 1,050,000 27 93
65.01 to 70.00 ......... 1 280,000 7 100
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Loan-to-Value Ratio 60%
Minimum Loan-to-Value Ratio 45%
Maximum Loan-to-Value Ratio 70%
</TABLE>
Pool - AA1003
Distribution by Total Debt Coverage Ratio (1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Aggregate
Number Principal Balance Principal Balance Cummulative
Debt Coverage Ratio of Loans As of Cut-off Date As of Cut-off Date Percentage
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1.26 to 1.50 ............... 5 $ 2,381,700 61% 61%
2.51 to 2.75 ............... 1 1,250,000 32 94
3.01 to 3.25 ............... 1 250,000 6 100
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Total Debt Coverage Ratio 1.85
Minimum Total Debt Coverage Ratio 1.31
Maximum Total Debt Coverage Ratio 3.01
(1) Total Debt Coverage Ratio is the ratio determined by dividing the
borrower's total annual net income (net of living expenses and taxes) from
all sources by the borrower's total annual debt service obligations
(including capital lease payments).
A-5
<PAGE>
Pool - AA1003
Distribution by Commodity Group (1)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Precentage
Number Aggregate Principal of Aggregate Principal
Commodity Group of Loans Balance As of Cut-off Date Balance As of Cut-off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle and Calves 3 $ 967,510 25%
Cotton/Tobacco 1 120,000 3
Feed Grains 2 632,500 16
Food Grains 3 674,090 17
Oilseeds 1 80,000 2
Permanent Plantings 2 700,000 18
Potatoes, Tomatoes, and Other Vegetables 1 107,100 3
Sugarbeets, Cane and Other Crops 3 600,500 15
- ------------------------------------------------------------------------------------------------------------------------------------
Total 16 $ 3,881,700 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of loans in each commodity group will not equal the total number
of loans because a Mortgaged Property may be used to produce multiple
commodities and thus the related Qualified Loan may be allocated to more
than one commodity group. As to any Qualified Loan allocated to more than
one commodity group, the principal balance thereof is allocated among
commodity groups based on the proportion of the Mortgaged Property used for
the production of each commodity.
Pool - AA1003
Distribution by States
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Aggregate
Number Principal Balance Principal Balance
State of Loans As of Cut-off Date As of Cut-off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California 1 $ 250,000 6%
Kentucky 1 800,000 21
Montana 3 1,871,700 48
Washington 2 960,000 25
- ------------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 3,881,700 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-6
<PAGE>
DESCRIPTION OF POOL AS1004
The Qualified Loans in Pool AS1004 will have had individual principal
balances as of the Cut-off Date of not less than $93,000 and not more than
$1,000,000. None of the Qualified Loans in Pool AS1004 will have been originated
prior to July 1, 1996 and all have a scheduled maturity of January 1, 2012. The
Qualified Loans in Pool AS1004 will have a weighted average Administrative Fee
Rate as of the Cut-off Date of approximately 1.181%.
All of the Qualified Loans in Pool AS1004 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to the maturity date of each such Qualified Loan.
Four of the Qualified Loans in Pool AS1004 (approximately 30% by aggregate
outstanding principal balance as of the Cut-off Date) provide for the
semi-annual payment of principal and interest on a level basis to fully amortize
each such Qualified Loan over its stated term. All of the remaining Qualified
Loans in Pool AS1004 are balloon loans which provide for regular semi-annual
payments of principal and interest computed on the basis of an amortization term
that is longer than the related term to stated maturity, with a "balloon"
payment (each, a "Balloon Payment") due at stated maturity that will be
significantly larger than the semi-annual payments (each, a "Qualified Balloon
Loan").
The following tables set forth additional information with respect to the
Qualified Loans included in Pool AS1004, in each case as of the Cut-off Date.
Percentages are based on the aggregate principal balance of Qualified Loans in
Pool AS1004.
Pool - AS1004
Distribution by Cut-off Date Principal Balance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Percentage of
Number of Principal Balance Aggregate
Cut-off Date Principal Balance Loans As of Cut-off Date Principal
Balance As of
Cut-off Date
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1 to $100,000............... 1 $ 93,000 2%
100,001 to 200,000............... 3 462,000 8
300,001 to 400,000............... 2 757,000 13
400,001 to 500,000............... 1 486,000 8
500,001 to 600,000............... 4 2,304,400 38
800,001 to 900,000............... 1 900,000 15
900,001 to 1,000,000............... 1 1,000,000 17
- -------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100.00%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average Loan Amount $ 461,723
Minimum Amount $ 93,000
Maximum Amount $ 1,000,000
A-7
<PAGE>
Pool - AS1004
Distribution by Mortgage Interest Rate
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Mortgage Interest Rate of Loans As of Cut-off Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8.251 % to 8.500% ............. 1 $ 1,000,000 17%
8.501 to 8.750 ............. 1 170,000 3
8.751 to 9.000 ............. 3 818,000 14
9.001 to 9.250 ............. 6 3,138,400 52
9.251 to 9.500 ............. 1 390,000 6
9.501 to 9.750 ............. 1 486,000 8
- ------------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Mortgage Interest Rate 9.038%
Minimum Mortgage Interest Rate 8.500%
Maximum Mortgage Interest Rate 9.520%
Pool - AS1004
Distribution by Net Mortgage Rate
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Net Mortgage Rate of Loans As of Cut-off Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.251 % to 7.500 % ...................... 1 $ 1,000,000 17 %
7.501 to 7.750 ....................... 4 942,400 16
7.751 to 8.000 ....................... 3 1,565,000 26
8.001 to 8.250 ....................... 5 2,495,000 42
- ---------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100 %
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Net Mortgage Rate 7.857%
Minimum Net Mortgage Rate 7.430%
Maximum Net Mortgage Rate 8.140%
A-8
<PAGE>
Pool - AS1004
Distribution by Remaining Amortization Term
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Percentage of
Principal Balance Aggregate Principal
Remaining Amortization Term Number of As of Cut-off Balance As of Cut-off
Loans Date Date
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
168 to 180 ............. 4 $ 1,787,000 30%
288 to 300 ............. 9 4,215,400 70
- --------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Remaining Amortization Term 264 months
Minimum Remaining Amortization Term 180 months
Maximum Remaining Amortization Term 300 months
Pool - AS1004
Distribution by Amortization Type
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Weighted Weighted
Principal of Aggregate Average Cut- Average
Year of Number Balance As of Principal Balance Off Date Loan- Balloon-to
Maturity of Loans Cut-off Date As of Cut-off Date to-Value Ratio Value Ratio (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fully Amortizing 2012 ....... 4 $ 1,787,000 30% 49% 0%
Balloon Loans 2012 ....... 9 4,215,400 70 61 42
- -----------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100% 58%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Weighted Average Balloon-to-Value Ratio represents the percentage of
the weighted average of the Balloon Payments of the Qualified Balloon Loans
in the Pool to the weighted average appraised value of the related
Mortgaged Properties
A-9
<PAGE>
Pool - AS1004
Distribution by Cut-off Date Loan-to-Value Ratio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Principal Aggregate Percentage
Loan-to-Value Ratio Number of Balance As of Principal
Loans Cut-off Date Balance As of
Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
35.01% to 40.00% ............ 1 $ 142,000 2% 2%
40.01 to 45.00 ............ 3 1,556,000 26 28
45.01 to 50.00 ............ 2 750,000 12 41
60.01 to 65.00 ............ 3 1,268,000 21 62
65.01 to 70.00 ............ 4 2,286,400 38 100
- ----------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Loan-to-Value Ratio 58%
Minimum Loan-to-Value Ratio 39%
Maximum Loan-to-Value Ratio 70%
Pool - AS1004
Distribution by Total Debt Coverage Ratio (1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Number of Principal Balance Aggregate Percentage
Debt Coverage Ratio Loans As of Cut-off Date Principal
Balance As of
Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1.26 to 1.50 ............ 8 $ 3,971,000 66% 66%
1.51 to 1.75 ............ 1 367,000 6 72
1.76 to 2.00 ............ 1 93,000 2 74
2.01 to 2.25 ............ 1 900,000 15 89
3.51 to 3.75 ............ 1 529,400 9 98
5.26 to 5.50 ............ 1 142,000 2 100
- ----------------------------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Total Debt Coverage Ratio 1.78
Minimum Total Debt Coverage Ratio 1.26
Maximum Total Debt Coverage Ratio 5.39
(1) Total Debt Coverage Ratio is the ratio determined by dividing the
borrower's total annual net income (net of living expenses and taxes) from
all sources by the borrower's total annual debt service obligations
(including capital lease payments).
A-10
<PAGE>
Pool - AS1004
Distribution by Commodity Group (1)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
Commodity Group Loans Date Cut-off Date
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle and Calves 2 $ 487,000 8%
Cotton/Tobacco 2 471,000 8
Feed Grains 9 2,842,860 47
Food Grains 3 640,940 11
Oilseeds 4 490,600 8
Permanent Plantings 3 1,070,000 18
- -------------------------------------------------------------------------------------------------------------
Total 23 $ 6,002,400 100%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of loans in each commodity group will not equal the total number
of loans because a Mortgaged Property may be used to produce multiple
commodities and thus the related Qualified Loan may be allocated to more
than one commodity group. As to any Qualified Loan allocated to more than
one commodity group, the principal balance thereof is allocated among
commodity groups based on the proportion of the Mortgaged Property used for
the production of each commodity.
Pool - AS1004
Distribution by States
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
State Loans Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California 2 $ 312,000 5%
Georgia 1 1,000,000 17
Illinois 2 1,200,000 20
Kansas 1 529,400 9
Kentucky 1 575,000 10
Minnesota 1 93,000 2
Montana 1 486,000 8
Nebraska 1 390,000 6
Ohio 1 150,000 2
Utah 1 367,000 6
Washington 1 900,000 15
- ---------------------------------------------------------------------------------------------------------------
Total 13 $ 6,002,400 100%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
A-11
<PAGE>
DESCRIPTION OF POOL CA1002
The two Qualified Loans in Pool CA1002 will have had individual principal
balances as of the Cut-off Date of $400,000 and $770,000 respectively. Neither
of the Qualified Loans in Pool CA1002 will have been originated prior to July 1,
1996 and both have a scheduled maturity of January 1, 2002. The Qualified Loans
in Pool CA1002 will have a weighted average Administrative Fee Rate as of the
Cut-off Date of approximately 1.323%.
Both of the Qualified Loans in Pool CA1002 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to the maturity date of each such Qualified Loan.
Both of the Qualified Loans in Pool CA1002 are balloon loans which provide
for regular annual payments of principal and interest computed on the basis of
an amortization term that is longer than the related term to stated maturity,
with a "balloon" payment (each, a "Balloon Payment") due at stated maturity that
will be significantly larger than the annual payments (each, a "Qualified
Balloon Loan").
Pool CA1002 consists of two Qualified Loans constituting 66% and 34 % (by
principal balance of the Cut-off Date), respectively, of the aggregate principal
amount of such Pool. The following tables set forth additional information with
respect to the Qualified Loans included in Pool CA1002, in each case as of the
Cut-off Date. Percentages are based on the aggregate principal balance of
Qualified Loans in Pool CA1002.
Pool - CA1002
Distribution by Cut-off Date Principal Balance
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of
Number of Principal Balance Aggregate
Cut-off Date Principal Balance Loans As of Cut-off Principal
Date Balance As of
Cut-off Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 300,001 to $ 400,000........... 1 $ 400,000 34%
700,001 to 800,000........... 1 770,000 66
- ---------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average Loan Amount $ 585,000
Minimum Amount $ 400,000
Maximum Amount $ 770,000
A-12
<PAGE>
Pool - CA1002
Distribution by Mortgage Interest Rate
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Mortgage Interest Rate of Loans As of Cut-off Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.501% to 8.750% .......... 1 $ 400,000 34%
8.751 to 9.000 ........... 1 770,000 66
- ---------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Mortgage Interest Rate 8.870%
Minimum Mortgage Interest Rate 8.620%
Maximum Mortgage Interest Rate 9.000%
Pool - CA1002
Distribution by Net Mortgage Rate
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Net Mortgage Rate of Loans As of Cut-off Date Cut-off Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.251% to 7.500% .............. 1 $ 400,000 34%
7.501 to 7.750 .............. 1 770,000 66
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Net Mortgage Rate 7.547%
Minimum Net Mortgage Rate 7.330%
Maximum Net Mortgage Rate 7.660%
A-13
<PAGE>
Pool - CA1002
Distribution by Amortization Type
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Weighted Weighted
Principal of Aggregate Average Cut- Average
Year of Number Balance As of Principal Balance Off Date Loan- Balloon-to
Maturity of Loans Cut-off Date As of Cut-off Date to-Value Ratio Value Ratio (1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balloon Loans 2002 ............ 2 $ 1,170,000 100% 67% 57%
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Weighted Average Balloon-to-Value Ratio represents the percentage of
the weighted average of the Balloon Payments of the Qualified Balloon Loans
in the Pool to the weighted average appraised value of the related
Mortgaged Properties
Pool - CA1002
Distribution by Remaining Amortization Term
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Percentage of
Principal Balance Aggregate Principal
Remaining Amortization Term Number of As of Cut-off Balance As of Cut-off
Loans Date Date
- --------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
168 to 180 ................... 2 $ 1,170,000 100%
- --------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Remaining Amortization Term 180 months
Minimum Remaining Amortization Term 180 months
Maximum Remaining Amortization Term 180 months
A-14
<PAGE>
Pool - CA1002
Distribution by Cut-off Date Loan-to-Value Ratio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Principal Aggregate Percentage
Loan-to-Value Ratio Number of Balance As of Principal
Loans Cut-off Date Balance As of
Cut-off Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
60.01% to 65.00% .................... 1 $ 400,000 34% 34%
65.01 to 70.00 .................... 1 770,000 66 100
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Loan-to-Value Ratio 67%
Minimum Loan-to-Value Ratio 62%
Maximum Loan-to-Value Ratio 70%
Pool - CA1002
Distribution by Total Debt Coverage Ratio (1)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Number of Principal Balance Aggregate Percentage
Debt Coverage Ratio Loans As of Cut-off Date Principal
Balance As of
Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.26 to 1.50 ............... 2 $ 1,170,000 100% 100%
- ----------------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Total Debt Coverage Ratio 1.43
Minimum Total Debt Coverage Ratio 1.40
Maximum Total Debt Coverage Ratio 1.50
(1) Total Debt Coverage Ratio is the ratio determined by dividing the
borrower's total annual net income (net of living expenses and taxes) from
all sources by the borrower's total annual debt service obligations
(including capital lease payments).
A-15
<PAGE>
Pool - CA1002
Distribution by Commodity Group (1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
Commodity Group Loans Date Cut-off Date
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Feed Grains 1 $770,000 66%
Permanent Plantings 1 400,000 34
- --------------------------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of loans in each commodity group will not equal the total number
of loans because a Mortgaged Property may be used to produce multiple
commodities and thus the related Qualified Loan may be allocated to more
than one commodity group. As to any Qualified Loan allocated to more than
one commodity group, the principal balance thereof is allocated among
commodity groups based on the proportion of the Mortgaged Property used for
the production of each commodity.
Pool - CA1002
Distribution by States
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
State Loans Date Cut-off Date
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Idaho 1 $ 770,000 66%
Washington 1 400,000 34
- --------------------------------------------------------------------------------------------------------
Total 2 $ 1,170,000 100%
- --------------------------------------------------------------------------------------------------------
</TABLE>
A-16
<PAGE>
DESCRIPTION OF POOL CS1002
The Qualified Loans in Pool CS1002 will have had individual principal
balances as of the Cut-off Date of not less than $120,000 and not more than
$2,300,000. None of the Qualified Loans in Pool CS1002 will have been originated
prior to July 1, 1996. The Qualified Loans in Pool CS1002 will have a weighted
average Administrative Fee Rate as of the Cut-off Date of approximately 1.265%.
All of the Qualified Loans in Pool CS1002 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to the maturity date of each such Qualified Loan.
All of the Qualified Loans in Pool CS1002 are balloon loans which provide
for regular semi-annual payments of principal and interest computed on the basis
of an amortization term that is longer than the related term to stated maturity,
with a "balloon" payment (each, a "Balloon Payment") due at stated maturity that
will be significantly larger than the semi-annual payments (each, a "Qualified
Balloon Loan").
One Qualified Loan included in Pool CS1002 constitutes 47% (by principal
balance as of the Cut-off Date) of the aggregate principal amount of such Pool.
Such Qualified Loan has the following additional characteristics (in each case,
as of the Cut-off Date):
Principal Balance .................................... $ 2,300,000
Mortgage Interest Rate ............................... 8.60%
Net Mortgage Rate .................................... 7.13%
Year of Maturity ..................................... 2002
Loan-to-Value Ratio .................................. 50%
Original term to Maturity ............................ 5 years
The Mortgaged Property securing such Qualified Loan is located in the State
of Oregon; the primary commodities produced on such property are sugar beets and
wheat. The loan is a Qualified Balloon Loan, with an amortization schedule of 25
years. The total debt service coverage ratio (which ratio gives effect to all
sources of income) for such loan is 1.40. See "RISK FACTORS -- "Relative Loan
Sizes."
The following tables set forth additional information with respect to the
Qualified Loans included in Pool CS1002, in each case as of the Cut-off Date.
Percentages are based on the aggregate principal balance of Qualified Loans in
Pool CS1002.
A-17
<PAGE>
Pool - CS1002
Distribution by Cut-off Date Principal Balance
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of
Number of Principal Balance Aggregate
Cut-off Date Principal Balance Loans As of Cut-off Principal
Date Balance As of
Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
$ 100,001 to $ 200,000............. 2 $ 266,300 5%
200,001 to 300,000............. 1 250,000 5
300,001 to 400,000............. 1 306,000 6
700,001 to 800,000............. 1 760,000 16
900,001 to 1,000,000............. 1 1,000,000 20
2,200,001 to 2,300,000............. 1 2,300,000 47
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Average Loan Amount $ 697,471
Minimum Amount $ 120,000
Maximum Amount $ 2,300,000
Pool - CS1002
Distribution by Mortgage Interest Rate
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Mortgage Interest Rate of Loans As of Cut-off Date Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
8.001 % to 8.250 % ........... 1 $ 760,000 16%
8.251 to 8.500 ............. 3 1,426,000 29
8.501 to 8.750 ............. 2 2,550,000 52
8.751 to 9.000 ............. 1 146,300 3
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Mortgage Interest Rate 8.494%
Minimum Mortgage Interest Rate 8.160%
Maximum Mortgage Interest Rate 8.800%
A-18
<PAGE>
Pool - CS1002
Distribution by Net Mortgage Rate
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Precentage of Aggregate
Number Principal Balance Principal Balance As of
Net Mortgage Rate of Loans As of Cut-off Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
7.001% to 7.250%........................ 4 $ 3,486,000 71%
7.251 to 7.500 ........................ 2 1,250,000 5
7.501 to 7.750 ........................ 1 146,300 23
- ---------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Net Mortgage Rate 7.229%
Minimum Net Mortgage Rate 7.070%
Maximum Net Mortgage Rate 7.720%
Pool - CS1002
Distribution by Remaining Amortization Term
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Percentage of
Principal Balance Aggregate Principal
Remaining Amortization Term Number of As of Cut-off Balance As of Cut-off
Loans Date Date
- ---------------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C>
168 to 180 ............... 5 $ 2,332,300 48%
288 to 300 ............... 2 2,550,000 52
- ---------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Remaining Amortization Term 243 months
Minimum Remaining Amortization Term 180 months
Maximum Remaining Amortization Term 300 months
A-19
<PAGE>
Pool - CS1002
Distribution by Amortization Type
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage Weighted Weighted
Principal of Aggregate Average Cut- Average
Year of Number Balance As of Principal Balance Off Date Loan- Balloon-to
Maturity of Loans Cut-off Date As of Cut-off Date to-Value Ratio Value Ratio (1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balloon Loans 2001 ........... 2 $ 1,010,000 21% 52% 44%
Balloon Loans 2002 ........... 5 3,872,300 79 56 49
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100% 55%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Maturity Date 1/1/02
Minimum Maturity Date 7/1/01
Maximum Maturity Date 1/1/02
(1) The Weighted Average Balloon-to-Value Ratio represents the percentage of
the weighted average of the Balloon Payments of the Qualified Balloon Loans
in the Pool to the weighted average appraised value of the related
Mortgaged Properties
Pool - CS1002
Distribution by Cut-off Date Loan-to-Value Ratio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Principal Aggregate Percentage
Loan-to-Value Ratio Number of Balance As of Principal
Loans Cut-off Date Balance As of
Cut-off Date
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
40.01% to 45.00% ................. 1 $ 250,000 5% 5%
45.01 to 50.00 ................. 1 2,300,000 47 52
50.01 to 55.00 ................. 1 760,000 16 68
60.01 to 65.00 ................. 1 1,000,000 20 88
65.01 to 70.00 ................. 3 572,300 12 100
- ----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Loan-to-Value Ratio 55%
Minimum Loan-to-Value Ratio 43%
Maximum Loan-to-Value Ratio 70%
A-20
<PAGE>
Pool - CS1002
Distribution by Total Debt Coverage Ratio (1)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Aggregate Percentage of Cumulative
Number of Principal Balance Aggregate Percentage
Debt Coverage Ratio Loans As of Cut-off Date Principal
Balance As of
Cut-off Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1.26 to 1.50 ............... 3 $ 2,670,000 55% 55%
2.26 to 2.50 ............... 1 1,000,000 20 75
2.76 to 3.00 ............... 1 306,000 6 81
5.01 to 5.25 ............... 1 760,000 16 97
5.26 to 5.50 ............... 1 146,300 3 100
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Weighted Average Total Debt Coverage Ratio 2.42
Minimum Total Debt Coverage Ratio 1.40
Maximum Total Debt Coverage Ratio 5.33
(1) Total Debt Coverage Ratio is the ratio determined by dividing the
borrower's total annual net income (net of living expenses and taxes) from
all sources by the borrower's total annual debt service obligations
(including capital lease payments).
Pool - CS1002
Distribution by Commodity Group (1)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
Commodity Group Loans Date Cut-off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle and Calves 1 $ 250,000 5
Food Grains 1 1,150,000 24%
Permanent Plantings 7 2,332,300 48
Sugarbeets, Cane and Other Crops 1 1,150,000 24
- ------------------------------------------------------------------------------------------------------------------------------------
Total 10 $ 4,882,300 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The number of loans in each commodity group will not equal the total number
of loans because a Mortgaged Property may be used to produce multiple
commodities and thus the related Qualified Loan may be allocated to more
than one commodity group. As to any Qualified Loan allocated to more than
one commodity group, the principal balance thereof is allocated among
commodity groups based on the proportion of the Mortgaged Property used for
the production of each commodity.
A-21
<PAGE>
Pool - CS1002
Distribution by States
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
State Loans Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
California 5 $ 2,332,300 48%
Oregon 2 2,550,000 52
- ---------------------------------------------------------------------------------------------------------
Total 7 $ 4,882,300 100%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
A-22
<PAGE>
PROSPECTUS
GUARANTEED AGRICULTURAL MORTGAGE-BACKED SECURITIES ("AMBS")
(ISSUABLE IN SERIES)
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
GUARANTOR
FARMER MAC MORTGAGE SECURITIES CORPORATION
DEPOSITOR
--------------
The securities offered hereby and by Supplements to this Prospectus (the "AMBS"
or "Certificates") will be offered from time to time in one or more series
(each, a "Series"). Each Series of Certificates will represent in the aggregate
the entire beneficial ownership interest in a trust fund (with respect to any
Series, the "Trust Fund") consisting of one or more segregated pools (each, a
"Pool") of various types of agricultural real estate mortgage loans ("Qualified
Loans"), the portions of loans guaranteed by the United States Secretary of
Agriculture ("Guaranteed Portions"), Trust Fund AMBS (as defined herein),
mortgage pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by Qualified Loans or Guaranteed Portions or
any combination thereof (with respect to any Series, collectively, the
"Qualified Assets").
