As filed with the Securities and Exchange Commission on September 29, 1999
Registration No. 333-80805
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------------------
FARMER MAC MORTGAGE SECURITIES CORPORATION
(Exact name of registrant as specified in its charter)
---------------------------
Delaware 52-1779791
(State of incorporation) (I.R.S. Employer Identification No.)
919 18th Street, N.W.
Washington, D.C. 20006
(202) 872-7700
(Address and telephone number of registrant's principal executive offices)
---------------------------
Henry D. Edelman
Farmer Mac Mortgage Securities Corporation
919 18th Street, N.W.
Washington, D.C. 20006
(202) 872-7700
(Name, address and telephone number of agent for service)
---------------------------
Copies to:
<TABLE>
<CAPTION>
<S> <C>
Hu A. Benton Michael T. Bennett
Andrews & Kurth L.L.P. Federal Agricultural Mortgage Corporation
1701 Pennsylvania Avenue, N.W., Suite 300 919 18th Street, N.W.
Washington, D.C. 20006 Washington, D.C. 20006
(202) 662-2700 (202) 872-7700
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time on or after the effective date of this Registration Statement, as
determined by market conditions.
If the only securities being registered on this form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Amount To Aggregate Price Aggregate Offering Amount of
Securities To Be Registered Be Registered (1) Per Unit (2) Price (2) Registration Fee (3)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Guaranteed Agricultural Mortgage-
Backed Securities (Issuable in Series) $1,000,000,000 100% $1,000,000,000 $208,889
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $248,600,788 principal amount of Guaranteed Agricultural
Mortgage-Backed Securities previously registered under the registrant's
Registration Statement on Form S-3 (Registration No. 333-26703). As
permitted by Rule 429 under the Securities Act, the prospectus filed as
part of this Registration Statement on Form S-3 will be used in connection
with the offering of such previously registered and unsold securities and
the securities covered hereby.
(2) Estimated solely for the purpose of computing the registration fee in
accordance with Rule 457(o) under the Securities Act.
(3) $278 of which was previously paid. The registration fee specified in the
table has been computed on the basis of the $751,399,212 principal amount
of securities covered hereby, prior to including the previously registered
and unsold securities referred to in footnote (1), as to which appropriate
Registration Fees have already been paid.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS INCLUDED IN THIS
REGISTRATION STATEMENT IS A COMBINED PROSPECTUS THAT ALSO RELATES TO
REGISTRATION STATEMENT NO. 333-26073 AS PREVIOUSLY FILED BY THE REGISTRANT ON
FORM S-3. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT
NO. 1 TO REGISTRATION STATEMENT NO. 333-26073, AND SUCH POST-EFFECTIVE AMENDMENT
WILL BECOME EFFECTIVE CONCURRENTLY WITH THE EFFECTIVENESS OF THIS REGISTRATION
STATEMENT AND IN ACCORDANCE WITH SECTION 8(c) OF THE SECURITIES ACT.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes a base prospectus relating to
Guaranteed Agricultural Mortgage-Backed Securities and an illustrative form of
prospectus supplement for use in an offering of Guaranteed Agricultural
Mortgage-Backed Securities. A prospectus supplement in definitive form
reflecting the terms of each series of Guaranteed Agricultural Mortgage-Backed
Securities will be filed with the Commission under the Securities Act of 1933,
as amended, pursuant to Rule 424(b) under the Securities Act.
<PAGE>
Prospectus supplement to prospectus dated ________________, 1999
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
[LOGO]
ISSUER
FARMER MAC MORTGAGE SECURITIES CORPORATION
DEPOSITOR
$__________ GUARANTEED AGRICULTURAL MORTGAGE-BACKED SECURITIES
- --------------------- We will create a trust fund to hold pools of
agricultural real estate mortgage loans and issue
CONSIDER CAREFULLY certificates backed by those loans. The trust fund will
THE RISK FACTORS issue--
BEGINNING ON PAGE
S-7 IN THIS Class Class Class
----- ----- -----
SUPPLEMENT AND ON Approximate original
PAGE 11 IN THE principal amount(1) $ $ $
PROSPECTUS.
CUSIP number
This prospectus
supplement does not Approximate initial
contain complete pass-through rate(2) _____% _____% _____%
information about
this offering. There Payment frequency
is additional
information in the First distribution date
prospectus. You
should read both Final distribution date
this prospectus ---------------------
supplement and the (1) May be up to 5% more or less.
prospectus in full. (2) Will vary with the weighted average of the
This prospectus interest rates for the mortgage loans in each pool
supplement may be as described in this prospectus supplement.
used to offer and
sell certificates The Federal Agricultural Mortgage Corporation, which is
only if accompanied also known as Farmer Mac, guarantees the timely payment
by the prospectus. of interest on and principal of the certificates. The
obligations of Farmer Mac under this 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.
- ---------------------
We will not list the certificates on any national securities exchange
or on any automated quotation system of any registered securities association,
such as NASDAQ.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
[The underwriter will purchase the certificates from the Depositor on
or about ______________ __ , 1999 and offer the certificates from time to time
in negotiated transactions, at varying prices to be determined at the time of
sale.] [The Depositor is [offering the certificates directly][issuing the
certificates in exchange for mortgage loans that are part of the trust fund]].
Proceeds to the Depositor from the sale of the certificates will be
[approximately] _____% of the aggregate original principal amount of the
certificates [(subject to increase if proceeds to the underwriter exceed certain
levels)], plus accrued interest on the certificates from _________ 1, 1999,
before deducting expenses payable by the Depositor estimated at $____________.
[_________________________________
Underwriter]
________________, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF TERMS................................................................................................S-3
RISK FACTORS....................................................................................................S-7
Some Mortgage Loans Are Not Subject to Yield Maintenance Charges.............................................S-7
Yield Maintenance Charges May Not Maintain the Anticipated Yield to Maturity.................................S-7
Yield Maintenance Charges May Be Waived......................................................................S-7
Farmer Mac Will Not Guarantee the Collection of Yield Maintenance Charges....................................S-7
Disproportionately Large Mortgage Loans in Some Pools May Adversely Affect Yield on Certificates.............S-8
Limited Number of Mortgage Loans in Some Pools May Adversely Affect Yield on Certificates....................S-8
DESCRIPTION OF THE MORTGAGE LOANS...............................................................................S-9
DESCRIPTION OF THE CERTIFICATES................................................................................S-10
FARMER MAC.....................................................................................................S-13
FARMER MAC GUARANTEE...........................................................................................S-13
OUTSTANDING GUARANTEES.........................................................................................S-14
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS..................................................................S-14
DESCRIPTION OF THE AGREEMENTS.................................................................................S-17
THE DEPOSITOR..................................................................................................S-18
FEDERAL INCOME TAX CONSEQUENCES................................................................................S-18
ERISA CONSIDERATIONS...........................................................................................S-19
LEGAL INVESTMENT...............................................................................................S-19
METHOD OF DISTRIBUTION.........................................................................................S-20
LEGAL MATTERS..................................................................................................S-20
FORWARD-LOOKING STATEMENTS.....................................................................................S-21
INDEX OF PRINCIPAL TERMS.......................................................................................S-22
ANNEX I: DESCRIPTION OF THE QUALIFIED LOAN POOLS...............................................................A-1
</TABLE>
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We provide information to you about the certificates we are offering in
two separate documents that progressively provide more detail:
o the accompanying prospectus, which provides general
information, some of which may not apply to your
certificates, and
o this prospectus supplement, which describes the specific
terms of your certificates.
IF THE DESCRIPTION OF YOUR CERTIFICATES VARIES BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION
IN THIS PROSPECTUS SUPPLEMENT.
S-2
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
certificates, read carefully this entire document and the accompanying
prospectus.
OFFERED SECURITIES
Farmer Mac Mortgage Securities Corporation (the "Depositor"), a wholly
owned subsidiary of Farmer Mac, is forming a trust fund to issue Guaranteed
Agricultural Mortgage-Backed Securities (the "Certificates") in _____ classes,
as listed on the cover page of this prospectus supplement. The Certificates
represent beneficial ownership interests in the trust fund. The trust fund
assets consist of:
o _____ pools of agricultural real estate mortgage loans;
o proceeds and collections on these loans; and
o a guarantee of timely payment of principal and interest on
the Certificates by Farmer Mac.
Each class of Certificates will separately represent the right to
receive certain distributions. Those distributions will be derived primarily
from amounts collected on mortgage loans in a specific pool. Each class of
Certificates has the same designation as the designation the Depositor has given
to the related pool of mortgage loans. Therefore,
o if you hold Class ______ Certificates, you will be entitled
to receive certain amounts collected on the mortgage loans
in the pool designated as ______;
o if you hold Class ______ Certificates, you will be entitled
to receive certain amounts collected on the mortgage loans
in the pool designated as ______; and
o if you hold Class ______ Certificates, you will be entitled
to receive certain amounts collected on the mortgage loans
in the pool designated as ______.
Each class of Certificates will be issued in an original principal
amount approximately equal to the original principal amount of its corresponding
pool of mortgage loans, subject to a permitted variance of plus or minus 5% as
described in "Description of the Certificates - General" in this prospectus
supplement.
S-3
<PAGE>
DISTRIBUTIONS ON THE CERTIFICATES
o Distributions on the Class ______ Certificates will be made on [a monthly]
basis. A distribution will occur for the Class ______ Certificates on the
25th day of each month.
o Distributions on the Class ______ Certificates will be made on [a
semi-annual] basis. A distribution will occur for the Class ______
Certificates on the 25th day of each January and July.
o Distributions on the Class ______ Certificates will be made on [a
semi-annual] basis. A distribution will occur for the Class ______
Certificates on the 25th day of each January and July.
In each case, if a distribution date falls on a day that is not a business day,
the distribution will be made on the next business day. The first distribution
date for each class of Certificates is listed on the cover page of this
prospectus supplement.
Distributions on the Certificates will be made only to those persons in
whose names the Certificates are registered on the close of business on the last
business day of the month prior to the month in which the distribution date
occurs.
DISTRIBUTIONS OF INTEREST
The Certificates of each class will accrue interest during each related
Interest Accrual Period at the pass-through rate described in "Description of
the Certificates - Distributions - Interest" in this prospectus supplement.
Accrued interest will be due on each distribution date.
Each "Interest Accrual Period" begins on the first day of the month in
which the previous distribution date for that particular class occurred and ends
on and includes the last day of the month preceding the month in which the
current distribution date for that particular class occurs. However, the first
Interest Accrual Period for each class will begin on _________ 1, 1999 and end
on and include the last day of the month preceding the month in which the first
distribution date for that particular class occurs.
DISTRIBUTIONS OF PRINCIPAL
On each distribution date, the trustee will distribute principal on
each class of Certificates in an aggregate amount equal to the sum of the
following for the corresponding pool:
o the principal portion of all scheduled payments (including any balloon
payments) on the mortgage loans in the pool due during the preceding
Due Period,
-- plus --
o the scheduled principal balance of each mortgage loan included in such
pool that was repurchased or became a defaulted mortgage loan (if
Farmer Mac, as the master servicer of the
S-4
<PAGE>
mortgage loans, has determined that all amounts to be received on the
mortgage loan have been recovered) during the preceding Due Period,
-- plus --
o all full or partial principal prepayments received during the
preceding Due Period.
Each "Due Period" begins on the second day of the month in which the
previous distribution date occurred and ends on the first day of the month in
which the related distribution date occurs. However, the first Due Period will
begin on _________ 2, 1999 and end on the first day of the month in which the
related distribution date occurs.
YIELD MAINTENANCE CHARGES
Some pools contain mortgage loans that require the borrower to pay a
charge if the borrower prepays the mortgage loan, in whole or in part, within a
specified time. This charge is known as a "Yield Maintenance Charge." The
trustee will distribute a portion of the amount of any Yield Maintenance Charge
actually collected from the borrower to the holders of the related class of
Certificates on each distribution date in the manner and to the extent described
in "Description of the Certificates Distributions - Yield Maintenance Charges"
in this prospectus supplement. You should review "Annex I: Description of the
Qualified Loan Pools" in this prospectus supplement to determine which pools
contain mortgage loans that have Yield Maintenance Charges, on what terms and
how we calculate the portion of Yield Maintenance Charges we will pass-through
to you.
THE GUARANTEE
Farmer Mac guarantees the timely payment of interest on and principal
of the Certificates (including any principal payments with respect to balloon
payments on the related mortgage loans).
Farmer Mac's obligations are not backed by the full faith and credit of
the United States.
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 MORTGAGE LOAN.
See "Farmer Mac Guarantee" in this prospectus supplement for additional
information concerning Farmer Mac's guarantee.
THE MASTER SERVICER
Farmer Mac will act as master servicer of the mortgage loans. The
mortgage loans will be directly serviced by one or more mortgage servicing
institutions we call central servicers, each of which will act on behalf of
Farmer Mac under a servicing contract (which may be supplemented from time to
time).
S-5
<PAGE>
OPTIONAL TERMINATION
Under certain conditions described in "Description of the Agreements -
Optional Termination" in this prospectus supplement, Farmer Mac, as master
servicer, has the right to terminate the trust fund and retire the Certificates.
THE TRUSTEE
The trustee for the Certificates will be _____________________, a
_____________________ organized and existing under the laws of
________________________.
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 "Federal Income Tax Consequences" in this prospectus supplement and
in the accompanying prospectus for additional information concerning the
application of federal income tax laws.
ERISA CONSIDERATIONS
Subject to important considerations described under "ERISA
Considerations" in this prospectus supplement and in the accompanying
prospectus, if you are investing assets of employee benefit plans or individual
retirement accounts, you can purchase the Certificates.
LEGAL INVESTMENT
The Certificates will constitute securities guaranteed by Farmer Mac
for purposes of Farmer Mac's charter. Subject to important considerations
described under "Legal Investment" in this prospectus supplement and in the
accompanying prospectus, the Certificates will, by statute, be legal investments
for certain types of institutional investors.
If your investment authority is subject to legal restrictions, you
should consult your own legal advisors to determine whether and the extent to
which Certificates constitute legal investments for you.
OFFICES OF FARMER MAC AND THE DEPOSITOR
The principal executive offices of Farmer Mac and the Depositor are
located at 919 18th Street, N.W., Washington, D.C. 20006 (telephone number:
202/872-7700).
S-6
<PAGE>
RISK FACTORS
You should carefully consider the following risks, together with the
risks set forth in "Risk Factors" in the prospectus, before investing in the
Certificates. If any of the following risks actually occur, your investment
could be materially and adversely affected.
SOME MORTGAGE LOANS ARE NOT SUBJECT TO YIELD MAINTENANCE CHARGES.
Certain mortgage loans in the trust fund may require the borrower to pay a Yield
Maintenance Charge if the borrower prepays the mortgage loan, in whole or in
part, within a specified time. However, the trust fund may also include mortgage
loans that do not require a Yield Maintenance Charge at any time. Borrowers
under mortgage loans that are not subject to Yield Maintenance Charges may be
more likely to prepay those mortgage loans than borrowers under mortgage loans
that are subject to Yield Maintenance Charges. Prepayments on mortgage loans may
adversely effect the yield to maturity on your Certificates.
YIELD MAINTENANCE CHARGES MAY NOT MAINTAIN THE ANTICIPATED YIELD TO
MATURITY. A borrower under a mortgage loan that requires a Yield Maintenance
Charge may decide to make a voluntary prepayment on the mortgage loan despite
the fact that he or she will be required to pay this charge. The trustee will
distribute a portion, calculated as described in "Annex I: Description of the
Qualified Loan Pools" in this prospectus supplement, of the amount of any Yield
Maintenance Charge actually collected from the borrower to the holders of the
related class of Certificates on the next distribution date in the manner and to
the extent described in this prospectus supplement. However, a Yield Maintenance
Charge may not be sufficient to maintain the yield to maturity on the related
mortgage loan (and the corresponding class of Certificates) at the level you
would have realized without the prepayment.
YIELD MAINTENANCE CHARGES MAY BE WAIVED. 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.
Generally, it is Farmer Mac's policy not to consent to the waiver of the
collection of a Yield Maintenance Charge unless the amount of the charge is
unduly large relative to the unpaid principal balance of the related mortgage
loan and the borrower requests a waiver and provides valid reasons for the
request. In those cases, and other circumstances that raise similar concerns of
fairness, Farmer Mac's policy is to require central servicers to attempt to
collect a portion of the 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. For example, Farmer Mac generally consents to waive all Yield
Maintenance Charges with respect to principal prepayments resulting from
condemnation of, or casualties on, properties securing mortgage loans.
If Farmer Mac consents to waive all or any portion of a Yield
Maintenance Charge, those amounts waived will not be available for distribution
to the holders of the related class of Certificates on any Distribution Date
and, if you hold Certificates of that class, your yield will be reduced.
