PROSPECTUS SUPPLEMENT
(To Prospectus dated May 22, 1997)
$15,419,349
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
1
GUARANTEED AGRICULTURAL MORTGAGE-BACKED SECURITIES
Guaranteed Agricultural Mortgage-Backed Securities offered hereby (the
"Certificates") evidence beneficial ownership interests in a trust fund (the
"Trust Fund") consisting primarily of one or more pools (each, a "Pool") of
agricultural real estate mortgage loans ("Qualified Loans"). 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-8 and in the
Prospectus on Page 16.
<TABLE>
<CAPTION>
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Class Original CUSIP Initial Payment Initial Final
Designation Principal Number Weighted Frequency Distribution Distribution
(1) Amount(2) Average Date Date (4)
Pass-Through
Rate(3)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Pool AM1008 $2,089,000 31316UH0 6.503% Monthly September 25, 1998 September 25, 2013
Pool AS1027 9,178,349 31316EA4 5 6.641 Semi-annua1 January 25, 1999 July 25, 2013
Pool CS1023 4,152,000 31316RAY 0 6.644 Semi-annual January 25, 1999 July 25, 2003
</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 underlying Qualified Loans included in the related Pool.
(2) Approximate, subject to a permitted variance of plus or minus 5% with
respect to each Pool.
(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 underlying Qualified Loans in the
related Pool. It is expected that the Pass-Through Rates for the initial
Interest Accrual Period for each Class of Certificates will be approximately the
applicable rates per annum set forth in the above table. 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 underlying Qualified Loans 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 102.1%
of the aggregate initial Certificate Balances (subject to increase if proceeds
to the Underwriter exceed certain levels), plus accrued interest thereon from
August 1, 1998 (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 issued in book-entry form, and
beneficial interests therein will be held through the book-entry system of the
Federal Reserve Banks, on or about August 26, 1998 (the "Closing Date").
Bear, Stearns & Co. Inc.
The date of this Prospectus Supplement is August 21, 1998.
<PAGE>
Each Class of Certificates will be issued in an original Class Certificate
Balance equal to the original principal amount of the related Pool. The initial
Class Certificate Balance of each Class of Certificates is subject to the
permitted variance set forth on the cover hereof with respect to the related
Pool.
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") determined as set forth on the cover page hereof 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 underlying 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. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
On any Distribution Date 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 "Termination Percentage"), the Master Servicer may purchase
from the Trust Fund all remaining Qualified Loans and thereby effect an early
retirement of the Certificates outstanding at such time. See "DESCRIPTION OF THE
AGREEMENTS--Optional Termination" herein and "DESCRIPTION OF THE
CERTIFICATES--TERMINATION" in the Prospectus.
The Qualified Loans will be directly serviced by Equitable Agri-Business,
Inc. or Zions First National Bank (each, a "Central Servicer") which will act on
behalf of Farmer Mac as described herein. See "DESCRIPTION OF THE AGREEMENTS"
herein.
The terms "Holder" and "Holders" used herein refer to both holders of
Book-Entry Certificates (as defined herein) and holders of Certificates which
are not Book-Entry Certificates, unless specific reference is made only to
either holders of Book-Entry Certificates or holders of Certificates which are
not Book-Entry Certificates.
The Certificates offered hereby constitute Guaranteed Agricultural
Mortgage-Backed Securities offered from time to time pursuant to a Prospectus
dated May 22, 1997 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.
---------------------------
<PAGE>
The Trust Fund will be treated as a grantor trust for federal income tax
purposes; no election will be made to treat the Trust Fund as a real estate
mortgage investment conduit. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
herein and in the Prospectus.
---------------------------
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Certificates, whether or not participating in this
distribution, may be required to deliver a Prospectus Supplement and the
Prospectus to which it relates. This 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.
---------------------------
All documents and reports filed or caused to be filed by the Depositor
subsequent to the date of this Prospectus Supplement with respect to the Trust
Fund pursuant to Sections 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 Supplement
and to be a part hereof. In addition, Farmer Mac's Annual Report on Form 10-K
for the year ended December 31, 1997, and any subsequent reports filed with the
Commission pursuant to Sections 13(a) or 15(d) of the Exchange Act shall also be
deemed to be incorporated by reference in this Prospectus Supplement and to be a
part hereof. All documents and reports filed by Farmer Mac pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus Supplement and prior to the termination of any offering made by this
Prospectus Supplement will likewise be deemed to be incorporated by reference
herein and to be a part hereof.
Any periodic reports filed by the Depositor or Farmer Mac under the
Exchange Act as described in the Prospectus can be inspected at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, DC 20549, and its Regional Offices
located as follows: Chicago Regional Office, Citicorp Center, 500 Madison
Street, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. The Commission maintains a World Wide Web site
on the Internet at http://www.sec.gov. that contains reports, proxy and other
information regarding registrants that file electronically with the Commission.
<PAGE>
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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 one or more
Classes, as set forth on the cover page hereof.
Each Class of Certificates will separately
evidence the right to receive distributions in
respect of the Pool of Qualified Loans having the
corresponding alpha-numerical designation and will
be issued in an original Class Certificate Balance
equal to the original principal amount of such
Pool. The initial Class Certificate Balance of
each Class of Certificates is subject to a
permitted variance as provided on the cover
hereof. See "ANNEX I: DESCRIPTION OF THE QUALIFIED
LOAN POOLS" for detailed information on the
underlying 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 Holders
of interest on and principal (including any
principal payments with respect to balloon
payments on the related Qualified Loans) 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, or Zions First National Bank, a
national bank (each, a "Central Servicer"), each
of 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 ............... U.S. Bank 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 Agreement"), each among Farmer Mac, the
Depositor and the Trustee.
Cut-off Date .............. As set forth on the cover page hereof.
Closing Date .............. As set forth on the cover page hereof.
Distribution Dates ........ Distributions to Holders of the Certificates of
each Class will be made on an annual, semi-annual,
quarterly or monthly basis as specified on the
cover page hereof. Such monthly Distribution Dates
will occur on the 25th day of each month and such
annual, semi-annual, or quarterly Distribution
Dates will occur on the 25th day of each January,
April, July and October, as applicable (unless
such 25th day is not a Business Day, whereupon
such distribution will be made on the next
following Business Day), commencing on the initial
Distribution Date for such Class set forth on the
cover page hereof.
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 and
including 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. 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 (as defined
herein), (ii) the scheduled principal balance
<PAGE>
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. See "DESCRIPTION
OF THE CERTIFICATES--Distributions-- Principal"
herein.
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, made more than 6 months prior to the
maturity date of such Qualified Loan. The amount
of any Yield Maintenance Charge in respect of the
related Qualified Loan, to the extent collected by
the related 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
Class of Certificates the collection of any Yield
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)
agricultural real estate mortgage loans
(collectively, the "Qualified Loans"), (ii) the
Farmer Mac Guarantee and (iii) the Collection
Account, the Certificate Account (each as defined
in the Prospectus) and all cash and investments
held therein. 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 all of the Pools in the
Trust Fund is less than the Termination Percentage
as of the Cut-off Date, the Master Servicer may
repurchase from the Trust Fund all remaining
Qualified Loans and thereby effect an early
retirement of the Certificates outstanding at such
time. See "DESCRIPTION OF THE AGREEMENTS--Optional
Termination" herein and in "DESCRIPTION OF THE
CERTIFICATES--TERMINATION" in the Prospectus.
Certain Federal Income Tax
Consequences .............. The Trust Fund will be treated as a grantor trust
for federal income tax purposes and not as an
association taxable as a corporation; no election
will be made to treat the Trust Fund as a real
estate mortgage investment conduit. 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 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.
<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
appropriate 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 each Servicing Contract, the Central Servicer may not waive the
collection of any Yield Maintenance Charge without the prior written 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 in various degrees to the extent
such amounts are not collected. See "FARMER MAC GUARANTEE" herein.
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.
Relative Loan Sizes. As of the Cut-off Date, Pool CS1023 includes one
Qualified Loan which constitutes approximately 68% (by principal balance) of the
aggregate principal balance of such Pool and Pool AM1008 includes two Qualified
Loans which constitute approximately 31% and 24% (by principal balance) 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 any such Qualified Loan would have a disproportionate
effect on the Pass-Through Rate and yield of the related Class 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 the Qualified Loan Schedules in "ANNEX I: DESCRIPTION OF THE
QUALIFIED LOAN POOLS" at the end of this Prospectus Supplement for detailed
information regarding the Qualified Loans in each Pool.
Limited Number of Loans. As of the Cut-off Date, Pool AM1008 and Pool
CS1023 include 7 and 4 Qualified Loans, respectively. As is the case with
Qualified Loans having higher principal balances as described in the preceding
paragraph, the payment experience of one or more Qualified Loans in any such
<PAGE>
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, a natural disaster or local economic conditions may have a greater
impact on any such Pool than would be the case if such Pool were more
geographically diverse. 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 addition, the Pass-Through Rate and yield
on the related Class of Certificates may be materially and adversely affected by
any default or voluntary prepayment of the related Qualified Loans. See "ANNEX
I: DESCRIPTION OF THE QUALIFIED LOAN POOLS" and "YIELD, PREPAYMENT AND MATURITY
CONSIDERATIONS" herein.
DESCRIPTION OF THE QUALIFIED LOANS
The Trust Fund will consist primarily of one or more Pools of Qualified
Loans which will be assigned to the Trust Fund by the Depositor. For a detailed
description of certain characteristics of the Qualified Loans in 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 each Pool is subject to the permitted variance described on the cover page
hereof. Each Qualified Loan is secured by a first-lien on Agricultural Real
Estate (the "Mortgaged Properties"). The principal amount of any Qualified Loan
cannot exceed $3,490,000, as adjusted for inflation; except that the principal
amount of any Qualified Loan secured by Agricultural Real Estate comprised of
not more than 1,000 acres may not exceed $6,000,000. "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.
All of the Qualified Loans meet Farmer Mac's Underwriting and Appraisal
Standards (the "Underwriting Standards") with respect to newly originated loans.
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 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. See
"DESCRIPTION OF THE TRUST FUNDS--Qualified Loans--General" in the Prospectus.
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 description of the Qualified Loans and the related Mortgaged
Properties is based upon each Pool as constituted at the close of business on
<PAGE>
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 in
"ANNEX I: DESCRIPTION OF THE QUALIFIED LOAN POOLS" 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 related 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.
The information in ANNEX I with respect to the Qualified Loans will be
revised to reflect any adjustments in the composition of the Trust Fund and will
be included in a Form 8-K to be filed with the Commission within 15 days after
the Closing Date. Such information will be available to Holders promptly
thereafter through the facilities of the Commission as described on page S-3
herein and 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 the Cut-off
Date (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 the Closing
Date. Each Class of Certificates will be issued in an initial Class Certificate
Balance equal to the original principal amount of the related Pool.
The Certificates will evidence beneficial ownership interests in a trust
fund (the "Trust Fund") consisting primarily of (i) agricultural real estate
mortgage loans (collectively, the "Qualified Loans"); (ii) the Farmer Mac
Guarantee; and (iii) the Collection Account, the Certificate Account and all
cash and investments therein. Each Pool of Qualified Loans 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 Holders' access to the factor and other loan information to be
published periodically by Farmer Mac with respect thereto. The first three
digits are "loan identifiers." The first digit denotes the maximum original term
to maturity of the Qualified Loans in the Pool; the second digit denotes the
scheduled payment frequency with respect to the Qualified Loans in the Pool; the
third digit 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:
<TABLE>
<CAPTION>
1st Digit 2nd Digit 3rd Digit
--------- --------- ---------
<S> <C> <C>
A=15 year A=Annual 1=January
B=7 year S=Semi-annual 2=April
C=5 year Q=Quarterly 3=July
G=10 year M=Monthly 4=October
H=25 year (Part-time
Farm)
</TABLE>
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 "Holders of Book-Entry Certificates." A
Holder of Book-Entry Certificates 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.
Distributions
General. Distributions of principal and interest on the Certificates will
be made on an annual, semi-annual, quarterly or monthly basis as specified for
each Class on the cover page hereof. Such monthly Distribution Dates will occur
on the 25th day of each month and such annual, semi-annual, or quarterly
Distribution Dates will occur on the 25th day of each January, April, July and
October, as applicable, commencing on the date for each Class set forth on the
cover page hereof (each, a "Distribution Date"). 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.
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
<PAGE>
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 preceding Distribution Date (or, in the case of the first Distribution Date
for each Class, from the Cut-off Date) through and including 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 applicable 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.
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 make
available to financial publications and electronic services 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
applicable Central Servicer, the Master Servicer will distribute such amount,
<PAGE>
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 the related servicing fee
rates) on such prepaid amount (i.e., the amount that would have been received by
the related noteholder in the absence of the prepayment) over earnings
calculated at a prevailing interest rate (a specified Treasury yield) on such
prepaid amount. Amounts, if any, passed through to Holders 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 Holders 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
Under the terms of its Servicing Agreement, Zions First National Bank, as
Central Servicer, will be required to advance its own funds with respect to
delinquent Qualified Loans. Under the terms of its Servicing Agreement,
Equitable Agri-Business, Inc., as Central Servicer, will not be required to so
advance. Because Farmer Mac guarantees timely distribution of interest and
principal on the Certificates (including any balloon payments), the presence or
absence of an advancing obligation 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.
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 the Cut-off Date, Farmer Mac had outstanding guarantees on
approximately $996.3 million aggregate principal amount of securities (including
approximately $315.9 million 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 the Cut-off Date, Farmer Mac had not borrowed any amounts from
the Secretary of the Treasury to fund guarantee payments.
<PAGE>
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rate of payment of principal on each Class of Certificates and the
yield to maturity thereof 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 of 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
each Servicing Contract (as defined herein), the Central Servicer may not waive
the collection of any Yield Maintenance Charge without the prior written 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. 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 the calculation of any Yield
Maintenance Charge occurs in connection with the principal prepayment, which may
not be on an Installment Payment Date, if interest rates have changed between
the date of the calculation and the Installment Payment Date, the Yield
Maintenance Charge may be greater or less than the amount which would have been
due had the calculation been performed as of the Installment Payment Date.
<PAGE>
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, if any, 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 Servicers not to enforce such
clauses unless the transferor of the related Mortgaged Property does not meet
the Underwriting Standards of Farmer Mac and the Servicing Contracts do not
require any such enforcement. In addition, at the request of the Borrower, the
applicable 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 (or the original amortization date if the Qualified Loan provides
for a balloon payment) for such loan. Any Qualified Loan as to which a partial
release occurs will remain in the Trust Fund.
The yield to maturity 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.
Investors 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.
<PAGE>
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 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 at least 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 one of the Central Servicers acting on behalf of Farmer
Mac pursuant to a Master Central Servicing Contract (as supplemented) between it
and Farmer Mac (the "Servicing Contract"). See "DESCRIPTION OF THE AGREEMENTS"
in the Prospectus. For a statement of the numbers of Qualified Loans (and
related principal balances) in each Pool serviced by each Central Servicer, see
the narrative description for each Pool set forth in ANNEX I hereto. Each
Central Servicer may subcontract the performance of certain of its servicing
duties to a subservicer who may be the seller (the "Seller(s)") and/or
originator of the respective Qualified Loans. In addition, each of 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 or
a Master Loan Sale 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 Holders 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 U.S. Bank 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
Each 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 in certain cases) may be
retained by the Central Servicers. The Depositor, the Master Servicer and the
Central Servicers are obligated to pay all expenses incurred in connection with
their respective responsibilities under the Trust Agreement and the Servicing
Contracts (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.