Each Certificate will be covered by a guarantee (the "Farmer Mac Guarantee") of
the timely payment of required distributions of interest and principal of the
Federal Agricultural Mortgage Corporation ("Farmer Mac"), a federally chartered
instrumentality of the United States, as described herein and in the related
Prospectus Supplement. See "FEDERAL AGRICULTURAL MORTGAGE CORPORATION" herein.
--------------
THE OBLIGATIONS OF FARMER MAC UNDER ITS GUARANTEE ARE OBLIGATIONS SOLELY OF
FARMER MAC AND ARE NOT OBLIGATIONS OF, AND ARE NOT GUARANTEED BY, THE FARM
CREDIT ADMINISTRATION, THE UNITED STATES OR ANY AGENCY OR INSTRUMENTALITY OF THE
UNITED STATES (OTHER THAN FARMER MAC), AND ARE NOT BACKED BY THE FULL FAITH AND
CREDIT OF THE UNITED STATES.
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 THE RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective investors should review the information appearing on page 13 herein
under the caption "RISK FACTORS" and such information as may be set forth under
the caption "RISK FACTORS" in the related Prospectus Supplement before
purchasing any Certificate
--------------
Prior to issuance there will have been no market for the Certificates of any
Series and there can be no assurance that a secondary market for any
Certificates will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Certificates of any Series
unless accompanied by the Prospectus Supplement for such Series.
Farmer Mac will publish and regularly update information regarding the Pools and
related Qualified Loans. See "AVAILABLE INFORMATION" herein.
Offers of the Certificates may be made through one or more different methods,
including offerings through underwriters, as more fully described under "METHOD
OF DISTRIBUTION" herein and in the related Prospectus Supplement.
June 26, 1996
1
<PAGE>
Each Series of Certificates will consist of one or more classes of
Certificates (each, a "Class") that may (i) provide for the accrual of interest
thereon based on fixed, variable or floating rates; (ii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions; (iii) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions; (iv) provide for
distributions of accrued interest thereon commencing only following the
occurrence of certain events, such as the retirement of one or more other
Classes of Certificates of such Series; (v) provide for distributions of
principal sequentially, based on specified payment schedules or other
methodologies; (vi) provide for distributions based on a combination of two or
more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds; and/or (vii) be entitled to
distributions of any Prepayment Premium and Yield Maintenance Charge (each as
defined herein), to the extent collected, in each case as described in the
related Prospectus Supplement. See "DESCRIPTION OF THE CERTIFICATES" herein and
in the related Prospectus Supplement.
Principal and interest with respect to Certificates will be distributable
quarterly, semi-annually or annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Certificates of any Series will be made only from the assets of the related
Trust Fund, including, without limitation, the related Farmer Mac Guarantee.
The Certificates of each Series will not represent an obligation of or
interest in the Depositor, any Originator, any Seller, any Central Servicer or
any of their respective affiliates, except to the limited extent described
herein and in the related Prospectus Supplement. Other than the Farmer Mac
Guarantee, neither the Certificates nor any assets in the related Trust Fund
(other than Guaranteed Portions) will be guaranteed or insured by any
governmental agency or instrumentality or by any other person. The Qualified
Assets in each Trust Fund will be held in trust for the benefit of the holders
of the related Series of Certificates pursuant to a Trust Agreement, as more
fully described herein. See "DESCRIPTION OF THE AGREEMENTS" herein.
The yield on each Class of Certificates of a Series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchases and defaults) on the Qualified Assets in the related Trust Fund and
the timing of receipt of such payments as described under the caption "YIELD
CONSIDERATIONS" herein and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" in
the related Prospectus Supplement. A Trust Fund may be subject to early
termination under the circumstances described herein and in the related
Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
real estate mortgage investment conduit or "REMIC" for federal income tax
purposes. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and in the
related Prospectus Supplement.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Certificates 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 obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating to
the Certificates of each Series will, among other things, set forth with respect
to such Certificates, as appropriate: (i) a description of the Class or Classes
of Certificates, the payment provisions with respect to each such Class and the
Pass-Through Rate or method of determining the Pass-Through Rate with respect to
each such Class; (ii) the aggregate principal amount and distribution dates
relating to such Series and, if applicable, the initial and final scheduled
distribution dates for each Class; (iii) information as to the Qualified Assets
comprising the Trust Fund, including the general characteristics of such assets
(with respect to the Certificates of any Series, the "Trust Assets"); (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) additional information with respect to the method of
2
<PAGE>
distribution of such Certificates; (vi) whether one or more REMIC elections will
be made and designation of the regular interests and residual interests; (vii)
information as to the terms of the Farmer Mac Guarantee of the Certificates;
(viii) whether such Certificates will be initially issued in definitive or
book-entry form; and (ix) to what extent, if any, the Farmer Mac Guarantee will
cover the timely payment of the related Balloon Payment on any Qualified Balloon
Loan.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Certificates.
The Depositor intends to establish a trust and cause it to issue a Series of
Certificates as soon as practicable after the Registration Statement is declared
effective. This Prospectus and the Prospectus Supplement relating to each Series
of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661; and New York Regional Office, Seven World Trade Center, New
York, New York 10048.
The Depositor will mail or cause to be mailed to holders of Definitive
Certificates (as defined herein) of each Series periodic unaudited reports
concerning the related Trust Fund. Unless and until Definitive Certificates are
issued such reports will be sent on behalf of the related Trust Fund to the
office identified for such purpose in the related Prospectus Supplement. Such
reports may be available to Beneficial Owners (as defined herein) of the
Certificates upon request to their respective Direct Participants or Indirect
Participants (as defined herein). See "DESCRIPTION OF THE CERTIFICATES --
Reports to Certificateholders; Publication of Certificate Factors" and
"DESCRIPTION OF THE AGREEMENTS" herein.
The Depositor will file or cause to be filed with the Commission such
periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations of the Commission thereunder. The Depositor intends to make a
written request to the staff of the Commission that the staff either (i) issue
an order pursuant to Section 12(h) of the Exchange Act exempting the Depositor
from certain reporting requirements under the Exchange Act with respect to each
Trust Fund or (ii) state that the staff will not recommend that the Commission
take enforcement action if the Depositor fulfills its reporting obligations as
described in its written request. If such request is granted, the Depositor will
file or cause to be filed with the Commission as to each Trust Fund the periodic
unaudited reports to holders of the Certificates referenced in the preceding
paragraph. In addition, because of the limited number of Certificateholders
expected for each Series, the Depositor anticipates that a significant portion
of such reporting requirements will be permanently suspended following the first
fiscal year for the related Trust Fund.
No person has been authorized to give any information or to make any
representations 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 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 Certificates or an
offer of the Certificates to any person in any state or other jurisdiction in
which such offer would be unlawful. The delivery of this Prospectus at any time
does not imply that information herein is correct as of any time subsequent to
its date; however, if any material change occurs while this Prospectus is
required by law to be delivered, this Prospectus will be amended or supplemented
accordingly.
Farmer Mac will publish and regularly update for the benefit of AMBS
investors information about the Certificates and Pools underlying such
Certificates ("AMBS Information"). Generally, Farmer Mac will provide AMBS
Information on a periodic scheduled basis after the date on which the related
Pool
3
<PAGE>
is formed. The information will be available from various sources, including
several information vendors that provide securities information. Investors can
obtain the names of those vendors disseminating AMBS Information by writing
Farmer Mac at 919 18th Street, N.W. Washington, D.C. 20006 or calling Farmer
Mac's Investor Inquiry Department at 1-800-TRY-FARM (879-3276).
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
All documents and reports filed or caused to be filed by the Depositor with
respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act, prior to the termination of an offering of Certificates evidencing
interests therein shall be deemed to be incorporated by reference in this
Prospectus and to be a part hereof. In addition, Farmer Mac's Annual Report on
Form 10-K for the year ended December 31, 1995 and Farmer Mac's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996 each filed with the Commission
pursuant to the Exchange Act shall also be deemed to be incorporated by
reference in this Prospectus and to be a part hereof. All documents filed by
Farmer Mac pursuant to the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of any offering made by this Prospectus
will likewise be deemed to be incorporated by reference herein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more Classes of Certificates, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such Classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Farmer Mac Mortgage Securities Corporation, 919 18th
Street, N.W., Suite 200, Washington, D.C. 20006, Attention: Corporate Secretary.
The Depositor has determined that its financial statements are not material to
the offering of any Certificates.
4
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each Series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such Series. An Index of Principal
Definitions is included at the end of this Prospectus.
Title of Certificates Guaranteed Agricultural Mortgage-Backed
Securities ("AMBS") issuable in Series (the
"Certificates").
Guarantor Federal Agricultural Mortgage Corporation ("Farmer
Mac"), a federally chartered instrumentality of the
United States, established by Title VIII of the Farm
Credit Act of 1971, as amended (the "Farmer Mac
Charter").
The 1996 Amendment The Farm Credit System Reform Act of 1996, Pub. L.
104-105 (the "1996 Amendment"), signed into law by the
President of the United States on February 10, 1996,
modified the Farmer Mac Charter as it theretofore
existed in several major respects, by, among other
things (i) authorizing Farmer Mac to purchase Qualified
Loans and to include such purchased Qualified Loans in
Trust Funds serving as the basis for securities
guaranteed by Farmer Mac, (ii) extending from December
1996 to December 1999 the statutory deadline for the
full imposition of certain regulatory capital
requirements applicable to Farmer Mac, and (iii)
eliminating statutory requirements for credit support
features aggregating not less than ten percent of the
initial principal balances of Qualified Loans in a
Trust Fund. The 1996 Amendment also made various
statutory changes intended to further streamline
program operations and clarify certain ambiguous
statutory provisions. See "FEDERAL AGRICULTURAL
MORTGAGE CORPORATION" and "RISK FACTORS -- Recent
Developments Affecting Farmer Mac" herein.
Depositor Farmer Mac Mortgage Securities Corporation, a
wholly-owned subsidiary of Farmer Mac. See "THE
DEPOSITOR" herein.
The Master Servicer Farmer Mac will act as the Master Servicer of the
Qualified Loans included in or underlying each Trust
Fund (in such capacity, the "Master Servicer").
Although Farmer Mac will be legally and contractually
responsible for all servicing, it will conduct its
servicing responsibilities for each Trust Fund through
one or more Central Servicers (each, a "Central
Servicer") which will be identified in the related
Prospectus Supplement.
Trustee The trustee (the "Trustee") for each Series of
Certificates will be named in the related Prospectus
Supplement. See "DESCRIPTION OF THE AGREEMENTS -- The
Trustee."
The Trust Assets Each Series of Certificates will represent in the
aggregate the entire beneficial ownership interest in
a Trust Fund consisting primarily of:
(a) Qualified
Assets The Qualified Assets with respect to each Series of
Certificates will consist of (i) agricultural real
estate mortgage loans (col
5
<PAGE>
lectively, the "Qualified Loans"), (ii) portions of
loans guaranteed by the United States Secretary of
Agriculture pursuant to the Consolidated Farm and Rural
Development Act (7 U.S.C. SectionSection1921 et seq.)
("Guaranteed Portions"), (iii) Farmer Mac Guaranteed
Agricultural Mortgage-Backed Securities ("Trust Fund
AMBS"), mortgage pass-through certificates or other
mortgage-backed securities evidencing interests in or
secured by Qualified Loans or Guaranteed Portions
(collectively, the "QMBS") or (iv) a combination of
Guaranteed Portions and QMBS. AMBS and Trust Fund AMBS
refer to Certificates issued and offered pursuant to
this Registration Statement. The Qualified Loans will
not be guaranteed or insured by Farmer Mac or any of
its affiliates or by any governmental agency or
instrumentality or other person. As more specifically
described herein, the Qualified Loans will be secured
by a fee simple mortgage or a minimum 50-year leasehold
mortgage, with status as a first lien on Agricultural
Real Estate (as defined below) that is located within
the United States (the "Mortgaged Properties"). A
Qualified Loan must be an obligation of (i) a citizen
or national of the United States or an alien lawfully
admitted for permanent residence in the United States;
or (ii) a private corporation or partnership whose
members, stockholders or partners holding a majority
interest in the corporation or partnership are
individuals described in clause (i). A Qualified Loan
must also be an obligation of a person, corporation or
partnership having farming experience or other training
sufficient to ensure a reasonable likelihood of
repayment of the loan according to its terms. A
Qualified Loan may be an existing or newly originated
mortgage loan that conforms to the requirements set
forth in the Farmer Mac program documents (the
"Guides").
Qualified Loans are secured by Agricultural Real
Estate. "Agricultural Real Estate" is defined as a
parcel or parcels of land, which may be improved by
buildings or other structures permanently affixed to
the parcel or parcels, that (a) are used for the
production of one or more agricultural commodities and
(b) consist of a minimum of five acres or are used in
producing minimum annual receipts of at least $5,000.
The principal amount of a Qualified Loan secured by
Agricultural Real Estate may not exceed $3,500,000, as
adjusted for inflation as of December 31, 1995.
Each Qualified Loan may provide for accrual of interest
thereon at an interest rate (a " Mortgage Interest
Rate") that is fixed over its term or that adjusts from
time to time, or is partially fixed and partially
floating or that may be converted from a floating to a
fixed Mortgage Interest Rate, or from a fixed to a
floating Mortgage Interest Rate, from time to time at
the Mortgagor's election, in each case as described in
the related Prospectus Supplement. The floating
Mortgage Interest Rates on the Qualified Loans in a
Trust Fund may be based on one or more indices. Each
Qualified Loan may provide for scheduled payments to
maturity, payments that adjust from time to time to
accommodate changes in the Mortgage Interest Rate or to
reflect the occurrence of certain
6
<PAGE>
events, and may provide for accelerated amortization,
in each case as described in the related Prospectus
Supplement. Each Qualified Loan may be fully amortizing
or require a balloon payment (each such payment, a
"Balloon Payment") due on its stated maturity date, in
each case as described in the related Prospectus
Supplement. Each Qualified Loan may contain
prohibitions on prepayment or require payment of a
Prepayment Premium or a Yield Maintenance Charge (each
term as defined herein) in connection with a
prepayment, in each case as described in the related
Prospectus Supplement. The Qualified Loans may provide
for payments of principal, interest or both, on due
dates that occur quarterly, semi-annually, annually or
at such other interval as is specified in the related
Prospectus Supplement. See "DESCRIPTION OF THE TRUST
FUNDS -- Qualified Loans."
(b) Farmer Mac
Guarantee The Certificates of each Series will be covered by a
Farmer Mac Guarantee. Because the Farmer Mac Guarantee
runs directly to Holders, it does not directly cover
payments on the related Qualified Loans included in or
underlying the related Trust Fund. Each Farmer Mac
Guarantee will provide for the payment by Farmer Mac to
Holders of any and all amounts necessary to assure the
timely payment of all required distributions of
interest and principal on the Certificates to the
extent set forth in the related Prospectus Supplement.
The related Prospectus Supplement will specify the
extent of Farmer Mac's guarantee obligation, if any,
with respect to any Qualified Loan in default as to its
Balloon Payment and will discuss any resulting impact
on the expected yield of the related Certificates. See
"YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" in the
related Prospectus Supplement. In addition, Farmer Mac
guarantees the distribution to Holders of the principal
balance of each Class of Certificates in full no later
than the related Final Distribution Date, whether or
not sufficient funds are available in the Certificate
Account. Farmer Mac's obligations under each Farmer Mac
Guarantee are obligations solely of Farmer Mac and are
not backed by the full faith and credit of the United
States. Farmer Mac will not guarantee the collection
from any borrower of any yield maintenance charge
("Yield Maintenance Charge") or any other premium
("Prepayment Premiums") payable in connection with a
principal prepayment on a Qualified Loan, and in the
event the related Trust Agreement entitles the related
Holders to receive distributions of such Yield
Maintenance Charges or Prepayment Premiums, such
Holders will receive such amounts only to the extent
actually collected. Under the Farmer Mac Charter,
Farmer Mac is required to establish a segregated
account into which it will deposit a portion of the
guarantee fees it receives for its guarantee
obligations. Farmer Mac expects that its future
contingent liabilities in respect of guarantees of
outstanding securities backed by agricultural mortgage
loans will substantially exceed any amounts on deposit
in such reserve account. The amount on deposit in such
reserve account as of the end of any calendar quarter
is set forth (as an
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allowance for losses) in Farmer Mac's consolidated
balance sheets filed with the Commission and
incorporated by reference herein. See "INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE" herein. If this
reserve account so established, together with any
remaining general Farmer Mac assets, is insufficient to
enable Farmer Mac to make a required payment under any
Farmer Mac Guarantee, Farmer Mac will issue obligations
to the Secretary of the Treasury in an amount at any
time outstanding not to exceed $1,500,000,000. The
Secretary of the Treasury is required to purchase
obligations issued by Farmer Mac not later than ten
business days after receipt by the Secretary of the
Treasury of a certification by Farmer Mac in accordance
with the requirements of the Farmer Mac Charter. The
Trust Agreement will contain various timing mechanisms
designed to assure that Farmer Mac will have sufficient
advance notice of any obligation under a Farmer Mac
Guarantee in order, to the extent required, to make
timely demand upon the Secretary of the Treasury. If
for any reason beyond the control of any Holder, such
Holder fails to receive on any Distribution Date such
Holder's portion of any payment required pursuant to
the Farmer Mac Guarantee, such Holder may, through the
related Trustee, enforce such obligation against Farmer
Mac to the extent of such Holder's portion. Farmer Mac
anticipates that its future contingent liabilities in
respect of guarantees of outstanding securities backed
by agricultural mortgage loans will greatly exceed its
resources, including its limited ability to borrow from
the United States Treasury. See "FEDERAL AGRICULTURAL
MORTGAGE CORPORATION" herein.
(c) Collection Account;
Certificate
Account Each Trust Fund will include one or more accounts
(each, a "Collection Account") established and
maintained on behalf of the Certificateholders into
which the Central Servicer designated in the related
Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement, deposit all
payments and collections received or advanced with
respect to the Qualified Assets in the Trust Fund. Such
an account may be maintained as an interest bearing or
a non-interest bearing account, and funds held therein
may be held as cash or invested in certain short-term
obligations. Prior to each Distribution Date, the
Central Servicer will remit to Farmer Mac, as Master
Servicer, for deposit into the Certificate Account
maintained by it funds then held in the Collection
Account that are applicable to the distribution on such
following Distribution Date. See "DESCRIPTION OF THE
AGREEMENTS -- Accounts" herein.
Description of
Certificates
Each Series of Certificates evidencing an interest in a
Trust Fund will be issued pursuant to a Trust
Agreement. If Qualified Loans are included in a Trust
Fund, they will be master serviced by Farmer Mac
pursuant to the related Trust Agreement. Farmer Mac's
servicing responsibilities under the Trust Agreement
will be performed on its behalf by one or more
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Central Servicers pursuant to Servicing Contracts with
Farmer Mac. Qualified Assets deposited into a Trust
Fund by the Depositor will have been sold to it by
Originators or other holders of Qualified Loans
(collectively, "Sellers") pursuant to a Master Loan
Sale Agreement (each a "Sale Agreement"). The Trust
Agreements, Servicing Contracts and Sale Agreements for
a particular Trust Fund are referred to herein as the
"Agreements." See "DESCRIPTION OF THE TRUST FUNDS"
herein and "DESCRIPTION OF THE QUALIFIED LOANS" in the
Prospectus Supplement. Each Series of Certificates will
include one or more Classes. Each Series of
Certificates will represent in the aggregate the entire
beneficial ownership interest in the related Trust
Fund. Each Class of Certificates (other than certain
Stripped Interest Certificates, as defined below) will
have a stated principal amount (a "Certificate
Balance") and (other than certain Stripped Principal
Certificates, as defined below), will accrue interest
thereon based on a fixed, variable or floating interest
rate (a "Pass-Through Rate"). The related Prospectus
Supplement will specify the Certificate Balance, if
any, and the Pass-Through Rate, if any, for each Class
of Certificates or, in the case of a variable or
floating Pass-Through Rate, the method for determining
the Pass-Through Rate. See "DESCRIPTION OF THE
CERTIFICATES" herein and in the related Prospectus
Supplement.
Distributions on
Certificates
Each Series of Certificates will consist of one or more
Classes of Certificates that may (i) provide for the
accrual of interest thereon based on fixed, variable or
floating rates; (ii) be entitled to principal
distributions with disproportionately low, nominal or
no interest distributions (collectively, "Stripped
Principal Certificates"); (iii) be entitled to interest
distributions with disproportionately low, nominal or
no principal distributions (collectively, "Stripped
Interest Certificates"); (iv) provide for distributions
of accrued interest thereon commencing only following
the occurrence of certain events, such as the
retirement of one or more other classes of Certificates
of such Series (collectively, "Accrual Certificates");
(v) provide for distributions of principal
sequentially, based on specified payment schedules or
other methodologies; (vi) provide for distributions
based on a combination of two or more components
thereof with one or more of the characteristics
described in this paragraph, including a Stripped
Principal Certificate component and a Stripped Interest
Certificate component, to the extent of available
funds; and/or (vii) to the extent the Trust Agreement
so provides, be entitled to distributions of any
Prepayment Premiums and Yield Maintenance Charges to
the extent collected, in each case as described in the
related Prospectus Supplement. With respect to
Certificates with two or more components, references
herein to Certificate Balance, notional amount and
Pass-Through Rate refer to the principal balance, if
any, notional amount, if any, and the Pass-Through
Rate, if any, for any such component.
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(a) Interest Interest on each Class of Certificates (other than
Stripped Principal Certificates and certain Classes of
Stripped Interest Certificates) of each Series will
accrue at the applicable Pass-Through Rate on the
outstanding Certificate Balance thereof and will be
distributed to Certificateholders as provided in the
related Prospectus Supplement (each of the specified
dates on which distributions are to be made, a
"Distribution Date"). Distributions with respect to
interest on Stripped Interest Certificates may be made
on each Distribution Date on the basis of a notional
amount as described in the related Prospectus
Supplement. Stripped Principal Certificates with no
stated Pass-Through Rate will not accrue interest. See
"YIELD CONSIDERATIONS" and "DESCRIPTION OF THE
CERTIFICATES -- Distributions of Interest on the
Certificates" herein.
(b) Principal The Certificates of each Series will have an aggregate
Certificate Balance no greater than the outstanding
principal balance of the Qualified Assets as of the
close of business on the first day of formation of the
related Trust Fund (the "Cut-off Date"), after
application of scheduled payments due on or before such
date, whether or not received. The Certificate Balance
of a Certificate outstanding from time to time
represents the maximum amount that the holder thereof
is then entitled to receive in respect of principal
from future cash flows on the assets in the related
Trust Fund. Distributions of principal will be made on
each Distribution Date to the Class or Classes of
Certificates entitled thereto until the Certificate
Balances of such Certificates have been reduced to
zero. Distributions of principal of any Class of
Certificates will be made on a pro rata basis among all
of the Certificates of such Class or by random
selection, as described in the related Prospectus
Supplement. Stripped Interest Certificates with no
Certificate Balance will not receive distributions in
respect of principal. See "DESCRIPTION OF THE
CERTIFICATES -- Distributions of Principal of the
Certificates" herein.
Qualified Loan Groups The Qualified Loans in a Trust Fund may be divided, to
the extent set forth in the related Prospectus
Supplement, into two or more Qualified Loan Groups
comprised of Qualified Loans having, in some cases,
similar Due Dates for scheduled payments and/or in
other cases generally similar Mortgage Interest Rates
or methods of calculating such rates and scheduled
final maturities. The related Prospectus Supplement
will specify whether a Qualified Loan Group will, for
Farmer Mac designation and reporting purposes,
constitute a Pool and will specify the numerical
designation for each Pool comprising the related
Series. Payments of interest and principal on the
Qualified Loans in a Qualified Loan Group, will be
applied first to required distributions on the related
Class or Classes of Certificates. Thus, each Qualified
Loan Group and each related Class or Classes of
Certificates will be separate and distinct from every
other
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Qualified Loan Group and its related Class or Classes
of Certificates, except with respect to Certificates
evidencing an ownership interest only in interest
payments or residual payments from Qualified Loans in
two or more Qualified Loan Groups. Information with
respect to any Qualified Loan Group will be set forth
in the related Prospectus Supplement. If the Qualified
Loans included in a Trust Fund are divided into
Qualified Loan Groups, references herein to the
Qualified Loans in such Trust Fund will refer, to the
extent required by the context, to such Qualified Loan
Groups.