FARMER MAC WILL NOT GUARANTEE THE COLLECTION OF YIELD MAINTENANCE
CHARGES. Holders of Certificates backed by pools containing mortgage loans that
have Yield Maintenance Charge provisions will receive a portion, calculated as
described in "Annex I: Description of the Qualified Loan Pools" in this
prospectus supplement, of the amount of any Yield Maintenance Charges actually
collected from borrowers on the appropriate distribution date in the manner and
to the extent described in this prospectus supplement. However, Farmer Mac will
not guarantee the collection of any Yield
S-7
<PAGE>
Maintenance Charge payable in connection with a principal prepayment on a
mortgage loan and cannot assure that any such amounts will actually be available
for distribution.
DISPROPORTIONATELY LARGE MORTGAGE LOANS IN SOME POOLS MAY ADVERSELY
AFFECT YIELD ON CERTIFICATES. Each of Pool ______ and Pool ______ contains some
loans that have disproportionately large outstanding principal balances as
compared to the other loans in such pool. Specifically, as of _________ 1, 1999:
o Pool ______ included ___ mortgage loans that constituted
approximately __% and __% (by principal balance) of the aggregate
principal balance of that pool; and
o Pool ______ included ___ mortgage loans that constituted
approximately __% and __% (by principal balance) of the aggregate
principal balance of that pool.
The impact of losses on individual mortgage loans (which result in
accelerated prepayments of principal under Farmer Mac's guarantee) and,
therefore, on your yield, if your Certificates relate to the pools comprised of
such loans, will be more severe in pools consisting of disproportionately large
loans. If losses result in early principal payments, and if the anticipated
yield on your Certificates (taking into account the purchase price you paid) is
higher than prevailing market yields when such payments occur, your overall
investment return will be less than anticipated.
In addition, principal payments, including voluntary prepayments and
prepayments due to defaults, liquidations and otherwise, on disproportionately
large loans will have much more of an effect on the pass-through rate and,
therefore, the yield of the related class of Certificates than other loans in
such pools. To the extent any disproportionately large loan bears interest at
rate, net of certain fees and expenses, in excess of the then applicable
pass-through rate on the Certificates related to such pool, principal payments
on such loan will lower the pass-through rate for such Certificates in future
Interest Accrual Periods because the weighted average mortgage loan rate for the
pool will decline. The result of a lower pass-through rate will be that you will
receive less interest on your Certificates.
LIMITED NUMBER OF MORTGAGE LOANS IN SOME POOLS MAY ADVERSELY AFFECT
YIELD ON CERTIFICATES. As of _________ 1, 1999, Pool ______ and Pool ______
included ___ and ___ mortgage loans, respectively. As is the case with mortgage
loans having disproportionately large outstanding principal balances as
described in the preceding risk factor, the impact of losses on individual
mortgage loans will be more severe in mortgage pools consisting of relatively
few mortgage loans.
[In addition, the payment experience of one or more mortgage loans in
Pool _____ and Pool _____ may have a disproportionate adverse effect on the
pass-through rates and yields of the related classes of Certificates.]
S-8
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
The Trust Fund will consist primarily of pools of agricultural real
estate mortgage loans (collectively, the "Qualified Loans") that 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 in "Description of
the Certificates - General" in this prospectus supplement. 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
(1) are used for the production of one or more agricultural commodities and (2)
include at least five acres or produce 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 are described in "Description of the Trust Funds -
Qualified Loans - General" in the prospectus.
The description of the Qualified Loans and the related Mortgaged
Properties is based upon each pool as constituted at the close of business on
_____________ 1, 1999 (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 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: Description of the Qualified Loan Pools"
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 Securities and Exchange Commission by _______________, 1999. Such
information will be available to Holders promptly thereafter through the
facilities of the Commission as described under "Where You Can Find Additional
Information" in the prospectus.
S-9
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Trust Agreement, dated as
of ______________ __, 199_ , as supplemented by an Issue Supplement dated as of
the Cut-off Date (together, 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
date this offering is completed. Each class of Certificates will be issued in an
initial Class Certificate Balance approximately equal to the original principal
amount of the related pool subject to a permitted variance of plus or minus 5%
with respect to each pool.
The Certificates will evidence beneficial ownership interests in a
trust fund (the "Trust Fund") consisting primarily of (i) the Qualified Loans;
(ii) the Farmer Mac Guarantee; and (iii) proceeds and collections on the
Qualified Loans, deposited in , or held as investments in, the Collection
Accounts and the Certificate Account, each as defined and described in the
prospectus. 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 fixed (with yield maintenance) A = Annual 1 = January
B=7 year fixed S = Semi-annual 2 = April
C=5 year conditional balloon re-set Q = Quarterly 3 = July
D=1 year adjustable M = Monthly 4 = October
E=3 year adjustable
F=5 year adjustable
G=10 year fixed
H=30 year fixed (part-time farm)
I=15 year fixed (partial open prepay)
J=5 year fixed/1 year adjustable (30 year maturity)
K=7 year fixed/1 year adjustable (30 year maturity)
L=10 year fixed/1 year adjustable (30 year maturity)
M=15 year fixed (part-time farm)
N=5 year fixed/1 year adjustable (15 year maturity)
O=7 year fixed/1 year adjustable (15 year maturity)
P=10 year fixed/1 year adjustable (15 year maturity)
Q=10 year fixed/1 year adjustable (25 year maturity)
</TABLE>
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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
Farmer Mac, as master servicer, on the applicable Distribution Dates by
crediting Holders' accounts at the Federal Reserve Banks.
Those 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. The terms "Holder" and "Holders" used herein refer to both
Holders of Book-Entry Certificates and holders of Certificates that are not
Book-Entry Certificates, unless specific reference is made only to either
Holders of Book-Entry Certificates or holders of Certificates that are not
Book-Entry Certificates.
Issuance of the Certificates in book-entry form may reduce the
liquidity of such Certificates in the secondary market because certain investors
may be unwilling to purchase Certificates for which they cannot obtain physical
certificates. See "Risk Factors - Your investment in the certificates will have
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 (a "Business Day" 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.
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The final Distribution Date for each class of Certificates has been set
to coincide with the latest maturing underlying Qualified Loan in the related
pool.
Interest. Interest on the Certificates of each class will be
distributed on each Distribution Date for such class in an aggregate amount
equal to the Accrued Certificate Interest for such Distribution Date and class.
"Accrued Certificate Interest" for each Distribution Date and class will equal
the amount of interest accrued during the related Interest Accrual Period at the
applicable Pass-Through Rate on the Class Certificate Balance of such class
immediately prior to such Distribution Date. Interest on the Certificates will
be calculated on the basis of a 360-day year consisting of twelve 30-day months.
As of any date of determination, the "Class Certificate Balance" of any class of
Certificates will equal the sum of the Certificate Balances of all Certificates
of the same class and the "Certificate Balance" of any Certificate as of any
date of determination will equal the original Certificate Balance thereof less
all amounts distributed thereon in respect of principal on preceding
Distribution Dates.
The Interest Accrual Periods for each class will depend on the payment
frequency of such class. As to any class and related Distribution Date, the
"Interest Accrual Period" will be the period from the first day of the month of
the 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, Farmer Mac as master
servicer and Farmer Mac as guarantor (such amount, the "Administrative Fee
Rate"). The weighted average Administrative Fee Rate as of the Cutoff Date for
each pool is set forth in "Annex I: Description of the Qualified Loan Pools"
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 that 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.
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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) that, 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. Under federal law, Yield Maintenance Charges
are not subject to state laws governing usury or loan prepayment provisions. 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, Farmer Mac,
as master servicer, will distribute such amount, adjusted to the related Net
Mortgage Rate as described below, to Holders of the related class of
Certificates. Each Yield Maintenance Charge has been designed to mitigate
reinvestment losses to the noteholder on the prepaid amount of any Qualified
Loan. Generally, such charge represents the excess of reinvestment earnings at
the related Mortgage Interest Rate (net of 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,
all calculations being done on present value basis. 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 the various Servicing Contracts, some central
servicers will be required to advance their own funds with respect to delinquent
Qualified Loans and other central servicers 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
The Federal Agricultural Mortgage Corporation, which is also known as
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.
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
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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" in this prospectus supplement.
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" in this prospectus supplement and "Federal Agricultural Mortgage
Corporation" in the prospectus.
OUTSTANDING GUARANTEES
As of the Cut-off Date, Farmer Mac had outstanding guarantees on
approximately $_____ million aggregate principal amount of securities (including
approximately $_____ million of securities evidencing assets that are guaranteed
by the Secretary of the United States Department of Agriculture). Farmer Mac is
authorized to borrow up to $1.5 billion 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.
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
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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 that would otherwise be
distributed over the remaining terms of the Qualified Loans.
Some 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, 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 and the borrower requests a waiver and provides valid reasons for
the request. 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 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, on a present value basis, 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 that would have been due had the calculation been performed
as of the Installment Payment Date.
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 a 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 in "Annex I: Description of the Qualified Loan Pools" in this
prospectus supplement) 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
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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.
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).
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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 or more central servicers acting on behalf of Farmer
Mac, each pursuant to a Master Central Servicing Contract (as supplemented)
between the central servicer 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: Description of the Qualified Loan Pools" hereto. Each
central servicer may subcontract the performance of certain of its servicing
duties to a subservicer who may be the seller (the "Seller") 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 (the "Trustee") for the Certificates pursuant to the Trust
Agreement will be _________________, a __________________organized and existing
under the laws of ______________with an office at ____________________________.
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, Farmer Mac as 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.
OPTIONAL TERMINATION
As master servicer, Farmer Mac 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 one percent thereof as of the Cut-off Date as of the Cut-off Date by
repurchasing all the Qualified Loans and REO Property 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
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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).
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 "Federal Income Tax Consequences."
No election will be made to treat the Trust Fund as a real estate
mortgage investment conduit, or REMIC, for federal income tax purposes. In the
opinion of Andrews & Kurth L.L.P., 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 Section 856(c)(4)(A) of
the Internal Revenue Code of 1986, as amended (the "Code"), 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 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."
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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 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 are guaranteed
by the United States or an agency or instrumentality thereof. The Department of
Labor 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." Accordingly, none of Farmer Mac, the trustee, the
master servicer or any central servicer will be subject to ERISA standards of
conduct in dealing with Qualified Loans or other trust fund assets.
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.
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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. 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.
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.]
[The Certificates are being offered and sold directly by Farmer
Mac.][The Certificates are being issued to Sellers in exchange for Qualified
Loans.]
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.]
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 Andrews & Kurth
L.L.P., Washington, D.C.[, and for the Underwriter by ________________________].
Andrews & Kurth L.L.P. has also acted as special tax counsel to the Trust Fund.
S-20
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus supplement represent our
expectations or projections for the certificates offered by this prospectus
supplement only as of the date of this prospectus supplement. You can generally
identify those statements, which are called "forward-looking statements," by the
use of the words "may," "will," "expect," "intend," "estimate," "anticipate" or
"believe" or similar language.
We believe the expectations expressed in all forward-looking statements
are reasonable and accurate based on information we currently have. However, our
expectations may not prove to be correct. Important factors that could cause
actual results to differ from our expectations are disclosed under "Risk
Factors" and in other parts of this prospectus supplement. You should always
consider those factors in evaluating any subsequent written and oral
forward-looking statements by us, or persons acting on our behalf, in connection
with this offering.
We will not report to the public any changes to any forward-looking
statements to reflect events, developments or circumstances that occur after the
date of this prospectus supplement.
S-21
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have
the meanings set forth on the pages indicated below.
<TABLE>
<CAPTION>
<S> <C>
Accrued Certificate Interest...................................................................................S-12
Administrative Fee Rate........................................................................................S-12
Agricultural Real Estate........................................................................................S-9
Business Day .................................................................................................S-11
Certificate Balance............................................................................................S-12
Certificates ..................................................................................................S-3
Class Certificate Balance......................................................................................S-12
Cut-off Date ..................................................................................................S-9
Depositor ..................................................................................................S-3
Distribution Date..............................................................................................S-11
Due Period ............................................................................................S-5, S-12
ERISA .................................................................................................S-19
Farmer Mac Charter.............................................................................................S-13
Farmer Mac Guarantee...........................................................................................S-13
Fed book-entry system..........................................................................................S-11
Holder(s) .................................................................................................S-11
Holder(s) of Book-Entry Certificates...........................................................................S-11
Interest Accrual Period...................................................................................S-4, S-12
IRA .................................................................................................S-19
Liquidated Qualified Loan......................................................................................S-12
Mortgage Interest Rate.........................................................................................S-12
Mortgaged Properties............................................................................................S-9
Net Mortgage Rate..............................................................................................S-12
Pass-Through Rate..............................................................................................S-12
Principal Distribution Amount..................................................................................S-12
Qualified Loans.................................................................................................S-9
Record Date .................................................................................................S-11
REO Property .................................................................................................S-18
Sale Agreement.................................................................................................S-17
Seller(s) .................................................................................................S-17
Servicing Contract.............................................................................................S-17
Trust Agreement................................................................................................S-10
Trust Fund .................................................................................................S-10
Trustee .................................................................................................S-17
Underwriting Standards..........................................................................................S-9
Weighted Interest Amount.......................................................................................S-12
Yield Maintenance Charge........................................................................................S-5
</TABLE>
S-22
<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 Securities and Exchange
Commission by ____________________ __, 1999. Such information will be available
to Holders of Certificates promptly thereafter through the facilities of the
Commission as described under "Where You Can Find Additional 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.
A-1
<PAGE>
Prospectus
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
GUARANTOR
FARMER MAC MORTGAGE SECURITIES CORPORATION
DEPOSITOR
GUARANTEED AGRICULTURAL MORTGAGE-BACKED SECURITIES
---------------------------------------
From time to time, we will a create a trust fund to:
o hold pools of agricultural real estate mortgage loans and
other assets; and
o issue securities, or certificates, backed by those assets.
The trust fund may issue the certificates in one or more series with one or more
classes. With this prospectus and supplements to this prospectus, we are
offering these agricultural mortgage-backed certificates.
The Federal Agricultural Mortgage Corporation, which is also known as
Farmer Mac, will guarantee the timely payment of interest on and principal of
the certificates. The obligations of Farmer Mac under this guarantee are
obligations solely of Farmer Mac. Farmer Mac's obligations under the guarantee
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. Farmer Mac's obligations under the guarantee are
not backed by the full faith and credit of the United States.
--------------------------------------------
We will not list the certificates on any national securities exchange
or on any automated quotation system of any registered securities association,
such as NASDAQ.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus or the related prospectus supplement.
Any representation to the contrary is a criminal offense.
------------------------------------------------------------
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 11 IN
THIS PROSPECTUS BEFORE PURCHASING ANY CERTIFICATE.
This prospectus may be used to offer and sell any series of
certificates only if accompanied by the prospectus
supplement for that series.
------------------------------------------------------------
We may offer the certificates through one or more different methods, including
through underwriters, as more fully described in this prospectus and in the
related prospectus supplement.
September 28, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY OF TERMS..................................................................................................4
RISK FACTORS.....................................................................................................11
Your investment in the certificates will have limited liquidity.............................................11
Farmer Mac's guarantee of the timely payment of interest on and principal
of certificates is limited..............................................................................11
The rate and timing of principal payments on the mortgage loans could adversely
affect your investment..................................................................................12
Additional risks to your investment are associated with borrower prepayments................................12
If we do not issue the certificates in definitive form, your exercise of
your rights may be limited..............................................................................13
SPECIFIC INFORMATION FOUND IN EACH PROSPECTUS SUPPLEMENT.........................................................13
WHERE YOU CAN FIND ADDITIONAL INFORMATION........................................................................14
WE HAVE INCORPORATED SOME INFORMATION
BY REFERENCE TO OTHER DOCUMENTS.............................................................................16
DESCRIPTION OF THE TRUST FUNDS...................................................................................17
General.....................................................................................................17
The Assets in Each Trust Fund...............................................................................17
Qualified Loans.............................................................................................19
QMBS........................................................................................................25
Guaranteed Portions.........................................................................................27
USE OF PROCEEDS..................................................................................................28
YIELD CONSIDERATIONS.............................................................................................29
General.....................................................................................................29
Pass-Through Rate...........................................................................................29
Timing of Payment of Interest...............................................................................29
Payments of Principal; Prepayments..........................................................................29
Prepayments, Maturity and Weighted Average Lives............................................................31
THE DEPOSITOR....................................................................................................32
FEDERAL AGRICULTURAL MORTGAGE CORPORATION........................................................................32
DESCRIPTION OF THE CERTIFICATES..................................................................................34
General.....................................................................................................34
Distributions...............................................................................................35
Distribution of Interest on the Certificates................................................................36
Distributions of Principal of the Certificates..............................................................37
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Distributions on the Certificates of Prepayment Premiums and Yield Maintenance Charges......................37
Advances in Respect of Delinquencies........................................................................37
Reports to Holders; Publication of Certificate Principal Factors............................................38
Termination.................................................................................................39
Book-Entry Registration.....................................................................................40
The Fed System..............................................................................................40
A Depository System.........................................................................................41
DESCRIPTION OF THE AGREEMENTS....................................................................................43
Assignment of Assets; Repurchases...........................................................................44
Representations and Warranties; Repurchases.................................................................45
Collections.................................................................................................47
Collection and Other Servicing Procedures...................................................................50
Events of Default...........................................................................................52
Rights Upon Event of Default................................................................................53
Supplemental Agreements.....................................................................................53
The Trustee.................................................................................................54
Duties of the Trustee.......................................................................................54
Indemnification of the Trustee..............................................................................55
Resignation and Removal of the Trustee......................................................................55
SELECTED LEGAL ASPECTS OF QUALIFIED LOANS AND OTHER MATTERS......................................................55
General.....................................................................................................56
Borrower's Rights Laws Applicable to Agricultural Mortgage Loans............................................57
Environmental Regulation....................................................................................57
Enforceability of Certain Provisions........................................................................59
Applicability of Usury Laws.................................................................................60
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.........................................................................60
General.....................................................................................................61
Grantor Trust Funds.........................................................................................61
REMICs......................................................................................................70
STATE TAX CONSIDERATIONS.........................................................................................87
ERISA CONSIDERATIONS.............................................................................................87
General.....................................................................................................87
Plan Assets.................................................................................................89
Prohibited Transactions.....................................................................................89
LEGAL INVESTMENT.................................................................................................91
METHOD OF DISTRIBUTION...........................................................................................91
INDEX OF PRINCIPAL TERMS.........................................................................................93
</TABLE>
3
<PAGE>
SUMMARY OF TERMS
This summary highlights selected information from this document and
does not contain all of the information that you need to consider in making your
investment decision. To understand all of the terms of the offering of the
certificates, read carefully this entire document and the prospectus supplement
related to your series of certificates.