<PAGE>
Optional Termination
The Master Servicer may effect an early termination of the Trust Fund on a
Distribution Date for any Class when the aggregate principal balance of
Qualified Loans in all of the Pools in the Trust Fund is reduced to less than
the Termination Percentage thereof as of the Cut-off Date by repurchasing all
the Qualified Loans and REO Property (as defined herein) at a price equal to
100% of the unpaid principal balance of the Qualified Loans, including any
Qualified Loans as to which the related property is held as part of the Trust,
plus accrued and unpaid interest thereon at the applicable Mortgage Interest
Rate, determined as provided in the Trust Agreement. The proceeds thereof will
be distributed to Holders of the then outstanding Classes of Certificates on
such Distribution Date whether or not such Distribution Date is a Distribution
Date for all such Classes of Certificates. See "DESCRIPTION OF
CERTIFICATES--Termination" 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 ("REO
Property"). 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
December 1991. The principal executive offices of the Depositor are located at
919 18th Street, N.W., Washington, D.C. 20006 (telephone (202)-872-7700).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of certain material anticipated federal
income tax consequences of an investment in the Certificates is to be considered
only in connection with the discussion in the Prospectus under the caption
"CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
No election will be made to treat the Trust Fund as a real estate mortgage
investment conduit ("REMIC") for federal income tax purposes. In the opinion of
Fried, Frank, Harris, Shriver & Jacobson, counsel for the Depositor, (i) the
Trust Fund will be treated as a grantor trust for federal income tax purposes
and not as an association taxable as a corporation; (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)(4)(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. If the value of the real property securing a Qualified Loan is
<PAGE>
lower than the amount of such Qualified Loan, any such Qualified Loan may not
qualify in its entirety under the foregoing Code sections. The Holders will be
treated as owners of their pro rata interests in the assets of the Trust Fund
with respect to the related Pool. The Trust Fund intends to account for all
servicing fees as reasonable servicing fees. However, if any servicing fees,
determined on a Qualified Loan by Qualified Loan basis, were determined to
exceed reasonable servicing fees, the Certificates would be treated as
representing an interest in one or more "stripped bonds."
On August 5, 1997, the President signed into law the Taxpayer Relief Act
of 1997 (the "1997 Act"). The 1997 Act amends certain of the rules discussed in
the Prospectus under the caption "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," as
described below:
(1) Effective for tax years beginning after August 5, 1997, the 1997 Act
requires the use of the Prepayment Assumption Rule in the computation of OID in
the case of "any pool of debt instruments the yield on which may be affected by
reason of prepayments (or to the extent provided in regulations, by reason of
other events)." This provision appears to apply the Prepayment Assumption Rule
to computations of OID with respect to all Grantor Trust Certificates, including
Grantor Trust Certificates issued by a Trust Fund as part of a single class of
Certificates. Because this provision is new, and because the relevant
legislative history contains very limited guidance as to how the provision is
meant to work, it is uncertain whether, and if so, how, the provision will be
applicable to Grantor Trust Certificates. As noted in the Prospectus in "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" under the caption "b. Multiple Classes of
Grantor Trust Certificates," the Master Servicer intends to compute OID on
Grantor Trust Certificates that constitute Stripped Bond Certificates or
Stripped Coupon Certificates in accordance with the Prepayment Assumption Rule.
In the absence of clear authority under the 1997 Act, the Master Servicer does
not intend to compute OID on Grantor Trust Certificates that are issued as part
of a single class of Certificates in accordance with the Prepayment Assumption
Rule. Potential investors should consult their own tax advisors regarding the
application of this provision of the 1997 Act.
(2) Effective August 5, 1997, the Secretary of the Treasury has authority
to issue regulations under Code Section 7701(a)(4) defining whether a
partnership will be considered domestic or foreign. The relevant legislative
history states that it is expected that a recharacterization of a partnership as
foreign rather than domestic under such regulations will be based only on
material factors such as the residence of the partners and the extent to which
the partnership is engaged in business in the United States or earns U.S. source
income. The provisions of any such regulations could affect whether a
partnership is considered a "U.S. Person" as that term is used in the
Prospectus. Generally, such regulations will apply only to partnerships created
or organized after the date that the regulations are promulgated in final form.
Potential investors which are partnerships should consult their own tax advisors
with respect to the application of such regulations to their individual
situations.
(3) The 1997 Act redesignates Code Section 856(c)(5)(A) as Code Section
856(c)(4)(A). Consequently, references to Code Section 856(c)(5)(A) in the
Prospectus should be read as referring to Code Section 856(c)(4)(A).
Potential investors should consult their tax advisors before acquiring
Certificates.
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. Certain
exemptions from the prohibited transaction rules could, however, be applicable.
As discussed under the caption "ERISA CONSIDERATIONS" in the Prospectus,
Final Regulations (as defined in the Prospectus) provide a plan asset exception
for a Plan's (as defined in the Prospectus) purchase and holding of "guaranteed
<PAGE>
governmental mortgage pool certificates." The Final Regulations provide that
where a Plan acquires a guaranteed governmental 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. Fried, Frank, Harris, Shriver &
Jacobson, counsel to Farmer Mac, has advised Farmer Mac that the Certificates
satisfy the conditions set forth in the Final Regulations and thus qualify as
"guaranteed governmental mortgage pool certificates"; no assurance can be given,
however, that the DOL or any other authority would concur with such analysis.
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.
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 each Underwriter identified on the
cover page hereof, the Certificates offered hereby are being purchased from the
Depositor by each such Underwriter upon issuance. Distribution of the
Certificates will be made by each such Underwriter from time to time in
negotiated transactions or otherwise at varying prices to be determined at the
time of sale. The proceeds to the Depositor from the sale of the Certificates
are set forth on the cover page hereof. To the extent provided in the
Underwriting Agreement, if the proceeds to the Underwriter or Underwriters from
the offering of the Certificates exceed certain levels, the purchase price for
the Certificates payable to the Depositor by each such 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 promptly thereafter through the facilities of
the Commission as described on page S-3 herein and under "AVAILABLE INFORMATION"
in the Prospectus. In connection with the purchase and sale of the Certificates
offered hereby, each 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, each Underwriter named on the cover page hereof and their affiliates
may be engaged in several ongoing business relationships with Farmer Mac.
The Underwriting Agreement provides that Farmer Mac and the Depositor will
indemnify each Underwriter named on the cover page hereof against certain civil
liabilities under the Securities Act of 1933 or contribute to payments each such
Underwriter may be required to make in respect thereof.
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 Fried, Frank, Harris,
Shriver & Jacobson and for the Underwriter by Stroock & Stroock & Lavan LLP, New
York, New York. Fried, Frank, Harris, Shriver & Jacobson has also acted as
special tax counsel to the Trust Fund.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the pages indicated below. The reference to Balloon
Payment is to an "A" page; all other references are to "S" pages.
<TABLE>
<CAPTION>
<S> <C>
1997 Act..............................................................19
Accrued Certificate Interest.......................................6, 13
Administrative Fee Rate...............................................13
Agricultural Real Estate..............................................10
Business Day..........................................................12
Central Servicer....................................................3, 5
Certificate Balance...................................................13
Certificates...........................................................5
Class Certificate Balance.............................................13
Closing Date...........................................................1
Cut-off Date...........................................................1
Depositor..............................................................5
Distribution Date..................................................6, 12
Due Period............................................................13
ERISA..............................................................8, 20
Farmer Mac..........................................................1, 5
Farmer Mac Charter.....................................................5
Farmer Mac Guarantee..................................................14
Fed book-entry system.................................................12
guaranteed governmental mortgage pool certificate.....................20
Holder.................................................................3
Holders of Book-Entry Certificates....................................12
Interest Accrual Period............................................6, 13
IRA................................................................8, 20
Liquidated Qualified Loan.............................................13
loan identifiers......................................................11
Master Servicer........................................................5
Mortgage Interest Rate................................................13
Mortgaged Properties..................................................10
Net Mortgage Rate.....................................................13
Pass-Through Rate......................................................3
Pool...................................................................1
Principal Distribution Amount......................................6, 13
Qualified Loans.....................................................1, 7
real estate assets....................................................18
Record Date...........................................................12
REMIC.................................................................18
REO Property..........................................................18
Sale Agreement........................................................17
Seller(s).............................................................17
Servicing Contract....................................................17
Termination Percentage.................................................3
Trust Agreement....................................................6, 11
Trust Fund.........................................................1, 11
Trustee................................................................6
Underwriter............................................................1
Underwriting Standards................................................10
Weighted Interest Amount..............................................13
Yield Maintenance Charge...............................................9
</TABLE>
<PAGE>
ANNEX I: DESCRIPTION OF THE 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 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. Such information will be available to Holders of Certificates
promptly thereafter through the facilities of the Commission as described on
page S-3 herein and under "AVAILABLE INFORMATION" in the Prospectus.
Percentages and principal balances of Qualified Loans in the following
tables have been rounded. Accordingly, the total of the percentages in any given
column may not add to 100% and the total of the principal balances in any given
column may not add to the amount shown as the total for such column.
<PAGE>
DESCRIPTION OF POOL AM1008
The Qualified Loans in Pool AM1008 will have had individual principal
balances as of the Cut-off Date of not less than $62,000 and not more than
$650,000. None of the Qualified Loans in Pool AM1008 will have been originated
prior to July 1, 1998. None of the Qualified Loans in Pool AM1008 will have a
scheduled maturity prior to August 1, 2013 or later than September 1, 2013. The
Qualified Loans in Pool AM1008 will have a weighted average Administrative Fee
Rate as of the Cut-off Date of approximately 1.394%.
All of the Qualified Loans in Pool AM1008 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to six months before the maturity date of each such Qualified
Loan.
All of the Qualified Loans in Pool AM1008 provide for the monthly payment
of principal and interest on a level basis to amortize fully each such Qualified
Loan over its stated term.
Equitable Agri-Business, Inc. will be the Central Servicer with respect to
four of the Qualified Loans in Pool AM1008 having an aggregate principal balance
as of the Cut-off Date of $1,240,000. Zions First National Bank will be the
Central Servicer with respect to three of the Qualified Loans in Pool AM1008
having an aggregate principal balance as of the Cut-off Date of $849,000.
The following schedule provides specific information with respect to each
Qualified Loan in, and certain summary data with respect to, Pool AM1008.
<PAGE>
<TABLE>
<CAPTION>
Qualified Loan Schedule
Pool: AM1008
Cut-off Date: 08/01/1998
Loan Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Remain Balloon- Total
Next Cut-off Amort Yield Loan- to- Debt
Next PMT Date Net Term Amort Maintenance to- Value Coverage
PMT Type Principal Mortgage Mortgage Maturity (months) Type Expiration Value Ratio Ratio
Date (1) Balance Rate Rate Date (2) (3) Date Ratio (4) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ID 09/01/1998 IO $ 650,000 8.070% 6.520% 09/01/2013 180 F 03/01/2013 60% 0% 1.49
ID 09/01/1998 PI $ 260,000 7.800% 6.430% 08/01/2013 180 F 02/01/2013 63% 0% 1.28
IN 09/01/1998 IO $ 500,000 7.490% 6.520% 09/01/2013 180 F 03/01/2013 64% 0% 0.91
MN 09/01/1998 IO $ 137,000 8.000% 6.510% 09/01/2013 180 F 03/01/2013 43% 0% 1.42
MO 09/01/1998 PI $ 62,000 8.350% 6.500% 08/01/2013 180 F 02/01/2013 60% 0% 2.26
OH 09/01/1998 IO $ 205,000 7.630% 6.480% 09/01/2013 180 F 03/01/2013 44% 0% 1.29
UT 09/01/1998 PI $ 275,000 8.370% 6.520% 08/01/2013 180 F 02/01/2013 64% 0% 1.35
- ------------------------------------------------------------------------------------------------------------------------------------
Totals Count: 7 $ 2,089,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Cut-off Administr Amort Loan- Total
Date Net -ative Term to- Debt
Principal Mortgage Mortgage Fee Maturity (months) Value Coverage
Balance Rate Rate Rate Date (6) (2) Ratio Ratio (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average $ 298,429 7.898% 6.503% 1.394% 09/01/2013 180 59% 1.31
Minimum $ 62,000 7.490% 6.430% 0.970% 08/01/2013 180 43% 0.91
Maximum $ 650,000 8.370% 6.520% 1.850% 09/01/2013 180 64% 2.26
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) PPI = Partial Principal and Interest. The principal portion of the payment
will be the principal amount as if a full payment were collected plus the
accrued interest from the Cut-off Date. PI= Principal and Interest for a full
period. IO = The next payment will be interest only.
(2) The Remaining Amortization Term represents the number of amortization
periods converted to months. For example, 300 months on an annual pay loan
represents 25 amortization periods.
(3) Amortization Type - B = Balloon Loan, F = Fully Amortizing.
(4) The Balloon-to-Value Ratio is the percentage of the Balloon Payment of each
Qualified Balloon Loan in the Pool to the appraised value of the related
Mortgaged Property.
(5) 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).
(6) The Weighted Average Maturity Date is rounded to the closest payment date.
<PAGE>
<TABLE>
<CAPTION>
The following table provides information with respect to the commodities produced on
Mortgaged Properties securing Qualified Loans in Pool AM1008.
Pool - AM1008
Distribution by Commodity Group (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of
Aggregate Principal Aggregate Principal
Number of Balance As Cut-off Balance As of Cut-
Commodity Group Loans Date Off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dairy 4 $ 1,185,000 57%
Feed Grains 4 $ 462,000 22%
Food Grains 1 $ 62,000 3%
Oilseeds 2 $ 318,500 15%
Potatoes, Tomatoes, and Other Vegetables 1 $ 61,500 3%
- ------------------------------------------------------------------------------------------------------------------------------------
Grand Total $ 2,089,000 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
DESCRIPTION OF POOL AS1027
The Qualified Loans in Pool AS1027 will have had individual principal
balances as of the Cut-off Date of not less than $65,000 and not more than
$1,475,200. None of the Qualified Loans in Pool AS1027 will have been originated
prior to July 7, 1998. All of the Qualified Loans in Pool AS1027 will have a
scheduled maturity date of July 1, 2013. The Qualified Loans in Pool AS1027
will have a weighted average Administrative Fee Rate as of the Cut-off Date of
approximately 1.314%.
All of the Qualified Loans in Pool AS1027 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to six months before the maturity date of each such Qualified
Loan.
Nine of the Qualified Loans in Pool AS1027 (approximately 17% 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 amortize fully
each such Qualified Loan over its stated term. All of the remaining Qualified
Loans in Pool AS1027 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").
Equitable Agri-Business, Inc. will be the Central Servicer with respect to
15 of the Qualified Loans in Pool AS1027 having an aggregate principal balance
as of the Cut-off Date of $6,896,349. Zions First National Bank will be the
Central Servicer with respect to nine of the Qualified Loans in Pool AS1027
having an aggregate principal balance as of the Cut-off Date of $2,282,000.
The following schedule provides specific information with respect to each
Qualified Loan in, and certain summary data with respect to, Pool AS1027.