Advances Each Central Servicer will be obligated as part of its
sub-servicing responsibilities to make certain advances
with respect to delinquent scheduled payments on the
Qualified Loans in such Trust Fund deemed to be
recoverable ("Advances"). Neither the Depositor nor any
of its affiliates will have any responsibility to make
such Advances, although the failure to advance may
trigger Farmer Mac's obligations under the Farmer Mac
Guarantee. Advances are reimbursable generally from
subsequent recoveries in respect of such Qualified
Loans and otherwise to the extent described herein and
in the related Prospectus Supplement. The Prospectus
Supplement for any Series of Certificates evidencing an
interest in a Trust Fund that includes QMBS will
describe any corresponding advancing obligation of any
person in connection with such QMBS. See "DESCRIPTION
OF THE CERTIFICATES -- Advances in Respect of
Delinquencies" herein.
Termination If so specified in the related Prospectus Supplement, a
Series of Certificates may be subject to optional early
termination through the repurchase of the Qualified
Assets in the related Trust Fund by the party specified
therein, under the circumstances and in the manner set
forth therein. If so provided in the related Prospectus
Supplement, upon the reduction of the Certificate
Balance of a specified Class or Classes of Certificates
by a specified percentage or amount or on and after a
date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of
all of the Qualified Assets of the Trust Fund, or of a
sufficient portion of such Qualified Assets to retire
such Class or Classes, or purchase such Qualified
Assets at a price set forth in the related Prospectus
Supplement. In addition, if so provided in the related
Prospectus Supplement, certain Classes of Certificates
may be purchased subject to similar conditions. See
"DESCRIPTION OF THE CERTIFICATES -- Termination"
herein.
Tax Status of the
Certificates The Certificates of each Series will constitute either
(i) "regular interests" ("REMIC Regular Certificates")
or "residual interests" ("REMIC Residual Certificates")
in a Trust Fund treated as a real estate mortgage
investment conduit ("REMIC") under Sections 860A
through 860G of the Internal Revenue Code of 1986, as
amended (the "Code"), or (ii) interests ("Grantor Trust
Certificates") in a Trust Fund treated as a grantor
trust
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within the meaning under subpart E, Part I of
subchapter J of the Code.
(a) REMIC REMIC Regular Certificates generally will be treated as
debt obligations of the applicable REMIC for federal
income tax purposes. Certain REMIC Regular Certificates
may be issued with original issue discount for federal
income tax purposes. See "CERTAIN FEDERAL INCOME TAX
CON-SEQUENCES" in the related Prospectus Supplement.
The Certificates will be treated as (i) "qualifying
real property loans" within the meaning of section
593(d)(1) of the Code, and (ii) "real estate assets"
within the meaning of section 856(c)(5)(A) of the Code,
in each case to the extent described herein and in the
related Prospectus Supplement. See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES" herein and in the related
Prospectus Supplement.
(b) Grantor Trust If no election is made to treat the Trust Fund relating
to a Series of Certificates as a REMIC, the Trust Fund
will be classified as a grantor trust and not as an
association taxable as a corporation for federal income
tax purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro rata
interests in the related Trust Assets. Investors are
advised to consult their tax advisors and to review
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES" herein and in
the related Prospectus Supplement.
ERISA The acquisition of a Certificate by a plan subject to
the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") or any other plan subject to Code
Section 4975 could, in some instances, result in a
prohibited transaction or other violations of the
fiduciary responsibility provisions of ERISA and Code
Section 4975. Certain exemptions from the prohibited
transaction rules could, however, be applicable. See
"ERISA CONSIDERATIONS" herein and in the related
Prospectus Supplement.
Legal Investment The Certificates will constitute securities guaranteed
by Farmer Mac for purposes of the Farmer Mac Charter
and, as such, will, by statute, be legal investments
for certain types of institutional investors to the
extent that those investors are authorized under any
applicable law to purchase, hold, or invest in
obligations issued by or guaranteed as to principal and
interest by the United States or any agency or
instrumentality of the United States. Investors whose
investment authority is subject to legal restrictions
should consult their own legal advisors to determine
whether and to what extent specific Classes of the
Certificates (particularly Classes of Stripped Interest
or Stripped Principal Certificates) constitute legal
investments for them. See "LEGAL INVESTMENT" herein and
in the related Prospectus Supplement.
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RISK FACTORS
Investors should consider, in connection with the purchase of Certificates,
among other things, the following factors and certain other factors as may be
set forth in "RISK FACTORS" in the related Prospectus Supplement.
RECENT DEVELOPMENTS AFFECTING FARMER MAC
The Farm Credit System Reform Act of 1996 (the "1996 Amendment") modified the
Farmer Mac Charter (as defined herein) by, among other things, requiring Farmer
Mac to increase its capital to at least $25 million by February 1998 (or sooner
if business volume increases substantially). The failure to raise capital to the
required level in accordance with the 1996 Amendment would result in the
suspension of Farmer Mac's ability to purchase new Qualified Loans or issue or
guarantee new securities and could adversely affect the liquidity of any
outstanding Certificates of any Class or Series. As of March 31, 1996, Farmer
Mac's capital as reported on its unaudited financial statements for the three
month period ended March 31, 1996 included as an exhibit to its Quarterly Report
on Form 10-Q was $11.373 million. Since that date, Farmer Mac issued additional
stock, which generated $2.56 million in capital. See Farmer Mac's Annual Report
on Form 10-K for the year ended December 31, 1995 and Quarterly Report on Form
10-Q for the three month period ended March 31, 1996, each filed with the
Commission pursuant to the Exchange Act and incorporated by reference in this
Prospectus, "INCORPORATION OF CERTAIN INFORMATION BY REFERENCE" and "FEDERAL
AGRICULTURAL MORTGAGE CORPORATION" herein.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Certificates of such Series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of Certificates
by a holder in any secondary market that may develop may be at a discount from
100% of their original Certificate Balance or from their purchase price. Except
to the extent described herein and in the related Prospectus Supplement,
Certificateholders will have no redemption rights and the Certificates are
subject to early retirement only under certain specified circumstances described
herein and in the related Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES -- Termination" herein.
FARMER MAC GUARANTEE
Farmer Mac's obligations under each Farmer Mac Guarantee are obligations
solely of Farmer Mac and are not backed by the full faith and credit of the
United States. Sources of funding for the payment of claims, if any, under any
Farmer Mac Guarantees will be (i) the fees Farmer Mac charges for providing its
guarantee and (ii) Farmer Mac's general assets, which are insignificant in
relation to its potential exposure to any meaningful level of possible claims
under Farmer Mac Guarantees. A portion of the guarantee fees received is
required to be set aside by Farmer Mac in a segregated account as a reserve
against losses from its guarantee activities. Farmer Mac expects that its future
contingent liabilities in respect of guarantees of outstanding securities backed
by agricultural mortgage loans will substantially exceed any amounts on deposit
in such reserve account. This reserve account must be exhausted before Farmer
Mac issues obligations to the Secretary of the Treasury against the
$1,500,000,000 Farmer Mac is authorized to borrow from the Secretary of the
Treasury pursuant to the Farmer Mac Charter. The Secretary of the Treasury is
required under the Farmer Mac Charter to purchase obligations issued by Farmer
Mac not later than ten business days after receipt by the Secretary of the
Treasury of a certification by Farmer Mac in the form prescribed by the Farmer
Mac Charter. The Trust Agreement will contain various timing mechanisms designed
to assure that Farmer Mac will have sufficient advance notice of any obligation
under a Farmer Mac Guarantee in order, to the extent required, to make timely
demand upon the Secretary of the Treasury. If for any reason beyond the control
of any Holder, such Holder fails to receive on any Distribution Date such
Holder's portion of any payment required pursu
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ant to the Farmer Mac Guarantee, such Holder may, through the related Trustee,
enforce such obligation against Farmer Mac to the extent of such Holder's
portion. Farmer Mac anticipates that its future contingent liabilities in
respect of guarantees of outstanding securities will greatly exceed its
resources, including its limited ability to borrow from the United States
Treasury referred to above. See "FEDERAL AGRICULTURAL MORTGAGE CORPORATION"
herein.
Farmer Mac will not guarantee the collection from any borrower of any yield
maintenance charge ("Yield Maintenance Charge") or any other premium
(collectively, "Prepayment Premiums") payable in connection with a principal
prepayment on a Qualified Loan, and in the event the related Trust Agreement
entitles the related Holders to receive distributions of such Yield Maintenance
Charges or Prepayment Premiums, such Holder will receive such amounts only to
the extent actually collected.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Agricultural lending is generally viewed as exposing lenders to a greater
risk of loss than single-family residential lending. Agricultural lending
typically involves larger loans to single borrowers than does lending on
single-family residences. Repayment of agricultural loans is typically dependent
upon the success of the related farming operation, which is, in turn, dependent
upon many variables and factors over which farmers may have little or no
control, such as weather conditions, economic conditions (both domestically and
internationally) and even political conditions. If the cash flow from a farming
operation is diminished (for example, adverse weather conditions destroy a crop
or prevent the planting or harvesting of a crop), the borrower's ability to
repay the loan may be impaired. Agricultural lending is perhaps more affected by
circumstances beyond the control of the borrower than any other area of real
estate lending. Under the Farmer Mac Guarantee, Holders will continue to receive
required interest and principal distributions on each Distribution Date
regardless of whether sufficient funds have been collected from borrowers. In
addition, principal prepayments resulting from liquidations of Qualified Loans
due to defaults or other calamities affecting Qualified Loans, or repurchases of
Qualified Loans due to breaches of representations and warranties may
significantly affect the yield to investors.
The rates of prepayment and default on the Qualified Loans in a particular
Trust Fund will affect the anticipated maturities and yields to maturity of the
related Certificates. Little or no historical data is available to provide
meaningful assistance in estimating the rate of prepayments and defaults on
loans secured by Agricultural Real Estate.
The yield to investors in each Class of a Series of Certificates will be
sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) of the underlying Qualified Assets, which, in the case
of each Trust Fund, will be prepayable to the extent described in the related
Prospectus Supplement. In addition, the yield to maturity on a Class of
Certificates may vary depending on the extent to which such Class is purchased
at a discount or premium. Holders of Certificates should consider, in the case
of any Certificates purchased at a discount, the risk that a slower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Certificates purchased
at a premium, the risk that a faster than anticipated rate of principal payments
could result in an actual yield that is lower than the anticipated yield.
The yield to maturity on each Class of Certificates will be extremely
sensitive to the rate and timing of principal payments (including prepayments)
of the underlying Qualifying Loans, which may fluctuate significantly from time
to time. Investors should fully consider the associated risks, including the
risk that an extremely rapid rate of principal payments on the Qualified Loans
could result in the failure of investors in any Class of Stripped Interest
Certificates to recoup their initial investments. See "YIELD CONSIDERATIONS --
Payments of Principal; Prepayments" herein.
Most loans secured by Agricultural Real Estate contain lock-out periods in
which prepayments are completely prohibited or set forth maximum amounts that
may be prepaid in any year, contain restrictions on the source of prepayments,
or impose prepayment penalties or charges and/or other restrictions on
prepayments including Yield Maintenance Charges. Because Farmer Mac does not
guarantee the collection of any Yield Maintenance Charges or Prepayment Premiums
on the underlying Qualified Loans, the expected yield to investors in the
Certificates may be sensitive in varying degrees to the
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extent such amounts are not collected. In addition, the required payment of
Prepayment Premiums or Yield Maintenance Charges may not be a sufficient
disincentive to prevent the voluntary prepayment of the Qualified Loans and,
even if collected, allocation thereof to any Class may be insufficient to offset
fully the adverse effects on the anticipated yield thereon arising out of the
corresponding principal payment. Each Prospectus Supplement will describe the
extent to which any restrictions on prepayments are applicable to the underlying
Qualified Loans and the standard or standards, if any, applicable to the
enforcement by the related Central Servicer of any such restrictions.
Each Prospectus Supplement will also set forth the extent to which the
underlying Qualified Loans include "due on sale" clauses which permit the
mortgagee to demand payment of the entire Qualified Loan in connection with the
sale or certain transfers of the related mortgaged property. Standards
applicable to the enforcement or waiver by the related Central Servicer of any
such "due on sale" clauses will also be described in the related Prospectus
Supplement.
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more Classes of the
Certificates will be issued and maintained and may be transferred only on the
book-entry system of the Federal Reserve Banks and/or will be initially
represented by one or more certificates registered in the name of the nominee
for the central depository identified therein, and will not be registered in the
names of the Beneficial Owners or their nominees. Because of this, unless and
until Definitive Certificates are issued, Beneficial Owners will not be
recognized by the Trustee as "Certificateholders" (as that term is to be used in
the Trust Agreement). Hence, until such time, Beneficial Owners will be able to
exercise the rights of Certificateholders only indirectly through the Federal
Reserve Banks and their participating financial institutions or through such
central depository and its participating organizations. See "DESCRIPTION OF THE
CERTIFICATES -- Book-Entry Registration and Definitive Certificates" herein.
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund are set forth above under "Summary --
The Trust Assets". The Certificates of any Series will be entitled to payment
only from the assets of the related Trust Fund and will not be entitled to
payments in respect of the assets of any other trust fund established by the
Depositor. If specified in the related Prospectus Supplement, the assets of a
Trust Fund will consist of certificates representing beneficial ownership
interests in another trust fund that contains Qualified Assets.
QUALIFIED LOANS
GENERAL
The general characteristics of and eligibility standards for Qualified Loans
are set forth above under "Summary -- The Trust Assets -- (a) Qualified Assets."
In addition to these general statutory standards, Farmer Mac has established
supplemental standards described below in an effort to reduce the risk of loss
from defaults by borrowers and to provide guidance to a participant in its
guarantee program concerning management, administration and conduct of
appraisals.
Farmer Mac's Underwriting and Appraisal Standards (the "Underwriting
Standards" and the "Appraisal Standards") are based on industry norms for
mortgage loans qualified to be sold in the secondary market, and are designed to
assess the creditworthiness of the borrower as well as the value of the
Mortgaged Properties relative to the amount of the Qualified Loan. Farmer Mac
generally relies on representations and warranties made by the Seller to ensure
that the Qualified Loans contained in the Trust Fund conform to such
Underwriting Standards and other requirements of the Guides.
The Underwriting Standards require, among other things, that the
loan-to-value ratio for any Qualified Loan cannot exceed 70%. In the case of
newly originated Qualified Loans secured by Agricultural Real Estate, borrowers
must also meet certain credit ratios, including: (i) a pro forma (after closing
the
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new loan) debt-to-asset ratio of 50% or less; (ii) a pro forma cash flow debt
service coverage ratio of not less than 1:1 on the subject property; (iii) a
total debt service coverage ratio, computed on a pro forma basis, of not less
than 1.25:1, including farm and off-farm income; and (iv) a ratio of current
assets to current liabilities, computed on a pro forma basis, of not less than
1:1.
In the case of existing loans, sustained loan performance is considered by
Farmer Mac to be a reliable alternative indicator of a borrower's ability to pay
the loan according to its terms. An existing loan generally will be eligible for
pooling and inclusion in a Trust Fund if it is at least three years old, has a
loan-to-value ratio (based on an updated appraisal) of 70% or less if the loan
is at least five years old (60% if the loan is less than five years old), and
there have been no payments more than 60 days past due during the three years
prior to pooling and no material restructurings or modifications for credit
reasons during the five years prior to pooling.
The Mortgaged Property securing a Qualified Loan must be covered by a hazard
insurance policy. The coverage of such policy is required to be in an amount not
less than the maximum insurable value of the Mortgaged Property securing the
related Qualified Loan from time to time or the principal balance outstanding on
the related Qualified Loan, whichever is less. Each such hazard insurance policy
covers physical damage to or destruction of the improvements of the property by
fire, lightning, explosion, smoke, windstorm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy. To
the extent the Mortgaged Property is located in an area designated as a flood
plain by the Federal government, a flood insurance policy must be maintained for
such Mortgaged Property.
The Underwriting Standards provide that Farmer Mac may purchase or guarantee
securities backed by loans that do not conform to one or more of the
Underwriting Standards when: (a) those loans exceed one or more of the
Underwriting Standards to which they do conform to a degree that compensates for
noncompliance with one or more other Underwriting Standards and (b) those loans
are made to producers of particular agricultural commodities in a segment of
agriculture in which such non-conformance and compensating strengths are typical
of the financial condition of sound borrowers. The acceptance by Farmer Mac of
loans that do not conform to one or more of the Underwriting Standards is not
intended to provide a basis for waiving or lessening in any way the requirement
that loans be of high quality in order to be included in a Trust Fund. The
entity that requests the acceptance by Farmer Mac of such loans bears the burden
of convincing Farmer Mac that the loans meet both tests as set forth in clauses
(a) and (b) above, and that the inclusion of such loans in a Trust Fund, will
strengthen, not weaken, the overall performance of the Trust Fund. For those
reasons, Farmer Mac does not believe that the inclusion of such loans in a
particular Trust Fund creates any additional risk.
The Appraisal Standards for newly originated loans require, among other
things, that the appraisal function be performed independently of the credit
decision making process. The Appraisal Standards require the appraisal function
to be conducted or administered by an individual meeting certain qualification
criteria who (a) is not associated, except by the engagement for the appraisal,
with the credit underwriters who make the loan decision, though both the
appraiser and the credit underwriter may be directly or indirectly employed by a
common employer; (b) receives no financial or professional benefit of any kind
relative to the report content, valuation or credit decision made or based on
the appraisal product; and (c) has no present or contemplated future direct or
indirect interest in the appraised property. The Appraisal Standards also
require uniform reporting of reliable and accurate estimates of the market
value, market rent and net property income characteristics of the Mortgaged
Property and the market forces relative thereto.
QUALIFIED LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement, with respect to the Qualified Loans, generally including
(i) the aggregate outstanding principal balance and the largest, smallest and
average outstanding principal balance of the Qualified Loans as of the
applicable Cut-off Date, (ii) the percentage (by principal balance) of Qualified
Loans secured by Mortgaged Properties upon which specified commodity groups are
produced (i.e. (a) food grains, (b) feed crops, (c) cotton/tobacco, (d)
oilseeds, (e) potatoes, tomatoes and other vegetables, (f) permanent plantings,
(g) sugarbeets, cane and other crops, (h) timber, (i) dairy, (j) cattle and
calves and (k) sheep,
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lamb and other livestock), (iii) the weighted average (by principal balance) of
the original and remaining terms to maturity of the Qualified Loans, (iv) the
earliest and latest origination date and maturity date of the Qualified Loans,
(v) the loan-to-value ratios and the weighted average (by principal balance) of
the current loan-to-value ratios of the Qualified Loans, (vi) the Mortgage
Interest Rates or range of Mortgage Interest Rates and the weighted average
Mortgage Interest Rate borne by the Qualified Loans, (vii) the geographic
distribution of Qualified Loans secured by Mortgaged Properties, (viii)
information with respect to the amortization provisions and provisions relating
to prepayment, including any Prepayment Premiums, Yield Maintenance Charges or
lock-outs, if any, of the Qualified Loans, (ix) with respect to Qualified Loans
with floating Mortgage Interest Rates ("ARM Loans"), the index, the frequency of
the adjustment dates, the highest, lowest and weighted average note margin and
pass-through margin, and the maximum Mortgage Interest Rate or monthly payment
variation at the time of any adjustment thereof and over the life of the ARM
Loan and the frequency of such monthly payment adjustments, (x) information
regarding the payment characteristics of the Qualified Loans, including without
limitation, Balloon Payments. If specific information respecting the Qualified
Loans is not known at the time Certificates are initially offered, more general
information of the nature described above will be provided in the Prospectus
Supplement, and specific information will be set forth in a report which will be
available to purchasers of the related Certificates at or before the initial
issuance thereof and will be filed as part of a Current Report on Form 8-K with
the Commission within fifteen days after such initial issuance.
QMBS
Any QMBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, a trust agreement, an indenture or
similar agreement (a "QMBS Agreement"). A seller (the "QMBS Issuer") and/or
servicer (the "QMBS Servicer") of the underlying Qualified Loans (or Underlying
QMBS) will have entered into the QMBS Agreement with a trustee or a custodian
under the QMBS Agreement (the "QMBS Trustee"), if any, or with the original
purchaser of the interest in the underlying Qualified Loans or QMBS evidenced by
the QMBS.
Distributions of any principal or interest, as applicable, will be made on
QMBS on the dates specified in the related Prospectus Supplement. The QMBS may
be issued in one or more Classes with characteristics similar to the Classes of
Certificates described in this Prospectus. Any principal or interest
distributions will be made on the QMBS by the QMBS Trustee or the QMBS Servicer.
The QMBS Issuer or the QMBS Servicer or another person specified in the related
Prospectus Supplement may have the right or obligation to repurchase or
substitute assets underlying the QMBS for the breach of certain representations
and warranties contained in the QMBS Agreement or under other circumstances
specified in the related Prospectus Supplement.
The Prospectus Supplement for a Series of Certificates evidencing interests
in Qualified Assets that include QMBS generally will specify (i) the aggregate
approximate initial and outstanding principal amount or notional amount, as
applicable, and type of the QMBS to be included in the related Trust Fund, (ii)
the original and remaining term to stated maturity of the QMBS, if applicable,
(iii) whether such QMBS is entitled only to interest payments, only to principal
payments or to both, (iv) the pass-through or bond rate of the QMBS or formula
for determining such rates, if any, (v) the applicable payment provisions for
the QMBS, including, but not limited to, any priorities, payment schedules and
subordination features, (vi) the QMBS Issuer, QMBS Servicer and QMBS Trustee, as
applicable, (vii) certain characteristics of the credit support, if any, such as
guarantees, subordination, reserve funds, insurance policies or letters of
credit or relating to the related underlying Qualified Loans, the underlying
QMBS or directly to such QMBS, (viii) the terms on which the related underlying
Qualified Loans or underlying QMBS for such QMBS or the QMBS may, or are
required to, be purchased prior to their maturity, (ix) the terms on which
Qualified Loans or underlying QMBS may be substituted for those originally
underlying the QMBS, (x) the servicing fees payable under the QMBS Agreement,
(xi) the type of information in respect of the underlying Qualified Loans
described under "-- Qualified Loans -- Qualified Loan Information in Prospectus
Supplements" above, and the type of information in respect of the underlying
QMBS described in this paragraph, (xii) the characteristics of any cash flow
agree
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ments that are included as part of the trust fund evidenced or secured by the
QMBS and (xiii) whether the QMBS is in certificated form, book-entry form or
held through a depository such as The Depository Trust Company or the
Participants Trust Company.
GUARANTEED PORTIONS
The participation in a loan guaranteed (each such participation in the
related whole loan (the "Guaranteed Loan") being referred to herein as a
"Guaranteed Portion" and the related guarantee being referred to herein as a
"Secretary's Guarantee") by the Secretary of Agriculture pursuant to the
Consolidated Farm and Rural Development Act (7 U.S.C. SectionSection 1921 et
seq.) is statutorily included in the definition of loans eligible as "Qualified
Loans" for Farmer Mac secondary market programs. Guaranteed Portions are exempt
from all underwriting, appraisal and repayment standards otherwise applicable to
Qualified Loans.
The maximum loss covered by a Secretary's Guarantee can never exceed the
lesser of (1) 90% of principal and interest indebtedness on the Guaranteed Loan,
any loan subsidy due, and 90% of principal and interest indebtedness on secured
authorized protective advances for protection and preservation of the related
mortgaged property; and (2) 90% of the principal advanced to or assumed by the
borrower under the Guaranteed Loan and any interest due (including a loan
subsidy).
The Secretary's Guarantee is a full faith and credit obligation of the United
States. Any Guaranteed Portion is the portion of the loan that is fully
guaranteed as to principal and interest due on such loan as described below. The
Secretary's Guarantee is activated if a Lender fails to repurchase the
Guaranteed Portion from the owner thereof (the "Owner") within thirty (30) days
of written demand from the Owner when (a) the borrower under the Guaranteed Loan
(the "Borrower") is in default not less than sixty (60) days in the payment of
any principal or interest due on the Guaranteed Portion, or (b) the Lender has
failed to remit to the Owner the payment made by the Borrower on the Guaranteed
Portion or any related loan subsidy within thirty (30) days of the Lender's
receipt thereof.