OFFERED SECURITIES
With this prospectus and supplements to this prospectus, we are
offering guaranteed agricultural mortgage-backed securities. From time to time,
we will form a trust fund to issue the securities, or certificates, in one or
more series with one or more classes.
THE TRUST FUND. Each series of certificates will represent beneficial
ownership interests in a trust fund. Each trust fund will consist of:
(1) real estate-related assets, which may include:
o agricultural real estate mortgage loans that meet our
qualifications; or
o portions of agricultural mortgage loans guaranteed by
the United States Secretary of Agriculture; or
o mortgage pass-through certificates or other
mortgage-backed securities representing interests in or
secured by these agricultural mortgage loans; or
o other agricultural mortgage-backed securities
guaranteed by Farmer Mac; or
o any combination of the assets listed above; and
(2) proceeds and collectins on the real estate-related assets;
and
(3) Farmer Mac's guarantee of the timely payment of required
distributions of interest on and principal of the
certificates.
In each prospectus supplement, we will name the entity that will act as trustee
for the trust fund. Farmer Mac may act as trustee or Farmer Mac may designate
another entity to act as trustee.
4
<PAGE>
THE CERTIFICATES -- GENERAL. The prospectus supplement for each series
of certificates will fully describe the features of the certificates we are
offering. In general, each series of certificates will consist of one or more
classes of certificates that may have one or more of the following
characteristics:
(1) provide for the accrual of interest on the certificates
based on fixed, variable or floating rates;
(2) be entitled to principal distributions with
disproportionately low, nominal or no interest
distributions;
(3) be entitled to interest distributions with
disproportionately low, nominal or no principal
distributions;
(4) provide for distributions of accrued interest on the
certificates commencing only after the occurrence of a
specified event, such as the retirement of one or more other
classes of certificates of the same series;
(5) provide for distributions of principal sequentially, based
on specified payment schedules or other methods; or
(6) be entitled to distributions of specified premiums and
charges we collect from borrowers under our loans.
DISTRIBUTIONS ON THE CERTIFICATES. Each registered holder of a
certificate will be entitled to receive distributions under the terms of that
certificate on an annual, semi-annual, quarterly or monthly basis, as specified
in the related prospectus supplement. Distributions will be made on the dates
specified in the related prospectus supplement.
o INTEREST
For each class of certificates that is entitled to interest,
interest will accrue at a rate, which is called a pass-through
rate, on the outstanding balance of the certificate or another
amount specified in the related prospectus supplement. The
prospectus supplement will also specify 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.
5
<PAGE>
o PRINCIPAL
The certificates of each series will have an aggregate balance
no greater than the outstanding principal balance of the
real-estate related assets in the trust fund when the trust
fund is formed, after application of scheduled payments on
those assets due on or before that date, whether or not
received.
The certificate balance of your certificate outstanding at a
given time represents the maximum principal amount that you
are then entitled to receive from future cash flows on the
assets in the trust fund. The trustee will make distributions
of principal on each distribution date to the class or classes
of certificates entitled to principal until the balances of
those certificates have been reduced to zero. Distributions of
principal will be in proportion to all of the certificates of
that class or by random selection, as described in the related
prospectus supplement. Those certificates with no certificate
balance will not receive distributions of principal.
The trustee will make distributions on the certificates of any series
only from the assets of the related trust fund, including Farmer Mac's
guarantee.
THE GUARANTEE. Farmer Mac will guarantee the timely payment of interest
on and principal of each class of certificates entitled to receive those
payments. Although Farmer Mac is a federally chartered instrumentality of the
United States, Farmer Mac's obligations are not backed by the full faith and
credit of the United States. However, if Farmer Mac's reserve account is
exhausted, Farmer Mac's charter authorizes Farmer Mac to borrow up to $1.5
billion from the Secretary of the Treasury to cover its guarantee.
TERMINATION. A series of certificates may be subject to optional early
repayment under the circumstances and in the manner described in the prospectus
supplement.
THE MORTGAGE LOANS
QUALIFIED LOANS. We will include in each trust fund only those mortgage
loans that meet our qualifications. Some of our qualifications are that:
(1) each mortgage loan must be secured by a fee simple mortgage
or a mortgage on a lease having a remaining term at least
equal to five years more than the amortization period of the
mortgage loan, with a first lien on agricultural real
estate, which we define as parcels of land, which may be
improved by buildings or other permanent structures, that:
o are used for the production of agricultural
commodities; and
o include at least five acres or produce annual receipts
of at least $5,000;
6
<PAGE>
(2) the agricultural real estate securing each mortgage loan
must be located within the United States;
(3) the borrower under each mortgage loan must be:
o a citizen or permanent resident of the United States;
or
o a private corporation or partnership whose majority
owners are citizens or permanent residents of the
United States;
(4) the borrower under each mortgage loan must have training or
farming experience to ensure a reasonable likelihood of
repayment of the loan; and
(5) each mortgage loan must conform to the requirements set
forth in Farmer Mac's program guides.
TERMS OF THE QUALIFIED LOANS. The mortgage loans in a trust fund may
have interest rates that:
o are fixed over their terms; or
o adjust from time to time; or
o are partially fixed and partially floating; or
o may be converted from floating to fixed, or from fixed
to floating, from time to time at the mortgagor's
election.
The floating mortgage interest rates on the mortgage loans in a trust fund may
be based on one or more indices.
Mortgage loans in a trust fund may have:
o scheduled payments to maturity;
o payments that adjust from time to time to accommodate
changes in the mortgage interest rate or for other
reasons; or
o accelerated amortization.
A mortgage loan may be fully amortizing or may require a balloon payment due on
its stated maturity date. A mortgage loan may provide for payments of principal,
interest or principal and interest, on due dates that occur monthly, quarterly,
semi-annually, annually or another interval.
7
<PAGE>
A mortgage loan in a trust fund may contain prohibitions on prepayment
or require payment of a prepayment premium or other charge in connection with a
prepayment.
WE WILL DESCRIBE IN MORE DETAIL THE TERMS OF THE MORTGAGE LOANS
INCLUDED IN A TRUST FUND IN THE RELATED PROSPECTUS SUPPLEMENT.
NO GUARANTEE. Except for portions of agricultural mortgage loans
guaranteed by the United States Secretary of Agriculture, the mortgage loans
included in a trust fund will not be guaranteed or insured by Farmer Mac or any
of its affiliates or by any governmental agency or instrumentality or other
person.
MORTGAGE LOAN GROUPS. The mortgage loans in a trust fund may be divided
into two or more groups. Each group will be made up of loans having similar
characteristics, such as:
o similar due dates for scheduled payments;
o similar mortgage interest rates or methods of
calculating mortgage interest rates; and
o similar scheduled final maturities.
We will specify in the prospectus supplement whether we will provide
separate reporting for a mortgage loan group within a trust fund. We will also
provide the numerical designation for each mortgage loan pool comprising the
related series. We will apply payments of interest and principal on the mortgage
loans in a mortgage loan group first to required distributions on the class or
classes of certificates related to that mortgage loan group.
Thus, each mortgage loan group and each related class or classes of
certificates will be separate and distinct from every other mortgage 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 mortgage loans in two or more mortgage loan groups. We
will provide information about any mortgage loan group in the related prospectus
supplement.
THE MASTER SERVICER. Farmer Mac will act as the master servicer of the
mortgage loans included in each trust fund. 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 that
will be identified in the related prospectus supplement.
8
<PAGE>
TAX STATUS OF THE CERTIFICATES
The certificates of each series will be considered either:
o interests in a trust fund treated as a grantor trust
under subpart E, Part I of subchapter J of chapter 1 of
subtitle A of the Internal Revenue Code of 1986, as
amended, if no election is made to treat the trust fund
as a real estate mortgage investment conduit or REMIC;
or
o regular interests or residual interests in a trust fund
as to which a REMIC election is made.
GRANTOR TRUST. If no election is made to treat the trust fund for 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. Therefore, if you hold the certificates issued by a grantor
trust, you will be treated as the owner of an undivided pro rata interest in the
assets of the trust fund.
REMIC. Regular interests in a trust fund as to which a REMIC election
is made generally are debt obligations for federal income tax purposes. In some
cases, REMIC regular interests may be issued with original issue discount for
federal income tax purposes. In general:
(1) certificates held by a real estate investment trust will be
treated as "real estate assets" within the meaning of
section 856(c)(4)(A) of the Internal Revenue Code and
interest on REMIC regular interests, and any amounts
includible in income with respect to residual interests in a
trust fund for which a REMIC election is made 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
(2) REMIC regular interests 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 Internal Revenue Code,
in each case to the extent described in this prospectus and in the related
prospectus supplement.
We urge you to consult your tax advisor and to review "Material Federal
Income Tax Consequences" in this prospectus and in the related prospectus
supplement.
9
<PAGE>
ERISA CONSIDERATIONS
The acquisition of a certificate by a plan subject to the Employee
Retirement Income Security Act of 1974, as amended, which is also known as
ERISA, or any other plan subject to section 4975 of the Internal Revenue Code
could, in some instances, result in violations of the fiduciary responsibility
provisions of ERISA and section 4975 of the Internal Revenue Code or a
prohibited transaction. Exemptions from the prohibited transaction rules could
be applicable. Moreover, the Department of Labor has advised us that the
certificates qualify for favorable treatment as "guaranteed governmental
mortgage pool certificates" for purposes of the Department of Labor's plan asset
regulations. Accordingly, certain ERISA standards will not apply to
administration of assets of a trust fund. We suggest that you review "ERISA
Considerations" in this prospectus and in the related prospectus supplement.
LEGAL INVESTMENT
The certificates will constitute securities guaranteed by Farmer Mac
for purposes of Farmer Mac's charter. By statute, the certificates will be legal
investments for some types of institutional investors if 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. If your investment authority is
subject to legal restrictions, you should consult your own legal advisors to
determine whether and to what extent specific classes of the certificates
constitute legal investments for you. You should review "Legal Investment" in
this prospectus and in the related prospectus supplement.
OFFICES OF FARMER MAC AND FARMER MAC MORTGAGE SECURITIES CORPORATION
The principal executive offices of Farmer Mac and Farmer Mac Mortgage
Securities Corporation are located at 919 18th Street, N.W., Washington, D.C.
20006. Our telephone number is 202/872-7700.
10
<PAGE>
RISK FACTORS
You should carefully consider the following risks, together with the
risks set forth in "Risk Factors" in the prospectus supplement, before investing
in any certificates. If any of the following risks actually occur, your
investment could be materially and adversely affected.
YOUR INVESTMENT IN THE CERTIFICATES WILL HAVE LIMITED LIQUIDITY.
No market will exist for the certificates of any series prior to their
issuance. We do not know if a secondary market for the certificates of any
series will develop. If a secondary market does develop, we cannot assure you
that it will provide you with liquidity of your investment. Any secondary market
for the certificates may provide less liquidity to you than a comparable market
for securities backed by single-family mortgage loans. The market value of the
certificates will fluctuate with changes in prevailing market rates of interest.
As a result, you may be forced to sell your certificates in any secondary market
that may develop at less than 100% of their original certificate balance or
their purchase price. Even if a secondary market that provides you with
liquidity for your investment does develop, we cannot predict whether it will
continue while certificates you hold are outstanding.
Except to the extent described in this prospectus and in the related
prospectus supplement, you will have no redemption rights and your certificates
will be subject to early retirement only under specified circumstances described
in this prospectus and in the related prospectus supplement.
FARMER MAC'S GUARANTEE OF THE TIMELY PAYMENT OF INTEREST ON AND PRINCIPAL OF
CERTIFICATES IS LIMITED.
Farmer Mac's obligations under its guarantee of interest on and
principal of certificates are obligations solely of Farmer Mac. Farmer Mac's
obligations are not backed by the full faith and credit of the United States.
Farmer Mac must set aside in a segregated account a portion of the fees
it charges for providing its guarantee as a reserve against losses from its
guarantee activities. If Farmer Mac is required to make a payment under its
guarantee, it will use the fees in this reserve account or its general assets.
If Farmer Mac's reserve account is exhausted, Farmer Mac's charter authorizes
Farmer Mac to borrow up to $1.5 billion from the Secretary of the Treasury to
cover its guarantee. However, Farmer Mac expects that its future maximum
potential liability under its guarantees of outstanding securities will greatly
exceed its resources, including its limited ability to borrow from the United
States Treasury. Therefore, if Farmer Mac's losses exceed $1.5 billion plus all
amounts in the reserve account and Farmer Mac's general assets, it is possible
that Farmer Mac will not have the funds to make payments under its guarantee.
In addition, if Farmer Mac is required to borrow money from the
Secretary of the Treasury to fulfill its guarantee obligations, the Secretary of
the Treasury will have up to ten days after it receives the certification it
requires to get Farmer Mac the money it needs. If Farmer Mac does not make a
timely demand upon the Secretary of the Treasury, Farmer Mac will not be able to
make payments of interest on and principal of certificates on a timely basis.
11
<PAGE>
THE RATE AND TIMING OF PRINCIPAL PAYMENTS ON THE MORTGAGE LOANS COULD ADVERSELY
AFFECT YOUR INVESTMENT.
Agricultural lending typically involves fewer, larger loans to single
borrowers than does lending on single-family residences. For this reason, the
yield on your certificates could be adversely affected if even one borrower on
one mortgage loan in the trust fund that issued your certificates does not repay
its loan as scheduled.
A borrower's repayment of an agricultural mortgage loan is typically
dependent on the success of the related farming operation, which is, in turn,
dependent on many factors over which a farmer may have little or no control.
These factors include weather conditions, domestic and international economic
conditions and even political conditions. If the cash flow from a farming
operation is reduced because, for example, adverse weather conditions destroy a
crop or prevent the planting or harvesting of a crop, the borrower may not be
able to repay the loan on time or at all. If a borrower defaults on a mortgage
loan, the mortgage may be liquidated, which would likely result in a principal
prepayment on the mortgage loan. Generally, the yield to maturity on your
certificates will be sensitive to some extent to the rate and timing of
principal payments, including prepayments, on the mortgage loans in the related
trust fund. We know that the rate and timing of principal payments, including
prepayments, may fluctuate significantly from time to time. However, we cannot
meaningfully predict the rate and timing of principal payments, including
prepayments, on agricultural mortgage loans held in any one trust fund.
In addition, the yield to maturity on your certificates may vary
depending on whether you purchased them at a discount or premium. If you
purchased your certificates at a discount, you should be aware that a slower
than anticipated rate of principal payments could result in an actual yield that
is lower than your anticipated yield. If you purchased your certificates at a
premium, or if your certificates entitle you to interest payments and low,
nominal or no principal distributions, you should be aware that a faster than
anticipated rate of principal payments could result in an actual yield that is
lower than your anticipated yield.
You should fully consider all of the risks described above before
investing in any certificates. In particular, if you are investing in
certificates that are entitled to interest distributions, but disproportionately
low, nominal or no principal distributions, you should fully consider the risk
that an extremely rapid rate of principal payments on the mortgage loans could
result in your failure to recoup your initial investment.
ADDITIONAL RISKS TO YOUR INVESTMENT ARE ASSOCIATED WITH BORROWER PREPAYMENTS.
Any principal prepayment on a mortgage loan in the trust fund that
issued your certificates, whether because of a borrower default or otherwise,
may significantly affect the yield on and maturity of your certificates.