<PAGE>
<TABLE>
<CAPTION>
Qualified Loan Schedule
Pool: AS1027
Cut-off Date: 08/01/1998
Loan Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Remain Balloon Total
Next Cut-off Amort Yield Loan to- Debt
Next Pmt Date Net Term Amort Maintenance to- Value Coverage
Pmt Type Principal Mortgage Mortgage Maturity (months) Type Expiration Value Ratio Ratio
Date (1) Balance Rate Rate Date (2) (3) Date Ratio (4) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CO 01/01/1999 PPI $ 325,000 8.250% 6.700% 07/01/2013 300 B 01/01/2013 67% 44% 1.28
ID 01/01/1999 PPI $ 480,000 7.650% 6.680% 07/01/2013 300 B 01/01/2013 49% 32% 1.56
ID 01/01/1999 PPI $ 330,000 7.640% 6.590% 07/01/2013 180 F 01/01/2013 47% 0% 1.33
ID 01/01/1999 PPI $ 183,125 8.070% 6.470% 07/01/2013 180 F 01/01/2013 68% 0% 1.32
ID 01/01/1999 PPI $ 150,000 7.900% 6.550% 07/01/2013 300 B 01/01/2013 65% 42% 1.35
IL 01/01/1999 PPI $ 305,194 7.800% 6.640% 07/01/2012 300 B 01/01/2013 43% 28% 1.00
IL 01/01/1999 PPI $ 166,830 7.750% 6.620% 07/01/2013 180 F 01/01/2013 63% 0% 4.32
IN 01/01/1999 PPI $ 644,000 7.990% 6.640% 07/01/2013 300 B 01/01/2013 70% 46% 1.26
KS 01/01/1999 PPI $ 371,000 8.030% 6.680% 07/01/2013 300 B 01/01/2013 70% 46% 1.82
MN 01/01/1999 PPI $ 210,000 7.880% 6.580% 07/01/2013 180 F 01/01/2013 69% 0% 1.27
MN 01/01/1999 PPI $ 95,000 8.200% 6.580% 07/01/2013 180 F 01/01/2013 50% 0% 2.27
MN 01/01/1999 PPI $ 92,000 7.750% 6.580% 07/01/2013 180 F 01/01/2013 66% 0% 1.32
MN 01/01/1999 PPI $ 90,000 7.750% 6.580% 07/01/2013 180 F 01/01/2013 23% 0% 1.95
MT 01/01/1999 PPI $ 1,300,000 8.000% 6.670% 07/01/2013 300 B 01/01/2013 60% 39% 1.51
MT 01/01/1999 PPI $ 250,000 8.250% 6.640% 07/01/2013 300 B 01/01/2013 30% 20% 1.44
ND 01/01/1999 PPI $ 151,000 7.850% 6.600% 07/01/2013 180 F 01/01/2013 50% 0% 1.56
ND 01/01/1999 PPI $ 87,000 7.750% 6.640% 07/01/2013 300 B 01/01/2013 37% 24% 1.64
NE 01/01/1999 PPI $ 300,000 7.670% 6.720% 07/01/2013 300 B 01/01/2013 49% 32% 1.60
NV 01/01/1999 PPI $ 1,475,200 8.050% 6.700% 07/01/2013 300 B 01/01/2013 59% 39% 1.32
OH 01/01/1999 PPI $ 208,000 7.730% 6.580% 07/01/2013 180 F 01/01/2013 54% 0% 1.41
OR 01/01/1999 PPI $ 650,000 7.750% 6.620% 07/01/2013 300 B 01/01/2013 63% 41% 1.48
SD 01/01/1999 PPI $ 700,000 8.250% 6.620% 07/01/2013 300 B 01/01/2013 63% 41% 2.40
SD 01/01/1999 PPI $ 550,000 8.000% 6.550% 07/01/2013 300 B 01/01/2013 51% 33% 1.29
SD 01/01/1999 PPI $ 65,000 7.970% 6.620% 07/01/2013 300 B 01/01/2013 45% 29% 1.74
- ----------------------------------------------------------------------------------------------------------------------------------
Totals Count: 24 $ 9,178,349
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Remain Total
Amort Loan Debt
Date Net Administrative Term to- Coverage
Principal Mortgage Mortgage Fee Maturity (months) Value Ratio
Balance Rate Rate Rate Date (6) (2) Ratio (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average $ 382,431 7.955% 6.641% 1.314 07/01/2013 280 58% 1.55
Minimum $ 65,000 7.640% 6.470% 0.950 07/01/2013 180 23% 1.00
Maximum $ 1,475,200 8.250% 6.720% 1.630 07/01/2013 300 70% 4.32
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) PPI = Partial Principal and Interest. The principal portion of the payment
will be the principal amount as if a full payment were collected plus the
accrued interest from the Cut-off Date. PI= Principal and Interest for a full
period. IO = The next payment will be interest only.
(2) The Remaining Amortization Term represents the number of amortization
periods converted to months. For example, 300 months on an annual pay loan
represents 25 amortization periods.
(3) Amortization Type - B = Balloon Loan, F = Fully Amortizing.
(4) The Balloon-to-Value Ratio is the percentage of the Balloon Payment of each
Qualified Balloon Loan in the Pool to the appraised value of the related
Mortgaged Property.
(5) 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).
(6) The Weighted Average Maturity Date is rounded to the closest payment date.
<PAGE>
<TABLE>
<CAPTION>
The following table provides information with respect to the commodities produced on
Mortgaged Properties securing Qualified Loans in Pool AS1027.
Pool - AS1027
Distribution by Commodity Group (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of
Aggregate Principal Aggregate Principal
Number of Balance As of Cut-off Balance As of Cut-
Commodity Group Loans Date off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cattle and Calves 2 $ 811,000 9%
Dairy 2 $ 207,500 2%
Feed Grains 19 $ 3,604,825 39%
Food Grains 12 $ 1,093,863 12%
Oilseeds 11 $ 1,144,712 12%
Potatoes, Tomatoes, and Other Vegetables 3 $ 555,000 6%
Sugarbeets, Cane and Other Crops 4 $ 1,761,450 19%
- ------------------------------------------------------------------------------------------------------------------------------------
Grand Total $ 9,178,349 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
DESCRIPTION OF POOL CS1023
The Qualified Loans in Pool CS1023 will have had individual principal
balances as of the Cut-off Date of not less than $152,500 and not more than
$2,824,500. None of the Qualified Loans in Pool CS1023 will have been originated
prior to July 2, 1998. All of the Qualified Loans will have a scheduled maturity
date of July 1, 2003. The Qualified Loans in Pool CS1023 will have a weighted
average Administrative Fee Rate as of the Cut-off Date of approximately 1.285%.
All of the Qualified Loans in Pool CS1023 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part, made prior to six months before the maturity date of each such Qualified
Loan.
All Qualified Loans in Pool CS1023 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").
Equitable Agri-Business, Inc. will be the Central Servicer with respect to
all of the Qualified Loans in Pool CS1023 having an aggregate principal balance
as of the Cut-off Date of $4,152,000.
Two of the Qualified Loans (the "Seasoned Loans") in pool CS1023 are loans
made to refinance maturing balloon loans with respect to which the borrower met
the terms and conditions. The Seasoned Loans were underwritten in accordance to
Farmer Mac's Underwriting Standards for seasoned loans, which do not require
complete borrower financial information, and, therefore, certain ratios (e.g.,
total debt coverage) are not available.
The following schedule provides specific information with respect to each
Qualified Loan in, and certain summary data with respect to, Pool CS1023.
<PAGE>
<TABLE>
<CAPTION>
Qualified Loan Schedule
Pool: CS1023
Cut-off Date: 08/01/1998
Loan Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Remain Balloon Total
Next Cut-off Amort Yield Loan- to- Debt
Next Pmt Date Net Term Amort Maintenance to- Value Coverage
Pmt Type Principal Mortgage Mortgage Maturity (months) Type Expiration Value Ratio Ratio
Date (1) Balance Rate Rate Date (2) (3) Date Ratio (4) (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S><C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CA 01/01/1999 PPI $ 2,824,500 7.950% 6.740% 07/01/2003 300 B 01/01/2003 61% 57% N/A (7)
MN 01/01/1999 PPI $ 400,000 8.125% 6.400% 07/01/2003 180 B 01/01/2003 51% 42% 1.47
SD 01/01/1999 PPI $ 152,500 7.950% 6.260% 07/01/2003 300 B 01/01/2003 54% 51% N/A (7)
WA 01/01/1999 PPI $ 775,000 7.750% 6.500% 07/01/2003 300 B 01/01/2003 42% 39% 1.39
- ------------------------------------------------------------------------------------------------------------------------------------
Totals Count: 4 $ 4,152,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary Information:
- ------------------------------------------------------------------------------------------------------------------------------------
Remain Total
Administr- Amort Loan Debt
Cut-off Net ative Term to- Coverage
Principal Mortgage Mortgage Fee Maturity (months) Value Ratio
Balance Rate Rate Rate Date (6) (2) Ratio (5)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average $ 1,038,000 7.930% 6.644% 1.285% 07/01/2003 288 56% 1.41
Minimum $ 152,500 7.750% 6.260% 1.210% 07/01/2003 180 42% 1.39
Maximum $ 2,824,500 8.125% 6.740% 1.725% 07/01/2003 300 61% 1.47
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) PPI = Partial Principal and Interest. The principal portion of the payment
will be the principal amount as if a full payment were collected plus the
accrued interest from the Cut-off Date. PI= Principal and Interest for a full
period. IO = The next payment will be interest only.
(2) The Remaining Amortization Term represents the number of amortization
periods converted to months. For example, 300 months on an annual pay loan
represents 25 amortization periods.
(3) Amortization Type - B = Balloon Loan, F = Fully Amortizing.
(4) The Balloon-to-Value Ratio is the percentage of the Balloon Payment of each
Qualified Balloon Loan in the Pool to the appraised value of the related
Mortgaged Property.
(5) 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).
(6) The Weighted Average Maturity Date is rounded to the closest payment date.
(7) Seasoned Loan for which Total Debt Coverage Ratio is not required by Farmer
Mac and is, therefore, not available.
<PAGE>
<TABLE>
<CAPTION>
The following table provides information with respect to the commodities produced on
Mortgaged Properties securing Qualified Loans in Pool CS1023.
Pool - CS1023
Distribution by Commodity Group (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage of
Aggregate Principal Aggregate Principal
Number of Balance As of Cut-off Balance As of Cut-
Commodity Group Loans Date off Date
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cotton/Tobacco 1 $ 564,900 14%
Feed Grains 3 $ 430,000 10%
Food Grains 2 $ 1,129,800 27%
Oilseeds 2 $ 443,435 11%
Permanent Plantings 1 $ 197,715 5%
Potatoes, Tomatoes, and Other Vegetables 3 $ 804,900 19%
Sugarbeets, Cane and Other Crops 1 $ 581,250 14%
- ------------------------------------------------------------------------------------------------------------------------------------
Grand Total $ 4,152,000 100%
- ------------------------------------------------------------------------------------------------------------------------------------
</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.
<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 16 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 make available 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.
May 22, 1997
<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 the 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 (as defined herein), any Seller (as
defined herein), any Central Servicer (as defined herein) 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 terms "Holder" and "Holders" used
herein refer to both holders of Book-Entry Certificates (as defined herein) and
holders of Definitive Certificates (as defined herein), unless specific
reference is made only to either holders of Book-Entry Certificates or holders
of Definitive Certificates.
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.
<PAGE>
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 (as defined herein) 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 distribution of such Certificates; (vi) whether one or more REMIC
(as defined herein) 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 (as defined herein) on any Qualified Balloon Loan (as defined
herein).
AVAILABLE INFORMATION
Farmer Mac is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission").
The Depositor has filed with 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
Commission maintains a World Wide Web site on the Internet at
http://www.sec.gov. that contains reports, proxy and other information regarding
registrants (including Farmer Mac and the Depositor) that file electronically
with the Commission.
Unless and until Definitive Certificates are issued or unless otherwise
provided in the related Prospectus Supplement, the Depositor will forward to the
Federal Reserve Bank of New York or the nominee for any private depository, as
applicable, periodic unaudited reports (as discussed below) concerning the
related Trust Fund. When and if Definitive Certificates are issued, the
Depositor will deliver such reports to Holders of Definitive Certificates. 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), through the facilities of the Commission, or
through information vendors, as discussed below. See "DESCRIPTION OF THE
CERTIFICATES - Reports to Holders; Publication of Certificate Factors" and
"DESCRIPTION OF THE AGREEMENTS" herein.
<PAGE>
The Depositor intends to make a written request to the staff of the
Commission that the staff 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. If such request is granted,
the Depositor will file or cause to be filed with the Commission such reports
with respect to each Trust Fund as are required by the Commission pursuant to
the Exchange Act and the rules and regulations of the Commission thereunder, and
will provide such reports to Holders of Definitive Certificates, if any. Because
of the limited number of record holders 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 as having been authorized by the
Depositor or any of the Underwriters. 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 to
any person by any person in any state or other jurisdiction in which such offer
or solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such solicitation. The delivery of this Prospectus at any time does not
imply that information contained 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 make available 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 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 Sections 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, 1997, and any subsequent reports
filed with the Commission pursuant to Sections 13(a) or 15(d) of the Exchange
Act shall also be deemed to be incorporated by reference in this Prospectus and
to be a part hereof. All documents and reports filed by Farmer Mac pursuant to
Sections 13(a), 13(c), 14 or 15(d) of 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 and to
be a part hereof. Such documents and reports can be inspected at the public
reference facilities maintained by the Commission as described under the caption
"AVAILABLE INFORMATION" of this Prospectus.
The consolidated balance sheets of Farmer Mac as of December 31, 1997 and
1996 and related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997 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.
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 (telephone (202) 872-7700). The Depositor has
determined that its financial statements are not material to the offering of any
Certificates.
<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
Terms 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 deposit 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
Delaware corporation and 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.
<PAGE>
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 (collectively, 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.ss.1921 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 the foregoing.
AMBS and Trust Fund AMBS refer to Certificates
issued and offered pursuant to this Registration
Statement or registration statements previously or
subsequently filed by the Depositor. 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 training or farming experience
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
<PAGE>
agricultural commodities and (b) consist of a
minimum of five acres or are used in producing
minimum receipts of at least $5,000. The principal
amount of a Qualified Loan secured by Agricultural
Real Estate of more than one thousand acres may
not exceed $3,490,000, as adjusted for inflation
as of December 31, 1997.
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 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
<PAGE>
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 Premium") 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 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 the 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
<PAGE>
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") Certificate Account
established and maintained on behalf of the
Holders 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 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 or a Selling and Servicing Agreement
(each a "Sale Agreement"). The Trust Agreements,
Servicing Contracts and Sale Agreements for a
particular Trust Fund
<PAGE>
are referred to herein as the "Agreements." See
"DESCRIPTION OF THE TRUST FUNDS" herein
"DESCRIPTION OF THE AGREEMENTS" 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
<PAGE>
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.
(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 Holders 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.
<PAGE>
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 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, to the extent set
forth in the Prospectus Supplement, 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 which are 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. Because Farmer Mac guarantees
timely distribution of interest and principal on
the Certificates (including any Balloon Payments),
the presence or absence of an Advancing obligation
will not affect distributions of interest and
principal to such Holders. In addition, Farmer Mac
may determine to make an Advance on behalf of a
Central Servicer rather than make a payment under
the related 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. ................ 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) interests in a Trust Fund treated as a
grantor trust under subpart E, Part I of
subchapter J of the Code, if no election is made
to treat the Trust Fund as a real estate mortgage
investment conduit (a "REMIC"), or (ii) "regular
interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual
Certificates" or "Class R Certificates") in a
Trust Fund as to which a REMIC election is made.
<PAGE>
(a) 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 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.
<PAGE>
(b) REMIC. .............. REMIC Regular Certificates generally will be
treated as debt obligations 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 CONSE- QUENCES" herein and in the related
Prospectus Supplement. In general, (i)
Certificates held by a real estate investment
trust will be treated as "real estate assets"
within the meaning of Section 856(c)(5)(A) of the
Code and interest on REMIC Regular Certificates,
and any amounts includible in income with respect
to REMIC Residual Certificates, held by a real
estate investment trust will be considered
"interest on obligations secured by mortgages on
real property" within the meaning of Section
856(c)(3)(B), and (ii) REMIC Regular Certificates
held by a REMIC will be considered "obligation[s]
. . . which [are] principally secured by an
interest in real property" within the meaning of
Section 860G(a)(3) of the Code, in each case to
the extent described herein and in the related
Prospectus Supplement. See "CERTAIN FEDERAL INCOME
TAX CONSE-QUENCES" 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.
<PAGE>
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). As of December 31, 1996, Farmer
Mac's capital as reported on its Annual Report on Form 10-K for the year ended
December 31, 1996 was $47.2 million. See Farmer Mac's Annual Report on Form 10-K
for the year ended December 31, 1996 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, Holders
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 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 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. However, 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. Investors 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,
limit the dates on which the payments may be made to regular interest payment
dates, 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 various degrees to the 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 Holders. Hence, until such time, Beneficial Owners
will be able to exercise the rights of Holders 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" herein.