If the Lender does not repurchase the Guaranteed Portion as provided above,
the Secretary is required to purchase the unpaid principal balance of the
Guaranteed Portion together with accrued interest (including any loan subsidy)
to the date of purchase, less the servicing fee, within thirty (30) days of
written demand from the Owner. While the Secretary's Guarantee will not cover
the note interest on Guaranteed Portions accruing after ninety (90) days from
the date of the original demand letter to the Lender requesting repurchase,
procedures will be set forth in the related Trust Agreement to require tendering
of Guaranteed Portions in a timely manner so as not to exceed the 90-day period.
If in the opinion of the Lender (with the concurrence of the Secretary) or in
the opinion of the Secretary, repurchase of the Guaranteed Portion is necessary
to service adequately the related Guaranteed Loan, the Owner will sell the
Guaranteed Portion to the Lender or the Secretary for an amount equal to the
unpaid principal balance and accrued interest (including any loan subsidy) on
such Guaranteed Portion less the Lender's servicing fee. Regulations prohibit
the Lender from repurchasing Guaranteed Portions for arbitrage purposes.
All Guaranteed Loans must be originated and serviced by eligible Lenders.
Under regulations, all eligible Lenders must be subject to credit examination
and supervision by either an agency of the United States or a state, must be in
good standing with their licensing authorities and have met any licensing, loan
making, loan servicing and other applicable requirements of the state in which
the collateral for a Guaranteed Loan will be located.
The Lender on each Guaranteed Loan is required to retain the unguaranteed
portion of the Guaranteed Loan (the "Unguaranteed Portion"), to service the
entire underlying Guaranteed Loan, including the Guaranteed Portion and to
remain mortgagee and/or secured party of record. The Guaranteed Portion and the
Unguaranteed Portion of the underlying Guaranteed Loan are to be secured by the
same security with equal lien priority. The Guaranteed Portion cannot be paid
later than or in any way be subordinated to the related Unguaranteed Portion.
The Farmer Mac Guarantee of Certificates evidencing interests in a Trust Fund
containing Guaranteed Portions will cover the timely payment of interest on and
principal of such Certificates (regardless of whether payment has been made
under the Secretary's Guarantee).
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USE OF PROCEEDS
The net proceeds to be received from the sale of a Series of Certificates by
the Depositor will be applied by the Depositor to the purchase of Trust Assets
from Sellers and to pay for certain expenses incurred in connection with such
purchase of Trust Assets and sale of Certificates. The Depositor expects to sell
Certificates from time to time, but the timing and amount of offerings of
Certificates will depend on a number of factors, including the volume of
Qualified Assets acquired by the Depositor, prevailing interest rates,
availability of funds and general market conditions.
Rather than sell Certificates directly itself, the Depositor expects that
Certificates comprising a substantial number of Series will be exchanged by the
Depositor for Qualified Assets being swapped to it by Sellers.
YIELD CONSIDERATIONS
GENERAL
The yield on any Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate and the weighted average
lives of the Qualified Assets in the related Trust Fund, which may be affected
by prepayments, defaults, liquidations or repurchases. See "RISK FACTORS" herein
and in the related Prospectus Supplement.
PASS-THROUGH RATE
Certificates of any Class within a Series may have fixed, variable or
floating Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Qualified Assets in the related Trust Fund. The Prospectus
Supplement with respect to any Series of Certificates will specify the
Pass-Through Rate for each Class of such Certificates or, in the case of a
variable or floating Pass-Through Rate, the method of determining the
Pass-Through Rate; and the effect, if any, of the prepayment of any Qualified
Asset on the Pass-Through Rate of one or more Classes of Certificates.
If the Interest Accrual Period for a Class ends prior to a Distribution Date
for the related Series of Certificates, the effective yield to maturity to each
holder of Certificates entitled to payments of interest will be below that
otherwise produced by the applicable Pass-Through Rate and purchase price of
such Certificate because, while interest will accrue on each such Certificate
during such Interest Accrual Period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Certificates (or addition to the Certificate
Balance of a Class of Accrual Certificates) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under "-- Pass-Through Rate," if the Interest Accrual Period
ends on a date other than a Distribution Date for the related Series, the yield
realized by the holders of such Certificates may be lower than the yield that
would result if the Interest Accrual Period ended on such Distribution Date. The
Interest Accrual Period for any Class of Certificates will be described in the
related Prospectus Supplement.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate of
principal payments on the Qualified Assets (including principal prepayments on
Qualified Loans resulting from voluntary prepayments by the Mortgagors,
insurance proceeds, condemnations and involuntary liquidations). A number of
social, economic, geographic, climatic, demographic, tax, legal and other
factors may influence the rate at which principal prepayments and defaults occur
on the Qualified Loans including, without limitation, the age of the Qualified
Loans, the payment terms of the Qualified Loans, the availability of
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mortgage credit, enforceability of due-on-sale clauses, servicing decisions, the
extent of the borrower's net equity in the related Mortgaged Property, the
characteristics of the borrowers, mortgage market interest rates in relation to
the effective interest rates on the Qualified Loans and other unforeseeable
variables, both domestic and international, affecting particular commodity
groups and the farming industry in general. Generally, however, if prevailing
interest rates fall significantly below the Mortgage Interest Rates on the
Qualified Loans comprising or underlying the Qualified Assets in a particular
Trust Fund, such Qualified Loans are likely to be the subject of higher
principal prepayments than if prevailing rates remain at or above the rates
borne by such Qualified Loans. In this regard, it should be noted that certain
Qualified Assets may consist of Qualified Loans with different Mortgage Interest
Rates and the stated pass-through or pay-through interest rate of certain QMBS
may be a number of percentage points higher or lower than certain of the
underlying Qualified Loans. The rate of principal payments on some or all of the
Classes of Certificates of a Series will correspond to the rate of principal
payments on the Qualified Assets in the related Trust Fund and is likely to be
affected by the existence of lock-out periods and prepayment premium provisions
of the Qualified Loans underlying or comprising such Qualified Assets, and by
the extent to which the servicer of any such Qualified Loan is able to enforce
such provisions. Qualified Loans with a lock-out period or a prepayment premium
provision, to the extent enforceable, generally would be expected to experience
a lower rate of principal prepayments than otherwise identical Qualified Loans
without such provisions, with shorter lock-out periods or with lower prepayment
premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Certificate, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Certificate offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Certificate, the actual yield to
maturity will be lower than that so calculated. In either case, if so provided
in the Prospectus Supplement for a Series of Certificates, the effect on yield
on one or more Classes of the Certificates of such Series of prepayments of the
Qualified Assets in the related Trust Fund may be mitigated or exacerbated by
any provisions for sequential or selective distribution of principal to such
Classes.
A prepayment of principal, whether full or partial, is applied so as to
reduce the outstanding principal balance of the related Qualified Loan as of the
Due Date next succeeding the date on which such prepayment is received. As a
result, a prepayment on a Qualified Loan will not reduce the amount of interest
passed through to holders of Certificates for each related Interest Accrual
Period.
The timing of changes in the rate of principal payments on the Qualified
Assets may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Qualified Assets and distributed on a Certificate, the greater the effect on
such investor's yield to maturity. The effect on an investor's yield of
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during a given period may not be offset by a
subsequent like decrease (or increase) in the rate of principal payments.
PREPAYMENTS, MATURITY AND WEIGHTED AVERAGE LIVES
The rates at which principal payments are received on the Qualified Assets
included in or comprising a Trust Fund for the related Series of Certificates
may affect the ultimate maturity and the weighted average life of each Class of
such Series. Prepayments on the Qualified Loans comprising or underlying the
Qualified Assets in a particular Trust Fund will generally accelerate the rate
at which principal is paid on some or all of the Classes of the Certificates of
the related Series.
As described in the related Prospectus Supplement for a Series of
Certificates, each Class of Certificates will have a final scheduled
Distribution Date, which is the date on or prior to which the Certificate
Balance thereof is required to be reduced to zero, calculated on the basis of
the assumptions applicable to such Series set forth therein. Payment of the
entire Certificate Balance of each such Class no later than such final
Distribution Date will be covered by the related Farmer Mac Guarantee.
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Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a Class of
Certificates of a Series will be influenced by the rate at which principal on
the Qualified Loans comprising or underlying the Qualified Assets is paid to
such Class, which may be in the form of scheduled amortization or prepayments
(for this purpose, the term "prepayment" includes prepayments, in whole or in
part, and liquidations due to default).
In addition, the weighted average lives of the Certificates may be affected
by the varying maturities of the Qualified Loans comprising or underlying the
Qualified Assets. If any Qualified Loans comprising or underlying the Qualified
Assets in a particular Trust Fund have actual terms to maturity of less than
those assumed in calculating final scheduled Distribution Dates for the Classes
of Certificates of the related Series, one or more Classes of such Certificates
may be fully paid prior to their respective final scheduled Distribution Dates,
even in the absence of prepayments. Accordingly, the prepayment experience of
the Qualified Assets will, to some extent, be a function of the mix of Mortgage
Interest Rates and maturities of the Qualified Loans comprising or underlying
such Qualified Assets. See "DESCRIPTION OF THE TRUST FUNDS" herein.
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment
model. CPR represents a constant assumed rate of prepayment each month relative
to the then outstanding principal balance of a pool of loans for the life of
such loans. Neither CPR nor any other prepayment model or assumption purports to
be an historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Qualified
Loans underlying or comprising the Qualified Assets. Moreover, CPR was developed
based upon historical prepayment experience for single family residential
mortgage loans. Thus, it is likely that prepayment of any Qualified Loans
comprising or underlying the Qualified Assets for any Series will not conform to
any particular level of CPR.
The Depositor is not aware of any meaningful prepayment statistics for
Qualified Loans secured by Agricultural Real Estate.
The Prospectus Supplement with respect to each Series of Certificates may
contain tables, if applicable, setting forth the projected weighted average life
of each Class of Certificates of such Series and the percentage of the initial
Certificate Balance of each such Class that would be outstanding on specified
Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Qualified Loans
comprising or underlying the related Qualified Assets are made at rates
corresponding to various percentages of CPR or at such other rates specified in
such Prospectus Supplement. Such tables and assumptions are intended to
illustrate the sensitivity of weighted average lives of the Certificates to
various prepayment rates and will not be intended to predict or to provide
information that will enable investors to predict the actual weighted average
lives of the Certificates. It is unlikely that prepayment of any Qualified Loans
comprising or underlying the Qualified Assets for any Series will conform to any
particular level of CPR or any other rate specified in the related Prospectus
Supplement.
THE DEPOSITOR
Farmer Mac Mortgage Securities Corporation, the Depositor, is a wholly-owned
subsidiary of Farmer Mac and was incorporated in the State of Delaware in May
1992. The principal executive offices of the Depositor are located at 919 18th
Street, N.W., Washington, D.C. 20006.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
The Federal Agricultural Mortgage Corporation ("Farmer Mac") is a federally
chartered instrumentality of the United States established by Title VIII of the
Farm Credit Act of 1971, as amended (12 U.S.C. SectionSection 2279aa et seq.)
(the "Farmer Mac Charter"). Farmer Mac was established primarily to attract new
capital for the financing of agricultural real estate and rural housing loans
and to provide liquidity to agricultural real estate and rural housing lenders.
Farmer Mac is intended to aid the development of
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a secondary market for agricultural real estate and rural housing loans made by
participating originators (each, an "Originator"), secured by first liens on
agricultural real estate, including rural housing, by guaranteeing the timely
payment of interest and principal on obligations backed by such loans and
securities representing interests in such loans or in Guaranteed Portions.
Section 503 of the Food, Agriculture, Conservation, and Trade Act Amendments
of 1991 (the "1991 Act") provided for the creation of an Office of Secondary
Market Oversight within the Farm Credit Administration ("FCA") that is managed
by a full-time director selected by and reporting to the FCA Board. Through this
office, the FCA has general regulatory and enforcement authority over Farmer
Mac, including the authority to promulgate rules and regulations governing the
activities of Farmer Mac and to apply its general enforcement powers to Farmer
Mac and its activities. The 1991 Act also established certain minimum and
critical capital levels for Farmer Mac.
The 1996 Amendment signed into law by the President of the United States on
February 10, 1996, modified the Farmer Mac Charter as it theretofore existed in
several major respects, by, among other things (i) authorizing Farmer Mac to
purchase Qualified Loans and to include such purchased Qualified Loans in Trust
Funds serving as the basis for securities guaranteed by Farmer Mac, (ii)
extending from December 1996 to December 1999 the statutory deadline for the
full imposition of certain regulatory capital requirements applicable to Farmer
Mac, and (iii) eliminating statutory requirements for credit support features
aggregating not less than ten percent of the initial principal balances of
Qualified Loans in a Trust Fund. The 1996 Amendment also made various statutory
changes intended to further streamline program operations and clarify certain
ambiguous statutory provisions.
The 1996 Amendment also imposed certain additional capital requirements upon
Farmer Mac and timing limitations therefor, including a requirement that Farmer
Mac increase its core capital to at least $25 million. The 1996 amendment limits
Farmer Mac's authority to conduct new business if the $25 million capital level
is not reached within two years after the enactment of the 1996 Amendment.
The Farmer Mac Charter authorizes Farmer Mac to borrow up to $1,500,000,000
from the Secretary of the Treasury, subject to certain conditions, to enable
Farmer Mac to fulfill its guarantee obligations. The debt created by such
borrowing will bear interest at a rate determined by the Secretary of the
Treasury taking into consideration the average rate on outstanding marketable
obligations of the United States as of the last day of the calendar month ending
before the date of the purchase of such obligations. The debt must be repaid
within a reasonable time.
Public offerings of securities guaranteed by Farmer Mac must be registered
with the Commission pursuant to the Securities Act of 1933, as amended (the
"1933 Act"). Farmer Mac is also subject to the periodic reporting requirements
of the Exchange Act and, accordingly, files reports with the Commission pursuant
thereto. Pursuant to existing FCA regulations, Farmer Mac is required to file
quarterly reports of condition with the FCA, as well as copies of all documents
filed with the Commission under the 1933 and Exchange Acts.
The Farmer Mac Charter requires the Comptroller General to perform a
financial audit of Farmer Mac on whatever basis the Comptroller General
determines to be necessary.
Although Farmer Mac is an institution of the Farm Credit System, it is not
liable for any debt or obligation of any other institution of the Farm Credit
System (a "System Institution"). Neither the Farm Credit System nor any other
individual System Institution is liable for any debt or obligation of Farmer
Mac. For more information about Farmer Mac, see the documents incorporated by
reference herein and referred to in "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" herein.
Farmer Mac maintains its principal executive offices at 919 18th Street,
N.W., Washington, D.C. 20006. Its telephone number is (202) 872-7700.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each Series (including any Class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. Each Series of
Certificates will consist of one or more Classes of Certificates that may (i)
provide for the accrual of interest thereon based on fixed, variable or floating
rates; (ii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, "Stripped Principal
Certificates"); (iii) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
"Stripped Interest Certificates"); (iv) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other Classes of Certificates of such
Series (collectively, "Accrual Certificates"); (v) provide for payments of
principal sequentially, based on specified payment schedules, from only a
portion of the Trust Assets in such Trust Fund or based on specified
calculations, to the extent of available funds, in each case as described in the
related Prospectus Supplement; (vi) provide for distributions based on a
combination of two or more components thereof with one or more of the
characteristics described in this paragraph including a Stripped Principal
Certificate component and a Stripped Interest Certificate component; and/or
(vii) be entitled to distributions of any Prepayment Premium and Yield
Maintenance Charge (each term as defined herein), to the extent collected, in
each case as described in the related Prospectus Supplement.
Each Class of Certificates of a Series will be issued in minimum
denominations corresponding to the Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Certificates may be
registered and such Certificates may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more Classes of Certificates of a Series may be issued in definitive form
("Definitive Certificates") or in book-entry form ("Book-Entry Certificates"),
as provided in the related Prospectus Supplement. See "-- Book-Entry
Registration" and "RISK FACTORS -- Book-Entry Registration" herein. Definitive
Certificates will be exchangeable for other Certificates of the same Class and
Series of a like aggregate Certificate Balance, notional amount or percentage
interest but of different authorized denominations.
DISTRIBUTIONS
Distributions on the Certificates of each Series will be made by or on behalf
of Farmer Mac on each Distribution Date as specified in the related Prospectus
Supplement. Distributions (other than the final distribution) will be made to
the persons in whose names the Certificates are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the "Record Date"), and the amount of each
distribution will be determined as of the close of business on the date
specified in the Trust Agreement (the "Determination Date"). All distributions
with respect to each Class of Certificates on each Distribution Date will be
allocated pro rata among the outstanding Certificates in such Class or by random
selection, as described in the related Prospectus Supplement or otherwise
established by Farmer Mac. Payments will be made either by wire transfer in
immediately available funds to the account of a Certificateholder at a bank or
other entity having appropriate facilities therefor, if such Certificateholder
has so notified the Trustee or other person required to make such payments no
later than the date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, holds Certificates in the
requisite amount specified therein), or by check mailed to the address of the
person entitled thereto as it appears on the Certificate Register; provided,
however, that the final distribution in retirement of Definitive Certificates
will be made only upon presentation and surrender of the Certificates at the
location specified in the notice to Certificateholders of such final
distribution.
All distributions on the Certificates of each Series on each Distribution
Date will be made from the amount on deposit in the related Certificate Account
on such Distribution Date as supplemented, to the extent necessary, by any
amount paid by Farmer Mac under its guarantee. As described below, the
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entire amount on deposit in the Certificate Account will be distributed among
the related Certificates or otherwise released from the Trust Fund on each
Distribution Date, and accordingly will not be available for any future
distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each Class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which will be a fixed, variable or floating rate at which interest will
accrue on such Class or a component thereof (the "Pass-Through Rate"). The
related Prospectus Supplement will specify the Pass-Through Rate for each Class
or component or, in the case of a variable or floating Pass-Through Rate, the
method for determining the Pass-Through Rate.
Distributions of interest in respect of the Certificates of any Class will be
made on each Distribution Date (other than any Class of Accrual Certificates,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any Class of Stripped Principal Certificates that are
not entitled to any distributions of interest) based on the Accrued Certificate
Interest (as defined herein) for such Class and such Distribution Date. Prior to
the time interest is distributable on any Class of Accrual Certificates, the
amount of Accrued Certificate Interest otherwise distributable on such Class
will be added to the Certificate Balance thereof on each Distribution Date. With
respect to each Class of Certificates and each Distribution Date (other than
certain Classes of Stripped Interest Certificates), "Accrued Certificate
Interest" will be equal to interest accrued for a specified period on the
outstanding Certificate Balance thereof immediately prior to the Distribution
Date, at the applicable Pass-Through Rate. Accrued Certificate Interest on
Stripped Interest Certificates will be equal to interest accrued for a specified
period on the outstanding notional amount thereof immediately prior to each
Distribution Date, at the applicable Pass-Through Rate. The method of
determining the notional amount for any Class of Stripped Interest Certificates
will be described in the related Prospectus Supplement. Reference to a notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal.
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each Series, other than certain Classes of Stripped
Interest Certificates, will have a "Certificate Balance" which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
in respect of principal out of the future cash flow on the Qualified Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time and, in the case of Accrual Certificates
prior to the Distribution Date on which distributions of interest are required
to commence, will be increased by any related Accrued Certificate Interest. The
initial aggregate Certificate Balance of all Classes of Certificates of a Series
will not be greater than the outstanding aggregate principal balance of the
related Qualified Assets as of the applicable Cut-off Date. The initial
aggregate Certificate Balance of a Series and each Class thereof will be
specified in the related Prospectus Supplement. Distributions of principal will
be made on each Distribution Date to the Class or Classes of Certificates
entitled thereto in accordance with the provisions described in such Prospectus
Supplement until the Certificate Balance of such Class has been reduced to zero.
Stripped Interest Certificates with no Certificate Balance are not entitled to
any distributions of principal.
DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS AND YIELD
MAINTENANCE CHARGES
If so provided in the related Prospectus Supplement, Prepayment Premiums or
Yield Maintenance Charges that are collected on the Qualified Assets in the
related Trust Fund may be distributed on each Distribution Date to the Class or
Classes of Certificates entitled thereto in accordance with the provisions
described in such Prospectus Supplement.
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ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any Series of Certificates evidencing an interest in a Trust
Fund, the Central Servicer or another entity described in the related Prospectus
Supplement will be required as part of its sub-servicing responsibilities to
advance on or before each Certificate Account Deposit Date (generally a date ten
days prior to the related Distribution Date) its own funds in an amount equal to
the aggregate of payments of principal and interest (net of the related Central
Servicer fee) that were due on the Qualified Loans in such Trust Fund and were
delinquent on such Certificate Account Deposit Date, subject to such Central
Servicer's (or another entity's) good faith determination that such advances
(each, an "Advance") will be reimbursable from recoveries on the Qualified Loans
respecting which such Advances were made (as to any Qualified Loan, "Related
Proceeds").
Because Farmer Mac guarantees timely distributions of interest and principal
on the Certificates to Holders, the failure of the Central Servicer to make any
required Advance will not affect distributions of interest and principal to such
Holders.
The Prospectus Supplement for any Series of Certificates evidencing an
interest in a Trust Fund that includes QMBS will describe any corresponding
advancing obligation of any person in connection with such QMBS.
REPORTS TO CERTIFICATEHOLDERS; PUBLICATION OF CERTIFICATE PRINCIPAL FACTORS
With each distribution to Holders of any Class of Certificates of a Series,
the Master Servicer will forward or cause to be forwarded to each such holder,
to the Trustee, the Depositor and to such other parties as may be specified in
the related Agreement, a statement setting forth, in each case to the extent
applicable and available:
(i) the amount of such distribution to holders of Certificates of such Class
allocable to principal, separately identifying the aggregate amount of any
principal prepayments and, if so specified in the related Prospectus Supplement,
any Prepayment Premiums or Yield Maintenance Charges included therein;
(ii) the amount of such distribution to holders of Certificates of such
Class allocable to Accrued Certificate Interest;
(iii) the Certificate Principal Factor for each Class of Certificates (i.e.,
the percentage carried to eight places which, when multiplied by the
denomination of a Certificate of such Class, will produce the Certificate
Balance of such Certificate or, in the case of an Interest Only Certificate, the
notional amount of such Certificate immediately following such Distribution
Date);
(iv) in the case of Certificates with a variable Pass-Through Rate, the
Pass-Through Rate applicable to such Distribution Date, and, if available, the
immediately succeeding Distribution Date, as calculated in accordance with the
method specified in the related Prospectus Supplement; and
(v) any other information required to be distributed to such parties as
specified in the related Prospectus Supplement or Agreement.
As soon as practicable following the fifth Business Day of each month during
which a Distribution Date for a Class of Certificates occurs, Farmer Mac will
calculate the certificate distribution amount for such Distribution Date and
will publish or otherwise make available for such Class of Certificates
comprising such Series the Certificate Principal Factor therefor described in
clause (iii) above.
In the case of information furnished pursuant to subclauses (i) and (ii)
above, the amounts shall be expressed as a dollar amount per minimum
denomination of Certificates or for such other specified portion thereof. The
Master Servicer or the Trustee, as specified in the related Prospectus
Supplement, will forward or cause to be forwarded to each holder, to the
Depositor and to such other parties as may be specified in the Agreements, a
copy of any statements or reports received by the Master Servicer or the
Trustee, as applicable, with respect to any QMBS. The Prospectus Supplement for
each Series of Certificates will describe any additional information to be
included in reports to the holders of such Certificates.
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Within a reasonable period of time after the end of each calendar year, the
Master Servicer, shall furnish to each person who at any time during the
calendar year was a holder of a Certificate a statement containing the
information set forth in subclauses (i) and (ii) above, aggregated for such
calendar year or the applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Master Servicer shall be deemed to
have been satisfied to the extent that substantially comparable information
shall be provided by the Master Servicer pursuant to any requirements of the
Code as are from time to time in force.