For example, many loans secured by agricultural real estate require
that penalty amounts or other charges accompany all prepayments. This provision
is designed to prevent or discourage prepayments under the loans. However, a
borrower under this type of mortgage loan may decide to
12
<PAGE>
make a voluntary prepayment on the mortgage loan despite the fact that he or she
will be required to pay a charge. The trustee will distribute a portion,
calculated as described in the related prospectus supplement, of the amount of
any charge actually collected from the borrower to the holders of the related
class of certificates to mitigate in part their reinvestment losses on the
prepaid amount. However, Farmer Mac does not guarantee the collection of any
charge imposed in connection with a prepayment on a mortgage loan. For this
reason, your expected yield in the certificates may be sensitive to some degree
to the extent these charges are not collected.
In addition, even if a charge on a prepaid mortgage loan is collected
and distributed, that charge may not be sufficient to maintain the yield to
maturity on the related mortgage loan, and the corresponding class of
certificates, at the level you would have realized without the prepayment.
IF WE DO NOT ISSUE THE CERTIFICATES IN DEFINITIVE FORM, YOUR EXERCISE OF YOUR
RIGHTS MAY BE LIMITED.
We will state in the prospectus supplement if one or more classes of
the certificates will be:
o issued and maintained on the book-entry system of the
federal reserve banks; or
o represented initially by one or more certificates registered
in the name of a nominee for a central depository, which we
will identify in the prospectus supplement; or
o issued and maintained on the book-entry system of the
federal reserve banks and represented initially by one or
more certificates registered in the name of a nominee for a
central depository, which we will identify in the prospectus
supplement.
If you purchase certificates that are issued in any of these forms, they will
not be registered in your name. Because of this, unless and until definitive
certificates are issued in your name:
o although you are the beneficial owner of the certificates,
the trustee of the related trust fund, will not recognize
you as the holder of the certificates; and
o you will be able to transfer your certificates and exercise
other rights of holders only indirectly through the federal
reserve banks and their participating financial institutions
or through the identified central depository and its
participating organizations.
SPECIFIC INFORMATION FOUND IN EACH PROSPECTUS SUPPLEMENT
As more particularly described in this prospectus, the prospectus
supplement relating to the certificates of each series will provide the
following information about the certificates:
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o a description of the class or classes of certificates,
including the payment provisions with respect to each class
and the pass-through rate or method of determining the
pass-through rate with respect to each class;
o the aggregate principal amount and distribution dates
relating to the series and, if applicable, the initial and
final scheduled distribution dates for each class;
o information about the assets comprising the trust fund,
including the general characteristics of the assets;
o the circumstances, if any, under which the trust fund may be
subject to early termination;
o additional information with respect to the method of
distribution of the certificates;
o whether one or more REMIC elections will be made and
designation of the regular interests and residual interests;
o information as to the terms of Farmer Mac's guarantee of the
certificates;
o whether the certificates will be initially issued in
definitive or book-entry form; and
o to what extent, if any, Farmer Mac's guarantee will cover
the timely payment of balloon payments on balloon loans.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Farmer Mac is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In compliance with the Exchange
Act, Farmer Mac files reports and other information with the SEC.
Farmer Mac Mortgage Securities Corporation, as depositor, has filed
with the SEC a registration statement under the Securities Act of 1933, as
amended, with respect to the certificates. This prospectus forms a part of the
registration statement. 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 in the prospectus and the prospectus supplement,
but do not contain all of the information set forth in the registration
statement pursuant to the rules and regulations of the SEC. For further
information, reference is made to the registration statement and the exhibits to
the registration statement. The SEC maintains public reference facilities where
you can inspect and copy the registration statement and its exhibits. These
facilities include the SEC's public reference section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its regional offices located as follows: in Chicago,
at Citicorp Center, 500 West Madison
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Street, Chicago, Illinois 60661; and in New York, at Seven World Trade Center,
New York, New York 10048. The SEC maintains a 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 SEC.
Unless and until definitive certificates are issued or unless otherwise
provided in the related prospectus supplement, Farmer Mac Mortgage Securities
Corporation, as depositor, will forward to the Federal Reserve Bank of New York
or the nominee for any private depository, as applicable, periodic unaudited
reports concerning the related trust fund. When and if definitive certificates
are issued, the depositor will deliver those reports to holders of definitive
certificates. Reports may be available to beneficial owners of certificates upon
request to the appropriate participating organization of the central depository
identified in the prospectus supplement, through the facilities of the SEC or
through information vendors, as discussed below. See "Description of the
Certificates -- Reports to Holders; Publication of Certificate Principal
Factors" and "Description of the Agreements."
Farmer Mac Mortgage Securities Corporation, as depositor, made a
written request to the staff of the SEC for an order pursuant to Section 12(h)
of the Exchange Act exempting the depositor from some reporting requirements
under the Exchange Act with respect to each trust fund. Though the SEC generally
no longer issues those orders with respect to securities such as the
certificates, the depositor now files with the SEC reports with respect to each
trust fund as are required under the Exchange Act, as modified by prior SEC
staff interpretations. The depositor will provide those 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 its 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 related
prospectus supplement. If given or made, you must not rely on the information or
representations as having been authorized by Farmer Mac Mortgage Securities
Corporation or any of the underwriters. This prospectus and any prospectus
supplement 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 an offer or solicitation is not
authorized or in which the person making an offer or solicitation is not
qualified to do so or to any person to whom it is unlawful to make a
solicitation. The delivery of this prospectus at any time does not imply that
information contained in this prospectus 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, we will amend or supplement it accordingly.
Farmer Mac will make available to investors information about the
certificates and pools underlying the certificates. Generally, Farmer Mac will
provide this 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. You can obtain the names of those vendors disseminating this
information by writing to Farmer Mac at 919 18th Street, N.W., Washington, D.C.
20006 or calling Farmer Mac's Investor Inquiry
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Department at 1-800-TRY-FARM (879-3276). The information will also be made
available at Farmer Mac's website at www.farmermac.com.
WE HAVE INCORPORATED SOME INFORMATION
BY REFERENCE TO OTHER DOCUMENTS
All documents and reports filed or caused to be filed by Farmer Mac
Mortgage Securities Corporation, as depositor, with respect to a trust fund in
accordance with sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to
the termination of an offering of certificates evidencing interests in the trust
fund, shall be deemed to be incorporated by reference in this prospectus and to
be a part of this prospectus. In addition, Farmer Mac's Annual Report on Form
10-K for the year ended December 31, 1998, and any subsequent reports filed with
the SEC in accordance with 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 of this prospectus. All documents and reports Farmer Mac files in
accordance with sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after 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 in this
prospectus and to be a part of this prospectus. These documents and reports can
be inspected at the public reference facilities the SEC maintains listed above
under the caption "Where You Can Find Additional Information."
The financial statements and schedules incorporated by reference in
this prospectus and elsewhere in the registration statement, to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP and KPMG LLP, independent public accountants, and are incorporated by
reference in this prospectus upon the authority of said firms as experts in
giving said reports.
Upon request, Farmer Mac Mortgage Securities Corporation, as 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 in this
prospectus by reference, in each case to the extent the documents or reports
relate to one or more of the classes of the certificates, other than the
exhibits to the documents, unless the exhibits are specifically incorporated by
reference in the documents. Requests for these documents should be directed in
writing to Farmer Mac Mortgage Securities Corporation, 919 18th Street, N.W.,
Suite 200, Washington, D.C. 20006, Attention: Corporate Secretary. The depositor
has determined that its financial statements are not material to the offering of
any certificates.
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DESCRIPTION OF THE TRUST FUNDS
GENERAL
The certificates of any series will receive payments only from the
assets of the related trust fund and will not be entitled to payments from
assets of any other trust fund Farmer Mac Mortgage Securities Corporation
establishes. The certificates of each series will not represent an obligation of
or interest in Farmer Mac Mortgage Securities Corporation, any mortgage loan
originator, any mortgage loan seller, any central servicer or any of their
respective affiliates, except to the limited extent described in this prospectus
and in the related prospectus supplement. The assets in each trust fund will be
held in trust for the benefit of the holders of the related certificates
pursuant to a trust agreement, as more fully described in this prospectus. See
"Description of the Agreements."
THE ASSETS IN EACH TRUST FUND
Each series of certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund consisting primarily of:
o specified assets that we call Qualified Assets,
o proceeds and collections on the Qualified Assets,
deposited in, or held as investments in, one or more
accounts, and
o Farmer Mac's guarantee of the timely payment of
interest on and principal of each class of certificates
entitled to receive interest or principal or interest
and principal.
Qualified Assets
The "Qualified Assets" with respect to each series of certificates will
consist of:
(1) one or more segregated pools of various types of
agricultural real estate mortgage loans (collectively, the
"Qualified Loans"), which will not be guaranteed or insured
by Farmer Mac or any of its affiliates or by any
governmental agency or instrumentality or other person, or
(2) 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"), or
(3) other guaranteed agricultural mortgage-backed certificates
issued and offered pursuant to this registration statement
or registration statements Farmer Mac Mortgage Securities
Corporation has previously or subsequently filed, or
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(4) mortgage pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by Qualified
Loans or Guaranteed Portions (collectively, the "QMBS") or
(5) a combination of the foregoing.
Farmer Mac's Guarantee
The certificates of each series will be covered by a guarantee from
Farmer Mac. Because Farmer Mac's guarantee runs directly to holders of
certificates, 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 certificates of any and all
amounts necessary to assure the timely payment of all required distributions of
interest and principal on the certificates to the extent set forth in the
related prospectus supplement. The related prospectus supplement will specify
the extent of Farmer Mac's guarantee obligation, if any, with respect to any
Qualified Loan in default as to its balloon payment and will discuss any
resulting impact on the expected yield of the related certificates. In addition,
Farmer Mac guarantees the distribution to holders of certificates of the
principal balance of each class of certificates in full no later than the
related final scheduled distribution date, whether or not sufficient funds are
available in the Certificate Account, which we define in "Description of the
Agreements -- Accounts -- Withdrawals."
Farmer Mac's obligations under each 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 or any other premium payable in connection with a principal
prepayment on a Qualified Loan. In the event the related trust agreement
entitles the related holders to receive distributions of yield maintenance
charges or prepayment premiums, the holders will receive a portion, calculated
as described in the related prospectus supplement, of those amounts actually
collected from the borrower to mitigate in part their reinvestment losses on the
prepaid amount. Under Farmer Mac's 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 as a loss reserve. 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 this reserve account. The amount on deposit in the 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 SEC and
incorporated by reference in this prospectus. See "We Have Incorporated Some
Information by Reference to Other Documents." If this reserve account, together
with any remaining general Farmer Mac assets, is not sufficient to enable Farmer
Mac to make a required payment under any guarantee, Farmer Mac will borrow from
the Secretary of the Treasury in an amount up to $1.5 billion. The Secretary of
the Treasury is required to purchase obligations Farmer Mac issues 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's 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 guarantee in order, to the extent required, to make timely
demand upon the Secretary of the Treasury. Farmer
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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 "Risk Factors -- Farmer Mac's guarantee of the timely
payment of interest on and principal of certificates is limited."
Except for Farmer Mac's 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.
Collections
Each trust fund will include proceeds and collections on the Qualified
Assets, which will be deposited in one or more accounts (each, a "Collection
Account" and, collectively, the "Collection Accounts"). Collection Accounts will
include collections on various pools of Qualified Assets and other funds of
Farmer Mac. Each central servicer named in the related prospectus supplement
will, to the extent described in this prospectus and in the prospectus
supplement, deposit into the Collection Accounts all payments and collections
received or advanced with respect to the Qualified Assets in the trust fund. A
Collection Account may be maintained as an interest bearing or a non-interest
bearing account. Funds held in each Collection Account may be held as cash or
invested in short-term obligations. Prior to each distribution date, each
central servicer will remit to Farmer Mac, as master servicer, for deposit into
the Certificate Account maintained by Farmer Mac funds then held in the
Collection Accounts that are to be distributed on the following distribution
date. See "Description of the Agreements -- Accounts" in this prospectus.
QUALIFIED LOANS
General
The general characteristics of, and eligibility standards for,
Qualified Loans are as follows:
(1) each Qualified Loan must be secured by a fee simple mortgage
or a mortgage on a leasehold the remaining term of which is
at least five years longer than the amortization period of
the Qualified Loan, with a first lien on agricultural real
estate, which we define as a parcel or parcels of land,
which may be improved by buildings or other structures
permanently affixed to the parcel or parcels, that:
o are used for the production of one or more agricultural
commodities; and
o consist of at least five acres or produce annual
receipts of at least $5,000;
(2) the agricultural real estate securing each Qualified Loan
must be located within the United States;
(3) the borrower under each Qualified Loan must be:
o a citizen or national of the United States or an alien
lawfully admitted for permanent residence in the United
States; or
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o a private corporation or partnership whose members,
stockholders or partners holding a majority interest in
the corporation or partnership are citizens or
nationals of the United States or aliens lawfully
admitted for permanent residence in the United States;
(4) the borrower under each Qualified Loan must have training or
farming experience sufficient to ensure a reasonable
likelihood of repayment of the loan according to its terms;
and
(5) each Qualified Loan may be an existing or newly originated
mortgage loan that conforms to the requirements set forth in
Farmer Mac's program guides.
The principal amount of a Qualified Loan secured by agricultural real estate of
more than one thousand acres may not exceed $3.5 million, as adjusted for
inflation as of October 31, 1998.
All buildings and other improvements on the mortgaged property securing
a Qualified Loan that have been given value in Farmer Mac's appraisal of the
mortgaged property must be covered by a hazard insurance policy. 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. Farmer Mac may require flood insurance after
considering the risk of flood loss on the repayment ability of the borrower and
the contributory value of the buildings located in an area designated as a flood
plain by the federal government.
Terms of Mortgage Loans
Each Qualified Loan may provide for accrual of interest on the loan at
a mortgage interest rate that:
o is fixed over its term; or
o adjusts from time to time; or
o is partially fixed and partially floating; or
o may be converted from floating to fixed, or from fixed
to floating, from time to time at the mortgagor's
election.
The floating mortgage interest rates on the Qualified Loans in a trust fund may
be based on one or more indices.
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Each Qualified Loan may provide for:
o scheduled payments to maturity;
o payments that adjust from time to time to accommodate
changes in the mortgage interest rate or to reflect the
occurrence of specified events; or
o accelerated amortization.
A Qualified Loan may be fully amortizing or may require a balloon payment due on
its stated maturity date. A Qualified Loan may provide for payments of
principal, interest or principal and interest, on due dates that occur monthly,
quarterly, semi-annually, annually or another interval.
A Qualified Loan may contain prohibitions on prepayment or require
payment of a prepayment premium or yield maintenance charge in connection with a
prepayment.
WE WILL DESCRIBE IN MORE DETAIL THE TERMS OF THE QUALIFIED LOANS
INCLUDED IN A TRUST FUND IN THE RELATED PROSPECTUS SUPPLEMENT.
Farmer Mac's Underwriting Standards and Appraisal Standards
In addition to the statutory standards described above, 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 Standards and Appraisal Standards are based
on industry norms for mortgage loans qualified to be sold in the secondary
market. Farmer Mac's Underwriting Standards and Appraisal Standards 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. While Farmer
Mac, either itself or through contract underwriters, reviews all loans submitted
to it for purchase, Farmer Mac generally relies on representations and
warranties made by originators or other sellers of Qualified Loans to Farmer Mac
(collectively, "Sellers") to ensure that the Qualified Loans included in the
trust fund conform to Farmer Mac's Underwriting Standards and other requirements
of Farmer Mac's program guides.
Farmer Mac's 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:
o a pro forma debt-to-asset ratio, on a market value
basis, of 50% or less, after closing the new loan;
o a pro forma cash flow to debt service coverage ratio of
not less than 1:1 on the property;
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o 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
o a ratio of current assets to current liabilities,
computed on a pro forma market value basis, of not
less than 1:1.
In the case of existing loans, Farmer Mac considers sustained loan
performance 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:
o it is at least three years old,
o has a loan-to-value ratio based on an updated appraisal
of 60% or less if the loan is at least five years old
or 70% or less if the loan is less than five years old,
o there have been no payments more than 30 days past due
during the three years prior to pooling, and
o there have been no material restructurings or
modifications during the five years prior to pooling.
Farmer Mac's Underwriting Standards provide that Farmer Mac may
purchase or guarantee securities backed by mortgage loans that do not conform to
one or more of the Underwriting Standards when:
(1) 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
(2) those loans are made to producers of particular agricultural
commodities in a segment of agriculture in which
noncompliance with some of the Underwriting Standards and
compensating strengths for others are typical of the
financial condition of sound borrowers.
For example, Farmer Mac will generally accept a newly originated Qualified Loan
secured by agricultural real estate that does not conform to the credit ratios
described in the previous paragraph if:
(1) the related agricultural real estate includes a
single-family, owner-occupied, detached residence that
constitutes a sufficient portion, as determined by Farmer
Mac, of the total appraised value of the property and that
residence is used as the borrower's primary residence;
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(2) the borrower generates sufficient income from all sources to
repay all creditors, as determined by two tests:
o the borrower's monthly house payment-to-income ratio is
28% or less, and
o the borrower's monthly debt payment-to-income ratio is
36% or less; and
(3) the borrower has demonstrated sound credit characteristics
through a history of timely debt repayment, generally based
on a credit report with information from at least two
national credit information repositories.