<PAGE>
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 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 60% or less if the loan
is at least five years old (70% or less 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
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
either (A) (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, 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, or (B) similar information with respect to each of the Qualified
Loans. 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
agreements 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. ss. 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 assured 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).
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.
<PAGE>
YIELD CONSIDERATIONS
General
The yield on any Certificate will depend on the price paid for the
Certificate, 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, all of which may be affected by
prepayments, defaults, liquidations or repurchases. See "RISK FACTORS -- Yield,
Prepayment and Maturity Considerations" 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 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 Holders 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 borrowers, 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 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 or yield maintenance
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 or yield maintenance 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 or yield maintenance.
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 following 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 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.
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
December 1991. The principal executive offices of the Depositor are located at
919 18th Street, N.W., Washington, D.C. 20006 (telephone (202) 872-7700).
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. ss. 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 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 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 by February 1998. As of December 31, 1997, Farmer Mac's capital
as reported on its Annual Report on Form 10-K for the year ended December 31,
1997 was $75 million.
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. Farmer Mac is required to
repurchase its debt obligations from the Treasury 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 Act and the Exchange Act.
The Farmer Mac Charter requires the Comptroller General to review annually,
and submit to the Congress a report regarding the actuarial soundness and
reasonableness of the fees Farmer Mac charges for providing its guarantee.
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 INFORMATION 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.
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 Trust Agreement and Issue Supplement.
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 the 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 on or before the fifth business day during the
month of such Distribution Date or such other date as may be specified in the
Trust Agreement and described in the related Prospectus Supplement (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 Holder at a bank or other entity having appropriate facilities
therefor, if such Holder 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 Holders of Definitive
Certificates 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 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.
Distribution 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.
Advances in Respect of Delinquencies
With respect to any Series of Certificates, the Central Servicer or another
entity described in the related Prospectus Supplement will, to the extent set
forth in the Prospectus Supplement, 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 distribution of interest and principal
on the Certificates (including any Balloon Payments), the presence or absence of
an Advancing obligation will not affect distributions of interest and principal
to such Holders. In addition, Farmer Mac may determine to make an Advance on
behalf of a Central Servicer rather than make a payment under the related Farmer
Mac Guarantee.
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 Holders; 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 the Trustee, the
Depositor, the Federal Reserve Bank of New York or the nominee for any private
depository, if applicable, the Holders of Definitive Certificates, if any, and
to such other parties as may be specified in the related Agreement, and will
generally make available to financial publications and electronic services, a
statement setting forth, in each case to the extent applicable and available:
(i) information sufficient to enable Holders of each Class to calculate the
amount of such distribution 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) information sufficient to enable Holders of each Class to calculate the
amount of such distribution 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.
On or before the Determination Date for a Class of Certificates, Farmer Mac
will calculate the certificate distribution amount for such Distribution Date,
and, as soon as possible thereafter, will 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 make available any information received by the Master Servicer
or the Trustee, as applicable, with respect to any QMBS.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer, shall make available the information set forth in subclauses
(i) and (ii) above, aggregated for such calendar year. 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, the foregoing statement 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 are available
through the facilities of the Commission and information vendors, and may be
obtained by the Beneficial Owner by requesting a copy and certifying 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 and "Available Information" herein. Communication among
Beneficial Owners may be conducted through the facilities of the related
depository or financial intermediary.
Termination
Farmer Mac's responsibilities and obligations created by the Trust Agreement
for each Series of Certificates will terminate upon the distribution to Holders
of that Series of all amounts required to be distributed to them pursuant to
such Trust Agreement following (i) the final payment 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 or (iii) distribution by
Farmer Mac pursuant to the Farmer Mac Guarantee on the Final Distribution Date
for the latest maturing Class of such Series of 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. Farmer Mac shall make available to
financial publications and electronic services notice for the benefit of Holders
that the final distribution will be made on the specified Distribution Date. 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 accounts the
Certificates have been deposited are herein referred to as "Holders of
Book-Entry Certificates." A Holder of Book-Entry Certificates is not necessarily
the Beneficial Owner of a Book-Entry Certificate. Beneficial Owners (as defined
below) will ordinarily hold beneficial interests in Book-Entry Certificates
through one or more financial intermediaries, such as banks, brokerage firms and
securities clearing organizations. A Holder of Book-Entry Certificates 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 Book-Entry Certificates. 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 Book-Entry
Certificates. The Federal Reserve Banks will act only upon the instructions of
the Holders of Book-Entry Certificates in recording transfers of Book-Entry
Certificates.
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 New York 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, which maintain
accounts with the Depository, will include securities brokers and dealers,
banks, trust companies and clearing corporations and may include certain other
organizations. Indirect access to a Depository system will also be 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 Holder of Book-Entry
Certificates will be the nominee for the Depository, and the Beneficial Owners
will not be recognized by the Trustee as the Holders of Book-Entry Certificates
under the Agreements. Beneficial Owners will be permitted to exercise the rights
of Holders of Book-Entry Certificates 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 will be required to make
book-entry transfers among Participants on whose behalf it acts with respect to
the Book-Entry Certificates and will be 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 will be required
to make book-entry transfers and receive and transmit such payments on behalf of
their respective Beneficial Owners.
Because the Depository will be able to act only on behalf of Participants,
who in turn will 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.
Under the Depository's procedures, the Depository will take any action
permitted to be taken by a Holder of Book-Entry Certificates 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 and whose
aggregate holdings represent no less than any minimum amount of Voting Rights,
if any, required therefor. Therefore, Beneficial Owners will only be able to
exercise their Voting Rights, if any, 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 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 will be 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 Beneficial Owners as the Holders of Definitive Certificates.
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. A Central Servicer may subcontract
the performance of certain of its servicing duties to a subservicer who may be
the seller or originator of the Qualified Loans (the "Sellers"). 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 and/or 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 the Holders
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 exhibits 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 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 the written
request by 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, on behalf of
Holders, 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 benefit of the Holders. If
any such document is found to be missing or defective in any material respect,
the Trustee (or such custodian) shall immediately notify the Seller in writing.
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
replace the Qualified Loan with an eligible substitute 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 Holders. 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
Holders. 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 that permits the holder of the mortgage to obtain
marketable title to the Mortgaged Property upon the borrower's default.
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 in all material respects 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 obligation 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 Holders. 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 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 Holders will be covered
by the Farmer Mac Guarantee. Therefore, Holders 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
To the extent described in the related Prospectus Supplement, each Trust Fund
will include one or more separate accounts established and maintained on behalf
of the Holders into which the Central Servicer will deposit all payments and
collections on the related Qualified Assets (collectively, the "Collection
Account"). The Collection Account must be an account or accounts with any
Federal Reserve Bank, the Trustee or any other depository institution or trust
company approved in writing 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
or repair of the related Mortgaged Property or released to the borrower 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 by the Central Servicer as described under
"DESCRIPTION OF THE CERTIFICATES - Advances in Respect of Delinquencies";
(v) to the extent required to be distributed to Holders, any amounts
representing Prepayment Premiums and Yield Maintenance Charges paid by
borrowers; 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 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 amount to be distributed for
the related Distribution Date as 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 is certain 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:
(i) towards the distribution to Holders in federal funds of the amount to
be distributed on 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 and in accordance with customary industry standards
for agricultural mortgage loan servicing, 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 Servicing Contract or is
consented to in writing in advance by Farmer Mac. 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 Farmer Mac. 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 certify 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 of the Qualified Loan, 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 Mortgaged 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 delivery of a deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Holders.
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
time as the Mortgaged Property is sold and such Qualified Loan becomes a
liquidated Qualified Loan. The Central Servicer, on behalf of Farmer Mac, is
required to use its best efforts to dispose of any Mortgaged Property acquired
by foreclosure, deed in lieu of foreclosure or otherwise in a reasonably
expeditious manner, in accordance with applicable local and environmental laws
to the extent applicable and consistent, if applicable, 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. Farmer Mac will
pay the Trustee a fee for services rendered in its capacity as Trustee. 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, to the extent provided in the Prospectus
Supplement, be entitled to retain, as additional compensation, all assumption
fees, late payment charges and other charges (other than 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 also provides 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 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 legal 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
Holders thereunder.
Events of Default
Events of Default by Farmer Mac 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 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 Balances 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.
Supplemental Agreements
The parties to the Trust Agreement may, without the consent of any of the
Holders, enter into an agreement or other instrument supplemental to the Trust
Agreement, which shall thereafter form a part of the Trust Agreement, in order
(i) to add to the covenants of Farmer Mac; (ii) to evidence the succession of
another Person or Persons to Farmer Mac pursuant to Article VII of the Trust
Agreement; (iii) to eliminate any right reserved to or conferred upon Farmer
Mac; (iv) to take such action to cure any ambiguity or correct or supplement any
provision of the Trust Agreement; or (v) to modify, eliminate or add to the
provision of the Trust Agreement to the extent necessary to maintain the Trust
Fund's tax exempt status under federal and state law.
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
issued under such Trust Agreement; provided that no such waiver or supplemental
agreement shall:
(a) without the consent of all Holders 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 Holders (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 Farmer Mac
in respect of the Qualified Loans, 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.
Indemnification of the Trustee
Farmer Mac shall indemnify the Trustee and any director, officer, employee or
agent of the Trustee for, and hold them harmless against, any loss or liability
incurred by any of them 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 and be discharged from the Trust created
by the Trust 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, and because
Farmer Mac is authorized to borrow up to $1,500,000,000 from the Secretary of
the Treasury the impact of any adverse effects described in the summaries of
certain legal aspects of the Qualified Loans below is not likely to affect the
Farmer Mac Guarantee or distributions to Holders. However, because 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, it is possible that the
adverse effects described below could affect distributions to Holders. See "RISK
FACTORS -- Farmer Mac Guarantee" herein.
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 remedies of a beneficiary under a
deed of trust or a mortgagee under a mortgage. In some states, statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust.
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. In addition, the terms of a mortgage loan secured by property of the
debtor may be modified in a federal bankruptcy case. Such modifications may
include reducing the amount of each periodic payment, changing the rate of
interest, extending or otherwise altering the repayment schedule, and reducing
the lender's security interest to the value of the collateral, thus leaving the
lender a general unsecured creditor for the difference between the value of the
collateral 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 Internal Revenue Code of 1986, as amended, 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, 4.14D and 4.36 of the Farm Credit Act
of 1971, as amended (12 U.S.C. ss. 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, 4.14D and 4.36 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.
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, on behalf of
Holders, 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 benefit of the Holders. If
any such document is found to be missing or defective in any material respect,
the Trustee (or such custodian) shall immediately notify the Seller in writing.
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
replace the Qualified Loan with an eligible substitute 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 Holders. 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
Holders. 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 that permits the holder of the mortgage to obtain
marketable title to the Mortgaged Property upon the borrower's default.
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 in all material respects 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 obligation 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 Holders. 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 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 Holders will be covered
by the Farmer Mac Guarantee. Therefore, Holders 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
To the extent described in the related Prospectus Supplement, each Trust Fund
will include one or more separate accounts established and maintained on behalf
of the Holders into which the Central Servicer will deposit all payments and
collections on the related Qualified Assets (collectively, the "Collection
Account"). The Collection Account must be an account or accounts with any
Federal Reserve Bank, the Trustee or any other depository institution or trust
company approved in writing 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
or repair of the related Mortgaged Property or released to the borrower 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 by the Central Servicer as described under
"DESCRIPTION OF THE CERTIFICATES - Advances in Respect of Delinquencies";
(v) to the extent required to be distributed to Holders, any amounts
representing Prepayment Premiums and Yield Maintenance Charges paid by
borrowers; 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 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 amount to be distributed for
the related Distribution Date as 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 is certain 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:
(i) towards the distribution to Holders in federal funds of the amount to
be distributed on 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 and in accordance with customary industry standards
for agricultural mortgage loan servicing, 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 Servicing Contract or is
consented to in writing in advance by Farmer Mac. 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 Farmer Mac. 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 certify 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 of the Qualified Loan, 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 Mortgaged 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 delivery of a deed in lieu of foreclosure, the deed or certificate of sale
will be issued to the Trustee or to its nominee on behalf of Holders.
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
time as the Mortgaged Property is sold and such Qualified Loan becomes a
liquidated Qualified Loan. The Central Servicer, on behalf of Farmer Mac, is
required to use its best efforts to dispose of any Mortgaged Property acquired
by foreclosure, deed in lieu of foreclosure or otherwise in a reasonably
expeditious manner, in accordance with applicable local and environmental laws
to the extent applicable and consistent, if applicable, 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. Farmer Mac will
pay the Trustee a fee for services rendered in its capacity as Trustee. 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, to the extent provided in the Prospectus
Supplement, be entitled to retain, as additional compensation, all assumption
fees, late payment charges and other charges (other than 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 also provides 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 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 legal 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
Holders thereunder.
Events of Default
Events of Default by Farmer Mac 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 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 Balances 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.
Supplemental Agreements
The parties to the Trust Agreement may, without the consent of any of the
Holders, enter into an agreement or other instrument supplemental to the Trust
Agreement, which shall thereafter form a part of the Trust Agreement, in order
(i) to add to the covenants of Farmer Mac; (ii) to evidence the succession of
another Person or Persons to Farmer Mac pursuant to Article VII of the Trust
Agreement; (iii) to eliminate any right reserved to or conferred upon Farmer
Mac; (iv) to take such action to cure any ambiguity or correct or supplement any
provision of the Trust Agreement; or (v) to modify, eliminate or add to the
provision of the Trust Agreement to the extent necessary to maintain the Trust
Fund's tax exempt status under federal and state law.
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
issued under such Trust Agreement; provided that no such waiver or supplemental
agreement shall:
(a) without the consent of all Holders 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 Holders (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 Farmer Mac
in respect of the Qualified Loans, 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.
Indemnification of the Trustee
Farmer Mac shall indemnify the Trustee and any director, officer, employee or
agent of the Trustee for, and hold them harmless against, any loss or liability
incurred by any of them 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 and be discharged from the Trust created
by the Trust 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, and because
Farmer Mac is authorized to borrow up to $1,500,000,000 from the Secretary of
the Treasury the impact of any adverse effects described in the summaries of
certain legal aspects of the Qualified Loans below is not likely to affect the
Farmer Mac Guarantee or distributions to Holders. However, because 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, it is possible that the
adverse effects described below could affect distributions to Holders. See "RISK
FACTORS -- Farmer Mac Guarantee" herein.
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 remedies of a beneficiary under a
deed of trust or a mortgagee under a mortgage. In some states, statutes limit
the right of the beneficiary or mortgagee to obtain a deficiency judgment
against the borrower following foreclosure or sale under a deed of trust.
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. In addition, the terms of a mortgage loan secured by property of the
debtor may be modified in a federal bankruptcy case. Such modifications may
include reducing the amount of each periodic payment, changing the rate of
interest, extending or otherwise altering the repayment schedule, and reducing
the lender's security interest to the value of the collateral, thus leaving the
lender a general unsecured creditor for the difference between the value of the
collateral 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 Internal Revenue Code of 1986, as amended, 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, 4.14D and 4.36 of the Farm Credit Act
of 1971, as amended (12 U.S.C. ss. 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, 4.14D and 4.36 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 the 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 Regulation
Real property pledged as a security to a lender may be subject to known or
unforeseen environmental risks. Of particular concern may be those mortgaged
properties which have been the site of manufacturing, industrial or disposal
activity. Such environmental risks may give rise to (a) a diminution in value of
the Mortgaged Property or the inability to foreclose against such property or
(b) in certain circumstances as more fully described below, liability for
clean-up costs or other remedial actions, which liability could exceed the value
of such property or the Qualified Loan related to such property.