Unless and until Definitive Certificates are issued, or unless otherwise
provided in the related Prospectus Supplement, such statements or reports will
be forwarded by the Master Servicer to the Federal Reserve Bank of New York or
the nominee for the private depository, as applicable. Such statements or
reports may be available to Beneficial Owners who request a copy and certify to
the Trustee or the Master Servicer, as applicable, that it is the Beneficial
Owner of a Certificate. See "DESCRIPTION OF THE CERTIFICATES -- Book-Entry
Registration" herein. Communication among Beneficial Owners may be conducted
through the facilities of the related depository or financial intermediary.
TERMINATION
The obligations created by the Trust Agreement for each Series of
Certificates will terminate upon the payment to Certificateholders of that
Series of all amounts required to be paid to them pursuant to such Trust
Agreement following the earlier of (i) the final payment or other liquidation of
the last Qualified Asset subject thereto, (ii) the purchase of all of the assets
of the Trust Fund by the party entitled to effect such termination, under the
circumstances and in the manner set forth in the related Prospectus Supplement
and (iii) distribution by Farmer Mac pursuant to the Farmer Mac Guarantee on the
Final Distribution Date of the latest maturing Class of such Series an amount
sufficient to reduce the Certificate Balance thereof to zero. In no event,
however, will any trust created by the Trust Agreement continue beyond a date
which is 21 years subsequent to the death of the survivor of the descendants of
Joseph P. Kennedy, the late ambassador of the United States to the Court of St.
James's, living on the Cut-off Date for the related Series. Written notice of
termination of the Agreements will be given to each Certificateholder and the
final distribution will be made only upon, in the case of any Definitive
Certificate, presentation and surrender of such Definitive Certificate at the
location to be specified in the notice of termination.
If so specified in the related Prospectus Supplement, a Series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Certificate Balance of
a specified Class or Classes of Certificates by a specified percentage or
amount, the party specified therein will solicit bids for the purchase of all
assets of the Trust Fund, or of a sufficient portion of such assets to retire
such Class or Classes or purchase such Class or Classes at a price set forth in
the related Prospectus Supplement, in each case, under the circumstances and in
the manner set forth therein.
BOOK-ENTRY REGISTRATION
If so provided in the related Prospectus Supplement, one or more Classes of
the Certificates of any Series will be issued as Book-Entry Certificates, and
each such Class will either (i) be issued and maintained only on the book-entry
system of the Federal Reserve Banks (the "Fed System") or (ii) be represented by
one or more single Certificates registered in the name of a nominee for the
depository identified in the Prospectus Supplement (the "Depository").
THE FED SYSTEM
Book-entry Certificates issued and maintained under the Fed System may be
held of record only by entities eligible to maintain book-entry accounts with
the Federal Reserve Banks. Such entities whose names appear on the book-entry
records of the Federal Reserve Banks as the entities for whose ac
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counts the Certificates have been deposited are herein referred to as "Holders"
or "Certificateholders". A Holder is not necessarily the Beneficial Owner of a
Book-Entry Certificate. Beneficial Owners (as defined below) will ordinarily
hold Book-Entry Certificates through one or more financial intermediaries, such
as banks, brokerage firms and securities clearing organizations. A Holder that
is not the Beneficial Owner of a Certificate, and each other financial
intermediary in the chain to the Beneficial Owner, will have the responsibility
of establishing and maintaining accounts for their respective customers. The
rights of the Beneficial Owner of a Book-Entry Certificate with respect to the
applicable Trust Fund and the Federal Reserve Banks may be exercised only
through the Holder of such Certificate. The Trustee, the Master Servicer and the
Federal Reserve Banks will have no direct obligations to a Beneficial Owner of a
Book-Entry Certificate that is not also the Holder of the Certificate. The
Federal Reserve Banks will act only upon the instructions of the Holder in
recording transfers of a Book-Entry Certificate.
A Fiscal Agency Agreement between Farmer Mac and the Federal Reserve Bank of
New York makes generally applicable to the Book-Entry Certificates (i)
regulations governing Farmer Mac's use of the book-entry system and (ii) such
procedures, insofar as applicable, as may from time to time be established by
regulations of the United States Department of the Treasury governing United
States securities, as now set forth in Treasury Department Circular Number 300,
31 C.F.R. Part 306 (other than Subpart O). The Book-Entry Certificates are also
governed by applicable operating circulars and letters of the Federal Reserve
Banks.
A DEPOSITORY SYSTEM
Any Depository will be a limited-purpose trust company organized under the
laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code ("UCC")
and a "clearing agency" registered pursuant to the provisions of Section 17A of
the Exchange Act. The Depository will have been created to hold securities for
its participating organizations ("Participants") and facilitate the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to a Depository system also is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Generally, investors that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other interests
in, Book-Entry Certificates may do so only through Participants and Indirect
Participants. In addition, such investors ("Beneficial Owners") will receive all
distributions on the Book-Entry Certificates through the Depository and its
Participants. Under a book-entry format, Beneficial Owners will receive payments
after the related Distribution Date because, while payments are required to be
forwarded to the nominee, as nominee for the Depository, on each such date, the
Depository will forward such payments to its Participants which thereafter will
be required to forward them to Indirect Participants or Beneficial Owners. So
long as a Certificate is in book-entry form, the only "Certificateholder" (as
such term is used in the Agreement) will be the nominee for the Depository, and
the Beneficial Owners will not be recognized by the Trustee as
Certificateholders under the Agreements. Beneficial Owners will be permitted to
exercise the rights of Certificateholders under the related Agreements only
indirectly through the Participants who in turn will exercise their rights
through the Depository.
Under the rules, regulations and procedures creating and affecting the
Depository and its operations, the Depository is required to make book-entry
transfers among Participants on whose behalf it acts with respect to the
Book-Entry Certificates and is required to receive and transmit distributions of
principal of and interest on the Book-Entry Certificates. Participants and
Indirect Participants with which Beneficial Owners have accounts with respect to
the Book-Entry Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective Beneficial
Owners.
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Because the Depository can act only on behalf of Participants, who in turn
act on behalf of Indirect Participants and certain banks, the ability of a
Beneficial Owner to pledge its interest in the Book-Entry Certificates to
persons or entities that do not participate in the Depository system, or
otherwise take actions in respect of its interest in the Book-Entry
Certificates, may be limited due to the lack of a physical certificate
evidencing such interest.
The Depository has advised the Depositor that it will take any action
permitted to be taken by a Certificateholder under an Agreement only at the
direction of one or more Participants to whose account with the Depository
interests in the Book-Entry Certificates are credited. Under the Depository's
procedures, the Depository will take actions permitted to be taken by Holders of
any class of Book-Entry Certificates only at the direction of one or more
Participants to whose account interests in the Book-Entry Certificates are
credited and whose aggregate holdings represent no less than any minimum amount
of Voting Rights required therefor. Therefore, Beneficial Owners will only be
able to exercise their Voting Rights to the extent permitted, and subject to the
procedures established, by their Participant and/or Indirect Participant, as
applicable. The Depository may take conflicting actions with respect to any
action of Certificateholders of any Class to the extent that Participants
authorize such actions. Neither the Master Servicer, the Depositor, the Trustee
nor any of their respective affiliates will have any liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Certificates, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form to Beneficial Owners or their nominees
("Definitive Certificates"), rather than to the Depository or its nominee only
if (i) the Depositor advises the Trustee in writing that the Depository is no
longer willing or able to properly discharge its responsibilities as depository
with respect to the Certificates and the Depositor is unable to locate a
qualified successor or (ii) the Depositor, at its option, elects to terminate
the book-entry system through the Depository.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, the Depository is required to notify all Participants of
the availability through the Depository of Definitive Certificates for the
Beneficial Owners. Upon surrender by the Depository of the certificate or
certificates representing the Book-Entry Certificates, together with
instructions for re-registration, the Trustee will issue (or cause to be issued)
to the Beneficial Owners identified in such instructions the Definitive
Certificates to which they are entitled, and thereafter the Trustee will
recognize the holders of such Definitive Certificates as Certificateholders
under the Trust Agreement.
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DESCRIPTION OF THE AGREEMENTS
The Certificates of each Series evidencing interests in a Trust Fund will be
issued pursuant to a Trust Agreement among the Depositor, Farmer Mac and the
Trustee. If Qualified Loans are included in a Trust Fund, Farmer Mac will be
responsible for the servicing of such Qualified Loans through one or more
Central Servicers acting pursuant to a Servicing Contract (as supplemented)
between the Central Servicer and Farmer Mac. In addition, each Seller of
Qualified Assets to the Depositor will transfer and assign such Qualified Assets
to the Depositor pursuant to a separate Sale Agreement between the Depositor,
Farmer Mac and such Seller. Each such Sale Agreement will include certain
representations and warranties of the Seller respecting the related Qualified
Assets which representations and warranties and the remedies for their breach
will be assigned to the Trustee for the benefit of Certificateholders pursuant
to the Trust Agreement for the related Series of Certificates. The Trust
Agreement, each Servicing Contract and each Sale Agreement relating to a
particular Series of Certificate are herein collectively referred to as the
"Agreements". The provisions of each Agreement will vary depending upon the
nature of the Certificates to be issued thereunder and the nature of the related
Trust Fund. Forms of a Trust Agreement, a Servicing Contract and a Sale
Agreement have been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The following summaries describe certain provisions
that may appear in each Agreement. The Prospectus Supplement for a Series of
Certificates will describe any provision of the Agreements relating to such
Series that materially differs from the description thereof contained in this
Prospectus. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Agreements for each Trust Fund and the description of such provisions in the
related Prospectus Supplement. As used herein with respect to any Series, the
term "Certificate" refers to all of the Certificates of that Series, whether or
not offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Depositor will provide a copy of the Agreements (without
exhibits) relating to any Series of Certificates without charge upon written
request of a holder of a Certificate of such Series addressed to the Trustee
identified in the related Prospectus Supplement.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any Series of Certificates, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Trust Assets to
be included in the related Trust Fund, together with all principal and interest
to be received on or with respect to such Trust Assets after the Cut-off Date,
other than principal and interest due on or before the Cut-off Date. The Trustee
will, concurrently with such assignment, deliver the Certificates to the
Depositor in exchange for the Trust Assets and the other assets comprising the
Trust Fund for such Series. Each Qualified Asset will be identified in a
schedule appearing as an exhibit to the related Agreement. Such schedule will
include detailed information (i) in respect of each Qualified Loan included in
the related Trust Fund, including without limitation, the address of the related
Mortgaged Property and type of such property, the Mortgage Interest Rate and, if
applicable, the applicable index, margin, adjustment date and any rate cap
information, the original and remaining term to maturity and the original and
outstanding principal balance, and (ii) in respect of each QMBS included in the
related Trust Fund, including without limitation, the QMBS Issuer, QMBS Servicer
and QMBS Trustee, the pass-through or bond rate or formula for determining such
rate, the issue date and original and remaining term to maturity, if applicable,
the original and outstanding principal amount and payment provisions, if
applicable.
With respect to each Qualified Loan, the Depositor will deliver or cause to
be delivered to the Trustee (or to the custodian hereinafter referred to)
certain loan documents, which will (unless the Qualified Loan is evidenced by a
participation certificate) include the original Mortgage Note endorsed, without
recourse, in blank or to the order of the Trustee, the original Mortgage (or a
certified copy thereof) with evidence of recording indicated thereon and an
assignment of the Mortgage to the Trustee in recordable form. The related
Agreements will require that the Depositor or another party specified therein
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records.
The Trustee (or a custodian) will review such Qualified Loan documents within
a specified period of days after receipt thereof, and the Trustee (or a
custodian) will hold such documents in trust for the
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benefit of the Certificateholders. If any such document is found to be missing
or defective in any material respect, the Trustee (or such custodian) shall
immediately notify Farmer Mac and the Seller. If the Seller cannot cure the
omission or defect within a specified number of days after receipt of such
notice, then the Seller will be obligated, within a specified number of days of
receipt of such notice, to repurchase the related Qualified Loan from the
Trustee at the Purchase Price (as defined below) or substitute for such
Qualified Loan.
With respect to each QMBS in certificated form, the Depositor will deliver or
cause to be delivered to the Trustee (or the custodian) the original certificate
or other definitive evidence of such QMBS together with bond power or other
instruments, certifications or documents required to transfer fully such QMBS to
the Trustee for the benefit of the Certificateholders. With respect to each QMBS
in uncertificated or book-entry form or held through a "clearing corporation"
within the meaning of the UCC, the Depositor and the Trustee will cause such
QMBS to be registered directly or on the books of such clearing corporation or
of a financial intermediary in the name of the Trustee for the benefit of the
Certificateholders. The related Agreement will require that either the Depositor
or the Trustee promptly cause any QMBS in certificated form not registered in
the name of the Trustee to be re-registered, with the applicable persons, in the
name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
There will be assigned to the Trustee pursuant to each Trust Agreement the
representations and warranties of the Seller in the related Sale Agreement, as
of a specified date covering, by way of example, the following types of matters:
(i) the accuracy of the information set forth for each Qualified Loan on the
schedule of Qualified Assets appearing as an exhibit to such Trust Agreement;
(ii) the existence of title insurance insuring (or a title opinion assuring) the
lien priority of the Qualified Loan; (iii) the authority of the Seller to sell
the Qualified Loan; (iv) the payment status of the Qualified Loan and the status
of payments of taxes, assessments and other charges affecting the related
Mortgaged Property; (v) the status of such Qualified Loan as a "Qualified Loan"
under the Farmer Mac Charter and its conformity in all material respects with
the Guides and (vi) the existence of customary provisions in the related
Mortgage Note and Mortgage to permit realization against the Mortgaged Property
of the benefit of the security of the Mortgage.
Unless otherwise specified in the related Sale Agreement, in the event of a
material breach of any such representation or warranty, the related Seller will
be obligated either to cure such breach or repurchase or replace the affected
Qualified Loan as described below. Since the representations and warranties will
not usually address events that may occur following the date as of which they
were made, the Seller will have a cure, repurchase or substitution obligation in
connection with a breach of such a representation and warranty only if the
relevant event that causes such breach occurs prior to such date. Such party
would have no such obligations if the relevant event that causes such breach
occurs after such date.
The Agreements will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Seller of any breach of any
representation or warranty made by it in respect of a Qualified Loan that
materially and adversely affects the value of such Qualified Loan or the
interests therein of the Certificateholders. If such Seller cannot cure such
breach within a specified period following the date on which it was notified of
such breach, then such Seller will be obligated to repurchase such Qualified
Loan from the Trustee within a specified period from the date on which the
Seller was notified of such breach, at the Purchase Price therefor. As to any
Qualified Loan, the "Purchase Price" is equal to the sum of the unpaid principal
balance thereof, plus unpaid accrued interest thereon at the Mortgage Interest
Rate from the date as to which interest was last paid to the due date in the Due
Period in which the relevant purchase is to occur, plus certain servicing
expenses that are reimbursable to the Master Servicer and Central Servicer. A
Seller's repurchase of a Qualified Loan may also include payment of a Prepayment
Premium or Yield Maintenance Charge to the extent described in the related
Prospectus Supplement. A Seller, rather than repurchase a Qualified Loan as to
which a breach has occurred, will have the option if so specified in the related
Prospectus Supplement, within two years after initial issuance of the related
Series of Certificates, to cause the removal of such Qualified Loan from the
Trust
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Fund and substitute in its place one or more other Qualified Loans, in
accordance with standards established by Farmer Mac to assure that any such
substitution will not materially alter the characteristics of the related Trust
Fund.
Neither the Depositor nor Farmer Mac will be obligated to purchase or
substitute for a Qualified Loan if a Seller defaults on its obligation to do so,
and no assurance can be given that Sellers will carry out such obligations with
respect to Qualified Loans. Any resultant loss to a Trust Fund which would
result in a deficiency in any required distribution to Certificateholders will
be covered by the Farmer Mac Guarantee. Therefore, Certificateholders will
suffer no loss by reason of any such Seller default.
The Seller will, with respect to a Trust Fund that includes QMBS, make
certain representations or warranties, as of a specified date, with respect to
such QMBS, covering (i) the accuracy of the information set forth therefor on
the schedule of Qualified Assets appearing as an exhibit to the related
Agreement and (ii) the authority of the Seller to sell such Qualified Assets.
ACCOUNTS
GENERAL
In each Servicing Contract, Farmer Mac will require the related Central
Servicer to establish and maintain one or more separate accounts in the name of
the Trustee for the collection of payments on the related Qualified Assets
(collectively, the "Collection Account"), which must be an account or accounts
with the Trustee or with any other depository institution or trust company
approved by Farmer Mac incorporated under the laws of the United States or any
state thereof and subject to supervision and examination by federal or state
banking authorities (an "Eligible Depository"). Each Collection Account may be
maintained as an interest bearing or a non-interest bearing account and the
funds held therein may be invested pending each succeeding Certificate Account
Deposit Date in certain short-term direct obligations of, and obligations fully
guaranteed by, the United States, Farmer Mac or any other agency or
instrumentality of the United States or any other obligation or security
approved by Farmer Mac ("Eligible Investments"). Any interest or other income
earned on funds in a Collection Account will be paid to Farmer Mac or the
related Central Servicer or its designee as additional servicing compensation,
as specified in the related Servicing Contract, and the risk of loss of funds in
a Collection Account resulting from such investments will be borne by Farmer Mac
or such Central Servicer, as the case may be. The amount of such loss will be
required to be deposited by Farmer Mac or such Central Servicer in the related
Collection Account immediately as realized.
DEPOSITS
The Central Servicer will deposit or cause to be deposited in a Collection
Account the following payments and collections received, or Advances made, by
it:
(i) all payments on account of principal, including principal prepayments,
on the Qualified Assets;
(ii) all payments on account of interest on the Qualified Assets, including
any default interest collected, in each case net of any portion thereof
permitted to be retained by a Central Servicer as servicing compensation;
(iii) all proceeds of any insurance policies ("Insurance Proceeds") to be
maintained in respect of each Mortgaged Property securing a Qualified Loan in
the Trust Fund (to the extent such proceeds are not applied to the restoration
of the property or released to the Mortgagor in accordance with the normal
servicing procedures of a Central Servicer, subject to the terms and conditions
of the related Mortgage and Mortgage Note) and all other amounts received and
retained in connection with the liquidation of defaulted Qualified Loans in the
Trust Fund, by foreclosure, condemnation or otherwise ("Liquidation Proceeds");
(iv) any Advances made as described under "DESCRIPTION OF THE CERTIFICATES
- -- Advances in Respect of Delinquencies";
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(v) to the extent required to be distributed to Certificateholders, any
amounts representing Prepayment Premiums and Yield Maintenance Charges; and
(vi) proceeds from the operation of foreclosed Mortgaged Properties held in
the Trust Fund ("REO Proceeds").
WITHDRAWALS
All such deposits in a Collection Account will, unless otherwise specified in
the Prospectus Supplement, be net of the following amounts to be retained by the
Central Servicer:
(i) amounts to reimburse the Central Servicer for unreimbursed amounts
advanced as described under "DESCRIPTION OF THE CERTIFICATES -- Advances in
Respect of Delinquencies" such reimbursement to be made out of amounts received
which were identified and applied by such Central Servicer as late collections
of interest on and principal of the particular Qualified Loans with respect to
which the Advances were made;
(ii) amounts to reimburse the Central Servicer for unpaid servicing fees
earned and certain unreimbursed servicing expenses incurred with respect to
Qualified Loans and properties acquired in respect thereof, such reimbursement
to be made out of amounts that represent Liquidation Proceeds and Insurance
Proceeds collected on the particular Qualified Loans and properties, and REO
Proceeds collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred;
(iii) amounts to reimburse the Central Servicer for any Advances described in
clause (i) above and any servicing expenses described in clause (ii) above
which, in the Central Servicer's good faith judgment, will not be recoverable
from the amounts described in clauses (i) and (ii), respectively, such
reimbursement to be made from amounts collected on other Trust Assets; and
(iv) to make any other withdrawals permitted by the related Agreement and
described in the related Prospectus Supplement.
On or before the issuance of a Series of Certificates, Farmer Mac is required
to either (i) open with an Eligible Depository one or more trust accounts in the
name of the Trustee applicable to the related Trust Fund (collectively, the
"Certificate Account") or (ii) in lieu of maintaining any such account or
accounts, maintain the Certificate Account for the related Trust Fund by means
of appropriate entries on Farmer Mac's books and records designating all amounts
credited thereto in respect of the related Qualified Assets as being held by it
for the related Holders of Certificates evidencing beneficial ownership of such
Trust Fund. To the extent that the Certificate Account for any Trust Fund is
maintained by Farmer Mac in the manner provided in (ii) above, all references
herein to deposits and withdrawals from the Certificate Account shall be deemed
to refer to credits and debits to the related books of Farmer Mac.
On or before a date (the "Certificate Account Deposit Date") which, for each
Trust Fund, will be approximately ten days before each Distribution Date, the
related Central Servicer will be required to withdraw from the applicable
Collection Account and remit to Farmer Mac for deposit in the Certificate
Account all funds held therein (other than amounts relating to future
Distribution Dates). In the event that the amount so remitted on or before a
Certificate Account Deposit Date is less than the Certificate Distribution
Amount for the related Distribution Date previously calculated by Farmer Mac,
Farmer Mac is required by the Trust Agreement to provide to the Trustee an
Officer's Certificate stating (i) the amount of such insufficiency, (ii) whether
Farmer Mac has determined that funds will be available to it on such
Distribution Date in an amount sufficient to cure such insufficiency pursuant to
its guarantee of the related Certificates without the necessity of borrowing
from the United States Treasury and (iii) in the event the response to (ii)
above is in the negative, attaching to such Officer's Certificate a copy of the
certification furnished to the Secretary of the Treasury requesting that funds
in the necessary amount be made available to Farmer Mac on or before such
Distribution Date for purposes of satisfying its guarantee obligations.
Amounts on deposit in the Certificate Account on a Distribution Date for a
Series will be withdrawn by Farmer Mac in the amount required, to the extent
funds are available therefor for application as follows:
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(i) towards the distribution to Certificateholders in federal funds of the
Certificate Distribution Amount for such Distribution Date;
(ii) to the reimbursement to Farmer Mac of any amount previously paid by it
in respect of such Series pursuant to its guarantee of the related Certificates;
(iii) to the payment of any portion of the Guarantee Fee for such
Distribution Date or any prior Distribution Date which has not otherwise been
paid; and
(iv) to the payment to Farmer Mac of any amounts remaining in the Certificate
Account after the withdrawals referred to in clauses (i) through (iii) above,
any such amounts being deemed to be payable to Farmer Mac as compensation for
its master servicing activities and to the reimbursement of expenses incurred by
it in connection therewith.
COLLECTION AND OTHER SERVICING PROCEDURES
COLLECTION PROCEDURES
Each Servicing Contract will provide that the Central Servicer will,
consistent with the Guides, make reasonable efforts to collect all payments
called for under the terms and provisions of the Qualified Loans. Consistent
with the above, the Central Servicer may in its discretion waive, postpone,
reschedule, modify or otherwise compromise the terms of payment of any Qualified
Loan so long as any such waiver, postponement, rescheduling, modification or
compromise is not inconsistent with the then current policies of Farmer Mac or
customary practices in the agricultural real estate mortgage servicing industry.
Any required adjustment to the payment schedule of any Qualified Loan as a
result of the foregoing will not affect the computation of the amount due on the
Certificates under the formula applicable thereto, subject to any exceptions set
forth in the related Prospectus Supplement.
As part of its servicing activities, the Central Servicer may, but is not
required to, enforce any due-on-sale or due-on-encumbrance clause contained in
any Mortgage Note or Mortgage, in accordance with the provisions of such
Mortgage Note or Mortgage and in the best interests of the Certificateholders.