As with the Underwriting Standards, the two tests are guidelines and deviations
from the tests are acceptable if there are clearly identified compensating
strengths. Approval of variances from these guidelines remains at the sole
discretion of Farmer Mac.
Farmer Mac's acceptance of mortgage loans that do not conform to one or
more of Farmer Mac's Underwriting Standards is not intended to provide a basis
for waiving or lessening in any way the requirement that mortgage loans be of
high quality in order to be included in a trust fund. The entity that requests
the acceptance by Farmer Mac of mortgage loans that do not conform to Farmer
Mac's Underwriting Standards bears the burden of convincing Farmer Mac 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 loans that do not conform to all of Farmer Mac's
Underwriting Standards in a particular trust fund creates any additional risk.
Farmer Mac's Appraisal Standards for newly originated loans require,
among other things, that the appraisal function be performed independently of
the credit decision making process. Sellers are expected to develop, implement
and maintain appraisal policies that ensure the following objectives are met:
(1) the collateral valuation function is conducted and
administered by qualified individuals;
(2) appraiser qualifications are verified and documented;
(3) there is uniform reporting of reliable and accurate
estimates of market value, market rent, net property
income and characteristics of the subject property; and
(4) Sellers will conduct, in a timely and reliable fashion, an
administrative appraisal review designed to ensure that
apparaisals meet expectiations communicated in the
engagement process and identify apparent departures from
Farmer Mac's Appraisal Standards.
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Farmer Mac will review selected appraisals to ensure compliance with
the Appraisal Statndards and of the administration of the appraisal function
conducted by Sellers.
Qualified Loan Groups
The Qualified Loans in a trust fund may be divided into two or more
groups. Each group will be made up of Qualified Loans having similar
characteristics, such as:
o similar due dates for scheduled payments;
o similar mortgage interest rates or methods of
calculating mortgage interest rates; and
o similar scheduled final maturities.
We will specify in the related prospectus supplement whether a mortgage
loan group will, for our designation and reporting purposes, constitute a pool
of mortgage loans. We will also provide the numerical designation for each pool
comprising the related series. Payments of interest and principal on the
Qualified Loans in a mortgage loan group will be applied first to required
distributions on the class or classes of certificates related to that mortgage
loan group.
Thus, each mortgage loan group and each related class or classes of
certificates will be separate and distinct from every other mortgage 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 mortgage loan groups. We
will provide information about any mortgage loan group in the related prospectus
supplement.
Qualified Loan Information in Prospectus Supplements
Each prospectus supplement, as of the date of the prospectus
supplement, will provide the following or similar information about the
Qualified Loans:
(1) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the
Qualified Loans as of the close of business on the first day
of formation of the related trust fund (the "Cut-off Date");
(2) the percentage by principal balance of Qualified Loans
secured by mortgaged properties upon which specified
commodity groups are produced, for example:
o food grains,
o feed crops,
o cotton/tobacco,
o oilseeds,
o potatoes, tomatoes and other vegetables,
o permanent plantings,
o sugarbeets, cane and other crops,
o timber,
o dairy,
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o cattle and calves, and
o sheep, lamb and other livestock;
(3) the weighted average by principal balance of the original
and remaining terms to maturity of the Qualified Loans;
(4) the earliest and latest origination date and maturity date
of the Qualified Loans;
(5) the loan-to-value ratios and the weighted average by
principal balance of the current loan-to-value ratios of the
Qualified Loans;
(6) the mortgage interest rates or range of mortgage interest
rates and the weighted average mortgage interest rate borne
by the Qualified Loans;
(7) the geographic distribution of Qualified Loans secured by
mortgaged properties;
(8) 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;
(9) with respect to Qualified Loans with floating mortgage
interest rates, 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 loan and the
frequency of such monthly payment adjustments; and
(10) information regarding the payment characteristics of the
Qualified Loans, including without limitation, balloon
payments.
If specific information respecting the Qualified Loans is not known at the time
certificates are initially offered, more general information of the nature
described above will be provided in the prospectus supplement, and specific
information will be set forth in a report that will be available to purchasers
of the related certificates at or before the initial issuance of the
certificates and will be filed as part of a Current Report on Form 8-K with the
SEC 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
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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:
(1) 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;
(2) the original and remaining term to stated maturity of the
QMBS, if applicable;
(3) whether the QMBS is entitled only to interest payments, only
to principal payments or to both;
(4) the pass-through or bond rate of the QMBS or formula for
determining such rates, if any;
(5) the applicable payment provisions for the QMBS, including,
but not limited to, any priorities, payment schedules and
subordination features;
(6) the QMBS Issuer, QMBS Servicer and QMBS Trustee, as
applicable;
(7) 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 the QMBS;
(8) 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;
(9) the terms on which Qualified Loans or underlying QMBS may be
substituted for those originally underlying the QMBS;
(10) the servicing fees payable under the QMBS Agreement;
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(11) 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;
(12) the characteristics of any cash flow agreements that are
included as part of the trust fund evidenced or secured by
the QMBS; and
(13) 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 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. Each such
participation in the related whole loan (the "Guaranteed Loan") is referred to
herein as a "Guaranteed Portion" and the related guarantee is referred to herein
as a "Secretary's Guarantee." 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 the 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:
o the borrower under the Guaranteed Loan is in default
not less than sixty (60) days in the payment of any
principal or interest due on the Guaranteed Portion, or
o 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.
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If the lender does not repurchase the Guaranteed Portion as provided
above, the Secretary of Agriculture 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 set forth in the related trust agreement will 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
of Agriculture, 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.
Farmer Mac's 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
Farmer Mac Mortgage Securities Corporation, as depositor, will apply
the net proceeds it receives from its sale of a series of certificates to
purchase assets from Sellers and to pay for the expenses incurred in connection
with the purchase of 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 the depositor acquires, prevailing interest rates, availability
of funds and general market conditions.
Rather than sell certificates directly itself, Farmer Mac Mortgage
Securities Corporation, as depositor, expects that certificates comprising a
substantial number of series will be exchanged by it for Qualified Assets being
swapped to it by Sellers.
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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 --The rate
and timing of principal payments on the mortgage loans could adversely affect
your investment" and "-- Additional risks to your investment are associated with
borrower prepayments."
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 that 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 (as defined below in
"Description of the Certificates -- General"), 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,
defaults, repurchases, insurance proceeds, condemnations and involuntary
liquidations). A number of social, economic, geographic, climatic, demographic,
tax,
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legal and other factors may influence the rate at which principal prepayments
and defaults occur on the Qualified Loans including, without limitation:
o the age of the Qualified Loans,
o the payment terms of the Qualified Loans,
o the availability of agricultural mortgage credit,
o enforceability of due-on-sale clauses,
o servicing decisions,
o the extent of the borrower's net equity in the related
mortgaged property,
o the characteristics of the borrowers,
o agricultural mortgage market interest rates in relation
to the effective interest rates on the Qualified Loans,
and
o 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 lockout 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
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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 in the prospectus
supplement. Payment of the entire certificate balance of each such class no
later than such final distribution date will be covered by Farmer Mac's
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
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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.
Farmer Mac Mortgage Securities Corporation 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
The depositor, Farmer Mac Mortgage Securities Corporation, is a wholly
owned subsidiary of Farmer Mac that 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. The depositor's telephone number
is (202) 872-7700.
FEDERAL AGRICULTURAL MORTGAGE CORPORATION
The Federal Agricultural Mortgage Corporation, which is also known as
Farmer Mac, is a federally chartered instrumentality of the United States.
Farmer Mac was established by Title VIII
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of the Farm Credit Act of 1971, as amended (12 U.S.C. ss. 2279aa et seq.), which
is Farmer Mac's 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, 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 provided for the creation of an Office of Secondary Market
Oversight within the Farm Credit Administration that is managed by a full-time
director selected by and reporting to the Farm Credit Administration Board.
Through this office, the Farm Credit Administration 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 Food,
Agriculture, Conservation, and Trade Act Amendments also established certain
minimum and critical capital levels for Farmer Mac.
The Farm Credit System Reform Act of 1996, Pub. L. 104-105, which the
President of the United States signed into law on February 10, 1996, modified
Farmer Mac's charter as it theretofore existed in several major respects, by,
among other things:
(1) 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,
(2) extending from December 1996 to December 1999 the statutory
deadline for the full imposition of certain regulatory
capital requirements applicable to Farmer Mac, and
(3) eliminating statutory requirements for credit support
features aggregating not less than ten percent of the
initial principal balances of pools of Qualified Loans in a
trust fund.
The Farm Credit System Reform Act also made various statutory changes intended
to further streamline program operations and clarify certain ambiguous statutory
provisions.
The Farm Credit System Reform Act 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. As
of December 31, 1998, Farmer Mac's regulatory capital as reported on its Annual
Report on Form 10-K for the year ended December 31, 1998 was $80.7 million.
Farmer Mac's charter authorizes Farmer Mac to borrow up to $1.5 billion
from the Secretary of the Treasury, subject to certain conditions, to enable
Farmer Mac to fulfill its guarantee
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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 SEC pursuant to the Securities Act. Farmer Mac is also
subject to the periodic reporting requirements of the Exchange Act and,
accordingly, files reports with the SEC pursuant thereto. Pursuant to existing
Farm Credit Administration regulations, Farmer Mac is required to file quarterly
reports of condition with the Farm Credit Administration, as well as copies of
all documents filed with the SEC under the Securities Act and the Exchange Act.
Farmer Mac's charter authorizes 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 in this prospectus and referred to in "We Have
Incorporated Some Information by Reference to Other Documents."
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 by this prospectus, will represent in the aggregate the entire
beneficial ownership interest in the trust fund created pursuant to the related
trust agreement and issue supplement. The prospectus supplement for each series
of certificates will fully describe the features of the certificates we are
offering. In general, each series of certificates will consist of one or more
classes of certificates that may have the following characteristics:
(1) provide for the accrual of interest on the certificates
based on fixed, variable or floating rates;
(2) be entitled to principal distributions with
disproportionately low, nominal or no interest distributions
(collectively, "Stripped Principal Certificates");
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(3) be entitled to interest distributions with
disproportionately low, nominal or no principal
distributions (collectively, "Stripped Interest
Certificates");
(4) provide for distributions of accrued interest on the
certificates commencing only after the occurrence of a
specified event, such as the retirement of one or more other
classes of certificates of the same series (collectively,
"Accrual Certificates");
(5) provide for distributions of principal sequentially, based
on specified payment schedules, from only a portion of the
assets in such trust fund or based on specified
calculations, to the extent of available funds;
(6) be entitled to distributions of any prepayment premium and
yield maintenance charge to the extent collected; and/or
(7) provide for distributions based on a combination of two or
more components thereof with one or more of the
characteristics described above, including a Stripped
Principal Certificate component and a Stripped Interest
Certificate component, to the extent of available funds.
With respect to certificates with two or more components, references herein to
certificate balance, notional amount and pass-through rate refer to the
principal balance, if any, notional amount, if any, and the pass-through rate,
if any, for any such component.
Each class of certificates of a series will be issued in minimum
denominations corresponding to stated principal amounts, or 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 the certificates may be
exchanged without the payment of any service charge payable in connection with
such registration of transfer or exchange, but Farmer Mac Mortgage Securities
Corporation, as depositor, the trustee, or any agent of the depositor or the
trustee 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 --If we do not issue the
certificates in definitive form, your exercise of your rights may be limited."
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
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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
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. 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.
Each class of certificates, other than classes of Stripped Principal
Certificates (which 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 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 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
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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 that, at any time, will
equal the then maximum amount that the holder thereof is entitled to receive in
respect of principal out of the future cash flow on the 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 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. 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 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, a portion of any
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, each central servicer or
another entity described in the related prospectus supplement will be required
to advance on or before each Certificate Account Deposit Date (as defined in
"Description of the Agreements -- Accounts -- Withdrawals") its own funds in an
amount equal to the aggregate of payments of principal and interest (net of the
related fee to the central servicer) that were due on the Qualified Loans in
such trust fund and were
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delinquent on such Certificate Account Deposit Date, subject to the 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").
Neither Farmer Mac Mortgage Securities Corporation, as depositor, nor
any of its affiliates will have any responsibility to make such Advances,
although Farmer Mac may make Advances if it deems such Advances appropriate. If
no Advance is made, Farmer Mac will remain obligated to make required payments
under its 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.
Advances are reimbursable generally from subsequent recoveries in
respect of such Qualified Loans and otherwise to the extent described in this
prospectus 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.
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, Farmer Mac Mortgage Securities Corporation, as 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 (as defined in "Description
of the Agreements"), and will generally make available to financial publications
and electronic services, a statement setting forth, in each case to the extent
applicable and available:
(1) 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;
(2) information sufficient to enable holders of each class to
calculate the amount of such distribution allocable to
Accrued Certificate Interest;
(3) the certificate principal factor for each class of
certificates, which is the percentage, carried to eight
places, that, when multiplied by the denomination
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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;
(4) 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
(5) 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 (3) above.
In the case of information furnished pursuant to clauses (1) and (2)
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 it receives 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 (1) and (2) above, aggregated for such calendar year. This obligation
of the master servicer shall be deemed to have been satisfied to the extent that
the master servicer provides substantially comparable information pursuant to
any requirements of the Internal Revenue 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 SEC and information vendors, may be
accessed on Farmer Mac's website (www.farmermac.com) and may be obtained by the
Beneficial Owner (as defined below under "-- A Depository System") by requesting
a copy and certifying to the trustee and the master servicer, that it is the
Beneficial Owner of a certificate. See "-- Book-Entry Registration" and "Where
You Can Find Additional Information." 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:
(1) the final payment of the last Qualified Asset subject
thereto,
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(2) 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
(3) distribution by Farmer Mac pursuant to Farmer Mac's
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 early termination through the optional repurchase
of the assets in the related trust fund by the party specified in the prospectus
supplement, under the circumstances and in the manner described in the
prospectus supplement. 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 or after a date specified
in the related prospectus supplement, the party specified in the prospectus
supplement will solicit bids for the purchase of all of the assets of the trust
fund, or of a sufficient portion of the assets to retire such class or classes
or purchase such assets at a price set forth in the related prospectus
supplement, in each case, under the circumstances and in the manner set forth in
the prospectus supplement. In addition, if so provided in the related prospectus
supplement, certain classes of certificates may be purchased subject to similar
conditions.
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
o be issued and maintained only on the book-entry system
of the Federal Reserve Banks (the "Fed System"), or
o 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
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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 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. None of Farmer Mac, the trustee,
the master servicer or the Federal Reserve Banks will have a direct obligation
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:
o regulations governing Farmer Mac's use of the
book-entry system, and
o 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
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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. The
trustee will not recognize the Beneficial Owners 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. None of Farmer Mac, the trustee, the master
servicer, Farmer Mac Mortgage Acceptance Company, as depositor, or 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,
rather than to the Depository or its nominee only if:
(1) Farmer Mac Mortgage Securities Corporation, as 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
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(2) 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 Farmer Mac Mortgage
Securities Corporation, as depositor, Farmer Mac, in the capacities of guarantor
and master servicer, and the trustee.
If Qualified Loans are included in a trust fund, Farmer Mac will be
responsible for the servicing of those Qualified Loans as master servicer.
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, as supplemented, with 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 depositor will have purchased the Qualified Assets it deposits into
a trust fund from Sellers pursuant to a master loan sale agreement or a selling
and servicing agreement (each a "Sale Agreement"). Each Sale Agreement will
include representations and warranties of the Seller concerning the Qualified
Assets. The representations and warranties and the remedies for their breach
will be assigned to the trustee for the benefit of the holders of the related
series of certificates.
The trust agreement, each servicing contract and each Sale Agreement
relating to a particular series of certificates are herein collectively referred
to as the "Agreements." The provisions of each Agreement will vary depending
upon the nature of the related certificates and 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 material provision of the Agreements relating to such series that
are not covered by the descriptions in this prospectus. The summaries are not
complete and you should read them together with any additional description in
the related prospectus supplement. Furthermore, the provisions of the Agreements
for each trust fund are controlling. 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. Farmer Mac Mortgage Securities Corporation, as
depositor, will provide a copy of the Agreements, without exhibits, relating to
any series of
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certificates without charge upon the written request by a holder of a
certificate of that series addressed to the depositor, 919 18th Street, N.W.,
Washington, D.C. 20006.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of certificates, Farmer Mac
Mortgage Securities Corporation, as depositor, will assign or cause to be
assigned to the trustee, on behalf of holders of the certificates, the assets to
be included in the related trust fund, together with all principal and interest
to be received on or with respect to such 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 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. The schedule will include detailed information
(1) in respect of each Qualified Loan included in the trust
fund, including:
o the address of the related mortgaged property and type
of such property;
o the mortgage interest rate and, if applicable, the
applicable index, margin, adjustment date and any rate
cap information;
o the original and remaining term to maturity; and
o the original and outstanding principal balance; and
(2) in respect of each QMBS included in the trust fund,
including:
o the QMBS Issuer, QMBS Servicer and QMBS Trustee;
o the pass-through or bond rate or formula for
determining the pass-through or bond rate;
o the issue date and original and remaining term to
maturity, if applicable;
o the original and outstanding principal amount; and
o payment provisions, if applicable.