Under the Comprehensive Environmental Response, Compensation, and Liability
Act ("CERCLA"), as amended by the Asset Conservation, Lender Liability, and
Deposit Insurance Protection Act of 1996, a lender may be liable as an "owner or
operator" for costs of addressing releases or threatened releases of hazardous
substances on a mortgaged property if such lender or its agents or employees
have "participated in the management" of the operations of the borrower, even
though the environmental damage or threat was caused by a prior owner or other
third party. Excluded from CERCLA's definition of "owner or operator," however,
is a person "who is a lender that, without participating in the management of a
vessel or facility, holds indicia of ownership primarily to protect the security
interest of the person in the vessel or facility" (the "secured-creditor
exemption"). This exemption for holders of a security interest such as a secured
lender applies only when the lender acts in a manner that is consistent with the
protection of its security interest in the contaminated facility or property.
Thus, if a lender's activities begin to encroach on the interest in the
contaminated facility or property, the lender faces potential liability as an
"owner or operator" under CERCLA. Similarly, when a lender forecloses and takes
title to a contaminated facility or property (unless the foreclosure and any
subsequent disposition of the facility or property are primarily for the
protection of the security interest), the lender may incur CERCLA liability.
A decision in May 1990 of the United States Court of Appeals for the Eleventh
Circuit in United States v. Fleet Factors Corp. construed CERCLA's original
exemption for secured creditors. The court held that a lender need not have
involved itself in the day-to-day operations of the facility or participated in
decisions relating to the use, handling, or disposal of hazardous waste to be
liable under CERCLA; rather, liability could attach to a lender if its
involvement with the management of the facility was broad enough to support the
inference that the lender had the capacity to influence the borrower's treatment
of hazardous waste. The court added that a lender's capacity to influence such
decisions could be inferred from the extent of its involvement in the facility's
financial management.
The United States Environmental Protection Agency sought to clarify and limit
the effects of Fleet Factors by issuing a Final Rule delineating the range of
permissible actions that may be undertaken by a holder of a contaminated
facility without exceeding the bounds of the secured-creditor exemption.
However, that rule was vacated by the United States Court of Appeals for the
District of Columbia on February 4, 1994 on the grounds that the EPA did not
have the authority to issue rules interpreting any terms contained in CERCLA.
In September 1996 Congress amended CERCLA, as noted above, in order to
clarify whether and under what circumstances clean-up costs or the obligation to
take remedial actions could be imposed on a secured lender such as the Trust
Fund. However, the amendment, which is intended to relieve lenders from
liability under CERCLA if they did not "participate in management," has not yet
been tested by the courts. Moreover, the EPA has announced its intention to
challenge certain aspects of the amendment on the grounds that Congress did not
fully or accurately codify the EPA's lender liability rule. It is thus still not
clear the extent to which management participation may be undertaken by a lender
without exposing it to the risk of environmental liability.
If the lender is or becomes liable for clean-up costs, it may bring an action
for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
bankrupt or otherwise judgment proof. Furthermore, such action against the
borrower may be adversely affected by any limitations on recourse in the
underlying mortgage loans. Similarly, in some states anti-deficiency legislation
and other statutes requiring the lender to exhaust its security before bringing
an action against the borrower-trustor may curtail the lender's ability to
recover from its borrower the environmental clean-up and other related costs and
liabilities incurred by the lender.
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 any Qualified
Loan 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.
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 Fried, Frank, Harris, Shriver & Jacobson ("Fried, Frank"),
counsel to the Depositor. This summary is based on laws, regulations, including
the REMIC regulations promulgated by the Treasury Department, rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change either prospectively or retroactively. Fried, Frank 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 Holders 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, Fried, Frank will deliver its opinion that
the 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"), and
not as an association taxable as a corporation. Accordingly, owners of
Certificates generally will be treated for federal income tax purposes as owners
of a portion of the Trust Fund's assets, as described below. In this portion of
this summary (under the caption "CERTAIN FEDERAL INCOME TAX CONSEQUENCES --
Grantor Trust Funds"), the Certificates offered by this Prospectus will be
referred to as "Grantor Trust Certificates," and the term "Qualified Loan" will
be used to refer to the Qualified Loans (including for this purpose Guaranteed
Portions) held by a Trust Fund as well as the mortgage loans underlying any
Qualified Assets (other than Qualified Loans) held by a Trust Fund.
a. Single Class of Grantor Trust Certificates
Characterization and General Rules. The Trust Fund may be created with a
single class of Grantor Trust Certificates relating to each Pool of Qualified
Assets comprising the Trust Fund. In this case, each Holder of a Grantor Trust
Certificate will be treated as the owner of a pro rata undivided interest in
each of the Qualified Assets in the related Pool.
Each Holder of a Grantor Trust Certificate will be required to report on its
federal income tax return, in accordance with such holder's method of
accounting, its pro rata share of the entire income from the Qualified Assets in
the Trust Fund represented by Grantor Trust Certificates, including interest,
original issue discount ("OID"), if any, prepayment fees, assumption fees and
any late payment charges received by the Master Servicer. Any amounts received
by a Holder in lieu of amounts due with respect to any Qualified Asset because
of a default or delinquency in payment should be treated for federal income tax
purposes as having the same character as the payments they replace. Under Code
Sections 162 or 212, each Holder of a Grantor Trust Certificate will be entitled
to deduct its pro rata share of servicing fees, prepayment fees, assumption
fees, any loss recognized upon an assumption and any late payment charges
retained by the Master Servicer, the Central Servicers or any subservicer
(collectively, "Servicers"), provided that such amounts are reasonable
compensation for services rendered by the Servicers to the Trust Fund. Holders
of Grantor Trust Certificates that are individuals, estates or trusts will be
entitled to deduct their share of the expenses of the Trust Fund as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses incurred by such Holders exceed 2% of their adjusted gross income. In
addition, the amount of itemized deductions otherwise allowable to an individual
whose adjusted gross income for a taxable year exceeds an amount specified in
the Code (which amount is adjusted each year for inflation) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the specified
amount or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. A Holder using the cash method of accounting generally must
take into account its pro rata share of income and deductions of the Trust Fund
as and when such income is collected by the Trust Fund or the expenses giving
rise to such deductions are paid by the Trust Fund. A Holder using an accrual
method of accounting must take into account its pro rata share of income and
deductions of the Trust Fund as they become due to, or are paid by, the Trust
Fund, whichever is earlier.
Note that if the servicing fees paid to the Servicers are treated by the
Internal Revenue Service ("IRS") as exceeding a reasonable compensation for the
services provided by the Servicers, the amount of such excess would be
considered as an ownership interest retained by the Servicers (or any person to
whom a Servicer assigned for value all or a portion of the servicing fees) in a
portion of the interest payments on the Qualified Loans. In that event, the
Trust Fund would be treated as having issued more than one class of interests in
each Pool, the rules described in the preceding paragraph would not apply to
Holders of Grantor Trust Certificates, and instead, the rules described below
under "-- b. Multiple Classes of Grantor Trust Certificates" would apply.
Original Issue Discount. The IRS has stated in published rulings that the
rules of the Code relating to OID and the Treasury regulations implementing such
rules (the "OID Regulations") are applicable to a Holder of Grantor Trust
Certificates' interest in those Qualified Loans issued with OID. These rules are
applicable to mortgages of corporations originated after May 27, 1969, mortgages
of non-corporate mortgagors (other than individuals) originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. As discussed
in more detail below, under the OID rules, OID generally must be reported as
ordinary gross income as it accrues under a constant yield method; thus in the
event that a Pool contains one or more Qualified Loans that were issued with
OID, Holders of Grantor Trust Certificates relating to that Pool may recognize
income in advance of the receipt of the cash associated with such income. In the
case of the Qualified Loans, OID could arise by financing of points or other
charges by the originator of such Loans in an amount greater than a statutory de
minimis amount, to the extent that the points are not for services provided by
the lender. OID could also arise if the interest rate structure of a Qualified
Loan includes a "teaser" rate. In addition, a Pool could contain Qualified
Assets that constitute "stripped bonds" or "stripped coupons," within the
meaning of Section 1286 of the Code, and each of those kinds of instruments
could be treated under that Section of the Code as bearing OID.
Each Qualified Loan underlying the Grantor Trust Certificates will be treated
as having been issued on the date it was originated with an amount of OID equal
to the excess of such Qualified Loan's "stated redemption price at maturity"
over its "issue price." The "stated redemption price at maturity" of a Qualified
Loan is the sum of all payments to be made on such Qualified Loan other than
payments that are treated as "qualified stated interest" payments (generally,
payments of interest at a single fixed or variable rate payable unconditionally
at least annually). The "issue price" of a Qualified Loan is generally the
amount lent to the mortgagor, which may be adjusted to take into account certain
loan origination fees. If the excess of a Qualified Loan's stated redemption
price at maturity over its issue price is less than 0.25% of the stated
redemption price at maturity multiplied by the number of complete years to
maturity of the Qualified Loan (in the case of a Qualified Loan the principal of
which is payable in more than one installment, the weighted average maturity of
the Qualified Loan is substituted for the number of complete years to maturity)
(the "de minimis amount"), the Qualified Loan is treated as not bearing OID.
Generally, the Holder of a Grantor Trust Certificate must include in gross
income the sum of the "daily portions" of the OID on the Qualified Loans
underlying such Certificate for each day on which such Holder owns the
Certificate. "Daily portions" are generally computed by determining the amount
of OID accruing during each "accrual period" and then dividing such amount by
the number of days in such accrual period. An "accrual period" is generally the
period of time between payment dates. The amount of OID that accrues during any
accrual period is generally the product of the "yield to maturity" of the
Qualified Loan and its "adjusted issue price" at the beginning of such accrual
period less any qualified stated interest allocable to the accrual period. The
"yield to maturity" of a Qualified Loan is generally the interest rate that,
when used to compute the present values of all the payments due under the
Qualified Loan as of its issue date, causes the sum of such present values to
equal the issue price of such Qualified Loan. The "adjusted issue price" of a
Qualified Loan as of the beginning of any accrual period generally equals the
issue price of such Qualified Loan, plus all the OID previously accrued on such
Qualified Loan, minus all payments previously made on such Qualified Loan, other
than payments of qualified stated interest. In the event that a Qualified Loan
has an initial accrual period longer or shorter than the regular accrual period
for such Qualified Loan, appropriate adjustments are made to take into account
such longer or shorter period.
Market Discount. The price paid for a Grantor Trust Certificate by a Holder
will be allocated to such Holder's undivided interest in each Qualified Loan in
the related Pool based on each Qualified Loan's relative fair market value, so
that such Holder's undivided interest in each Qualified Loan will have its own
tax basis. To the extent that a holder's tax basis in an undivided interest in a
Qualified Loan is less than such Holder's share of the principal amount of such
Qualified Loan (or, if such Qualified Loan was issued with OID, the adjusted
issue price of such Qualified Loan), such Qualified Loan may be considered to
have been purchased at a "market discount," subject to the market discount rules
of Code Sections 1276-1278. The market discount rules provide that if the amount
of market discount with respect to a Holder's interest in a Qualified Loan
exceeds a statutorily-defined de minimis amount (described below), gain on
disposition of the Qualified Loan and the receipt of any principal payment on
such Qualified Loan (whether scheduled or not) is taxable as ordinary income to
the extent of the amount of market discount that has accrued (but has not been
included in income) as of the time such gain is recognized or such principal
payment is received. Holders of Grantor Trust Certificates will be entitled to
elect to include market discount currently as it accrues, rather than upon
disposition or receipt of a principal payment, in which case such election
generally would apply to all debt instruments (i.e., not only to interests in
Qualified Loans) acquired by such Holders during the year in which such election
is made and in all subsequent years.
The method of accruing market discount in the case of Grantor Trust
Certificates, which represent interests in Qualified Loans, is not entirely
clear. The Code grants the Treasury Department authority to issue regulations
providing for the method of accruing market discount on debt instruments, such
as the Qualified Loans, the principal of which is payable in more than one
installment. Since the Treasury Department has not yet issued those regulations,
rules described in the relevant legislative history should apply. Under those
rules, the Holder of a market discount bond may elect to accrue market discount
either on the basis of a constant yield method or according to one of the
following methods: (a) in the case of a Qualified Loan 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; or
(b) in the case of a Qualified Loan not 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
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. Because the regulations implementing these
rules have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate (or
the underlying Qualified Loans) purchased at a discount in the secondary market.
A Holder who acquires a Grantor Trust Certificate (i.e., an interest in a
Qualified Loan) 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,
unless the Holder makes the election described above to include market discount
currently as it accrues. Holders that incur or continue indebtedness to purchase
or carry their Grantor Trust Certificates should consult their tax advisors as
to the proper application of this rule.
If the amount of market discount on a Holder's interest in a Qualified Loan
is less than an amount equal to 0.25% of such Holder's portion of the Qualified
Loan's stated redemption price at maturity multiplied by the number of complete
years to maturity remaining after the date of purchase (i.e., the de minimis
amount), the market discount on that interest will be not be subject to the
rules described above. In the case of a Qualified Loan the principal of which is
payable in more than one installment, while it is not certain due to the absence
of applicable authority, by analogy to the OID rules, that computation should be
made by substituting the weighted average maturity of the Qualified Loan for the
number of complete years to maturity of the Qualified Loan.
Treasury regulations implementing the market discount rules have not yet been
issued; therefore, Holders of Grantor Trust Certificates are urged to consult
their own tax advisors regarding the application of these rules and the
advisability of making any of the elections allowed under these rules.
Premium. In the event a Holder of a Grantor Trust Certificate acquires an
interest in a Qualified Loan at an "acquisition premium," i.e., for an amount
greater than the Qualified Loan's then adjusted issue price but less than the
sum of the remaining payments due on the Qualified Loan (other than payments of
qualified stated interest), the Holder will be entitled to offset a portion of
the OID that accrues in each subsequent accrual period by a portion of that
excess.
In the event a Holder of a Grantor Trust Certificate acquires an interest in
a Qualified Loan at a premium (i.e., for an amount greater than the sum of the
remaining payments due on the Qualified Loan, other than payments of qualified
stated interest), the Holder may elect to amortize such premium under a constant
yield method, provided that such Qualified Loan was originated after September
27, 1985. Amortized premium under these rules will be treated as an offset to
interest income on such Qualified Loan, and the tax basis of an interest in a
Qualified Loan will be reduced to the extent that amortizable premium is applied
to offset interest payments. A Holder that elects to amortize premium under
these rules will be deemed to have made an election to amortize premium with
respect to all debt instruments (i.e., not only with respect to interests in
Qualified Loans) having amortizable bond premium that such Holder holds during
the year of the election or acquires thereafter. Premium allocable to Qualified
Loans originated on or before September 27, 1985, should be allocated among the
principal payments on such Qualified Loans and allowed as an ordinary deduction
as principal payments are made.
Election to Treat All Interest as OID. The OID Regulations permit the Holder
of a Grantor Trust Certificate 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 Grantor Trust Certificate representing an interest in
Qualified Loans with market discount, the Holder of such Certificate would be
deemed to have made an election to include market discount in income currently
with respect to all other debt instruments having market discount that such
Holder acquires during the year of the election or thereafter. Similarly, a
Holder that makes this election for a Certificate that represents an interest in
Qualified Loans acquired at a premium will be deemed to have made an election to
amortize bond premium on a constant yield method with respect to all debt
instruments having amortizable bond premium that such Holder owns in the year of
the election or thereafter acquires. The election to accrue all interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Prepayment Premiums and Yield Maintenance Charges. Because of the absence of
clear authority, it is uncertain whether the portion of any Prepayment Premium
or Yield Maintenance Charge received by any Holder of a Grantor Trust
Certificate should be treated as capital gain (assuming a Certificate is held as
a capital asset) or as ordinary income. Holders that receive distributions from
a Trust Fund of Prepayment Premiums or Yield Maintenance Charges should consult
their tax advisors regarding the taxable status of such amounts.