In cases in which the Mortgaged Property is to be conveyed to a person by a
borrower and such person enters into an assumption agreement or a substitution
agreement, pursuant to which a new borrower is substituted for the existing
borrower, the Central Servicer is obligated to take reasonable steps (in
conformity with applicable law and Farmer Mac's requirements) to assure that (i)
the Qualified Loan will continue to be secured by a first mortgage lien pursuant
to the terms of the Mortgage, (ii) no material term including, but not limited
to, the Mortgage Interest Rate and any term affecting the amount or timing of
payment will be altered, nor will the term of the Qualified Loan be increased,
and (iii) if the seller/transferor of the Mortgaged Property is to be released
from liability on the Qualified Loan, such release will not adversely affect the
collectability of the Qualified Loan.
REALIZATION UPON DEFAULTED QUALIFIED LOANS
Subject to the conditions set forth in the Servicing Contract, the Central
Servicer is required to foreclose upon or otherwise comparably convert the
ownership of properties securing such of the Qualified Loans as come into and
continue in default and as to which no arrangements consistent with the Guides
have been made for collection of delinquent payments.
Borrowers who do not wish to proceed through foreclosure may assign the deed
of their Mortgaged Property to the Trust Fund with the consent of the Central
Servicer. The Central Servicer will then take the appropriate steps to liquidate
the property and pay off the Qualified Loan.
In the event that title to any Mortgaged Property is acquired in foreclosure
or by deed in lieu of foreclosure, the deed or certificate of sale will be
issued to the Trustee or to its nominee on behalf of Certificateholders.
Notwithstanding any such acquisition of title and cancellation of the related
Qualified Loan, such Qualified Loan will be considered for purposes of
calculation of amounts due on the Certificates under any formula applicable
thereto to be an outstanding Qualified Loan held in the Trust Fund until such
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time as the Mortgaged Property is sold and such Qualified Loan becomes a
liquidated Qualified Loan. The Central Servicer is required to dispose of any
Mortgaged Property in accordance with applicable local and environmental laws
and, to the extent applicable, consistent with the status of the Trust as a
REMIC.
COMPENSATION AND PAYMENT OF EXPENSES
The Central Servicer will receive a fee (the "Central Servicing Fee") payable
out of the interest payments received on each Qualified Loan. The Trustee will
receive a fee for services rendered in its capacity as Trustee, payable by
Farmer Mac. The amount of such compensation with respect to the Certificates may
decrease as the Qualified Loans amortize, and will be affected by principal
prepayments on the Qualified Loans. In addition, Farmer Mac, as Master Servicer,
may be entitled to compensation for its master servicing duties.
The Central Servicer will be entitled to retain all assumption fees, late
payment charges and other charges (other than, to the extent required to be
distributed to Certificateholders, Prepayment Premiums or Yield Maintenance
Charges), to the extent collected from borrowers and as described in the
Servicing Contract, and may be entitled to retain any earnings on the investment
of funds held by it pending remittance to Farmer Mac for deposit in the
Certificate Account to the extent provided in the related Servicing Contract.
The Central Servicer will also be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Qualified Loans
including, under certain circumstances, reimbursement of expenditures incurred
in connection with the preservation of the related Mortgaged Properties.
CERTAIN MATTERS REGARDING FARMER MAC
The Trust Agreement provides that Farmer Mac may not resign from its
obligations and duties thereunder.
The Trust Agreement will also provide that neither Farmer Mac nor the
Depositor nor any of their respective directors, officers, employees or agents
will be under any liability for any action taken or for refraining from the
taking of any action in good faith pursuant to the Trust Agreement, or for
errors in judgment; provided, however, that neither Farmer Mac nor the Depositor
will be protected against any liability which would otherwise be imposed by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties or by reason of willful disregard of obligations and duties
thereunder. In addition, the Trust Agreement will provide that neither Farmer
Mac nor the Depositor will be under any obligation to appear in, prosecute or
defend any legal action which is not incidental to their responsibilities under
the Trust Agreement and which in their opinion may involve them in any expense
or liability. Farmer Mac and the Depositor may, however, in their discretion
undertake any such action which they may deem necessary or desirable with
respect to the Trust Agreement and the rights and duties of the parties thereto
and the interests of the Certificateholders thereunder.
EVENTS OF DEFAULT
Events of Default under the Trust Agreement will consist of (i) any failure
by Farmer Mac to distribute to Holders of Certificates of any Class in the
related Trust Fund any distribution required to be made under the terms of the
related Trust Agreement (including, for this purpose, pursuant to the Farmer Mac
Guarantee) which continues unremedied for a period of five days after the date
upon which written notice of such failure, requiring the same to be remedied,
shall have been given to Farmer Mac by the Trustee or to Farmer Mac and the
Trustee by the Holders of Certificates of such Class having Certificate Balances
or Notional Balances aggregating not less than 5% of the aggregate of the
Certificate Balances or Notional Balances of all of the Certificates of such
Class, (ii) failure on the part of Farmer Mac duly to observe or perform in any
material respect any other of the covenants or agreements on the part of Farmer
Mac in the Trust Agreement which continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the same to be
remedied, shall have been given to Farmer Mac and the Trustee by the Holders of
Certificates of any Class in the related Trust Fund having Certificate Balances
or Notional Balances aggregating not less than 25% of
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the aggregate of the Certificate Balances or Notional Balances of all of the
Certificates of such Class, and (iii) certain events of insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings regarding
Farmer Mac indicating its insolvency or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, the Trustee or the Holders
of Certificates of any Class in the related Trust Fund having Certificate
Balances or Notional Balances aggregating not less than 25% of the aggregate of
the Certificate Balances or notional amounts of such Class may (a) terminate all
obligations and duties imposed upon Farmer Mac (other than its obligations under
the Farmer Mac Guarantee) under the Trust Agreement, and (b) name and appoint a
successor or successors to succeed to and assume all of such obligations and
duties. Such actions shall be effected by notice in writing to Farmer Mac and
shall become effective upon receipt of such notice by Farmer Mac and the
acceptance of such appointment by such successor or successors. Because the
Trustee is required to give notice to Farmer Mac of any failure to make a
required distribution, the Holders' failure to give such notice will not result
in a waiver of the remedies available upon default.
AMENDMENT
The Trust Agreement may be amended by the respective parties thereto without
the consent of any of the Holders of Certificates (i) to cure any ambiguity,
(ii) to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein or (iii) to make any other
provisions with respect to matters or questions arising under the Trust
Agreement which are not materially inconsistent with the provisions thereof,
provided that any such amendment described in this clause (iii) will not
adversely affect in any material respect the interests of any Certificateholder.
With the consent of the Holders of Certificates of each Class in the related
Trust Fund having Certificate Balances and Notional Balances aggregating not
less than 66% of the aggregate of the Certificate Balances or Notional Balances,
as applicable, of all of the Certificates of such Class (i) compliance by Farmer
Mac with any of the terms of the related Trust Agreement may be waived or (ii)
Farmer Mac may enter into any supplemental agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of such Trust Agreement or of modifying in any manner the rights of the Holders
of the Certificates issued under such Trust Agreement; provided that no such
waiver or supplemental agreement shall:
(a) without the consent of all Certificateholders affected thereby
reduce in any manner the amount of, or delay the timing of, distributions
which are required to be made on any Certificate; or
(b) without the consent of all Certificateholders (i) terminate or
modify the Farmer Mac Guarantee with respect to the Certificates of such
Series, or (ii) reduce the aforesaid percentages of Certificates, the
Holders of which are required to consent to any waiver or any supplemental
agreement.
Notwithstanding the foregoing, the Trustee will not be entitled to consent to
any such amendment without having first received an Opinion of Counsel, to the
extent applicable, to the effect that such amendment will not cause the Trust
Fund to fail to qualify as a REMIC.
THE TRUSTEE
The Trustee under each Trust Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company serving as Trustee may have a banking
relationship with Farmer Mac and its affiliates and with any Central Servicer
and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency of
any Agreement, the Certificates or any Trust Asset or related document and is
not accountable for the use or application by or on behalf of any Central
Servicer or Farmer Mac of any funds paid to such Central Servicer or
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Farmer Mac in respect of the Certificates or the Trust Assets, or deposited into
or withdrawn from any Account or any other account by or on behalf of any
Central Servicer or Farmer Mac. If no Event of Default has occurred and is
continuing, the Trustee is required to perform only those duties specifically
required under the related Agreement. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
The Trustee and any director, officer, employee or agent of the Trustee shall
be entitled to indemnification out of the Trust Fund for any loss or liability
incurred without negligence or bad faith in connection with the Trustee's
acceptance or administration of the trusts created by the related Trust
Agreement.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to Farmer Mac. Upon receiving such
notice of resignation, Farmer Mac is required promptly to appoint a successor
trustee. If no successor trustee shall have been so appointed and have accepted
appointment within 90 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for the
appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then Farmer Mac may
remove the Trustee and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN LEGAL ASPECTS OF QUALIFIED LOANS AND OTHER MATTERS
The following discussion contains summaries of certain legal aspects of
mortgage loans, including the Qualified Loans, that are general in nature.
Because such legal aspects are governed in part 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 Mortgaged Properties may be situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Qualified Loans. Because Farmer Mac guarantees the timely
payment of principal and interest on the Certificates to Holders, the impact of
any adverse effects described in the summaries of certain legal aspects of the
Qualified Loans below will not affect the Farmer Mac Guarantee or distributions
to Holders.
GENERAL
The Qualified Loans will be evidenced by promissory notes, collectively
referred to as "Mortgage Notes," and secured by either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
property subject to a Qualified Loan is located. A mortgage creates a lien upon
the real property encumbered by the mortgage. Foreclosure of a mortgage is
generally accomplished by judicial action. Foreclosure of a deed of trust is
generally accomplished by a non-judicial trustee's sale under a specific
provision in the deed of trust which 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, 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 from the foreclosure sale.
The effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property in a timely manner. Certain states have
imposed statutory prohibitions which limit the reme
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dies 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.
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 or enforce a deficiency
judgment. 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. The federal bankruptcy code also includes provisions under which a "family
farmer with regular annual income" is permitted to file and obtain confirmation
of a plan on an expedited basis, and protections for such debtors that are not
available to other types of debtors. Federal bankruptcy laws and applicable
state laws may also limit the ability to enforce any assignment by a borrower of
rents and leases related to a Mortgaged Property.
The Code provides priority to certain tax liens over the lien of a mortgage.
In addition, substantive requirements are imposed upon mortgage lenders in
connection with the origination and 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.
BORROWER'S RIGHTS LAWS APPLICABLE TO AGRICULTURAL MORTGAGE LOANS
FARM CREDIT ACT
In general, borrowers with loans, including mortgage loans, from lenders
which are institutions of the Farm Credit System, are entitled to certain rights
under Sections 4.14, 4.14A, 4.14B, 4.14C and 4.37 of the Farm Credit Act of
1971, as amended (12 U.S.C. SectionSection 2001 et seq.) (the "Farm Credit
Act"). These rights include restructuring and favorable treatment of certain
borrower money held by the lender in case of the liquidation of the lender.
Section 8.9 of the Farm Credit Act provides that the rights as conferred under
such Sections 4.14, 4.14A, 4.14B, 4.14C and 4.37 are not applicable to any
Qualified Loan.
CERTAIN STATE LAWS
Certain states have enacted legislation granting certain rights to borrowers
under agricultural mortgage loans. These rights may include, among others,
restructuring of loans, mediation prior to foreclosure, moratoria on
foreclosures or payments, access by a dispossessed borrower to previously
planted crops, redemption provisions that are more favorable to farm borrowers
than to other commercial borrowers and restrictions on disposition of
agricultural property acquired through foreclosure. Section 8.6(b)(5) of the
Farmer Mac Charter specifically provides that such rights apply to Qualified
Loans. Section 8.6(b)(5) allows a Seller or Farmer Mac to require discounts or
charge fees reasonably related to costs and expenses arising from such
borrowers' rights provisions but prohibits a Seller or Farmer Mac from refusing
to purchase such Qualified Loans.
Sellers will represent and warrant in Sale Agreements that each Qualified
Loan was originated in compliance with applicable state laws in all material
respects and that no homestead exemption is available to the borrower unless the
value of the portion of the Mortgaged Property not subject to a homestead
exemption would result in a current loan-to-value ratio of not more than 70%.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, and under state law in certain states, a secured
party which takes a deed in lieu of foreclosure, purchases a mortgaged property
at a foreclosure sale or is deemed to have participated in the manage
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ment or operation of a mortgaged property may become liable in certain
circumstances for the costs of remedial action ("Cleanup Costs") if hazardous
wastes or hazardous substances have been released or disposed of on the
property. Such Cleanup Costs may be substantial. It is possible that such
Cleanup Costs could become a liability of the Trust Fund and reduce the amounts
otherwise distributable to the Certificateholders if a Mortgaged Property
securing a Qualified Loan became the property of the Trust Fund in certain
circumstances or if the Trust Fund is deemed to have participated in the
management or operation of such property and if such Cleanup Costs were
incurred. Moreover, certain states by statute impose a lien for any Cleanup
Costs incurred by such state on the property that is the subject of such Cleanup
Costs (a "State Environmental Lien"). All subsequent liens on such property are
subordinated to such State Environmental Lien and, in some states, even prior
recorded liens are subordinated to such State Environmental Liens. In the latter
states, the security interest of the Trustee in a property that is subject to
such a State Environmental Lien could be adversely affected. The Servicing
Contract provides that title to a Mortgaged Property securing a defaulted
Qualified Loan shall not be taken by the Trust Fund if the Central Servicer
determines that Cleanup Costs would exceed the potential recovery upon
liquidation of such Qualified Loan.
ENFORCEABILITY OF CERTAIN PROVISIONS
GENERAL
Upon foreclosure, courts have imposed general equitable principles. These
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have 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 failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of trust or mortgages receive
notices in addition to the statutorily prescribed minimum. For the most part,
these cases have upheld the notice provisions as being reasonable or have found
that the sale by a trustee under a deed of trust, or under a mortgage having a
power of sale, does not involve sufficient state action to afford constitutional
protection to the borrower.
DUE-ON-SALE CLAUSES
Some or all of the Qualified Loans in a Trust Fund, as set forth in the
related Prospectus Supplement, may contain due-on-sale clauses. These clauses
permit the lender to accelerate the maturity of the loan if the borrower sells,
transfers or conveys the property. The enforceability of these clauses has been
the subject of legislation or litigation in many states, and in some cases the
enforceability of these clauses was limited or denied. Federal legislation that
overrides state laws restricting the enforceability of due-on-sale clauses
applies only to mortgage loans secured by a residence occupied by the borrower.
Similar state laws may restrict the enforceability of any due-on-encumbrance
provisions contained in the Qualified Loans.
Any inability to enforce a due-on-sale clause may result in a Qualified Loan
bearing an interest rate below the current market rate being assumed by a new
purchaser of the Mortgaged Property rather than being paid off, which may have
an impact upon the average life of the Qualified Loans and the number of
Qualified Loans which may be outstanding until maturity.
APPLICABILITY OF USURY LAWS
Section 8.12(d) of the Farmer Mac Charter expressly excludes all Qualified
Loans purchased by the Depositor within 180 days of such Qualified Loan's date
of origination from any provision of the constitution or law of any state which
expressly limits the rate or amount of interest, discount points, financial
charges, or other charges, including Yield Maintenance Charges and Prepayment
Premiums, that may be charged, taken, received, or reserved.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Certificates is based
on the advice of Brown & Wood, counsel to the Depositor. This summary is based
on laws, regulations, including the REMIC regulations promulgated by the
Treasury Department (the "REMIC Regulations"), rulings and decisions now in
effect or (with respect to regulations) proposed, all of which are subject to
change either prospectively or retroactively. Brown & Wood will deliver an
opinion to the Depositor that the information set forth under this caption,
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES," to the extent that it constitutes
matters of law or legal conclusions, is correct in all material respects. This
summary does not address the federal income tax consequences of an investment in
Certificates applicable to all categories of investors, some of which (for
example, banks and insurance companies) may be subject to special rules.
Prospective investors should consult their tax advisors regarding the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of Certificates.
GENERAL
The federal income tax consequences to Certificateholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Certificates as a REMIC under the Code. The Prospectus Supplement for
each Series of Certificates will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If a REMIC election is not made, Brown & Wood will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Internal Revenue Code of 1986, as
amended (the "Code"). In this case, owners of Certificates will be treated for
federal income tax purposes as owners of a portion of the Trust Fund's assets as
described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Qualified Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Qualified Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Qualified Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ("OID"), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Central Servicer. Under Code Sections 162
or 212 each Grantor Trust Certificateholder will be entitled to deduct its pro
rata share of servicing fees, prepayment fees, assumption fees, any loss
recognized upon an assumption and late payment charges retained by the Central
Servicer, provided that such amounts are reasonable compensation for services
rendered to the Trust Fund. Grantor Trust Certificateholders that are
individuals, estates or trusts will be entitled to deduct their share of
expenses as itemized deductions only to the extent such expenses plus all other
Code Section 212 expenses exceed two percent of its adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable for the taxable
year for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation) will be reduced by the lesser of
(i) 3% of the excess of adjusted gross income over the applicable amount or (ii)
80% of the amount of itemized deductions otherwise allowable for such taxable
year. A Grantor Trust Certificateholder using the cash method of accounting must
take into ac
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count its pro rata share of income and deductions as and when collected by or
paid to the Central Servicer. A Grantor Trust Certificateholder using an accrual
method of accounting must take into account its pro rata share of income and
deductions as they become due or are paid to the Central Servicer, whichever is
earlier. If the servicing fees paid to the Central Servicer are deemed to exceed
reasonable servicing compensation, the amount of such excess could be considered
as an ownership interest retained by the Central Servicer (or any person to whom
the Central Servicer assigned for value all or a portion of the servicing fees)
in a portion of the interest payments on the Qualified Assets. The Qualified
Assets would then be subject to the "coupon stripping" rules of the Code
discussed below.
As to each Series of Certificates Brown & Wood will have advised the
Depositor that:
(i) a Grantor Trust Certificate owned by a financial institution
described in Code Section 593(a) representing principal and interest
payments on Qualified Assets will be considered to represent "qualifying
real property loans" within the meaning of Code Section 593(d) and the
Treasury regulations under Code Section 593, to the extent that the
Qualified Assets represented by that Grantor Trust Certificate are of a type
described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Qualified Assets will be considered to
represent "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest income on the Qualified Assets will be considered
"interest on obligations secured by mortgages on real property" within the
meaning of Code Section 856(c)(3)(B), to the extent that the Qualified
Assets represented by that Grantor Trust Certificate are of a type described
in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
"obligation[s] ... which [are] principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3).
Stripped Bonds and Coupons. Certain Trust Funds may consist of Farmer Mac
Guaranteed Securities which constitute "stripped bonds" or "stripped coupons" as
those terms are defined in section 1286 of the Code, and, as a result, such
assets would be subject to the stripped bond provisions of the Code. Under these
rules, such Government Securities are treated as having original issue discount
based on the purchase price and the stated redemption price at maturity of each
Security. As such, Grantor Trust Certificateholders would be required to include
in income their pro rata share of the original issue discount on each Government
Security recognized in any given year on an economic accrual basis even if the
Grantor Trust Certificateholder is a cash method taxpayer. Accordingly, the sum
of the income includible to the Grantor Trust Certificateholder in any taxable
year may exceed amounts actually received during such year.
Premium. The price paid for a Grantor Trust Certificate by a holder will be
allocated to such holder's undivided interest in each Qualified Asset based on
each Qualified Asset's relative fair market value, so that such holder's
undivided interest in each Qualified Asset will have its own tax basis. A
Grantor Trust Certificateholder that acquires an interest in Qualified Assets at
a premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Qualified
Assets were originated after September 27, 1985. Premium allocable to mortgage
loans originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Qualified Loan (or an underlying mortgage loan with
respect to a Qualified Asset) prepays in full, equal to the difference
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between the portion of the prepaid principal amount of such Qualified Loan (or
underlying mortgage loan) that is allocable to the Certificate and the portion
of the adjusted basis of the Certificate that is allocable to such Qualified
Loan (or underlying mortgage loan). If a reasonable prepayment assumption is
used to amortize such premium, it appears that such a loss would be available,
if at all, only if prepayments have occurred at a rate faster than the
reasonable assumed prepayment rate. It is not clear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
Original Issue Discount. The Internal Revenue Service (the "IRS") has stated
in published rulings that, in circumstances similar to those described herein,
the special rules of the Code relating to OID (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the "OID Regulations"), will be applicable to a Grantor
Trust Certificateholder's interest in those Qualified Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate Mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges 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. OID generally must be reported as ordinary gross income as it
accrues under a constant interest method. See "-- Multiple Classes of Grantor
Trust Certificates -- Accrual of Original Issue Discount" below.
Market Discount. A Grantor Trust Certificateholder that acquires an undivided
interest in Qualified Assets may be subject to the market discount rules of Code
Sections 1276 through 1278 to the extent an undivided interest in a Qualified
Asset is considered to have been purchased at a "market discount." Generally,
the amount of market discount is equal to the excess of the portion of the
principal amount of such Qualified Asset allocable to such holder's undivided
interest over such holder's tax basis in such interest. Market discount with
respect to a Grantor Trust Certificate will be considered to be zero if the
amount allocable to the Grantor Trust Certificate is less than 0.25% of the
Grantor Trust Certificate's stated redemption price at maturity multiplied by
the weighted average maturity remaining after the date of purchase. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or
a prepayment) or any gain on disposition of a market discount bond acquired by
the taxpayer after October 22, 1986 shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the time of such
payment. The amount of accrued market discount for purposes of determining the
tax treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (ii) a
fraction, the numerator of which is the amount of stated interest paid during
the accrual period and the denominator of which is the total amount of stated
interest remaining to be paid at the beginning of the accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of
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prepayments of other obligations securing such instruments, the same prepayment
assumption applicable to calculating the accrual of OID will apply. Because the
regulations described above have not been issued, it is impossible to predict
what effect those regulations might have on the tax treatment of a Grantor Trust
Certificate purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. If such holder elects to include
market discount in income currently as it accrues on all market discount
instruments acquired by such holder in that taxable year or thereafter, the
interest deferral rule described above will not apply.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount with respect to
all other debt instruments having market discount that such Certificateholder
acquires during the year of the election or thereafter. Similarly, a
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "-- Regular Certificates -- Premium"
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
Prepayment Premiums and Yield Maintenance Charges. The portion of any
Prepayment Premium or Yield Maintenance Charge received by any Holder in excess
of the Holder's basis allocable to the Qualified Loan which is being prepaid may
be treated as short-term or long-term capital gain. Generally, prepayment
premiums, to the extent passed through as distributions, are treated as
producing capital gain rather than ordinary income for investors that hold a
debt security as a capital asset. The holding period for long-term capital gain
is one year for the Certificates. Holders should consult their tax advisors
regarding the taxable status of such Prepayment Premiums or Yield Maintenance
Charges.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Qualified Assets (the "Stripped
Bond Certificates"), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
"Stripped Coupon Certificates").
Servicing fees in excess of reasonable servicing fees ("excess servicing")
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Qualified Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Qualified Asset by Qualified Asset basis, which could result
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in some Qualified Assets being treated as having more than 100 basis points of
interest stripped off. See "-- Non-REMIC Certificates" and "Multiple Classes of
Grantor Trust Certificates -- Stripped Bonds and Stripped Coupons" herein.