With respect to each Qualified Loan, Farmer Mac Mortgage Securities
Corporation, as depositor, will deliver or cause to be delivered to the trustee
or to the custodian hereinafter referred to, certain loan documents. These
documents will, unless the Qualified Loan is evidenced by a participation
certificate, include:
o the original mortgage note endorsed, without recourse,
in blank or to the order of the trustee,
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o the original mortgage (or a certified copy thereof)
with evidence of recording indicated thereon, and
o an assignment of the mortgage to the trustee in
recordable form.
The related Agreements will require that Farmer Mac Mortgage Securities
Corporation, as depositor, or another party specified therein, promptly cause
each assignment of mortgage to be recorded in the appropriate public office for
real property records.
The trustee or a custodian will review the Qualified Loan documents
within a specified period of days after receiving them. The trustee or the
custodian will then hold the Qualified Loan documents in trust for the benefit
of the holders of certificates. If any document is found to be missing or
defective in any material respect, the trustee or 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
(defined below in "-- Representations and Warranties; Repurchases") or replace
the Qualified Loan with an eligible substitute Qualified Loan.
With respect to each QMBS in certificated form, Farmer Mac Mortgage
Securities Corporation, as 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 a bond power or other instruments,
certifications or documents required to transfer fully such QMBS to the trustee
for the benefit of the holders of certificates. 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. 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 of certificates.
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:
o the accuracy of the information set forth for each
Qualified Loan on the schedule of Qualified Assets
appearing as an exhibit to the trust agreement;
o the existence of title insurance insuring, or a title
opinion assuring, the lien priority of the Qualified
Loan;
o the authority of the Seller to sell the Qualified Loan;
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o the payment status of the Qualified Loan and the status
of payments of taxes, assessments and other charges
affecting the related mortgaged property;
o the status of such Qualified Loan as a "Qualified Loan"
under Farmer Mac's charter and its conformity in all
material respects with Farmer Mac's program guides; and
o 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 to
repurchase or replace the affected Qualified Loan as described below. Because
the representations and warranties will not usually address events that 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 the date as of which the representations and warranties were
made (usually the date it sells the Qualified Loan to the depositor). The Seller
would have no such obligation if the relevant event that causes such breach
occurs after that 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 it made in respect of a Qualified Loan that
materially and adversely affects the value of such Qualified Loan or the
interests therein of the holders of certificates. If the Seller cannot cure such
breach within a specified period following the date on which it was notified of
such breach, then the 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. For any Qualified Loan, the
"Purchase Price" is equal to the sum of the loan's unpaid principal balance 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
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 trust fund.
Neither Farmer Mac Mortgage Securities Corporation nor Farmer Mac will
be obligated to purchase or substitute for a Qualified Loan if a Seller defaults
on its obligation to do so. No assurance can be given that Sellers will carry
out their obligations with respect to Qualified Loans. Any resultant loss to a
trust fund that would result in a deficiency in any required distribution to
holders of certificates will be covered by Farmer Mac's guarantee. Therefore,
holders will suffer no
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loss of principal or accrued interest by reason of any such Seller default.
However, Farmer Mac's guarantee does not extend to prepayment premiums or yield
maintenance charges if a Seller was obligated to pay such amounts as part of the
Purchase Price.
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
o the accuracy of the information set forth for such QMBS
on the schedule of Qualified Assets appearing as an
exhibit to the related Agreement, and
o the authority of the Seller to sell such Qualified
Assets.
COLLECTIONS
General
To the extent described in the related prospectus supplement, the
central servicer will deposit all payments and collections on the related
Qualified Assets into one or more Collection Accounts. Each Collection Account
will consist only of funds of Farmer Mac and the types of deposits described
below for trust funds. Trust fund collections in a Collection Account will not
be separated from those included in other trust funds or from funds of Farmer
Mac. Each Collection Account must be an account or accounts with any Federal
Reserve Bank 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 with respect to a trust fund:
o all payments on account of principal, including
principal prepayments, on the Qualified Assets;
o all payments on account of interest on the Qualified
Assets, including any default interest collected, in
each case net of any portion thereof retained by a
central servicer as servicing compensation;
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o all proceeds of any insurance policies ("Insurance
Proceeds") to be maintained on 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
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");
o any Advances made by the central servicer or other
entity as described under "Description of the
Certificates -- Advances in Respect of Delinquencies";
o to the extent required to be distributed to holders of
certificates any amounts representing prepayment
premiums and yield maintenance charges paid by
borrowers; and
o proceeds from the operation of foreclosed mortgaged
properties held in the trust fund ("REO Proceeds").
Withdrawals
Generally, such deposits in a Collection Account with respect to trust
fund will, to the extent specified in the prospectus supplement, be net of the
following amounts to be retained by the central servicer:
o 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 that 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;
o 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;
o amounts to reimburse the central servicer for any
Advances described above and any servicing expenses
described above which, in the central servicer's good
faith judgment, will not be recoverable as described
above, such
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reimbursement to be made from amounts collected on
other assets in the trust fund; and
o 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
o 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
o 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.
If the Certificate Account for any trust fund is maintained by Farmer Mac on its
books as described 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") that, 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 an officer's certificate stating
o the amount of such insufficiency,
o 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
o in the event borrowing from the United States Treasury
will be necessary, 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 to satisfy its
guarantee obligations.
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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:
o towards the distribution to holders of certificates in
federal funds of the amount to be distributed on such
distribution date;
o 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;
o to the payment of any portion of the Guarantee Fee for
such distribution date or any prior distribution date
that has not otherwise been paid; and
o to the payment to Farmer Mac of any amounts remaining
in the Certificate Account after the withdrawals
referred to 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 Farmer Mac's program 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
o the new borrower qualifies under Farmer Mac's credit
underwriting standards,
o the Qualified Loan will continue to be secured by a
first mortgage lien pursuant to the terms of the
mortgage,
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o 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
o 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 Farmer Mac's program 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 fund as a REMIC.
The Servicing Agreements give the related central servicer the option,
in lieu of foreclosure (but without any obligation), to purchase any Qualified
Loans that become 90 or more days delinquent for an amount equal to the Purchase
Price. A central servicer's purchase of a Qualified Loan under these
circumstances will not require the payment of a prepayment premium or yield
maintenance charge.
Compensation and Payment of Expenses
The central servicer will receive a fee payable out of the interest
payments received on each Qualified Loan. 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
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duties. The trustee will receive a fee for services rendered in its capacity as
trustee. Farmer Mac will be responsible for paying the trustee fees.
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 Farmer
Mac Mortgage Securities Corporation, as 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 that 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 that is not
incidental to their responsibilities under the trust agreement and that 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 that
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:
o 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 Farmer Mac's guarantee) that 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 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,
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o 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 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
o 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 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
o terminate all obligations and duties imposed upon
Farmer Mac (other than its obligations under Farmer
Mac's guarantee) under the trust agreement, and
o 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.
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 to:
o add to the covenants of Farmer Mac;
o evidence the succession of another person or persons to
Farmer Mac pursuant to the trust agreement;
o eliminate any right reserved to or conferred upon
Farmer Mac;
o take such action to cure any ambiguity or correct or
supplement any provision of the trust agreement; or
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o 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
o compliance by Farmer Mac with any of the terms of the
related trust agreement may be waived, or
o 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:
o without the consent of all holders affected thereby
reduce in any manner the amount of, or delay the timing
of, distributions that are required to be made on any
certificate; or
o without the consent of all holders (a) terminate or
modify Farmer Mac's guarantee with respect to the
certificates of such series, or (b) 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 if a REMIC election has been
made.
THE TRUSTEE
In each prospectus supplement, we will name the entity that will act as
trustee for the trust fund. Farmer Mac may act as trustee under the related
trust agreement or Farmer Mac may designate another entity to act as trustee
under the related trust agreement. If specified in the prospectus supplement, a
commercial bank, national banking association, banking corporation or trust
company that Farmer Mac may designate 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 asset in a trust fund 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
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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
If Farmer Mac is not acting as 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
If Farmer Mac is not acting as trustee, the trustee under a trust
agreement may at any time resign and be discharged from the trust fund 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 act as
trustee or appoint a successor trustee. If Farmer Mac does not act as trustee
and 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 a trustee, other than Farmer Mac, shall cease to be
eligible to continue as such under the related Agreement, or if at any time a
trustee shall become incapable of acting, or shall be adjudged bankrupt or
insolvent, or a receiver of a trustee or of its property shall be appointed, or
any public officer shall take charge or control of a trustee or of its property
or affairs for the purpose of rehabilitation, conservation or liquidation, then
Farmer Mac may remove the trustee and act as trustee or appoint a successor
trustee.
Any resignation or removal of a trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
SELECTED LEGAL ASPECTS OF QUALIFIED LOANS AND OTHER MATTERS
The following discussion contains summaries of selected legal aspects
of mortgage loans, including the Qualified Loans, that are general in nature.
Because these 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 $1.5 billion from the Secretary of the
Treasury, the impact of any adverse effects described in the summaries of
selected legal aspects of the
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Qualified Loans below is not likely to affect Farmer Mac's 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's
guarantee of the timely payment of interest on and principal of each class of
certificates entitled to receive interest or principal or interest and principal
is limited."
GENERAL
The Qualified Loans will be evidenced by promissory notes, which we
refer 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 that authorizes the trustee to sell the property to a third party
upon any default by the borrower under the terms of the note or deed of trust.
In some states, 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. Some states have imposed statutory
prohibitions that limit the remedies of a beneficiary under a deed of trust or a
mortgagee under a mortgage. In some states, statutes limit the right of the
beneficiary or mortgagee to obtain a deficiency judgment against the borrower
following foreclosure or sale under a deed of trust.
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. These
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 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
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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 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.). 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.
State Laws
Some states have enacted legislation granting rights to borrowers under
agricultural mortgage loans. These rights may include, among others:
o restructuring of loans,
o mediation prior to foreclosure,
o moratoria on foreclosures or payments,
o access by a dispossessed borrower to previously planted
crops,
o redemption provisions that are more favorable
to farm borrowers than to other commercial borrowers,
and
o restrictions on disposition of agricultural property
acquired through foreclosure.
Section 8.6(b)(5) of Farmer Mac's 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 that have been the site of manufacturing, industrial or disposal
activity. Such environmental risks may give rise to:
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(1) a diminution in value of the mortgaged property or the
inability to foreclose against such property or
(2) in some cases, 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, which is also known as 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, and the
lender actively participates in the management of the facility in a manner
inconsistent with activities necessary to protect his security interest, 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 if the foreclosing lender's post-
foreclosure actions exceed the parameters of the secured creditor exemption.
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.
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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, although the EPA has
not yet challenged any aspect of the amendment. 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.
Some states have enacted legislation similar to CERCLA, which gives
those states the legal authority to 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. Each servicing
contract will provide 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
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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 Farmer Mac's charter expressly excludes any
Qualified Loan Farmer Mac Mortgage Securities Corporation purchases within 180
days of such Qualified Loan's date of origination from any provision of the
constitution or law of any state that 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.
MATERIAL 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 Andrews & Kurth L.L.P., 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. Andrews & Kurth L.L.P. will deliver an opinion to the
Depositor that the information set forth under this caption, "Material 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.
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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 Internal Revenue 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, Andrews & Kurth L.L.P. will deliver
its opinion that the trust fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of chapter 1 of subtitle A of the Internal
Revenue 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 "Material 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
sections 162 or 212 of the Internal Revenue Code, 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 Internal
Revenue 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 Internal Revenue Code (which amount is
adjusted each year for inflation) will be reduced by the
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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 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 Internal Revenue 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 Internal Revenue Code, and each of those kinds of instruments could
be treated under that section of the Internal Revenue 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
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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 Grantor Trust Certificate for each day on which such holder owns
the Grantor Trust 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.
Section 1272(a)(6) of the Internal Revenue Code 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").
As a result of amendments to the Internal Revenue Code in 1997, effective for
tax years beginning after August 5, 1997, the Internal Revenue Code also
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 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. In
the absence of clear authority, 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 Internal Revenue Code.
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
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Qualified Loan may be considered to have been purchased at a "market discount,"
subject to the market discount rules of Internal Revenue 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 Internal Revenue 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
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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 Grantor Trust
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 Grantor Trust
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 Grantor Trust 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
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charge received by any holder of a Grantor Trust Certificate should be treated
as capital gain (assuming a Grantor Trust 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 Grantor Trust Certificates with respect to Certain
Holders. As to each series of certificates issued in a single class with respect
to a Pool, Andrews & Kurth L.L.P. 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
section 856(c)(4)(A) of the Internal Revenue Code, and interest income
on the Qualified Loans will be considered "interest on obligations
secured by mortgages on real property" within the meaning of section
856(c)(3)(B) of the Internal Revenue Code, in each case to the extent
that the Qualified Loans represented by the Grantor Trust Certificate
are of a type described in such Internal Revenue 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 section
860G(a)(3) of the Internal Revenue Code to the extent that the
Qualified Loans represented by the Grantor Trust Certificate are of a
type described in such Internal Revenue 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 sections of the Internal Revenue Code.
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 section 1286 of the Internal Revenue
Code, 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, section 1286 of the Internal Revenue Code 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
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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 Stripped Bond Certificate is purchased
for purposes of calculating any OID, and the issue price of such Stripped Bond
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
Internal Revenue 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. 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
Internal Revenue 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
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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 Internal Revenue 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 section 856(c)(4)(A) of the
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Internal Revenue Code, and interest income attributable to such certificates
should represent "interest on obligations secured by mortgages on real property"
within the meaning of section 856(c)(3)(B) of the Internal Revenue Code,
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 by an interest in real property" within
the meaning of section 860G(a)(3) of the Internal Revenue Code to the extent
that the Qualified Loans underlying such certificates are of a type described in
such Internal Revenue 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 section 582(c)(1) of the
Internal Revenue Code, 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.
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As used herein, a "U.S. Person" means a person who is (a) a citizen or
resident of the United States, (b) a corporation or a partnership, including an
entity treated as a corporation or a partnership for U.S. federal income tax
purposes, created in the United States or organized under the laws of the United
States or any state thereof or the District of Columbia (except, in the case of
a partnership, as otherwise provided by Treasury regulations), (c) an estate the
income of which is includable in gross income for federal income tax purposes
regardless of its connection with the conduct of a trade or business within the
United States, or (d) a trust whose administration is subject to the primary
supervision of a United States court and that has one or more of U.S. Persons
who have the authority to control all substantial decisions of the trust.
Final regulations dealing with backup withholding and information
reporting on income paid to foreign persons and related matters (the "New
Withholding Regulations") were published in the Federal Register on October 14,
1997. In general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. THE DISCUSSION SET FORTH
ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO ACCOUNT. PROSPECTIVE
NON-U.S. PERSONS WHO OWN INTERESTS IN MORTGAGE LOANS ARE STRONGLY ENCOURAGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW WITHHOLDING REGULATIONS.
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 Internal Revenue 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
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under "-- a. Taxation of Owners of REMIC Residual Certificates," the Internal
Revenue 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 Internal Revenue 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, or portion of a trust fund, that elects REMIC status,
Andrews & Kurth L.L.P. 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, or such portion, 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 section 856(c)(4)(A)
of the Internal Revenue Code; 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 section 856(c)(3)(B) of the Internal Revenue Code.
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 section 856(c) of
the Internal Revenue Code 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 Internal Revenue
Code.
Tiered REMIC Structures. For certain series of certificates, separate
elections may be made to treat separately designated portions of the related
trust fund as REMICs for federal income tax purposes. Upon the issuance of any
such series of certificates, Andrews & Kurth L.L.P. will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Trust Agreement, each of the portions will qualify as a REMIC, and the
REMIC Certificates issued by both each of the portions will constitute REMIC
Regular Certificates or REMIC Residual Certificates, as the case may be, in the
related REMIC.
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Such REMICs 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)(4)(A) of the Internal Revenue Code
and (ii) whether the income on such certificates is interest described in
section 856(c)(3)(B) of the Internal Revenue 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 servicer 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
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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.
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
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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
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.
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The method of accruing market discount in the case of REMIC Regular
Certificates is not entirely clear. The Internal Revenue 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
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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.
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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 section 1274(d) of
the Internal Revenue Code (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 section 582(c)(1) of the Internal Revenue Code, 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.
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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.
As previously mentioned, the New Withholding Regulations were published
in the Federal Register on October 14, 1997 and generally will be effective for
payments made after December 31, 2000, subject to certain transition rules. THE
DISCUSSION SET FORTH ABOVE DOES NOT TAKE THE NEW WITHHOLDING REGULATIONS INTO
ACCOUNT. PROSPECTIVE NON-U.S. PERSONS WHO OWN INTERESTS IN MORTGAGE LOANS ARE
STRONGLY ENCOURAGED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE NEW
WITHHOLDING REGULATIONS.