Characterization of Certificates with respect to Certain Holders. As to each
Series of Certificates issued in a single class with respect to a Pool, Fried,
Frank will advise the Depositor that:
(i) a Grantor Trust 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), in each case to the extent that the Qualified Loans
represented by the Grantor Trust Certificate are of a type described in such
Code section; and
(ii) a Grantor Trust Certificate owned by a REMIC will represent an
interest in "obligation[s] ... which [are] principally secured by an interest
in real property" within the meaning Code Section 860G(a)(3) to the extent
that the Qualified Loans represented by the Grantor Trust Certificate are of
a type described in such Code section.
If the value of the real property securing a Qualified Loan is lower than the
amount of such Qualified Loan, such Qualified Loan may not qualify in its
entirety under the foregoing Code sections.
b. Multiple Classes of Grantor Trust Certificates
If a Trust Fund is created with two classes of Grantor Trust Certificates
relating to a Pool, one class of Grantor Trust Certificates may represent the
right to principal and some interest, or principal only, on all or a portion of
the Qualified Assets in the Pool (the "Stripped Bond Certificates"), while the
other class of Grantor Trust Certificates may represent the right to some or all
of the interest on such portion (the "Stripped Coupon Certificates"). Under 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 on the obligation results in the creation
of "stripped bonds" with respect to principal payments and "stripped coupons"
with respect to interest payments. For purposes of the OID, market discount and
related rules, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is purchased and
provides that the OID rules are applied to that obligation, rather than to the
underlying debt instrument that has been "stripped." As noted above under "-- a.
Single Class of Grantor Trust Certificates -- Characterization and General
Rules," servicing fees that are treated by the IRS as exceeding a reasonable fee
("excess servicing fee") will be treated as creating stripped coupons (the right
to receive the excess servicing fee) and stripped bonds (the right to receive
all the principal of, and all the interest, other than the amount of the excess
servicing fee, on, the Qualified Loans).
Although not entirely clear due to the absence of applicable authority, a
Stripped Bond Certificate generally should be treated as an interest in
Qualified Assets issued on the date such Certificate is purchased for purposes
of calculating any OID, and the issue price of such Certificate should be the
amount paid for such Certificate. Discount on a Stripped Bond Certificate will
be treated as market discount, subject to the rules described above under "-- a.
Single Class of Grantor Trust Certificates -- Market Discount," rather than as
OID, if either (i) the amount of OID on such Certificate is less than the de
minimis amount (generally calculated as described above as 0.25% of the stated
redemption price at maturity of the Certificate multiplied by the weighted
average maturity of the Certificate) or (ii) the annual stated interest rate
payable on the Certificate (including any amounts treated as a reasonable
servicing fee) is more than 100 basis points less than the annual stated
interest rate payable on the Qualified Loans (including all amounts paid as
servicing fees) before the creation of the Stripped Coupon Certificates. The
treatment of discount as market discount rather than as OID under this rule
constitutes a method of accounting for tax purposes; thus any Holder of a
Grantor Trust Certificate that adopted a method of accounting for stripped bonds
prior to its acquisition of any Certificates subject to the rule described in
this paragraph should consult its tax advisor to determine whether it is
required to change its previously-adopted method of accounting, and if so, how
to make that change.
The tax treatment of Stripped Coupon Certificates is uncertain. The Code
could be read literally to require that OID computations be made separately for
each payment from each Qualified Loan. The better treatment, however, appears to
be to treat all payments to be received on a Stripped Coupon Certificate as a
single installment obligation subject to the OID rules, in which case, all
payments on such Certificate would be included in the Certificate's stated
redemption price at maturity.
The computation of OID with respect to Stripped Bond Certificates and
Stripped Coupon Certificates is uncertain due to the absence of applicable
authority. Code Section 1272(a)(6) provides that in the case of an instrument,
the payments on which may be accelerated by reason of prepayments on other
obligations securing such instrument, OID computations must take into account a
"prepayment assumption" (the "Prepayment Assumption Rule"). The Prepayment
Assumption Rule does not by its terms apply to Stripped Bond Certificates or
Stripped Coupon Certificates, because these Certificates are not secured by the
underlying Qualified Assets. However, payments on these Certificates may, in
fact, be accelerated by reason of prepayments on the Qualified Assets. There are
no regulations implementing the Prepayment Assumption Rule, and there is no
other authority as to whether that Rule is to be applied in the computation of
OID with respect to instruments such as the Certificates. In the absence of any
authoritative guidance, the Master Servicer intends to compute OID on Stripped
Bond Certificates and Stripped Coupon Certificates in accordance with the
Prepayment Assumption Rule.
Under the Prepayment Assumption Rule, OID for any accrual period is generally
determined by (a) adding (i) the present value as of the end of the accrual
period of all remaining payments to be received on the Certificate (determined
by using as a discount factor the original yield to maturity of the Certificate
and taking into account a prepayment assumption) and (ii) any payments received
during such accrual period that were included in the state redemption price at
maturity, and (b) subtracting from that sum the adjusted issue price of the
Certificate at the beginning of such accrual period. The Code provides that the
prepayment assumption is to be determined in the manner prescribed by
regulations. These regulations have not yet been issued. However, the
legislative history to the Prepayment Assumption Rule indicates that the
regulations are to require that the same prepayment assumption used to determine
the offering price of a Certificate (the "Prepayment Assumption") be used to
make OID computations. It is unclear whether that rule would apply in the case
of Stripped Bond Certificates and Stripped Coupon Certificates, or whether,
assuming any prepayment assumption is to be used with respect to such
Certificates, such prepayment assumption would be determined based on conditions
existing at the time such stripped interests are created (e.g., in the case of a
subsequent Holder, at the time such Holder acquires such Certificate). Neither
the Depositor, the Guarantor nor the Master Servicer will make any
representation that any Certificate will prepay at a rate consistent with the
Prepayment Assumption or at any other rate.
It is unclear under what circumstances, if any, the prepayment of a Qualified
Loan will give rise to a loss to the Holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If a Stripped Bond
Certificate is treated as a single instrument (rather than as an interest in
discrete Qualified Loans) and the Prepayment Assumption Rule applies in the
computation of OID with respect to such Certificate, it appears that no loss
will be allowable as a result of any particular prepayment, and instead, a
prepayment should be treated as a partial payment of the stated redemption price
of the Stripped Bond Certificate and accounted for under the Prepayment
Assumption Rule. However, if a Stripped Bond Certificate is treated as an
interest in discrete Qualified Loans, then when a Qualified Loan is prepaid, the
Holder of such Certificate should recognize a loss equal to the excess of the
portion of the Holder's adjusted basis for such Certificate allocable to such
Qualified Loan over the amount of principal prepaid. If a Stripped Coupon
Certificate is treated as a single instrument and the Prepayment Assumption Rule
applies, it appears that no loss will be available as a result of any particular
prepayment, unless prepayments on the Qualified Loans generally occur at a rate
faster than the assumed prepayment rate. However, if a Stripped Coupon
Certificate is treated as an interest in discrete Qualified Loans, then when a
Qualified Loan is prepaid, the Holder of such Certificate should recognize a
loss equal to the portion of the Holder's adjusted basis for such Certificate
allocable to such Qualified Loan. If a Stripped Bond Certificate or Stripped
Coupon Certificate is treated as a single instrument but the Prepayment
Assumption Rule does not apply, it appears that no loss will be allowable as a
result of any particular prepayment, and a Holder would be entitled to a loss
only upon receiving a final payment with respect to such Certificate that is
less than such Holder's remaining adjusted basis for such Certificate.
As noted, the tax treatment of Stripped Bond Certificates and Stripped Coupon
Certificates is subject to significant uncertainties. 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.
Characterization of Stripped Bond Certificates and Stripped Coupon
Certificates with respect to Certain Holders. As noted above under "--a. Single
Class of Grantor Trust Certificates -- Characterization of Stripped Bond
Certificates and Stripped Coupon Certificates with respect to Certain Holders,"
Certificates issued in a single class with respect to a Pool will represent
permissible investments for real estate investment trusts, provided the
underlying Qualified Assets constitute permissible investments. There is no
specific authority regarding whether Certificates that constitute Stripped Bond
Certificates or Stripped Coupon Certificates will also represent permissible
investments for such Holders. However, the Code provisions governing stripped
obligations by their terms apply only for purposes of determining OID, market
discount and similar matters. Therefore, while not free from doubt, Stripped
Bond Certificates and Stripped Coupon Certificates should represent "real estate
assets" within the meaning of Code Section 856(c)(5)(A), and interest income
attributable to such Certificates should 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 characterization of
the Grantor Trust Certificates and the income therefrom. Stripped Bond
Certificates and Stripped Coupon Certificates held by a REMIC will constitute
"obligation[s] ... which [are] principally secured, directly or indirectly, by
an interest in real property" within the meaning of Code Section 860G(a)(3) to
the extent that the Qualified Loans underlying such Certificates are of a type
described in such Code section .
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 Holder's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the Holder's purchase price for the Grantor
Trust Certificate, increased by the OID included in the Holder's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the Holder. Such gain or
loss will be capital gain or loss to a Holder for which a Grantor Trust
Certificate is a "capital asset" and will be long-term or short-term depending
on whether the Grantor Trust Certificate has been owned for the long-term
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, a Holder of a Grantor Trust Certificate that is not a U.S. Person
(as defined below) and for which income derived from a Certificate would not be
effectively connected with the conduct of a U.S. trade or business will not be
subject to U.S. federal income or withholding tax in respect of distributions on
a Certificate, provided that such Holder complies with certain identification
requirements (including delivery of a statement, signed by the Holder under
penalties of perjury, certifying that such Holder is not a U.S. Person and
providing the holder's name and address). This rule may not apply to a Holder in
the event (i) such Holder owns 10% or more of the interests in the obligor under
a Qualified Loan, (ii) such Holder is a "controlled foreign corporation" for
U.S. federal income tax purposes, or (iii) one or more Qualified Loans in the
related Pool were originated on or before July 18, 1984. If any of these
circumstances exist with respect to a Holder that is not a U.S. Person,
distributions made to such Holder could be subject to withholding, and such
Holder should consult its own tax advisor regarding the federal income tax
consequences of holding a Certificate.
A Grantor Trust Certificate held by a Holder who is a nonresident alien
individual and for whom distributions would be exempt from tax as described in
the preceding paragraph will not be included in the U.S. estate of such Holder.
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 is includible in gross income for federal income tax purposes
regardless of its source.
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 or entity who held a Grantor
Trust Certificate at any time during such year, such information as may be
required by applicable rules to assist such Holders 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 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 "--b. Taxation of Owners of REMIC Residual Certificates" and "--e.
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 the
REMIC as described below under "--a. Taxation of Owners of REMIC Residual
Certificates," the Code provides that the 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 Certificates (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 during which the requirements for
such status were not satisfied. With respect to each Trust Fund that elects
REMIC status, Fried Frank will deliver its opinion generally to the effect that,
under then existing law and assuming compliance with all provisions of the
related Trust Agreement and any related agreements, such Trust Fund will qualify
as a REMIC, and the related Certificates will be considered to be regular
interests ("REMIC Regular Certificates") or 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 if so, whether the Certificates of a particular class will be treated as
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 real estate investment trust will
constitute "real estate assets" within the meaning of Code Section 856(c)(5)(A);
and (ii) interest on REMIC Regular Certificates held by a real estate investment
trust and any income includible with respect to a REMIC Residual Certificate
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). However, if less than 95% of the REMIC's assets qualify as
real estate assets, the Certificates will be qualifying assets only to the
extent that the REMIC's assets are qualifying assets. It is unclear whether
property acquired by foreclosure held pending sale and amounts in reserve
accounts (to the extent not invested in real estate assets) would be considered
to be real estate assets, or whether such assets otherwise would receive the
same treatment as the Qualified Assets for purposes of all of the foregoing
sections. Also, payments on Qualified Assets held pending distribution on the
REMIC Certificates will be considered to be part of the Qualified Assets for
purposes of Code Section 856(c) and thus will be treated as real estate assets
as described above. In addition, REMIC Regular Certificates held by a REMIC will
be considered "obligation[s] ... which [are] principally secured by an interest
in real property" within the meaning of Section 860G(a)(3) of the Code.
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat separately designated portions of the related
Trust Fund as REMICs (respectively, the "Master REMIC" and the "Subsidiary
REMIC") for federal income tax purposes. Upon the issuance of any such Series of
Certificates, Fried Frank will deliver its opinion generally to the effect that,
assuming compliance with all provisions of the related Trust Agreement, each of
the Master REMIC and the Subsidiary REMIC will qualify as a REMIC, and the REMIC
Certificates issued by both the Master REMIC and the Subsidiary REMIC will
constitute REMIC Regular Certificates or REMIC Residual Certificates, as the
case may be, in the related REMIC.
The Master REMIC and the Subsidiary REMIC will be treated as one REMIC solely
for purposes of determining (i) whether the REMIC Certificates will be
considered "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code and (ii) 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. The REMIC Regular Certificates may be issued with
OID. Holders of any class of REMIC Regular Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant yield method based on the compounding
of interest as it accrues, rather than in accordance with the receipt of
distributions on the REMIC Regular Certificates. The amount and rate of accrual
of OID will be determined by taking into account the expected rate of
prepayments on the Qualified Assets held by the REMIC and will be adjusted to
reflect the rate of prepayments as they actually occur. As described in more
detail below, under this method, if the actual prepayments during a particular
period exceed the expected prepayments, the amount of OID accrued in that period
will be greater than the amount of OID that would accrue if prepayments during
that period equaled the amount expected. Similarly, if the actual prepayments
during a particular period are less than the expected prepayments, the amount of
OID accrued in that period will be less than the amount of OID that would accrue
if prepayments during that period equaled the amount expected (but in no case
less than zero). The OID rules provide that the expected rate of prepayments to
be used for these computations be determined as prescribed by regulations which
have not yet been issued. The legislative history to these rules provides,
however, that the regulations should require that the rate used be the
prepayment assumption that is used in determining the initial offering price of
the REMIC Regular Certificates the ("Prepayment Assumption"). The Prepayment
Assumption with respect to a Series of REMIC Regular Certificates will be set
forth in the related Prospectus Supplement. However, neither the Depositor, the
Trustee nor the Master or Central Servicer will make any representation that the
REMIC Regular Certificates will in fact prepay at the Prepayment Assumption or
at any other rate. The OID rules applicable to REMIC Regular Certificates are
very complex and are subject to uncertainties due to the absence of applicable
authority; thus, Holders are urged to consult their own tax advisors regarding
the tax consequences of purchasing, owning and disposing of the REMIC Regular
Certificates.
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 "stated
redemption price at maturity" of a REMIC Regular Certificate includes the
original principal amount of the Certificate and all other payments on the
Certificate other than payments that constitute "qualified stated interest."
"Qualified stated interest" generally means interest at a single fixed rate or
qualified variable rate (as described below) that is unconditionally payable at
intervals of one year or less during the entire term of the REMIC Regular
Certificate. Interest is treated as payable at a single fixed rate only if the
rate appropriately takes into account the length of the interval between
payments. 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 may be added to the
Certificate's stated redemption price at maturity. The "issue price" of a REMIC
Regular Certificate of a particular class is generally 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).
Under a "de minimis" rule, OID on a REMIC Regular Certificate will generally
be considered to be zero if the OID calculated as described above is less than
0.25% of the stated redemption price at maturity of the Certificate multiplied
by the weighted average maturity of the REMIC Regular Certificate. For this
purpose, the weighted average maturity of the 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 such distribution and the
denominator of which is the stated redemption price at maturity of the
Certificate). Although not entirely clear, it appears that the schedule of such
distributions should be determined taking into account the Prepayment
Assumption. 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.