Although not entirely clear, a Stripped Bond Certificate generally should be
treated as an interest in Qualified Assets issued on the day such Certificate is
purchased for purposes of calculating any OID. Generally, if the discount on a
Qualified Asset is larger than a de minimis amount (as calculated for purposes
of the OID rules) a purchaser of such a Certificate will be required to accrue
the discount under the OID rules of the Code. See "-- Non-REMIC Certificates"
and "-- Single Class of Grantor Trust Certificates -- Original Issue Discount"
herein. However, a purchaser of a Stripped Bond Certificate will be required to
account for any discount on the Qualified Assets as market discount rather than
OID if either (i) the amount of OID with respect to the Qualified Assets is
treated as zero under the OID de minimis rule when the Certificate was stripped
or (ii) no more than 100 basis points (including any amount of servicing fees in
excess of reasonable servicing fees) is stripped off of the Trust Fund's
Qualified Assets. Pursuant to Revenue Procedure 91-49, issued on August 8, 1991,
purchasers of Stripped Bond Certificates using an inconsistent method of
accounting must change their method of accounting and request the consent of the
IRS to the change in their accounting method on a statement attached to their
first timely tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Qualified Asset. However, based on the recent
IRS guidance, it appears that all payments from a Qualified Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Qualified Asset would be included in the Qualified Asset's stated redemption
price at maturity for purposes of calculating income on such certificate under
the OID rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Qualified
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Qualified Assets, or if no prepayment
assumption is used, then when a Qualified Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Qualified
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Qualified Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Qualified Assets. While Code Section 1286 treats a stripped
obligation as a separate obligation for purposes of the Code provisions
addressing OID, it is not clear whether such characterization would apply with
regard to these other Code sections. Although the issue is not free from doubt,
based on policy considerations, each class of Grantor Trust Certificates, should
be considered to represent "qualifying real property loans" within the meaning
of Code Section 593(d), and "real estate assets" within the meaning of Code
Section 856(c)(5)(A), and interest income attributable to Grantor Trust
Certificates should be considered to represent "interest on obligations secured
by mortgages on real property" within the meaning of Code Section 856(c)(3)(B),
provided that in each case the underlying Qualified Assets and interest on such
Qualified Assets qualify for such treatment. Prospective purchasers to which
such characterization of an investment in Certificates is material should
consult their own tax advisors regarding the characteriza
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tion of the Grantor Trust Certificates and the income therefrom. Grantor Trust
Certificates will be "obligation[s] ... which [are] principally secured,
directly or indirectly, by an interest in real property" within the meaning of
Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other Than
ARM Loans
The original issue discount rules of Code Sections 1271 through 1275 will be
applicable to a Certificateholder's interest in those Qualified Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate Mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of "teaser" rates on the Qualified Assets. OID on each Grantor
Trust Certificate must be included in the owner's 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 amount of OID required to be included
in an owner's income in any taxable year with respect to a Grantor Trust
Certificate representing an interest in Qualified Assets other than Qualified
Assets with interest rates that adjust periodically ("ARM Loans") likely will be
computed as described below under "-- Accrual of Original Issue Discount." The
following discussion is based in part on the OID Regulations and in part on the
provisions of the Tax Reform Act of 1986 (the "1986 Act"). The OID Regulations
generally are effective for debt instruments issued on or after April 4, 1994,
but may be relied upon as authority with respect to debt instruments, such as
the Grantor Trust Certificates, issued after December 21, 1992. The holder of a
Certificate should be aware, however, that the OID Regulations do not adequately
address certain issues relevant to prepayable securities.
Under the Code, the Qualified Assets underlying the Grantor Trust Certificate
will be treated as having been issued on the date they were originated with an
amount of OID equal to the excess of such Qualified Asset's stated redemption
price at maturity over its issue price. The issue price of a Qualified Asset is
generally the amount lent to the mortgagee, which may be adjusted to take into
account certain loan origination fees. The stated redemption price at maturity
of a Qualified Asset is the sum of all payments to be made on such Qualified
Asset other than payments that are treated as qualified stated interest
payments. The accrual of this OID, as described below under "-- Accrual of
Original Issue Discount," will utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
"Prepayment Assumption"), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the "Legislative History") provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the Master Servicer intends to calculate and report OID
under the method described below.
Accrual of Original Issue Discount. Generally, the owner of a Grantor Trust
Certificate must include in gross income the sum of the "daily portions," as
defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive accrual period (or shorter period from
the
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date of original issue) that ends on the day in the calendar year corresponding
to each of the Distribution Dates on the Grantor Trust Certificates (or the day
prior to each such date). This will be done, in the case of each full accrual
period, by (i) adding (a) the present value at the end of the accrual period
(determined by using as a discount factor the original yield to maturity of the
respective component under the Prepayment Assumption) of all remaining payments
to be received under the Prepayment Assumption on the respective component and
(b) any payments included in the state redemption price at maturity received
during such accrual period, and (ii) subtracting from that total the "adjusted
issue price" of the respective component at the beginning of such accrual
period. The adjusted issue price of a Grantor Trust Certificate at the beginning
of the first accrual period is its issue price; the adjusted issue price of a
Grantor Trust Certificate at the beginning of a subsequent accrual period is the
adjusted issue price at the beginning of the immediately preceding accrual
period plus the amount of OID allocable to that accrual period reduced by the
amount of any payment other than a payment of qualified stated interest made at
the end of or during that accrual period. The OID accruing during such accrual
period will then be divided by the number of days in the period to determine the
daily portion of OID for each day in the period. With respect to an initial
accrual period shorter than a full accrual period, the daily portions of OID
must be determined according to an appropriate allocation under any reasonable
method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired 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 Qualified Assets acquired by a Certificateholder are purchased at a
price equal to the then unpaid principal amount of such Qualified Asset, no
original issue discount attributable to the difference between the issue price
and the original principal amount of such Qualified Asset (i.e. points) will be
includible by such holder. Other original issue discount on the Qualified Assets
(e.g., that arising from a "teaser" rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as the
Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ("Stripped ARM Obligations") to holders in a manner it believes is
consistent with the rules described above under the heading "-- Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans" and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ("Deferred Interest") to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors are
urged to consult their tax advisors regarding how income will be includible with
respect to such Certificates.
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
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Certificate is a "capital asset" within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Grantor Trust Certificates will be "evidences of indebtedness" within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences ownership
in underlying Qualified Assets that were issued on or before July 18, 1984,
interest or OID paid by the person required to withhold tax under Code Section
1441 or 1442 to (i) an owner that is not a U.S. Person (as defined below) or
(ii) a Grantor Trust Certificateholder holding on behalf of an owner that is not
a U.S. Person will be subject to federal income tax, collected by withholding,
at a rate of 30% or such lower rate as may be provided for interest by an
applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Grantor Trust Certificate evidences ownership
in Qualified Assets issued after July 18, 1984, by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to
Qualified Assets of where the Mortgagor is not a natural person in order to
qualify for the exemption from withholding.
As used herein, a "U.S. Person" means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust, the
income of which from sources outside the United States is includible in gross
income for federal income tax purposes regardless of its connection with the
conduct of a trade or business within the United States.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable time
after the end of each calendar year, to each person who was a Certificateholder
at any time during such year, such information as may be deemed necessary or
desirable to assist Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such Certificates as nominees on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
REMICS
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to federal income tax
(see, however "-- Taxation of Owners of REMIC Residual Certificates" and "--
Prohibited Transactions" below), if a Trust Fund with respect to which a REMIC
election is made fails to comply with one or more of the ongoing requirements of
the Code for REMIC status during any taxable year, including the implementation
of restrictions on the purchase and transfer of the residual interests in a
REMIC as described below under "Taxation of Owners of REMIC Residual
Certificates," the Code provides that a Trust Fund will not be treated as a
REMIC for such year and thereafter. In that event, such entity may be taxable as
a separate corporation, and the related Certifi
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cates (the "REMIC Certificates") may not be accorded the status or given the tax
treatment described below. While the Code authorizes the Treasury Department to
issue regulations providing relief in the event of an inadvertent termination of
the status of a Trust Fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, may be accompanied by sanctions, such as the imposition
of a corporate tax on all or a portion of the REMIC's income for the period in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Trust Agreement, such Trust Fund will qualify
as a REMIC, and the related Certificates will be considered to be regular
interests ("REMIC Regular Certificates") or a sale class of residual interests
("REMIC Residual Certificates") in the REMIC. The related Prospectus Supplement
for each Series of Certificates will indicate whether the Trust Fund will make a
REMIC election and whether a class of Certificates will be treated as a regular
or residual interest in the REMIC.
A "qualified mortgage" for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) Certificates held by a thrift institution taxed as a
"mutual savings bank" or "domestic building and loan association" will represent
interests in "qualifying real property loans" within the meaning of Code Section
593(d)(1); (ii) Certificates held by a real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(A);
and (iii) interest on Certificates held by a real estate investment trust will
be considered "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B). If less than 95% of the REMIC's
assets are assets qualifying under any of the foregoing Code sections, the
Certificates will be qualifying assets only to the extent that the REMIC's
assets are qualifying assets. In addition, payments on Qualified Assets held
pending distribution on the REMIC Certificates will be considered to be
qualifying real property loans for purposes of Code Section 593(d)(1) and real
estate assets for purposes of Code Section 856(c).
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the "Subsidiary REMIC" and the "Master REMIC") for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood, will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Trust Agreement, the Master REMIC
as well as any Subsidiary REMIC will each qualify as a REMIC, and the REMIC
Certificates issued by the Master REMIC and the Subsidiary REMIC, respectively,
will be considered to evidence ownership of REMIC Regular Certificates or REMIC
Residual Certificates in the related REMIC within the meaning of the REMIC
provisions.
Only REMIC Certificates issued by the Master REMIC and the residual interest
in the Subsidiary REMIC will be offered hereunder. The Subsidiary REMIC and the
Master REMIC will be treated as one REMIC solely for purposes of determining
whether the REMIC Certificates will be (i) "qualifying real property loans"
under Section 593(d) of the Code; (ii) "real estate assets" within the meaning
of Section 856(c)(5)(A) of the Code; and (iii) whether the income on such
Certificates is interest described in Section 856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the "stated redemption price at maturity" of a REMIC Regular Certificate and its
"issue price." Holders of any class of Certificates issued with
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OID will be required to include such OID in gross income for federal income tax
purposes as it accrues, in accordance with a constant interest method based on
the compounding of interest as it accrues rather than in accordance with receipt
of the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the 1986 Act. Holders of REMIC
Regular Certificates (the "REMIC Regular Certificateholders") should be aware,
however, that the OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
"stated redemption price at maturity" over its "issue price." The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the "Closing Date"), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
"qualified stated interest." Qualified stated interest generally means interest
payable at a single fixed rate or qualified variable rate (as described below)
provided that such interest payments are unconditionally payable at intervals of
one year or less during the entire term of the REMIC Regular Certificate.
Interest is payable at a single fixed rate only if the rate appropriately takes
into account the length of the interval between payments. Distributions of
interest on REMIC Regular Certificates with respect to which Deferred Interest
will accrue will not constitute qualified stated interest payments, and the
stated redemption price at maturity of such REMIC Regular Certificates includes
all distributions of interest as well as principal thereon.
Where the interval between the issue date and the first Distribution Date on
a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose,
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the weighted average maturity of the REMIC Regular Certificate is computed as
the sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
"Super-Premium Certificates"). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Qualified Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain contingent payment rules contained in regulations proposed on April 8,
1986, with respect to original issue discount should apply to such Certificates.
Under those rules, a Super-Premium Certificate would not be required to report
income on the basis of a yield based on the Prepayment Assumption, but rather
would use a yield equal to the applicable Federal rate (which is an average
yield on Treasury obligations), until the initial price of the respective
Super-Premium Certificate is fully recovered. The IRS recently proposed and then
withdrew a revised set of proposed contingent payment regulations which differed
substantially from the contingent payment regulations proposed in 1986. The
proposed regulations regarding contingent interest have not been adopted in
final form and may not currently be relied upon. If the Super Premium
Certificates were treated as contingent payment obligations, it is unclear how
holders of those Certificates would report income or recover their basis. In the
alternative, the IRS could assert that the stated redemption price at maturity
of such REMIC Regular Certificates should be limited to their principal amount
(subject to the discussion below under "-- Accrued Interest Certificates"), so
that such REMIC Regular Certificates would be considered for federal income tax
purposes to be issued at a premium. If such a position were to prevail, the
rules described below under "-- Taxation of Owners of REMIC Regular Certificates
- -- Premium" would apply. It is unclear when a loss may be claimed for any
unrecovered basis for a Super-Premium Certificate. It is possible that a holder
of a Super-Premium Certificate may only claim a loss when its remaining basis
exceeds the maximum amount of future payments, assuming no further prepayments
or when the final payment is received with respect to such Super-Premium
Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than any REMIC Regular Certificate based on a notional
amount) does not exceed 125% of its actual principal amount, the interest rate
is not considered disproportionately high. Accordingly, such REMIC Regular
Certificate generally should not be treated as a Super-Premium Certificate and
the rules described below under "-- REMIC Regular Certificates -- Premium"
should apply. However, it is possible that holders of REMIC Regular Certificates
issued at a premium, even if the premium is less than 25% of such Certificate's
actual principal balance, will be required to amortize the premium under an
original issue discount method or contingent interest method even though no
election under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income the
"daily portions," as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the
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disposition date. In the case of an original holder of a REMIC Regular
Certificate, a calculation will be made of the portion of the OID that accrues
during each successive period ("an accrual period") that ends on the day in the
calendar year corresponding to a Distribution Date (or if Distribution Dates are
on the first day or first business day of the immediately preceding month,
interest may be treated as payable on the last day of the immediately preceding
month) and begins on the day after the end of the immediately preceding accrual
period (or on the issue date in the case of the first accrual period). This will
be done, in the case of each full accrual period, by (i) adding (a) the present
value at the end of the accrual period (determined by using as a discount factor
the original yield to maturity of the REMIC Regular Certificates as calculated
under the Prepayment Assumption) of all remaining payments to be received on the
REMIC Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
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 holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Some interest based on a variable
rate may constitute contingent interest. Interest based on a variable rate will
constitute qualified stated interest and not contingent interest if, generally,
(i) such interest is unconditionally payable at least annually, (ii) the issue
price of the debt instrument does not exceed the total noncontingent principal
payments and (iii) interest is based on a "qualified floating rate," an
"objective rate," a combination of a single fixed rate and one or more
"qualified floating rates," one "qualified inverse floating rate," or a
combination of "qualified floating rates " that do not operate in a manner that
significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under "--
Original Issue Discount and Premium" by assuming generally that the index used
for the variable rate will remain fixed throughout the term of the Certificate.
Appropriate adjustments are made for the actual variable rate.
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The IRS recently issued final regulations (the "Contingent Regulations")
governing the calculation of OID on instruments having contingent interest
payments. The Contingent Regulations specifically do not apply for purposes of
calculating OID on debt instruments subject to Code Section 1272(a)(6), such as
REMIC Regular Certificates. Additionally, the OID Regulations do not contain
provisions specifically interpreting Code Section 1272(a)(6).
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Qualified Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates. As stated above, the Contingent Regulations do not apply
to debt instruments such as the REMIC Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount with respect to all other debt instruments having
market discount that such Certificateholder acquires during the year of the
election or thereafter. Similarly, a Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See "--
REMIC Regular Certificates -- Premium" herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, "market discount" equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, such election
will apply to all market discount bonds acquired by such Certificateholder on or
after the first day of the first taxable year to which such election applies.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment or
a prepayment) or any gain on disposition of a market discount bond acquired by
the taxpayer after October 22, 1986, shall be treated as ordinary income to the
extent that it does not exceed the accrued market discount at the
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time of such payment. The amount of accrued market discount for purposes of
determining the tax treatment of subsequent principal payments or dispositions
of the market discount bond is to be reduced by the amount so treated as
ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) a fraction, the numerator of
which is the amount of stated interest paid during the accrual period and the
denominator of which is the total amount of stated interest remaining to be paid
at the beginning of the period. For purposes of calculating market discount
under any of the above methods in the case of instruments (such as the REMIC
Regular Certificates) that provide for payments that may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount also
may be required to defer a portion of its interest deductions for the taxable
year attributable to any indebtedness incurred or continued to purchase or carry
such Certificate purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
Premium. A purchaser of a REMIC Regular Certificate that purchases the REMIC
Regular Certificate at a cost (not including accrued qualified stated interest)
greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment.
Deferred Interest. Certain classes of REMIC Regular Certificates may provide
for the accrual of Deferred Interest with respect to one or more ARM Loans. Any
Deferred Interest that accrues with respect to a class of REMIC Regular
Certificates will constitute income to the holders of such Certificates prior to
the time distributions of cash with respect to such Deferred Interest are made.
It is unclear, under the OID Regulations, whether any of the interest on such
Certificates will constitute qualified stated interest or whether all or a
portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and, therefore, applying the latter analysis may result only
in a slight difference in the timing of the inclusion in income of interest on
such REMIC Regular Certificates.
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Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under "-- Market Discount" above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a "capital asset" (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate 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 such holder's income with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be "evidences of indebtedness" within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a statement of
the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information necessary
to compute the accrual of any market discount that may arise upon secondary
trading of REMIC Regular Certificates. Because exact computation of the accrual
of market discount on a constant yield method would require information relating
to the holder's purchase price which the REMIC may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
("Payment Lag Certificates") may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution Date to
Distribution Date. If a portion of the initial purchase price of a REMIC Regular
Certificate is allocable to interest that has accrued prior to the issue date
("pre-issuance accrued interest") and the REMIC Regular Certificate provides for
a payment of stated interest on the first payment date (and the first payment
date is within one year of the issue date) that equals or exceeds the amount of
the pre-issuance accrued interest, then the REMIC Regular Certificates' issue
price may be computed by subtracting from the issue price the amount of
pre-issuance accrued interest, rather than as an amount payable on the REMIC
Regular Certificate. However, it is unclear under this method how the OID
Regulations treat interest on Payment Lag Certificates. Therefore, in the case
of a Payment Lag Certificate, the Trust Fund intends to include accrued interest
in the issue price and report interest payments made on the first Distribution
Date as interest to the extent such payments represent interest for the number
of days that the Certificateholder has held such Payment Lag Certificate during
the first accrual period.
Investors should consult their own tax advisors concerning the treatment for
federal income tax purposes of Payment Lag Certificates.
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Non-Interest Expenses of the REMIC. Under temporary Treasury regulations, if
the REMIC is considered to be a "single-class REMIC," a portion of the REMIC's
servicing, administrative and other non-interest expenses will be allocated as a
separate item to those REMIC Regular Certificateholders that are "pass-through
interest holders." Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Regular Certificates. See "Pass-Through of Non-Interest
Expenses of the REMIC" under "Taxation of Owners of REMIC Residual Certificates"
below.
Prepayment Premiums and Yield Maintenance Charges. The portion of any
Prepayment Premium or Yield Maintenance Charge received by any Holder in excess
of the Holder's basis allocable to the Qualified Loan which is being prepaid may
be treated as short-term or long-term capital gain. Generally, premiums or
charges to the extent passed through as distributions, are treated as producing
capital gain rather than ordinary income for investors that hold a debt security
as a capital asset. It is unclear under the REMIC Regulations whether such
portion will be treated as capital gain or additional interest. The holding
period for long-term capital gain is one year for the Certificates. Holders
should consult their tax advisors regarding the taxable status of such
Prepayment Premiums or Yield Maintenance Charges.
Non-U.S. Persons. Generally, payments of interest (including any payment with
respect to accrued OID) on the REMIC Regular Certificates to a REMIC Regular
Certificateholder who is not a U.S. Person and is not engaged in a trade or
business within the United States will not be subject to federal withholding tax
if (i) such REMIC Regular Certificateholder does not actually or constructively
own 10 percent or more of the combined voting power of all classes of equity in
the Issuer; (ii) such REMIC Regular Certificateholder is not a controlled
foreign corporation (within the meaning of Code Section 957) related to the
Issuer; and (iii) such REMIC Regular Certificateholder complies with certain
identification requirements (including delivery of a statement, signed by the
REMIC Regular Certificateholder under penalties of perjury, certifying that such
REMIC Regular Certificateholder is a foreign person and providing the name and
address of such REMIC Regular Certificateholder). If a REMIC Regular
Certificateholder is not exempt from withholding, distributions of interest to
such holder, including distributions in respect of accrued OID, may be subject
to a 30% withholding tax, subject to reduction under any applicable tax treaty.
Further, a REMIC Regular Certificate will not be included in the estate of a
non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons related
to such holders should not acquire any REMIC Residual Certificates, and holders
of REMIC Residual Certificates (the "REMIC Residual Certificateholder") and
persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual Certificates. The
REMIC will not be subject to federal income tax except with respect to income
from prohibited transactions and certain other transactions. See "-- Prohibited
Transactions and Other Taxes" below. Instead, each original
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holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be "portfolio income" for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of "passive losses."
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable income
from the REMIC Residual Certificate in excess of the cash distributed. For
example, a structure where principal distributions are made serially on regular
interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Qualified
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its federal
income tax return amounts representing a daily share of the taxable income of
the REMIC for each day that such REMIC Residual Certificateholder owns such
REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See "-- Sale or Exchange of REMIC
Residual Certificates" below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
Taxable Income of the REMIC Attributable to Residual Interests. The taxable
income of the REMIC will reflect a netting of (i) the income from the Qualified
Assets and the REMIC's other assets and (ii) the deductions allowed to the REMIC
for interest and OID on the REMIC Regular Certificates and, except as described
above under "-- Taxation of Owners of REMIC Regular Certificates -- Non-Interest
Expenses of the REMIC," other expenses. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that (i) the limitations on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts, and (iii)
the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply. The REMIC's gross income includes interest,
original issue discount income, and market discount income, if any, on the
Qualified Loans, reduced by amortization of any premium on the Qualified Loans,
plus income on reinvestment of cash flows and reserve assets, plus any
cancellation of indebtedness income upon allocation of realized losses to the
REMIC Regular Certificates. Note that the timing of cancellation of indebtedness
income recognized by REMIC Residual Certificateholders resulting from defaults
and delinquencies on Qualified Assets may differ from the time of the actual
loss on the Qualified Asset. The REMIC's deductions include interest and
original issue discount expense on the REMIC Regular Certificates, servicing
fees on the Qualified Loans, other administrative expenses of the REMIC and
realized losses on the Qualified Loans. The requirement that REMIC Residual
Certificateholders report
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their pro rata share of taxable income or net loss of the REMIC will continue
until there are no Certificates of any class of the related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Qualified Assets and other assets of
the REMIC in proportion to their respective fair market value. A Qualified Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Qualified
Assets. Premium on any Qualified Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Qualified Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the cost
of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See "-- Sale or Exchange of REMIC Residual
Certificates" below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see "-- Allocation of the Income of
the REMIC to the REMIC Residual Certificates" above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of REMIC
Residual Certificateholders that are individuals or closely held corporations to
deduct net losses may be subject to additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual Certificate
should be aware that the IRS recently released proposed regulations (the
"Proposed Mark-to-Market Regulations") which provide that a REMIC Residual
Certificate acquired after January 3, 1995 cannot be marked-to-market. The
Proposed Mark-to-Market Regulations change the temporary regulations which
allowed a Residual Certificate to be marked-to-market provided that it was not a
"negative value" residual interest and did not have the same economic effect as
a "negative value" residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all of
the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will
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be allocated, under temporary Treasury regulations, among the REMIC Regular
Certificateholders and the REMIC Residual Certificateholders on a daily basis in
proportion to the relative amounts of income accruing to each Certificateholder
on that day. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and is structured with the principal purpose of avoiding the single class
REMIC rules. The expenses of the REMIC will be allocated to holders of the
related REMIC Residual Certificates in their entirety and not to holders of the
related REMIC Regular Certificates.
In the case of individuals (or trusts, estates or other persons that compute
their income in the same manner as individuals) who own an interest in a REMIC
Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g. a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other "miscellaneous
itemized deductions" of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the "Applicable Amount") will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term "pass-through interest
holder" generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an "excess inclusion") for any calendar quarter
will, with an exception discussed below for certain thrift institutions, be
subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as "unrelated business taxable income" within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see "-- Tax-Exempt Investors" below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See "-- Non-U.S. Persons" below.
The exception for thrift institutions is available only to the institution
holding the REMIC Residual Certificate and not to any affiliate of the
institution, unless the affiliate is a subsidiary all the stock of which, and
substantially all the indebtedness of which, is held by the institution, and
which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the "daily accruals" (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate 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 REMIC Residual Certificate at the beginning of the
calendar quarter and 120 percent of the "Federal long-term rate" in effect at
the time the REMIC Residual Certificate is issued. For this purpose, the
"adjusted issue price" of a REMIC Residual Certificate at the beginning of any
calendar
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quarter equals the issue price of the REMIC Residual Certificate, 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 REMIC Residual
Certificate 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.