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
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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 Internal Revenue 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.
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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 Internal Revenue 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 Internal Revenue Code as an "excess inclusion")
for any calendar quarter may be subject to
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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 Internal Revenue 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 section 857(b)(2) of the
Internal Revenue Code, 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
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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.
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 Internal Revenue 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, Internal
Revenue 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
section 67 or section 68 of the Internal Revenue Code 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. REMIC Residual Certificates are not subject to
the mark-to-market rules and may not be marked-to-market.
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
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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 Internal
Revenue 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 section 582(c)(1) of the Internal Revenue
Code, 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 Internal Revenue 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 section 1091 of the Internal Revenue
Code. 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
Internal Revenue 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 quarterly to 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
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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 Internal Revenue 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.
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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
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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
Internal Revenue 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 Internal Revenue 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
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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 Farmer
Mac's guarantee.
F. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning
of section 860F(a)(4)(A)(i) of the Internal Revenue Code, 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
"Material Federal Income Tax Consequences," you should consider the state, local
and foreign tax consequences of the acquisition, ownership and disposition of
certificates. State, local and foreign income and other tax laws may differ
substantially from federal law. The discussion under "Material Federal Income
Tax Consequences" is not intended to describe any aspect of the income tax laws
of any state, locality or foreign country.
ERISA CONSIDERATIONS
GENERAL
This section summarizes some important issues under the Employee
Retirement Income Security Act of 1974, as amended, which is known as ERISA, and
the prohibited transaction provisions of section 4975 of the Internal Revenue
Code that you should consider before purchasing any certificates.
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ERISA imposes restrictions on:
o employee benefit plans and other retirement
arrangements subject to ERISA ("Plans"), and
o persons who are parties in interest or disqualified
persons with respect to those Plans.
Some employee benefit plans, such as governmental plans and church plans (if no
election has been made under Internal Revenue Code section 410(d)), are not
subject to the requirements of ERISA. Assets of those 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,
o 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
o 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 Internal Revenue 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:
(1) 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,
(2) 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
(3) has any discretionary authority or discretionary
responsibility in the administration of such Plan.
In considering an investment in the certificates, a fiduciary should
consider:
(1) 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,
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(2) whether the investment satisfies the diversification
requirements of section 404(a)(1)(C) of Title I of ERISA,
and
(3) in the case of a Plan described in Internal Revenue Code
section 401(a) ("Qualified Plan") or an individual
retirement account, or 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." The Department of Labor has
issued final regulations defining plan assets in the context of plan investments
in other entities ("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 section 4975 of
the Internal Revenue Code) 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,
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 are guaranteed by the United States or an agency or
instrumentality thereof. The Department of Labor 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." Accordingly,
none of Farmer Mac, the trustee, the master servicer or any central servicer
will be subject to ERISA standards of conduct in dealing with Qualified Loans,
QMBS or other trust fund assets.
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
Internal Revenue Code section 4975 could, in some instances, result in
prohibited transactions or other violations of the fiduciary responsibility
provisions of ERISA and Internal Revenue Code section 4975. An exemption 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:
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o PTCE 84-14 -- Class Exemption for Plan Asset
Transactions Determined by Independent Qualified
Professional Asset Managers;
o PTCE 96-23 -- Class Exemption for Plan Asset
Transactions Determined by In-House Asset Managers;
o PTCE 91-38 -- Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds;
o PTCE 90-1 -- Class Exemption for Certain Transactions
Involving Insurance Company Pooled Separate Accounts;
or
o 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 any of the above
referenced class exemptions, a fiduciary of a Plan should itself confirm that
the requirements set forth in such 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:
(1) has investment discretion with respect to the investment of
such assets of such Plan or
(2) 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 Internal Revenue 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.
90
<PAGE>
LEGAL INVESTMENT
The certificates will constitute securities guaranteed by Farmer Mac
for purposes of Farmer Mac's charter. As such, the certificates will, by
statute, be legal investments for any
o persons,
o trusts,
o corporations,
o partnerships,
o associations,
o business trusts, and
o 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, 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
Farmer Mac's 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 not aware of any state that has
enacted such legislation prior to the deadline therefor in Farmer Mac's charter.
Farmer Mac's 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.
You should consult you own legal advisors in determining whether and to
what extent the certificates constitute legal investments for you.
METHOD OF DISTRIBUTION
The certificates offered by the related prospectus supplements may be:
(1) issued to Sellers or originators in exchange for Qualified
Loans or
91
<PAGE>
(2) 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:
o the name or names of the underwriters,
o the purchase price of the certificates,
o the proceeds from the sale, and
o 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, Farmer Mac Mortgage Securities Corporation, as
depositor, and the appropriate underwriters, 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 Farmer Mac
Mortgage Securities Corporation will indemnify each underwriter named on the
cover page of any prospectus supplement against certain civil liabilities under
the Securities Act, or contribute to payments each such underwriter may be
required to make in respect thereof.
92
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
<TABLE>
<CAPTION>
<S> <C>
Accrual Certificates.............................................................................................35
accrual period ..............................................................................................63, 73
Accrued Certificate Interest.....................................................................................37
acquisition premium..............................................................................................65
adjusted issue price.....................................................................................63, 73, 81
Advance(s) ......................................................................................................38
Agreements ......................................................................................................43
Applicable Amount ...............................................................................................82
Beneficial Owners ...............................................................................................41
Book-Entry Certificates..........................................................................................35
Certificate Account..............................................................................................49
Certificate Account Deposit Date.................................................................................49
Collection Account(s)............................................................................................19
Contributions Tax ...............................................................................................86
CPR .............................................................................................................32
Cut-off Date ....................................................................................................24
daily accruals ..................................................................................................81
Daily portions ..............................................................................................63, 73
de minimis amount ...............................................................................................63
Definitive Certificates..........................................................................................35
Depository ......................................................................................................40
Determination Date...............................................................................................36
disqualified organization........................................................................................84
Eligible Depository..............................................................................................47
Eligible Investments.............................................................................................47
excess servicing fee.............................................................................................66
Fed System ......................................................................................................40
federal long-term rate...........................................................................................81
Final Regulations ...............................................................................................89
Grantor Trust Certificates.......................................................................................61
guaranteed governmental mortgage pool certificate................................................................89
Guaranteed Loan .................................................................................................27
Guaranteed Portions..............................................................................................17
Holders of Book-Entry Certificates...............................................................................41
Indirect Participants............................................................................................41
Insurance Proceeds...............................................................................................48
issue price .....................................................................................................62
Liquidation Proceeds.............................................................................................48
Mortgage Notes ..................................................................................................56
Net income from foreclosure property.............................................................................86
New Withholding Regulations......................................................................................70
noneconomic REMIC Residual Certificate...........................................................................85
</TABLE>
93
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
OID .............................................................................................................61
OID Regulations .................................................................................................62
Owner ...........................................................................................................27
Participants ....................................................................................................41
pass-through entity..............................................................................................84
pass-through interest holder.....................................................................................82
phantom income ..................................................................................................79
Plan(s) .........................................................................................................88
portfolio income ................................................................................................79
Prepayment Assumption........................................................................................67, 72
Prepayment Assumption Rule.......................................................................................63
prohibited transaction...........................................................................................86
Prohibited Transactions Tax......................................................................................86
Purchase Price ..................................................................................................46
QMBS ............................................................................................................18
QMBS Agreement ..................................................................................................25
QMBS Issuer .....................................................................................................25
QMBS Servicer ...................................................................................................25
QMBS Trustee ....................................................................................................25
Qualified Assets ................................................................................................17
Qualified Loans .................................................................................................17
Qualified Plan ..................................................................................................89
Qualified stated interest........................................................................................72
Record Date .....................................................................................................35
Related Proceeds ................................................................................................38
REMIC Certificates...............................................................................................71
REMIC Regular Certificates.......................................................................................71
REMIC Residual Certificates......................................................................................71
REO Proceeds ....................................................................................................48
Sale Agreement ..................................................................................................43
secured-creditor exemption.......................................................................................58
Sellers .........................................................................................................21
Servicers .......................................................................................................61
State Environmental Lien.........................................................................................59
stated redemption price at maturity..........................................................................62, 72
Stripped Bond Certificates.......................................................................................66
Stripped Coupon Certificates.....................................................................................66
Stripped Interest Certificates...................................................................................35
Stripped Principal Certificates..................................................................................34
System Institution...............................................................................................34
U.S. Person .....................................................................................................70
Underlying QMBS .................................................................................................25
Unguaranteed Portion.............................................................................................28
yield to maturity ...........................................................................................63, 73
</TABLE>
94
<PAGE>
- --------------------------------------------------------------------------------
Until _________ __, 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus supplement and prospectus. This is in addition to the
dealers' obligation to deliver a prospectus supplement and prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
--------------------------------------------
$________________
Guaranteed Agricultural
Mortgage-Backed
Securities
[LOGO]
Federal Agricultural
Mortgage Corporation
--------------------------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------------------------
--------------------------------------------
_______________, 1999
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses the registrant
expects to incur in connection with the issuance and distribution of the
securities being registered, other than underwriting discounts and commissions,
which amounts will be provided for each series of securities on the cover page
of the related prospectus supplement.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration Fee................................................................. $208,889
Trustee's Fees and Expenses (including counsel fees)................................. 20,000
Printing and Engraving Costs......................................................... 50,000
Legal Fees and Expenses.............................................................. 160,000
Accounting Fees and Expenses......................................................... 100,000
Miscellaneous........................................................................ 111,111
-----------
TOTAL....................................................................... $650,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's certificate of incorporation provides that directors
and officers of the registrant will be indemnified to the fullest extent
authorized or permitted by Delaware law. Section 145 of the Delaware General
Corporation Law provides, in substance, that Delaware corporations have the
power, under specified circumstances, to indemnify their directors, officers,
employees or agents in connection with actions, suits or proceedings involving
any of them by reason of the fact that they were or are such directors,
officers, employees or agents against expenses incurred in any such action, suit
or proceeding.
The form of Underwriting Agreement incorporated by reference as Exhibit
1.1 to this Registration Statement provides, under certain circumstances, for
the indemnification of the registrant, each underwriter and other persons.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement*
4.1 Form of Master Central Servicing Agreement*
4.2 Form of Loan Sale Agreement
4.3 Form of Trust Agreement - Grantor Trusts*
4.4 Form of Trust Agreement - REMIC Trusts*
5.1 Opinion of General Counsel of the registrant as to legality
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters**
23.1 Consent of the General Counsel of the registrant (included in Exhibit 5.1)
23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)
23.3 Consent of KPMG LLP
23.4 Consent of Arthur Andersen LLP
24.1 Powers of Attorney**
</TABLE>
- ------------------
* Incorporated by reference to the corresponding exhibit to Amendment No. 1
to Farmer Mac Mortgage Securities Corporation's Registration Statement on
Form S-3 (File No. 333-26073) filed on May 20, 1997.
** Previously filed.
ITEM 17. UNDERTAKINGS.
A. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment to those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) or the Securities
Exchange Act of 1934 that are incorporated by reference in the Registration
Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-2
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 that is incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
C. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be an initial bona fide offering thereof.
D. Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the registrant as
specified in Item 15 above or otherwise, the registrant has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of the registrant's counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Washington, D.C., on the 28th day of
September, 1999.
FARMER MAC MORTGAGE SECURITIES
CORPORATION
By: /s/ Henry D. Edelman
--------------------------------
Henry D. Edelman
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Henry D. Edelman President and Director September 28, 1999
- -------------------------------- (Principal Executive Officer)
Henry D. Edelman
/s/ Michael T. Bennett Secretary and Director September 28, 1999
- --------------------------------
Michael T. Bennett
/s/ Nancy E. Corsiglia Vice President, Treasurer and Director September 28, 1999
- -------------------------------- (Principal Financial Officer)
Nancy E. Corsiglia
</TABLE>
II-4
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement*
4.1 Form of Master Central Servicing Agreement*
4.2 Form of Loan Sale Agreement
4.3 Form of Trust Agreement - Grantor Trusts*
4.4 Form of Trust Agreement - REMIC Trusts*
5.1 Opinion of General Counsel of the registrant as to legality
8.1 Opinion of Andrews & Kurth L.L.P. as to tax matters**
23.1 Consent of the General Counsel of the registrant(included in Exhibit 5.1)
23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 8.1)
23.3 Consent of KPMG LLP
23.4 Consent of Arthur Andersen LLP
24.1 Powers of Attorney**
</TABLE>
- ------------------
* Incorporated by reference to the corresponding exhibit to Amendment No. 1
to Farmer Mac Mortgage Securities Corporation's Registration Statement on
Form S-3 (File No. 333-26073) filed on May 20, 1997.
** Previoulsy filed.
FARMER MAC I
SELLER/SERVICER AGREEMENT
This Seller/Servicer Agreement (the "Agreement") is dated as of , 19 ,
between the FEDERAL AGRICULTURAL MORTGAGE CORPORATION, a federal instrumentality
of the United States ("Farmer Mac") and , a ________________ (the "Seller"). All
capitalized terms used in this Agreement and not otherwise defined shall have
the meanings set forth in the Selling and Servicing Guide (the "Guide").
Farmer Mac operates a mortgage loan purchase program to provide
agricultural mortgage lenders an agricultural secondary mortgage market. Farmer
Mac is willing to purchase Qualified Loans from approved sellers pursuant to
mortgage purchase programs announced by Farmer Mac from time to time. As such,
Farmer Mac has developed the Guide which sets forth the requirements for, and
conditions respecting, participation in any mortgage purchase program announced
by Farmer Mac to purchase Qualified Loans.
The Seller intends to originate or purchase Qualified Loans and sell such
loans to Farmer Mac.
Farmer Mac, either itself or through a Farmer Mac designated Loan Reviewer,
will review loan files with respect to mortgage loans submitted by approved
sellers for purchase and may approve such loans for sale to Farmer Mac if they
meet the requirements set forth in the Guide. Farmer Mac, either itself or
through a Farmer Mac designated Central Servicer, will also service Qualified
Loans it purchases and will delegate certain servicing responsibilities with
respect to such Qualified Loans to the approved sellers under the conditions and
in accordance with the provisions of the Guide.
The purpose of this Agreement is to establish the Seller as an approved
seller of Qualified Loans to Farmer Mac; to provide the terms and conditions of
sales; to specify the requirements with respect to loan file review; to
establish the Seller as a Field Servicer of Qualified Loans on behalf of Farmer
Mac and any Central Servicer; and to provide the terms and conditions of
servicing.
In consideration of the purpose of this Agreement and of all the provisions
and mutual promises contained herein, the Seller and Farmer Mac agree as
follows:
Section 1. Seller/Servicer Guide. Farmer Mac has provided the Guide to the
Seller and the Seller has received and reviewed the Guide which is incorporated
herein by reference as though fully set forth in this Agreement. Farmer Mac and
the Seller agree to comply with and be bound by all of the terms and provisions
of the Guide which Farmer Mac may, in its discretion and without the consent of
the Seller, amend or supplement at any time by written notice to the Seller.
From and after the date of each amendment or supplement, the Guide, as so
amended or supplemented, shall be a part of this Agreement; however, no such
amendment or supplement will affect any Commitment to Purchase (rate lock)
issued prior to the date of the amendment or supplement or any servicing
obligations undertaken prior to such date.
Section 2. Selling. Seller eligibility and sales of Qualified Loans to
Farmer Mac hereunder shall be governed by Chapters 2 and 3 of the Guide.
<PAGE>
2.1 Individual Commitments, Separate Agreements. Each purchase by
Farmer Mac hereunder will be made only pursuant to a written Commitment to
Purchase (rate lock). Each Commitment to Purchase (rate lock) constitutes a
separate agreement between the Seller and Farmer Mac with respect to each
Qualified Loan required to be delivered or actually delivered thereunder, and
each such separate agreement may be separately assigned, and separately
enforced, by Farmer Mac or any assignee, without affecting the rights of any
party to, or assignee under, such Commitment to Purchase (rate lock) with
respect to any other mortgage loan.
2.2 Basic Seller Obligations. There are certain basic obligations
imposed upon the Seller under this Agreement, including but not limited to
obligations to:
o sell Qualified Loans to Farmer Mac once a Commitment to
Purchase (rate lock) has been issued by Farmer Mac;
o pay a Pairoff fee to Farmer Mac in the event a Qualified
Loan or substitute is not delivered in accordance with the
terms of such Commitment to Purchase (rate lock), as set
forth in 303.5 of the Guide; and
o make representations and warranties with respect to each
Qualified Loan and incur certain consequences in connection
with the breach of such representations and warranties, as
set forth in 304 and 305 of the Guide.
2.3 No Purchase Obligation. The fact that Farmer Mac signed this
Agreement does not mean that Farmer Mac must issue a Commitment to Purchase
(rate lock) any mortgage loan submitted to Farmer Mac for review and approval.