<PAGE>
Generally, a Holder of a REMIC Regular Certificate must include in gross
income the "daily portions," as determined below, of the OID that accrues on
such Certificate for each day such Holder holds the Certificate. "Daily
portions" are generally computed by determining the amount of OID accruing
during each "accrual period" and then dividing such amount by the number of days
in such accrual period. An "accrual period" is generally the period of time
between payment dates on the REMIC Regular Certificate. The amount of OID that
accrues in any accrual period is generally determined by (a) adding (i) the
present value at the end of the accrual period of all remaining payments to be
received on the Certificate (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificate and taking into
account the Prepayment Assumption) and (ii) any payments received during such
accrual period that were included in the stated redemption price at maturity,
and (b) subtracting from that sum the "adjusted issue price" of the Certificate
at the beginning of such accrual period. The "yield to maturity" of a REMIC
Regular Certificate is generally the interest rate that, when used to compute
the present values of all the payments due under the Certificate as of its issue
date (taking the Prepayment Assumption into account), causes the sum of such
present values to equal the issue price of such Certificate. 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 accrued during such accrual period, and minus the amount of
any payments made on the Certificate during such accrual period, other than any
payment of qualified stated interest. As noted above, the calculation of OID
under this method will cause the accrual of OID with respect to a particular
accrual period either to increase or decrease (but never below zero) relative to
the Certificate's original yield to maturity to reflect prepayments during such
accrual period that exceeded or were less than the Prepayment Assumption.
Certain REMIC Regular Certificates may be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (e.g.,
so-called "interest-only" or "I/O" strips). The income tax treatment of such
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 Certificates is the sum of all payments to be made on such
Certificates determined taking the Prepayment Assumption into account, with the
result that such Certificates would be treated as issued with OID. The
calculation of income in this manner could result in negative OID when
prepayments on the Qualified Assets occur faster than the Prepayment Assumption;
however negative OID is not deductible in the period accrued, but should be
allowed as an offset to future accruals of positive OID. Alternatively, it is
possible that the stated redemption price at maturity of these Certificates
should be limited to their stated principal amount, so that such REMIC Regular
Certificates would be considered to be issued at a premium. In such case, the
rules described below under "--Premium" would apply. It is unclear when a loss
may be claimed for any unrecovered basis in a REMIC Regular Certificate
described in this paragraph; it is possible that a loss may only be claimed when
the remaining basis in the Certificate exceeds the maximum amount of future
payments to be received on the Certificate, assuming no further prepayments, or
perhaps only when the final payment is received with respect to such
Certificate.
Certain REMIC Regular Certificates may provide for interest based on a
variable rate. The OID Regulations provide that interest based on certain kinds
of variable rates will constitute qualified stated interest; thus Certificates
that bear interest at one of these kinds of variable rates would not have OID
(unless the Certificates were issued at a discount from their principal amount).
However, a Certificate that bears interest based on a variable rate that does
not constitute qualified stated interest would have OID, because all such
interest would be included in the Certificate's stated redemption price at
maturity. The Prospectus Supplement with respect to an issuance of REMIC Regular
Certificates that bear interest at a variable rate will indicate whether such
interest will be treated as qualified stated interest.
Market Discount. A Holder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without OID, at a purchase price less than its remaining stated principal
amount, or in the case of a REMIC Regular Certificate issued with OID, at a
purchase price less than its adjusted issue price, will be required to include
as ordinary income a portion of such market discount upon the receipt of any
distribution of an amount included in such Certificate's stated redemption price
at maturity. Under the market discount rules, each such distribution is treated
as ordinary income up to the amount of market discount accrued (and not
previously included) as of the date of such distribution. Upon disposition of a
REMIC Regular Certificate, Holders are required to treat any gain recognized as
ordinary income to the extent of the market discount accrued as of the date of
disposition. Holders may elect to include market discount in income currently as
<PAGE>
it accrues rather than including it on the deferred basis described above. If
made, such election will apply to all market discount bonds (i.e., not only to
REMIC interests) acquired by such Holder during the year in which such election
is made and in all subsequent years.
The method of accruing market discount in the case of REMIC Regular
Certificates is not entirely clear. The Code grants the Treasury Department
authority to issue regulations providing for the method of accruing market
discount on debt instruments, such as the REMIC Regular Certificates, the
principal of which is payable in more than one installment. Since the Treasury
Department has not yet issued those regulations, rules described in the relevant
legislative history should apply. Under those rules, the Holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant yield method or according to one of the following methods: (a) in the
case of a REMIC Regular Certificate 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; or (b) in the case
of a REMIC Regular Certificate not 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
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. The calculation of accrued market discount
under any of the above methods will be made taking into account the same
Prepayment Assumption applicable to the calculation of the accrual of OID, as
described above. Because the regulations implementing these rules have not been
issued, it is impossible to predict what effect those regulations might have on
the tax treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
A Holder who acquires 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, unless the Holder makes the election described above to
include market discount currently as it accrues. Holders that incur or continue
indebtedness to purchase or carry their REMIC Regular Certificates should
consult their tax advisors as to the proper application of this rule.
If the amount of market discount on a REMIC Regular Certificate is less than
a de minimis amount equal to 0.25% of the Certificate's remaining stated
redemption price at maturity multiplied by the weighted average remaining
maturity of the Certificate, the market discount on that Certificate will not be
subject to the rules described above. Although not entirely clear, it appears
that the computation of the de minimis amount should be made taking the
Prepayment Assumption into account. De minimis market discount should be
allocated among the distributions representing stated redemption price at
maturity of the Certificate, and the allocable portion of the market discount
should be included in income at the time each such distribution is made or is
due.
Treasury regulations implementing the market discount rules have not yet been
issued; therefore, Holders are urged to consult their own tax advisors regarding
the application of these rules and the advisability of making any of the
elections allowed under these rules.
Premium. In the event a Holder acquires an interest in a REMIC Regular
Certificate at an "acquisition premium," i.e., for an amount greater than the
Certificate's then adjusted issue price but less than its then remaining stated
redemption price at maturity, the Holder will be entitled to offset a portion of
the OID that accrues in each subsequent accrual period by a portion of that
excess.
In the event a Holder acquires a REMIC Regular Certificate at a premium
(i.e., for an amount greater than its then remaining stated redemption price at
maturity), the Holder may elect to amortize such premium under a constant yield
method. Amortized premium under these rules will be treated as an offset to
interest income on such Certificate, and the tax basis of the Certificate will
be reduced to the extent that amortizable premium is applied to offset interest
payments. A Holder that elects to amortize premium under these rules will be
deemed to have made an election to amortize premium with respect to all debt
instruments (i.e., not only with respect to REMIC interests) having amortizable
bond premium that such Holder holds during the year of the election or acquires
thereafter.
Because of the absence of applicable regulations, it is not clear whether,
and if so, how, the Prepayment Assumption should be taken into account in
computing the amortization of premium under these rules. However, the applicable
legislative history generally states that the same rules that apply to the
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 these rules.
Election to Treat All Interest as OID. The OID Regulations permit a Holder of
a REMIC Regular Certificate 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 Holder would be
deemed to have made an election to include market discount in income currently
with respect to all other debt instruments having market discount that such
Holder acquires during the year of the election or thereafter. Similarly, a
Holder 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 on a constant
yield method with respect to all debt instruments having amortizable bond
premium that such Holder owns in the year of the election or thereafter
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
Sale or Other Disposition of a REMIC Regular Certificate. If a REMIC Regular
Certificate is sold, exchanged, redeemed or otherwise disposed of, the seller
will recognize gain or loss equal to the difference between the amount received
on the sale or other disposition and the seller's adjusted tax basis in the
Certificate. Such adjusted basis generally will equal the initial cost of the
Certificate to the seller, increased by any OID and market discount previously
included in the seller's gross income with respect to the Certificate, and
reduced (but not below zero) by payments previously received by the seller of
amounts included in the Certificate's stated redemption price at maturity and by
any amortized premium previously recognized by the seller. A Holder who receives
a final payment on a REMIC Regular Certificate that is less than the Holder's
adjusted tax basis in the Certificate will generally be entitled to recognize a
loss. Except as provided in the following paragraphs 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.
Gain from the sale or other disposition of a REMIC Regular Certificate that
would otherwise be treated as capital gain will instead 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 "applicable federal rate" as defined in Code Section 1274(d)
(generally, an average of current yields on Treasury securities of comparable
maturity), 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.
Non-Interest Expenses of the REMIC. As discussed in more detail below under
"--b. Taxation of Holders of REMIC Residual Certificates - Pass-Through of
Non-Interest Expenses of the REMIC," 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
Holders of REMIC Regular Certificates that are individuals or "pass-through
interest holders." Holders that are individuals or pass-through interest holders
should consult their tax advisors about the impact of these rules on an
investment in the REMIC Regular Certificates.
Prepayment Premiums and Yield Maintenance Charges. Because of the absence of
clear authority, it is uncertain whether the portion of any Prepayment Premium
or Yield Maintenance Charge received by any Holder should be treated as capital
gain (assuming a Certificate is held as a capital asset) or as ordinary income.
Holders should consult their tax advisors regarding the taxable status of such
amounts.
Non-U.S. Persons. Generally, a Holder that is not a U.S. Person (as defined
above under "--Grantor Trust Funds - d. Non-U.S. Persons") and for which income
derived from a REMIC Regular Certificate would not be effectively connected with
the conduct of a U.S. trade or business will not be subject to U.S. federal
income or withholding tax in respect of distributions on a REMIC Regular
Certificate, provided that such Holder complies with certain identification
requirements (including delivery of a statement, signed by the Holder under
penalties of perjury, certifying that such Holder is not a U.S. Person and
providing the name and address of such Holder). This rule may not apply to a
Holder that owns, directly or indirectly, a 10% or greater interest in the REMIC
Residual Certificates. If a Holder of a REMIC Regular Certificate is not exempt
from U.S. tax as described above, 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. Holders
of REMIC Regular Certificates that also own REMIC Residual Certificates and are
not U.S. Persons should consult their tax advisors as to whether distributions
to them from the REMIC are exempt from U.S. federal income tax.
A REMIC Regular Certificate held by a nonresident alien individual for whom
distributions on such Certificate would be exempt from tax as described in the
preceding paragraph will not be included in the U.S. estate of such Holder.
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 or entity who held a REMIC Regular Certificate at
any time during such year, such information as may be required by applicable
rules to assist such Holders 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 on behalf of beneficial
owners. In particular, such information 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. 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 Holders of REMIC Residual Certificates
Holders of REMIC Residual Certificates will be subject to rules, described
below, that differ from those that would apply if such Holders were treated as
owning undivided interests in the Qualified Assets held by the REMIC or as
owning debt instruments issued by the REMIC. The rules applicable to Holders of
REMIC Residual Certificates are very complex; such Holders are urged to consult
their tax advisors before making an investment in REMIC Residual Certificates.
Allocation of the Income of the REMIC to the REMIC Residual Certificates. The
REMIC itself will not be subject to federal income tax, except as described
below with respect to "prohibited transactions" and certain other transactions.
See "--e. Prohibited Transactions and Other Taxes" below. Instead, each original
Holder of a REMIC Residual Certificate is required to report its share of the
taxable income, or subject to the limitations described below, the net loss, of
the REMIC for each day during the taxable year on which such Holder owns any
REMIC Residual Certificates. Such income or loss is treated as ordinary income
or loss. The taxable income or loss of the REMIC for each day will be determined
by allocating the taxable income or loss of the REMIC for each calendar quarter
ratably to each day in the quarter. Such Holder's share of the taxable income or
loss of the REMIC for each day will be based on the proportion of the
outstanding REMIC Residual Certificates that such Holder owns on that day. The
taxable income or loss of the REMIC will be determined under an accrual method
and will be includible by the Holder of a REMIC Residual Certificate without
regard to the timing or amounts of cash distributions made to such Holder by the
REMIC. Ordinary income derived from REMIC Residual Certificates will be
characterized as "portfolio income" for purposes of determining limitations on
the deductibility by certain taxpayers of "passive losses."
A Holder of a REMIC Residual Certificate may be required to include taxable
income from the Certificate in excess of the cash distributed. For example, a
structure where principal distributions are made serially on REMIC Regular
Certificates (that is, a so-called "fast-pay, slow-pay" structure) may generate
a mismatching of income and cash distributions (that is, "phantom income") to a
Holder of a REMIC Residual Certificate. Depending upon the structure of a
particular transaction, phantom income may significantly reduce the after-tax
yield of an investment in a REMIC Residual Certificate. Potential investors
should consult their own tax advisors concerning the federal income tax
treatment to them of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of the Certificate.
The legislative history to the REMIC rules 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 Certificate at a price greater
than (or less than) the adjusted tax basis of such Certificate in the hands of
the previous Holder of such Certificate. No regulations have been issued
providing for such adjustments. As a result, it is not clear whether such
adjustments will in fact be permitted or required and, if so, how they would be
made.
The requirement that Holders of REMIC Residual Certificates report their pro
rata shares of the REMIC's taxable income or net loss will continue until there
are no Certificates of any class of the related Series outstanding.
Taxable Income of the REMIC. The taxable income of the REMIC will reflect a
netting of the income from the Qualified Assets and the REMIC's other assets and
the deductions allowed to the REMIC for interest and OID on the REMIC Regular
Certificates and, except as described below under "--Pass-Through of
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, with certain exceptions. The REMIC's
gross income generally 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, but does not include any income in respect of a prohibited
transaction, as described below. The REMIC's deductions generally 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 REMIC will not be subject
to the Code Section 67 limitation on deduction of servicing, administrative and
other non-interest expenses (so-called "miscellaneous itemized deductions"), but
Holders who are individuals and who are allocated a share of such expenses will
be subject to that limitation.
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. The issue
price of the REMIC Residual Certificates will be determined under the general
OID rules (or, if such Certificates are not offered initially, will be the fair
market value of such Certificates). Such aggregate tax basis will be allocated
among the Qualified Assets and other assets of the REMIC in proportion to their
respective fair market values. A Qualified Asset will be deemed to have been
acquired with discount or premium to the extent that the REMIC's initial tax
basis therein is less than or greater than its adjusted issue price,
respectively. Any such discount (whether market discount or OID) will be
includible in the REMIC's taxable income as it accrues under a method similar to
the method described above for accruing OID on the REMIC Regular Certificates.
The REMIC expects to elect to amortize any premium on the Qualified Assets on a
constant yield method. It is not clear whether the yield of a Qualified Asset
would be calculated for this purpose based only on scheduled payments or by
taking into account the Prepayment Assumption.
The REMIC will be allowed a deduction for stated interest and OID on the
REMIC Regular Certificates. OID deductions (including deductions for any de
minimis OID that would not be includible as OID by the Holders of REMIC Regular
Certificates) will generally accrue in the same manner as described above with
respect to REMIC Regular Certificates, except that no adjustments to OID
deductions will be made to reflect the purchase of a REMIC Regular Certificate
at an acquisition premium. If a class of REMIC Regular Certificates is issued at
a price in excess of the stated redemption price at maturity of such class, the
net amount of interest deductions that will be allowed to the REMIC in each
taxable year with respect to the REMIC Regular Certificates of such class will
be reduced by an amount equal to the portion of such excess that is considered
to be amortized or repaid in such year.
A Holder of a REMIC Residual Certificate will not be permitted to amortize
the cost of the Certificate as an offset to such holder's 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.
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 will be
allocated among the Holders of REMIC Residual Certificates 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 tax basis in such Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such Holder to offset its share of the REMIC's taxable income in future
periods, but not otherwise. The ability of Holders of REMIC Residual
Certificates to deduct net losses may be subject to additional limitations under
the Code, as to which Holders should consult their own tax advisors.
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 may
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not be offset by any unrelated losses, deductions or loss
carryovers of the Holder of the REMIC Residual Certificate, (ii) will be treated
as "unrelated business taxable income" within the meaning of Code Section 512 if
the Holder of the REMIC Residual Certificate is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income, and (iii) is not eligible for any reduction in the rate of withholding
tax in the case of a Holder of a REMIC Residual Certificate that is not a U.S.
Person.