As an exception to the general rule described above, the Treasury Department
has authority to issue regulations that would treat the entire amount of income
accruing on a REMIC Residual Certificate as excess inclusions if the REMIC
Residual Certificates in the aggregate are considered not to have "significant
value." Under the REMIC Regulations, REMIC Residual Certificateholders that are
thrift institutions described in Code Section 593 can offset excess inclusions
with unrelated deductions, losses and loss carryovers provided the REMIC
Residual Certificates have "significant value". For purposes of applying this
rule, thrift institutions that are members of an affiliated group filing a
consolidated return, together with their subsidiaries formed to issue REMICs,
are treated as separate corporations. REMIC Residual Certificates have
"significant value" if: (i) the REMIC Residual Certificates have an aggregate
issue price that is at least equal to 2% of the aggregate issue price of all
REMIC Residual Certificates and REMIC Regular Certificates with respect to the
REMIC and (ii) the anticipated weighted average life of the REMIC Residual
Certificates is at least 20% of the anticipated weighted average life of the
REMIC based on the anticipated principal payments to be received with respect
thereto (using the Prepayment Assumption and any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents), except that all anticipated distributions are to be used to
calculate the weighted average life of REMIC Regular Certificates that are not
entitled to any principal payments or are entitled to a disproportionately small
principal amount relative to interest payments thereon and all anticipated
distributions are to be used to calculate the weighted average life of the REMIC
Residual Certificates. The principal amount will be considered
disproportionately small if the issue price of the REMIC Residual Certificates
exceeds 125% of their initial principal amount. Finally, an ordering rule under
the REMIC Regulations provides that a thrift institution may only offset its
excess inclusion income with deductions after it has first applied its
deductions against income that is not excess inclusion income.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such REMIC
Residual Certificates, reduced (but not below zero) by the real estate
investment trust taxable income (within the meaning of Code Section 857(b)(2),
excluding any net capital gain), will be allocated among the shareholders of
such trust in proportion to the dividends received by such shareholders from
such trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the "wash sale" rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset.
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However, REMIC Residual Certificates will be "evidences of indebtedness" within
the meaning of Code Section 582(c)(1), so that gain or loss recognized from sale
of a REMIC Residual Certificate by a bank or thrift institution to which such
section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller of
a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a "taxable mortgage pool" (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the "wash
sale" rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived from
"prohibited transactions" (the "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Qualified Asset, the receipt of income from a source other than
a Qualified Asset or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Qualified Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the "Contributions Tax"). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat such
Trust Fund as a REMIC may also 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. "Net income
from foreclosure property" generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Central Servicer's,
Trustee's or Seller's obligations, as the case may be, under the related
Agreement for such Series, such tax will be borne by such Master Servicer,
Central Servicer, Trustee or Seller, as the case may be, out of its own funds or
(ii) the Seller's obligation to repurchase a Qualified Loan, such tax will be
borne by the Seller. In the event that such Master Servicer, Central Servicer,
Trustee or Seller, as the case may be, fails to pay or is not required to pay
any such tax as provided above, such tax will be payable out of the Trust Fund
for such Series and will be covered under the Farmer Mac Guarantee.
LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
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The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its "unrelated business
taxable income" within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See "-- Taxation of Owners
of REMIC Residual Certificates -- Excess Inclusions" above.
RESIDUAL CERTIFICATE PAYMENTS -- NON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see "-- Taxation of Owners of REMIC Regular Certificates -- Non-U.S. Persons"
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as "portfolio interest," subject to the conditions
described in "-- Taxation of Owners of REMIC Regular Certificates" above, but
only to the extent that the underlying mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See "-- Taxation of Owners of REMIC Residual
Certificates -- Excess Inclusions" above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the REMIC Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See "-- Taxation of Owners of REMIC Residual Certificates --
Excess Inclusions" above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see "-- Tax-Related Restrictions on Transfers of REMIC Residual
Certificates" below.
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REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless there
are reasonable arrangements designed to ensure that residual interests in such
entity are not held by "disqualified organizations" (as defined below). Further,
a tax is imposed on the transfer of a residual interest in a REMIC to a
"disqualified organization." The amount of the tax equals the product of (A) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated "excess inclusions" with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A "disqualified
organization" means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
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, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on "unrelated business taxable income" and
(C) a rural electric or telephone cooperative.
A tax is imposed on a "pass-through entity" (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of liability
for the tax if such record holder furnishes to such entity an affidavit that
such record holder is not a disqualified organization and, for such period, the
pass-through entity does not have actual knowledge that the affidavit is false.
For this purpose, a "pass-through entity" means (i) a regulated investment
company, real estate investment trust or common trust fund, (ii) a partnership,
trust or estate and (iii) certain cooperatives. Except as may be provided in
Treasury regulations not yet 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 tax on pass-through entities
is generally effective for periods after March 31, 1988, except that in the case
of regulated investment companies, real estate investment trusts, common trust
funds and publicly-traded partnerships the tax shall apply only to taxable years
of such entities beginning after December 31, 1988. Under proposed legislation,
large partnerships (generally with 250 or more partners) will be taxable on
excess inclusion income as if all partners were disqualified organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard, for
federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a "U.S. Person," as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment
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or collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest 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. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a REMIC
Residual Certificate that has a "tax avoidance potential" to a "foreign person"
will be disregarded for federal income tax purposes. This rule appears to apply
to a transferee who is not a U.S. Person unless such transferee's income in
respect of the REMIC Residual Certificate is effectively connected with the
conduct of a United Sates trade or business. A REMIC Residual Certificate is
deemed to have a tax avoidance potential unless, at the time of transfer, the
transferor reasonably expect that the REMIC will distribute to the transferee
amounts that will equal at least 30 percent of each excess inclusion, and that
such amounts will be distributed at or after the time the excess inclusion
accrues and not later than the end of the calendar year following the year of
accrual. If the non-U.S. Person transfers the REMIC Residual Certificate to a
U.S. Person, the transfer will be disregarded, and the foreign transferor will
continue to be treated as the owner, if the transfer has the effect of allowing
the transferor to avoid tax on accrued excess inclusions. The provisions in the
REMIC Regulations regarding transfers of REMIC Residual Certificates that have
tax avoidance potential to foreign persons are effective for all transfers after
June 30, 1992. The Agreement will provide that no record or beneficial ownership
interest in a REMIC Residual Certificate may be transferred, directly or
indirectly, to a non-U.S. Person unless such person provides the Trustee with a
duly completed IRS Form 4224 and the Trustee consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a
pass-through entity.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
income tax consequences of the acquisition, ownership, and disposition of the
Certificates. State income tax law may differ substantially from the
corresponding federal law, and this discussion does not purport to describe any
aspect of the income tax laws of any state. Therefore, potential investors
should consult their own tax advisors with respect to the various tax
consequences of investments in the Certificates.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
imposes certain restrictions on employee benefit plans and certain other
retirement arrangements subject to ERISA ("Plans") and on persons who are
parties in interest or disqualified persons ("parties in interest") with respect
to such Plans. Certain employee benefit plans, such as governmental plans and
church plans (if no election has been made under Code Section 410(d)), are not
subject to the requirements of ERISA, and assets of such plans may be invested
in Certificates without regard to the ERISA considerations described below,
subject to the provisions of other applicable federal and state law. If the
assets of a Trust Fund were deemed to be plan assets, (i) the prudence standards
and other provisions of Title I of ERISA applicable to investments by Plans and
their fiduciaries would extend (as to all fiduciaries) to all assets of the
Trust Fund and (ii) transactions involving the assets of the Trust Fund and
parties in interest or disqualified persons with respect to such plans might be
prohibited under ERISA Section 406 and Code Section 4975 unless an exemption is
applicable. Under ERISA, parties in interest include, among others, fiduciaries,
service providers and employers whose employees are covered by a Plan.
A fiduciary with respect to a Plan is a person who (i) exercises any
discretionary authority or discretionary control respecting management of a Plan
or exercises any authority or control respecting management or disposition of
its assets, (ii) renders investment advice for a fee or other compensation,
direct or indirect, with respect to any monies or other property of such Plan,
or has any authority or responsibility to do so, or (iii) has any discretionary
authority or discretionary responsibility in the administration of such Plan.
In considering an investment in the Certificates, a fiduciary should consider
(i) whether the investment is prudent and in accordance with the documents and
instruments governing the Plan and is appropriate for the Plan in light of the
Plan's investment portfolio taken as a whole, (ii) whether the investment
satisfies the diversification requirements of Section 404(a)(1)(C) of Title I of
ERISA, and (iii) in the case of a Plan described in Code Section 401(a)
("Qualified Plan") or an individual retirement account ("IRA") whether the
investment will result in unrelated business taxable income to the Qualified
Plan or IRA.
PLAN ASSETS
ERISA standards of conduct are imposed on parties, such as fiduciaries, who
have authority to deal with "plan assets." Final regulations defining plan
assets in the context of plan investments in other entities have been issued by
the Department of Labor ("Final Regulations"). The Final Regulations set forth
the general rule that, when a Plan (which term shall include for purposes of
this discussion Qualified Plans, IRAs and any other plan described in Code
Section 4975 (a "Code Section 4975 Plan") invests in another entity, the Plan's
assets include its investment, but do not, solely by reason of such investment,
include any of the underlying assets of the entity. The general rule does not
apply, however, if a Plan acquires an equity interest in an entity that is
neither a publicly-offered security nor a security issued by an investment
company registered under the Investment Company Act of 1940. If the general rule
does not apply, a Plan's assets include both the equity interest and an
undivided interest in each of the underlying assets of the entity, unless it is
established that (i) the entity is an operating company or
63
<PAGE>
(ii) equity participation in the entity by benefit plan investors is not
significant. Equity participation in the Trust would be considered significant
if immediately after the most recent acquisition of any equity interest, 25% or
more of the value of any class of equity interests in the Trust is held by Plan
investors.
In addition, the Final Regulations provide that where a Plan acquires a
guaranteed government mortgage pool certificate, the Plan's assets include the
certificate and all of its rights with respect to such certificate under
applicable law, but do not, solely by reason of the Plan's holding of such
certificate, include any of the mortgages underlying such certificate. The term
"guaranteed governmental mortgage pool certificate" is defined as a certificate
backed by, or evidencing an interest in, specified mortgages or participation
interests therein, and with respect to which interest and principal payable
pursuant to the certificate is guaranteed by the United States or an agency or
instrumentality thereof. Although the Certificates may satisfy the governmental
mortgage pool exemption set forth in the Final Regulations, no assurance can be
given that the Department of Labor or any other authority would concur with such
analysis.
A "publicly-offered security" is one that is freely transferable, part of a
class of securities that is widely held and is either (i) part of a class of
securities registered under section 12(b) or 12(g) of the Exchange Act or (ii)
sold as part of an offering of securities to the public pursuant to an effective
registration statement under the 1933 Act and the class of securities of which
such security is a part is registered under the Exchange Act within 120 days (or
a later time as permitted by the Securities and Exchange Commission) after the
end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. A class of securities is widely held only if
it is a class of securities that is owned by 100 or more investors independent
of the issuer and one another. It is unlikely that the Certificates offered
hereby will be considered to be publicly-offered securities.
PROHIBITED TRANSACTIONS
A broad range of transactions between parties-in-interest and Plans are
prohibited by ERISA. The acquisition of a Certificate by a Plan subject to ERISA
or Code Section 4975 could result in prohibited transactions or other violations
of the fiduciary responsibility provisions of ERISA and Code Section 4975.
Certain exemptions from the prohibited transaction rules could be applicable,
depending in part upon the type and circumstances of the Plan fiduciary making
the decision to acquire a Certificate.
Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1") generally exempts
from the application of the prohibited transaction rules transactions relating
to the operation of a "mortgage pool" and the purchase, sale, and holding of
"mortgage pool pass-through certificates," provided that certain conditions set
forth in PTCE 83-1 are satisfied. The term "mortgage pool pass-through
certificate" is defined in PTCE 83-1 as "a certificate representing a beneficial
undivided fractional interest in a mortgage pool and entitling the holder of
such a certificate to pass-through payments of principal and interest from the
pooled mortgage loans, less any fees retained by the pool sponsor." The term
"mortgage pool" is defined as an investment pool the corpus of which is held in
trust and consists solely of (i) interest bearing obligations secured by either
first or second mortgages or deeds of trust on single-family residential
property, (ii) property which had secured such obligations and which had been
acquired by foreclosure, and (iii) undistributed cash. Single-family,
residential property is non-farm property comprising one to four dwelling units,
including condominiums. It appears that, for purposes of PTCE 83-1, the term
"mortgage pool pass-through certificate" would not include Certificates.
If for this or any other reasons PTCE 83-1 does not provide an exemption for
a particular Plan desiring to invest in the Certificates, one of five other
prohibited transaction class exemptions issued by the Department of Labor might
apply, i.e., PTCE 84-14 (Class Exemption for Plan Asset Transactions Determined
by Independent Qualified Professional Asset Managers), PTCE 96-23 (Class
Exemption for Plan Asset Transactions Determined by In-House Asset Managers),
PTCE 91-38 (Class Exemption for Certain Transactions Involving Bank Collective
Investment Funds), PTCE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts) or PTCE 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts). There can be
no assurance that any of these class exemptions will apply with respect to any
particular Plan desiring to invest in the Certificates or, even if it were to
apply, that the exemption would apply to all transactions involving the Pool.
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Before purchasing any Certificates, a Plan fiduciary should determine whether
any ERISA prohibited transaction exemption is applicable.
Special caution should be exercised before the assets of a Plan are used to
purchase a Certificate in circumstances where an affiliate of the Seller, the
Originator, the Central Servicer, or the Trustee either: (a) has investment
discretion with respect to the investment of such assets of such Plan or (b) has
authority or responsibility to give, or regularly gives investment advice with
respect to such assets for a fee and pursuant to an agreement or understanding
that such advice will serve as a primary basis for investment decisions with
respect to such assets and that such advice will be based on the particular
investment needs of the Plan.
Any Plan fiduciary considering whether to purchase any Certificates on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Each Plan fiduciary also should determine whether,
under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the Plan
taking into consideration the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
METHOD OF DISTRIBUTION
The Certificates offered by the related Prospectus Supplements may be (i)
issued to Sellers or Originators in exchange for Qualified Loans or (ii) sold
either directly or to underwriters for immediate resale in a public offering.
The Prospectus Supplement for each Series of Certificates will set forth the
method of distribution, and, in the case of any sale to underwriters, will
additionally set forth the terms of the offering of the Certificates of such
Series offered thereby, including the name or names of the underwriters, the
purchase price of such Certificates, the proceeds from such sale, and, in the
case of an underwritten fixed price offering, the initial public offering price,
the discounts and commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers.
The Certificates of a Series may be acquired by underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
underwriters will be subject to certain conditions precedent and such
underwriters will be severally obligated to purchase all of the Certificates of
a Series offered by the Prospectus Supplement for such Series if any are
purchased. If the Certificates of a Series are offered other than through
underwriters, the Prospectus Supplement for such Series will contain information
regarding the nature of such offering and any agreements to be entered into with
respect to the purchase of such Certificates.
The place and time of delivery for the Certificates of a Series in respect of
which this Prospectus is delivered will be set forth in the Prospectus
Supplement for such Series.
LEGAL INVESTMENT
The Certificates will constitute securities guaranteed by Farmer Mac for
purposes of the Farmer Mac Charter and, as such, will, by statute, be legal
investments for any persons, trusts, corporations, partnerships, associations,
business trusts and business entities (including depository institutions, life
insurance companies and pension funds) created pursuant to or existing under the
laws of the United States or (except as indicated below) of any State (including
the District of Columbia and Puerto Rico) 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 the Farmer Mac Charter, if a State enacted
legislation prior to January 6, 1996 specifically limiting the legal investment
authority of any state-chartered entities with respect to Farmer Mac guaranteed
securities, such securities will constitute legal investments for entities
subject to such legislation only to the extent provided therein. Farmer Mac is
unaware of any state that has enacted such legislation prior to the deadline
therefor in the Farmer Mac Charter.
65
<PAGE>
The Farmer Mac Charter thus allows federal savings and loan associations and
federal savings banks to invest in Farmer Mac guaranteed securities without
limitation as to the percentage of their assets represented thereby; federal
credit unions to invest in Farmer Mac guaranteed securities without limitation
as to percentage of capital and surplus; and allows national banks to purchase
Farmer Mac guaranteed securities for their own account without regard to the
limitation generally applicable to investment securities set forth in 12 U.S.C.
Section24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In addition, on July 9, 1990, the
Comptroller of the Currency issued an interpretation that Farmer Mac guaranteed
securities of the type offered hereby are eligible for dealing in and
underwriting by national banks.
Relevant regulatory authorities may impose administrative restrictions on
investment in Certificates with special characteristics, such as interest only
and principal only certificates.
Investors should consult their own legal advisors in determining whether and
to what extent the Certificates constitute legal investments for such investors.
66
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms shall
have the meanings set forth on the pages indicated below:
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
1933 Act......................................... 22
1986 Act......................................... 44
1991 Act......................................... 22
1996 Amendment................................... 5
Accounts......................................... 31
Accrual Certificates............................. 9,23
Accrual Period................................... 50
Accrued Certificate Interest..................... 24
Adjusted Issue Price............................. 45
Advance.......................................... 11,25
Agreements....................................... 29
Agricultural Real Estate......................... 6
AMBS............................................. 1,5
AMBS Information................................. 3
Applicable Amount................................ 57
Appraisal Standards.............................. 15
ARM Loans........................................ 17,44
Balloon Payments................................. 7
Beneficial Owners................................ 27
Book-Entry Certificates.......................... 23
Borrower......................................... 18
Central Servicer................................. 5
Central Servicing Fee............................ 34
Certificate Account.............................. 32
Certificate Account Deposit Date................. 32
Certificate Balance.............................. 9,24
Certificateholders............................... 15,27
Certificates..................................... 1,5
Class............................................ 2
Cleanup Costs.................................... 38
Closing Date..................................... 48
Code............................................. 11
Code Section 4975 Plan........................... 63
Collection Account............................... 31
Commission....................................... 3
Contingent Regulations........................... 51
67
<PAGE>
PAGE
-------
Contributions Tax................................ 59
CPR.............................................. 21
Cut-off Date..................................... 10
Deferred Interest................................ 45
Definitive Certificates.......................... 23,28
Depository....................................... 26
Determination Date............................... 23
Disqualified Organizations....................... 61
Distribution Date................................ 10
Eligible Depository.............................. 31
Eligible Investment.............................. 31
ERISA............................................ 63
Excess inclusion................................. 57
Excess servicing................................. 43
Exchange Act..................................... 3
Farmer Mac....................................... 1,5,21
Farmer Mac Charter............................... 5,21
Farmer Mac Guarantee............................. 1
FCA.............................................. 22
Fed System....................................... 26
Final Regulations................................ 63
Grantor Trust Certificates....................... 11
Guaranteed Governmental Mortgage Pool
Certificate...................................... 64
Guaranteed Portion............................... 1,6,18
Guides........................................... 6
Holders.......................................... 27
Indirect Participants............................ 27
Insurance Proceeds............................... 31
IRA.............................................. 63
IRS.............................................. 41
Legislative History.............................. 44
Liquidation Proceeds............................. 31
Master REMIC..................................... 47
Master Servicer.................................. 5
Mortgage Interest Rate........................... 6
Mortgaged Notes.................................. 36
Mortgaged Pool................................... 64
Mortgage Pool Pass-Through Certificates ......... 64
Mortgaged Properties............................. 6
OID.............................................. 39,41
68
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PAGE
----------
OID Regulations.................................. 41
Originator....................................... 22
Owner............................................ 18
Participants..................................... 27
Parties in interest.............................. 63
Pass-Through entity.............................. 61
Pass-Through Rate................................ 9,24
Payment Lag Certificates......................... 53
phantom income................................... 55
Plans............................................ 63
Pool............................................. 1
pre-issuance accrued interest.................... 53
Prepayment ...................................... 21
Prepayment Assumption............................ 44
Prohibited Transactions Tax...................... 59
Proposed Mark-to-Market Regulations.............. 57
PTCE 83-1........................................ 64
Publicly-Offered Security........................ 64
Purchase Price................................... 30
QMBS............................................. 1,6
QMBS Agreement................................... 17
QMBS Issuer...................................... 17
QMBS Servicer.................................... 17
QMBS Trustee..................................... 17
Qualified Assets................................. 1
Qualified Loans.................................. 1,5
Qualified Loan Pool.............................. 10
Qualified Mortgage............................... 47
Qualified Plan................................... 63
Record Date...................................... 23
Related Proceeds................................. 25
REMIC............................................ 11
REMIC Certificates............................... 47
REMIC Regular Certificateholders................. 48
REMIC Regular Certificates....................... 11,47
REMIC Regulations................................ 39
REMIC Residual Certificateholder................. 54
REMIC Residual Certificates...................... 11,47
REO Proceeds..................................... 31
Sale Agreement................................... 9
69
<PAGE>
PAGE
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Secretary's Guarantee............................ 18
Sellers.......................................... 9
Series........................................... 1
State Environmental Lien......................... 38
Stripped ARM Obligations......................... 45
Stripped Bond Certificates....................... 42
Stripped Coupon Certificates..................... 42
Stripped Interest Certificates................... 9,23
Stripped Principal Certificates.................. 9,23
Subsidiary REMIC................................. 47
Super-Premium Certificates....................... 49
System Institution............................... 22
Trust Assets..................................... 2
Trust Fund....................................... 1
Trust Fund AMBS.................................. 6
Trustee.......................................... 5
UCC.............................................. 27
Underwriting Standards........................... 15
Unguaranteed Portion............................. 18
U.S. Person...................................... 46
Yield Maintenance Charge......................... 7,14
</TABLE>
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Depositor or by the Underwriter.
This Prospectus Supplement and the Prospectus do not constitute an offer to
sell, or a solicitation of an offer to buy, the securities offered hereby by
anyone in any jurisdiction in which such an offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make any s$15,936,400r
solicitation. Neither the delivery of this Prospectus Supplement and the
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that information herein or therein is correct as of any time since
the date of this Prospectus Supplement or the Prospectus.
--------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Page
Summary of Terms
Risk Factors ............................................................ S-7
Description of the Qualified Loans .................................... S-7
Description of the Certificates ......................................... S-8
Farmer Mac Guarantee .................................................... S-11
Outstanding Guarantees .................................................. S-12
Yield, Prepayment and Maturity Considerations ........................... S-12
Description of the Agreements........................................... S-14
The Depositor ........................................................... S-15
Certain Federal Income Tax Consequences ................................. S-15
ERISA Considerations .................................................... S-16
Legal Investment ........................................................ S-16
Method of Distribution .................................................. S-17
Incorporation of Certain Documents by Reference ......................... S-17
Experts ................................................................. S-17
Legal Matters............................................................ S-18
Index of Principal Terms................................................. S-19
Annex I: Description of the Qualified Loan Pools ........................ A-1
PROSPECTUS
Prospectus Supplement ................................................... 2
Available Information ................................................... 3
Incorporation of Certain Documents by Reference ......................... 4
Summary of Prospectus ................................................... 5
Risk Factors ............................................................ 13
Description of the Trust Funds ......................................... 15
Use of Proceeds ......................................................... 19
Yield Considerations .................................................... 19
The Depositor ........................................................... 21
Federal Agricultural Mortgage Corporation ............................... 21
Description of the Certificates ......................................... 23
Description of the Agreements ........................................... 29
Certain Legal Aspects of Qualified Loans and Other Matters .............. 36
Certain Federal Income Tax Consequences ................................. 39
State Tax Considerations ................................................ 63
ERISA Considerations .................................................... 63
Method of Distribution .................................................. 65
Legal Investment ........................................................ 65
Index of Principal Terms ................................................ 67
--------------
Until 90 days after the date of this Prospectus Supplement, all de alers
effecting transactions in the Certificates offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus
Supplement and Prospectus to which it relates. This is in addition to the
obligation of dealers to deliver a Prospectus Supplement and Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
================================================================================
$15,936,400
FARMER MAC
GUARANTEED AGRICULTURAL
MORTGAGE-BACKED
SECURITIES
FEDERAL AGRICULTURAL
MORTGAGE CORPORATION
----------------------
PROSPECTUCS SUPPLEMENT
----------------------
BEAR, STEARNS & CO. INC.
November 21, 1996
================================================================================