Any obligation to purchase will arise only after review and approval and the
issuance by Farmer Mac of a Commitment to Purchase (rate lock).
Section 3. Loan File Review. Submission of documents for review and
approval by Farmer Mac shall be governed by Chapter 3 of the Guide.
Section 4. Servicing. Servicing of Qualified Loans hereunder shall be
governed by Chapter 4 of the Guide or by a field servicing contract between the
Seller and a Central Servicer, if Farmer Mac assigns the central servicing of
such Qualified Loans to a Central Servicer. The field servicing contract, the
form of which will have been reviewed by Farmer Mac, will neither increase the
duties of nor reduce the field servicing fee to be paid to the Seller.
Section 5. Events of Default; Remedies; Indemnification. Seller will be in
default under this Agreement upon the occurrence of any Event of Default under
the Guide, and will be subject to any remedies available to Farmer Mac,
including, but not limited to, indemnification of Farmer Mac and Seller's
obligation to repurchase one or more of the Qualified Loans, as more fully set
forth in the Guide.
Section 6. Termination and Effect of Termination. This Agreement and the
Guide may be terminated as set forth in the Guide. The Guide sets forth the
effect of any such termination.
2
<PAGE>
Section 7. Miscellaneous.
7.1 Notice. Any notice shall be given and shall be effective as
specified in 101.1 of the Guide and shall be given to Farmer Mac at the address
specified in 101.1 of the Guide, and to the Seller at the following address, or
to such other address as may be given by one party to the other party in
writing:
Seller's Address: _________________________________
_________________________________
_________________________________
7.2 Severability and Enforcement. If any provision of this Agreement
conflicts with applicable law, the other provisions of this Agreement that can
be carried out without the conflicting provision will not be affected.
All rights and remedies under this Agreement are distinct and
cumulative not only as to each other but as to any rights or remedies afforded
by law or equity. They may be exercised together, separately or successively.
Any failure by Farmer Mac to exercise any of its remedies does not constitute a
waiver of that remedy in the future as to the same or any other Event of
Default. These rights and remedies are for the benefit of Farmer Mac and any of
its respective successors and assigns.
7.3 Governing Law. This Agreement will be governed by, and construed
in accordance with, federal law; to the extent federal law incorporates state
law, that state law shall be the laws of the District of Columbia.
7.4 Assignability. As more fully set forth in the Guide, it is
understood and agreed that: (i) Seller may not transfer or assign any of its
rights or duties under this Agreement or the Guide without Farmer Mac's prior
written consent; and (ii) Farmer Mac may assign its rights and duties under such
documents without Seller's consent or approval.
7.5 Entire Agreement. This Agreement and the Guide, including the
exhibits attached to the Guide and all updates and other documents incorporated
by reference in the Guide, constitute the entire understanding between Farmer
Mac and the Seller and supersede all other agreements, covenants,
representations, warranties, understandings and communications between the
parties, whether oral or written, with respect to the transactions contemplated
by the Guide.
This Agreement may be executed in two or more counterparts, which, when
combined, will constitute one instrument.
3
<PAGE>
This Agreement has been executed as of the date first written by duly
authorized representatives of Farmer Mac and the Seller.
FARMER MAC
By:
______________________________
Title:
____________________________
SELLER
By:
______________________________
Title:
____________________________
4
<PAGE>
Representations Incorporated by Reference in Loan Sale Agreement
304.3 Loan-Specific Representations and Warranties
The Seller hereby represents and warrants the following with respect
to each mortgage loan sold or transferred by the Seller to Farmer Mac:
1. The loan information submitted to Farmer Mac by the Seller is
true and correct.
2. Each Final Loan File contains the documents specified in items 3
through 10 of the subsection "Final Loan File Contents" in
Section 302.5 of the Guide.
3. Each mortgage loan conforms in all material respects to the
provisions of the Guide, including, but not by way of limitation,
the following:
a. Each mortgage loan was originated by an Originator.
b. The Borrowers under each Qualified Loan are Eligible
Borrowers.
c. Except as otherwise identified in writing by the Seller,
none of the Borrowers under any Qualified Loan are Related
Borrowers with respect to any Borrowers under any other
Qualified Loan sold by the Seller pursuant to its
Seller/Servicer Agreement.
d. Each mortgage loan is a Qualified Loan.
4. The Qualified Loan is:
a. Principally secured by real property (i.e., had a
Loan-to-Value ratio at origination not in excess of 125%
and, as of the Purchase Date, not in excess of 75%; 85% in
the case of part-time farm loans); and
b. Not secured by any collateral having material value other
than the Mortgage and any additional security documents that
evidence rights or interests in the Mortgaged Property, or
rights and fixtures appurtenant thereto.
5. Encumbrances to the Qualified Loan are considered to be:
a. Any security agreement, chattel mortgage or equivalent
document that is related to the Mortgage which has been
delivered to Farmer Mac or its designee is a valid and
subsisting lien on the property described in such document.
b. The related Mortgage is a valid first lien on the fee title
to the related Mortgaged Property; except that, the lien
created by the related Mortgage may be subordinate to
another mortgage held by Farmer Mac or its designee. The
Mortgaged Property is free and clear of all mechanics'
liens, materialmen's liens or similar types of liens. There
are no rights outstanding that could result in any of such
liens being imposed on the Mortgaged Property.
5
<PAGE>
c. Appropriate UCC Financing Statements on fixtures and
personal property have been filed and a UCC Search has been
conducted indicating a security interest in such fixtures
and personal property.
6. In connection with the origination of the Qualified Loan, a
lender's title insurance policy was issued by a title insurance
company acceptable to Farmer Mac or, if title insurance is not
available in the area where the Mortgaged Property is located, an
opinion of counsel was delivered by an attorney or firm of
attorneys rated at least "BV" by Martindale-Hubbell (or approved
by Farmer Mac if no such rating is available). The title
insurance insures (or the title opinion assures) that a lien of
the priority described in clause (5)(B) of this subsection
secures the Mortgage Note, and that the property is not subject
to encumbrances except those taken into account in the appraisal
which established the Appraised Value or which are customarily
acceptable to lenders in the area and does not materially impair
the value of the property.
7. Each of the Mortgage Note and Mortgage (including any amendments
or modifications to either such document) and each additional
security document that evidences rights or interests in the
Mortgaged Property has been properly signed and is the legal,
valid and binding obligation of the Borrower, enforceable by
Farmer Mac, and its successors and assigns in accordance with its
terms.
8. The Mortgage contains customary and enforceable provisions that
permit the holder of the Mortgage to obtain marketable title to
the Mortgaged Property upon the Borrower's default under the
Qualified Loan. There is no exemption available to the Borrower
that would interfere with the right to sell the Mortgaged
Property or to foreclose the Mortgage, except for state statutes
or regulations respecting rights of redemption or mediation or
rights to cure defaults or require restructuring of loans,
moratoria on foreclosures or payments, rights of first refusal or
homestead rights; provided that no homestead rights exempt from
foreclosure any portion of the Mortgaged Property if the value of
the remainder of such property would result in a Loan-to-Value
ratio of more than 75% at the Purchase Date.
9. The Mortgage contains a provision for the acceleration of the
payment of the unpaid principal balance of the Qualified Loan in
the event that the Mortgaged Property is sold or transferred
without the prior written consent of the mortgagee thereunder.
10. The Mortgage Note is payable in monthly, quarterly, semi-annual
or annual installments in compliance with the description of the
applicable loan product as described in the Cash Window Rate
Sheet, so as to result in complete amortization (after a final
payment of principal that may be substantially disproportionate
to the other scheduled payments of principal) of the Qualified
Loan over the stated or calculated term. The Qualified Loan does
not provide for negative amortization of interest.
11. Neither the Mortgage nor the Mortgage Note is usurious and each
meets or is exempt from any applicable usury laws or regulations.
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12. All relevant material requirements of federal, state and local
laws, rules and regulations then applicable to the making,
servicing and assigning of the Qualified Loan were complied with,
including, without limitation, equal credit opportunity,
disclosure and truth-in-lending laws.
13. There are no tax or hazard insurance escrow deposits or payments
relating to the Qualified Loan.
14. The Mortgage provides that the holder may make advances under the
Mortgage to protect the holder's interest in the Mortgaged
Property and to protect the Mortgaged Property from loss.
Repayment of such advances (including reasonable costs and
attorney's fees) plus interest at a default rate of interest is
an obligation of the Borrower, secured by the Mortgage.
15. The Mortgage Note provides that any installment payment not
received by the tenth day of the month in which it is due shall
accrue interest at a default rate equal to 5% per annum greater
than the note rate from the date such payment was due, with a
minimum accrual equal to 5% of the delinquent installment
payment.
16. The Qualified Loan is not subject to any right of rescission,
set-off, counterclaim or defense.
17. The Mortgage has not been satisfied, canceled or subordinated.
There have been no material modifications or amendments to the
Mortgage or other principal mortgage documents except as
contained in the Mortgage File delivered to Farmer Mac or its
designee.
18. There are no defaults under the Mortgage or Mortgage Note and all
taxes, governmental assessments, insurance premiums, water,
sewer, and municipal charges relating to the Mortgaged Property
that previously became due and owing have been paid.
19. The Qualified Loan has been not more than 30 days delinquent in
payment of principal or interest during the three (3) years
preceding the Purchase Date.
20. The Seller has not advanced funds to, or induced, solicited or
knowingly received any advance of funds (nor will the Seller
advance funds, or induce, solicit or knowingly receive any
advance of funds) from a party other than the Borrower, directly
or indirectly, for the payment of any amount required under the
Qualified Loan other than short-term loans made in the ordinary
course of business.
21. An appraisal to establish the Appraised Value of the related
Mortgaged Property has been conducted in accordance with the
Appraisal Standards set forth in Chapter 202.
22. All of the improvements on the Mortgaged Property that were
included for the purpose of determining the Appraised Value are
within the boundaries and building restriction lines of such
property, and no improvements on adjoining properties encroach
upon the Mortgaged Property.
23. The structures valued in the appraisal establishing the Appraised
Value of the Mortgaged Property are free of material damage and
are in good repair.
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24. All improvements on the Mortgaged Property that were assigned a
value in the Appraised Value are insured against loss by a
Standard Hazard Insurance Policy that conforms to the
requirements of the Guide.
25. Any applicable zoning laws or regulations or any inspections,
licenses or certificates required with respect to the use and
occupancy of the related Mortgaged Property were complied with,
duly made or issued, as the case may be.
26. The Seller or its agent has physically inspected the related
Mortgaged Property and observed its main activities within 180
days prior to the Purchase Date and has observed that activities
on such Mortgaged Property appeared to have been conducted in a
manner conforming to sound environmental practices as currently
understood and, to the best of the Seller's knowledge:
a. The Borrower has handled on the property only Hazardous
Materials customarily used in the operation of a farm or
ranch, including ordinary cleaning fluids, fuel oil,
fertilizers and pesticides, and only in accordance with any
applicable Environmental Statute;
b. The Borrower has not otherwise produced or disposed of
Hazardous Materials on the Mortgaged Property;
c. There has been no discharge of Hazardous Materials into
waters on or adjacent to the Mortgaged Property, or onto
lands from which such substances might seep, flow or drain
into such waters in a manner which violates any
Environmental Statute; and
d. There has been no event that could give rise to a claim
under any environmental statute or under common law,
pertaining to hazardous materials on or originating from the
Mortgaged Property or any other real property owned or
occupied by the Borrower or arising out of the conduct of
the Borrower, including pursuant to any Environmental
Statute.
27. There is no proceeding pending, currently occurring or, to the
best of Seller's knowledge, threatened, for the total or partial
condemnation of the Mortgaged Property.
28. The Seller knows of nothing involving the Mortgage, the Mortgaged
Property, the Borrower or the Borrower's credit standing that can
reasonably be expected to: a) cause private institutional
investors to regard the Mortgage as an unacceptable investment;
b) cause the Mortgage to become delinquent or; c) adversely
affect the Mortgage's value or marketability.
29. The Qualified Loan is not cross-collateralized with any other
mortgaged properties not subject to the Seller/Servicer Agreement
and there are no lenders, other than any approved in writing by
Farmer Mac, who own a participation interest in the Qualified
Loan.
30. To the extent necessary to preserve the value of the Mortgaged
Property, a security interest has been properly perfected in any
water rights and entitlements associated with the
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Mortgaged Property and such documentation has been obtained, as
may be necessary, to insure the delivery of water to the
Mortgaged Property.
31. The Mortgaged Property is contiguous to a public thoroughfare, or
includes such rights-of-way or easements, so that a public
thoroughfare provides for reasonable ingress and egress to such
property.
32. The proceeds of the Qualified Loan have been fully disbursed,
there is no requirement for future advances thereunder and any
and all requirements as to completion of any on-site or off-site
improvements and as to disbursement of any escrow funds therefor
have been complied with. All costs, fees, transfer taxes, and
expenses incurred in making, closing or recording the Qualified
Loan have been paid.
9
[Letterhead of Federal Agricultural Mortgage Corporation]
September 29, 1999
Farmer Mac Mortgage Securities Corporation
919 18th Street, N.W., Suite 200
Washington, D.C. 20006
Re: Form S-3 Registration Statement; File No. 333-80805
Ladies and Gentlemen:
I am the Vice President and General Counsel of the Federal Agricultural
Mortgage Corporation, a federally chartered instrumentality of the United States
("Farmer Mac"), and, in that capacity, I have acted as counsel to Farmer Mac
Mortgage Securities Corporation ("FMMSC"), a wholly owned subsidiary of Farmer
Mac, in connection with the preparation and filing with the Securities and
Exchange Commission of a registration statement on Form S-3 (the "Registration
Statement") relating to the registration under the Securities Act of 1933 (the
"1933 Act") of Guaranteed Agricultural Mortgage-Backed Securities (the
"Securities"). The Securities are to be issued from time to time in series
pursuant to either:(i) a trust agreement dated as of June 1, 1996 (the "First
Trust Trust Agreement") and entered into between Farmer Mac, FMMSC and First
Trust National Association, as Trustee, as supplemented by an issue supplement
thereto each time a series of Securities is issued (each, an "Issue Supplement")
pursuant to the First Trust Trust Agreement; or (ii) a trust agreement dated as
of March 1, 1998 (the "Farmer Mac Trust Agreement" and, together with the First
Trust Trust Agreement, each, a "Trust Agreement") and entered into between
Farmer Mac both in its individual capacity and as trustee, and FMMSC, as
supplemented by an Issue Supplement thereto each time a series of Securities is
issued pursuant to the Farmer MAC Trust Agreement.
In arriving at the opinions expressed below, I have made such legal and
factual examinations and inquiries, and have examined and relied upon the forms
of prospectus and prospectus supplement (collectively, the "Prospectus")
contained in the Registration Statement and originals or copies, certified or
otherwise identified to my satisfaction, of such other certificates, corporate
records, agreements and other instruments and documents, as I have deemed
advisable or necessary for the purpose of rendering this opinion.
In rendering the opinions expressed below, I have assumed and have not
verified that the signatures on all documents that I have examined are genuine,
that all copies of documents that I have examined conform to the originals
thereof and that the originals thereof are authentic.
Based upon the foregoing, it is my opinion that:
1. Each Trust Agreement constitutes a legal, valid and binding
obligation of Farmer Mac and FMMSC, the enforcement of which will be subject to
general principles of equity regardless of whether enforcement is sought in a
proceeding in equity or at law.
<PAGE>
Farmer Mac Mortgage Securities Corporation
September 29, 1999
Page 2 of 2
2. When an Issue Supplement has been duly authorized by all necessary
action and duly executed and delivered by Farmer Mac, FMMSC and the related
trustee, and when the Securities of the related series have been duly executed,
countersigned, issued and sold as contemplated in the Registration Statement,
such Securities will be legally and validly issued, fully paid and
nonassessable, and the holders of such Securities will be entitled to the
benefits of the Trust Agreement and the Issue Supplement.
3. Pursuant to the Farmer Mac Guarantee, which is set forth in Article
V of the Trust Agreement, Farmer Mac will guarantee payments on the Securities
as and to the extent described in the Prospectus under "FARMER MAC GUARANTEE".
The obligations of Farmer Mac under the Farmer Mac Guarantee will not carry the
full faith and credit of the United States.
I express no opinion other than as to the laws of the United States of
America and the laws of the State of New York. I hereby consent to the filing of
this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Michael T. Bennett
Michael T. Bennett
Vice President and General Counsel
Consent of Independent Public Accountants
The Board of Directors
Federal Agricultural Mortgage Corporation
We consent to the use of our report incorporated herein by reference and to the
reference to our firm as experts on page 16 of the Prospectus dated September
28, 1999.
/s/ KPMG LLP
Washington, D.C.
September 28, 1999
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated January 20, 1999,
included in the Federal Agricultural Mortgage Corporation's Form 10-K for the
year ended December 31, 1998, and to all references to our Firm included in this
registration statement.
Arthur Andersen LLP
September 28, 1999
Vienna, Virginia