Except as discussed in the following paragraph, with respect to any Holder of
a REMIC Residual Certificate, the excess inclusion for any calendar quarter will
be the excess, if any, of (i) the income allocable to such Holder for that
calendar quarter with respect to its REMIC Residual Certificate over (ii) the
sum of the "daily accruals" for each day during the calendar quarter on which
such Holder holds such 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" of the Certificate at the beginning of the calendar quarter and 120
percent of the "federal long-term rate" in effect at the time the Certificate is
issued. For this purpose, the "adjusted issue price" of a REMIC Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Certificate, increased by the amount of daily accruals for all prior
quarters, and decreased (but not below zero) by the aggregate amount of
distributions made on the 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, which regulations have not yet been issued,
that would treat the entire amount of income accruing on a REMIC Residual
Certificate as an excess inclusion if the REMIC Residual Certificates in the
aggregate are considered not to have "significant value." Applicable legislative
history provides that for this purpose, REMIC Residual Certificates should be
treated as having "significant value" if the 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. It is impossible to predict whether any such regulations will be issued,
and if so, how they will define "significant value" for purposes of this rule.
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.
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 be allocated among the
Holders of the REMIC Regular Certificates and the REMIC Residual Certificates on
a daily basis in proportion to the relative amounts of income accruing to each
Holder with respect to that day. In general terms, a "single-class" REMIC is a
REMIC that either (i) would qualify, under existing regulations, as a grantor
trust if it were not a REMIC (treating all interests in the REMIC as ownership
interests, even if they are in fact classified as debt for federal income tax
purposes) or (ii) is similar to a grantor trust and is structured with the
principal purpose of avoiding the "single-class" REMIC rules.
<PAGE>
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" (as defined below) 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 to an individual whose
adjusted gross income exceeds a specified 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 Holders of REMIC Residual Certificates who are
subject to the limitations of either Code Section 67 or Code Section 68 may be
substantial. Further, a Holder (other than a corporation) subject to the
alternative minimum tax may not deduct any miscellaneous itemized deductions in
determining such holder's alternative minimum taxable income, even though an
amount equal to the amount of such deductions will be included in such holder's
gross 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
includes entities taxed as individuals and certain pass-through entities, but
does not include real estate investment trusts. Prospective investors that are
individuals or other pass-through interest holders should consider the impact of
these rules on them prior to making an investment in REMIC Regular Certificates
or REMIC Residual Certificates.
Mark-to-Market Rules. Prospective purchasers of a REMIC Residual Certificate
should be aware that the IRS recently adopted regulations which provide that
REMIC Residual Certificates are not subject to the mark-to-market rules. These
regulations reverse the position taken in the previous regulations which allowed
a REMIC residual interest 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.
Distributions. In general, any distribution made with respect to a REMIC
Residual Certificate will be treated as a non-taxable return of capital to the
extent it does not exceed the Holder's adjusted tax basis in such REMIC Residual
Certificate. To the extent a distribution exceeds such adjusted tax basis, it
will be treated as gain from the sale of the REMIC Residual Certificate.
Amounts paid to Holders of REMIC Residual Certificates that are not U.S.
Persons 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 above under "--a. Taxation of Owners of REMIC Regular Certificates,"
but only to the extent that the underlying mortgage loans were originated after
July 18,1984. If the portfolio interest exemption is unavailable, distributions
will be subject to United States withholding tax when made (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, which
regulations have not been issued, imposing withholding tax without regard to
whether distributions are made, where necessary to prevent avoidance of tax. If
the amounts distributed to Holders of REMIC Residual Certificates that are not
U.S. Persons are effectively connected with their conduct of a trade or business
in the United States, the 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts distributed will be subject to U.S. federal taxation at
regular graduated rates. For special restrictions on the transfer of REMIC
Residual Certificates to non-U.S. Persons, see "--c. Tax-Related Restrictions on
Transfers of REMIC Residual Certificates" below.
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 tax 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 tax basis in a REMIC Residual Certificate generally equals
the cost of such REMIC Residual Certificate to such Holder, increased by the
taxable income of the REMIC that was included in the income of such Holder 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 Holder with
respect to such REMIC Residual Certificate and by the distributions received
with respect thereto by such Holder. In general any such gain or loss will be
capital gain or loss provided the REMIC Residual Certificate is held as a
capital asset. 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 Holder
on the sale will not be deductible, but, instead, will increase such Holder's
adjusted tax basis in the newly acquired asset.
Administrative Matters Applicable to Holders of REMIC Residual Certificates.
Solely for the purpose of the administrative provisions of the Code, the REMIC
generally will be treated as a partnership and the Holders of REMIC Residual
Certificates will be treated as the partners. Certain information will be
furnished quarterlyto each Holder of a REMIC Residual Certificate who held a
REMIC Residual Certificate on any day in the previous calendar quarter.
Each Holder of a REMIC Residual Certificate is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the
Holder 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.
c. 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) and
information necessary for the application of the tax described in this paragraph
is made available by the REMIC. 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 (i) an amount (as determined under 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 is relieved of liability for
the tax if the transferee furnishes 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. For this
purpose, 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 tax, 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 (i)
the amount of excess inclusions for the taxable year applicable to the interest
held by the disqualified organization and (ii) 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 (A) a regulated investment
company, real estate investment trust or common trust fund, (B) a partnership,
trust or estate and (C) 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.
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 Trustee and/or the Master Servicer. The Trustee and/or
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 rules disregard, for
federal income tax purposes, any transfer of a "noneconomic REMIC Residual
Certificate" to a U.S. Person (or generally to a non-U.S. Person that holds the
REMIC Residual Certificate in connection with a U.S. trade or business) unless
no significant purpose of the transfer is to enable the transferor to impede the
assessment 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 is treated as existing 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 (A) the
transferor conducted a reasonable investigation of the transferee and (B) the
transferee acknowledges to the transferor that the REMIC Residual Certificate
may generate tax liabilities in excess of the cash flow and the transferee
represents that it intends to pay such taxes 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 Certificate and would continue to be
subject to tax on its allocable portion of the net income of the REMIC.
Non-U.S. Persons. The REMIC rules provide that the transfer of a REMIC
Residual Certificate that has a "tax avoidance potential" to a non-U.S. 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 States 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 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 and/or the Master Servicer with a duly
completed IRS Form 4224 and the Trustee and/or Master Servicer consents to such
transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
will 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 taxes which may be imposed on a
pass-through entity.
d. Tax-Exempt Holders of REMIC Residual Certificates
As noted above under "--b. Taxation of Holders of REMIC Residual Certificates
- - Excess Inclusions," any Holder of a REMIC Residual Certificate 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.
e. Prohibited Transactions and Other Taxes
The Code imposes a tax on a REMIC 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" includes 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 received 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 REMIC made after the day on which the
REMIC issues all of its interests could result in the imposition of a tax on the
REMIC equal to 100% of the value of the contributed property (the "Contributions
Tax"). No Trust Fund that makes an election to be treated as a REMIC will accept
contributions that would subject it to such tax.
In addition, 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 the 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.
f. 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 REMIC Regular Certificates and REMIC Residual Certificates within the
90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If the adjusted tax basis in a REMIC Residual Certificate
of a Holder of a REMIC Residual Certificate exceeds the amount of cash
distributed to such Holder of a REMIC Residual Certificate in final liquidation
of its interest, then it would appear that the Holder of a REMIC Residual
Certificate 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.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described under "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," potential investors should consider the state
local and foreign tax consequences of the acquisition, ownership, and
disposition of the Certificates. State, local and foreign income and other tax
laws may differ substantially from federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state, locality or
foreign country.
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 (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 a plan asset exception for a
Plan's purchase and holding of "guaranteed governmental mortgage pool
certificates." The Final Regulations provide that where a Plan acquires a
guaranteed governmental 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. Fried, Frank, Harris, Shriver & Jacobson, counsel to
Farmer Mac, has advised Farmer Mac that the Certificates satisfy the conditions
set forth in the Final Regulations and thus qualify as "guaranteed governmental
mortgage pool certificates;" no assurance can be given, however, 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 any IRA or any other Plan subject to Code Section 4975 could, in some
instances, 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.
For a particular Plan desiring to invest in the Certificates, a prohibited
transaction class exemption issued by the Department of Labor might apply as
follows: 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 any Certificates in reliance on either the guaranteed
governmental mortgage pool certificate 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.
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, the Trustee or the Borrower 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, and the potential consequences on their specific
circumstances, prior to making an investment in the Certificates. 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.
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.
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.
Section 24 (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 them.
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.
In addition to purchasing the Certificates pursuant to the underwriting
agreements among Farmer Mac, the Depositor and the appropriate underwriters
(each, an "Underwriting Agreement"), each underwriter named on the cover page of
a Prospectus Supplement and their affiliates may be engaged in several ongoing
business relationships with Farmer Mac.
Each Underwriting Agreement provides that Farmer Mac and the Depositor will
indemnify each underwriter named on the cover page of any Prospectus Supplement
against certain civil liabilities under the Securities Act of 1933, as amended,
or contribute to payments each such underwriter may be required to make in
respect thereof.
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms shall
have the meanings set forth on the pages indicated below:
<PAGE>
1933 Act..............................................................33
1991 Act..............................................................32
1996 Amendment.........................................................6
Accrual Certificates..............................................14, 33
accrual period....................................................54, 62
Accrued Certificate Interest..........................................35
acquisition premium...............................................55, 64
adjusted issue price..............................................54, 62
Advance...............................................................35
Advances..............................................................17
Agreements........................................................14, 39
Agricultural Real Estate...............................................8
AMBS................................................................1, 6
AMBS Information.......................................................4
applicable federal rate...............................................65
Appraisal Standards...................................................25
ARM Loans.............................................................26
Balloon Payment.......................................................10
Beneficial Owners.....................................................38
Book-Entry Certificates...............................................34
Borrower..............................................................28
Central Servicer.......................................................6
Central Servicing Fee.................................................45
CERCLA................................................................49
Certificate...........................................................40
Certificate Account...................................................43
Certificate Account Deposit Date......................................43
Certificate Balance...............................................14, 35
Certificates........................................................1, 6
Class..................................................................2
Class R Certificates..................................................18
Code..................................................................52
Code Section 4975 Plan................................................74
Collection Account................................................13, 42
Commission.............................................................3
CPR...................................................................31
Cut-off Date..........................................................16
Daily portions....................................................54, 62
de minimis amount.....................................................54
Definitive Certificates...........................................34, 39
Depository............................................................37
Determination Date....................................................34
disqualified organization.............................................71
Distribution Date.....................................................16
Eligible Depository...................................................42
Eligible Investments..................................................42
ERISA.............................................................20, 73
evidences of indebtedness.............................................65
excess servicing fee..................................................56
Exchange Act...........................................................3
Farm Credit Act.......................................................49
Farmer Mac......................................................1, 6, 32
Farmer Mac Charter....................................................32
Farmer Mac Guarantee...................................................1
FCA...................................................................32
Fed System............................................................37
Final Regulations.....................................................74
guaranteed governmental mortgage pool certificate.....................74
Guaranteed Loan.......................................................27
Guaranteed Portion....................................................27
Guaranteed Portions.................................................1, 8
Guides.................................................................8
Holder.................................................................2
Holders of Book-Entry Certificates....................................37
Indirect Participants.................................................38
Insurance Proceeds....................................................42
IRA...................................................................74
IRS...................................................................53
issue price.......................................................53, 61
Liquidation Proceeds..................................................42
Master REMIC..........................................................60
Master Servicer........................................................6
Mortgage Interest Rate................................................10
Mortgage Notes........................................................48
Mortgaged Properties...................................................8
Net income from foreclosure property..................................73
noneconomic REMIC Residual Certificate................................71
OID...................................................................52
OID Regulations.......................................................53
Originator............................................................32
Owner.................................................................28
Participants..........................................................38
parties in interest...................................................73
pass-through entity...................................................71
pass-through interest holder..........................................69
pass-through interest holders.........................................65
Pass-Through Rate.................................................14, 34
phantom income........................................................66
plan assets...........................................................74
Plans.................................................................73
Pool...................................................................1
Prepayment Assumption.............................................57, 61
Prepayment Assumption Rule............................................57
Prepayment Premium....................................................12
Prepayment Premiums...................................................23
prohibited transaction................................................72
Prohibited Transactions Tax...........................................72
publicly-offered security.............................................74
Purchase Price........................................................41
QMBS...................................................................8
QMBS Agreement........................................................27
QMBS Issuer...........................................................27
QMBS Servicer.........................................................27
QMBS Trustee..........................................................27
Qualified Loans.....................................................1, 8
Qualified Plan........................................................74
Qualified stated interest.............................................61
real estate assets....................................................20
Record Date...........................................................34
Related Proceeds......................................................35
REMIC..............................................................2, 18
REMIC Regular Certificates............................................18
REMIC Residual Certificates.......................................18, 60
Sale Agreement........................................................13
Secretary's Guarantee.................................................27
secured-creditor exemption............................................49
Sellers...........................................................13, 39
Series.................................................................1
Servicers.............................................................52
State Environmental Lien..............................................50
stated redemption price at maturity...............................53, 61
Stripped Bond Certificates............................................56
Stripped Coupon Certificates..........................................56
Stripped Interest Certificates....................................14, 33
Stripped Principal Certificates...................................14, 33
Subsidiary REMIC......................................................60
System Institution....................................................33
Trust Fund.............................................................1
Trust Fund AMBS........................................................8
Trustee................................................................8
U.S. Person...........................................................59
UCC...................................................................38
Underwriting Agreement................................................76
Underwriting Standards................................................25
Unguaranteed Portion..................................................28
Yield Maintenance Charge..........................................12, 23
yield to maturity.................................................54, 62
<PAGE>
===============================================================================
No person has been authorized
to give any information or to make
any representations other than $15,419,349
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 1
authorized by the Depositor or by
any Underwriter. This Prospectus
Supplement and the Prospectus do
not constitute an offer to sell, or Guaranteed Agricultural
a solicitation of an offer to buy, Mortgage-Backed
the securities offered hereby by Securities
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 Federal Agricultural
so or to anyone to whom it is Mortgage Corporation
unlawful to make any such offer or
solicitation. Neither the delivery
of this Prospectus Supplement and
the Prospectus nor any sale made
hereunder shall, under any ______________________
circumstances, create an
implication that information herein PROSPECTUS SUPPLEMENT
or therein is correct as of any _______________________
time since the date of this
Prospectus Supplement or the
Prospectus. [UNDERWRITER]
-------------
TABLE OF CONTENTS August 21, 1998
PROSPECTUS SUPPLEMENT
Page
Summary of Terms ............. S-4
Risk Factors ................. S-8
Description of the Qualified
Loans ....................... S-9
Description of the
Certificates ................ S-10
Farmer Mac Guarantee ......... S-13
Outstanding Guarantees ....... S-13
Yield, Prepayment and Maturity
Considerations .............. S-14
Description of the
Agreements .................. S-16
The Depositor ................ S-17
Certain Federal Income Tax
Consequences ................ S-17
ERISA Considerations ......... S-18
Legal Investment ............. S-19
Method of Distribution ....... S-19
Legal Matters ................ S-20
Index of Principal Terms ..... S-21
Annex I: Description of the
Qualified Loan Pools ........ A-1
PROSPECTUS
Prospectus Supplement ....... 3
Available Information ....... 3
Incorporation of Certain
Information by Reference ... 4
Summary of Prospectus ....... 6
Risk Factors ................ 16
Description of the Trust
Funds ...................... 19
Use of Proceeds ............. 23
Yield Considerations ......... 23
The Depositor ................ 26
Federal Agricultural Mortgage
Corporation ................. 26
Description of the
Certificates ................ 27
Description of the
Agreements .................. 33
Certain Legal Aspects of
Qualified Loans and
Other Matters ............... 42
Certain Federal Income Tax
Consequences ................ 46
State Tax Considerations ..... 67
ERISA Considerations ......... 67
Legal Investment ............. 69
Method of Distribution ....... 70
Index of Principal Terms ..... 71
--------------
Until 90 days after the date
of this Prospectus Supplement, all
dealers 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.
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