Prospectus supplement to prospectus dated March 29, 2000
Federal Agricultural Mortgage Corporation
FARMER MAC
Issuer
Farmer Mac Mortgage Securities Corporation
Depositor
$20,611,498 Guaranteed Agricultural Mortgage-Backed Securities
Consider carefully the risk factors beginning on page S-7 in this prospectus
supplement and on page 11 in the prospectus.
This prospectus supplement does not contain complete information about this
offering. There is additional information in the prospectus. You should read
both this prospectus supplement and the prospectus in full. This prospectus
supplement may be used to offer and sell certificates only if accompanied by
the prospectus.
- --------------------------------------------------------------------------------
We will create a trust fund to hold two pools of agricultural real estate
mortgage loans and issue certificates backed by those loans. The trust fund will
issue -
Class QM1010 Class QS1010
------------ ------------
Approximate original
principal amount(1) $ 4,391,638 $ 16,219,860
CUSIP number 31317 GAK 3 31317 HAK 1
Approximate initial
pass-through rate(2) 7. 407% 7. 539 %
Payment frequency Monthly Semi-Annual
First distribution date April 25, 2000 July 25, 2000
Final distribution date November 25, 2024 July 25, 2025
(1) May be up to 5% more or less.
(2) Will vary with the weighted average of the
interest rates for the mortgage loans in each pool
as described in this prospectus supplement.
The Federal Agricultural Mortgage Corporation, which is also known as
Farmer Mac, guarantees 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 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 Depositor is offering the certificates directly. Proceeds to the
Depositor from the sale of the certificates will be 100% of the aggregate
original principal amount of the certificates, plus accrued interest on the
certificates from March 1, 2000, before deducting expenses payable by the
Depositor estimated at $10,800.
March 29, 2000
<PAGE>
TABLE OF CONTENTS
Page
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
Character of Mortgage Loans in Some Pools May Result in an Increased
Likelihood of Prepayments...................................................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-20
INDEX OF PRINCIPAL TERMS....................................................S-21
ANNEX I: DESCRIPTION OF THE QUALIFIED LOAN POOLS............................A-1
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.
<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 two 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 two 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
distributions 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 QM1010 Certificates, you will be
entitled to receive amounts collected on the mortgage loans
in the pool designated as QM1010; and
o if you hold Class QS1010 Certificates, you will be entitled
to receive amounts collected on the mortgage loans in the pool
designated as QS1010.
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.
DISTRIBUTIONS ON THE CERTIFICATES
o Distributions on the Class QM1010 Certificates will be made on a monthly
basis. A distribution will occur for the Class QM1010 Certificates on the
25th day of each month.
o Distributions on the Class QS1010 Certificates will be made on a semi-annual
basis. A distribution will occur for the Class QS1010 Certificates on the
25th day of each January and July.
<PAGE>
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 March 1, 2000 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 the
pool that was repurchased or became a defaulted mortgage loan (if Farmer
Mac, as the master servicer of the 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 March 2, 2000 and end on the first day of the month in which the
related distribution date occurs.
<PAGE>
Yield Maintenance Charges
Some pools may 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, if
any, 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 and "Description
of the Trust Funds - The Assets in Each Trust Fund - Farmer Mac's Guarantee" in
the prospectus 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).
OPTIONAL TERMINATION
Under the 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.
<PAGE>
THE TRUSTEE
The trustee for the Certificates will be U.S. Bank Trust National
Association, a national banking association organized and existing under the
federal laws of the United States.
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 some
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. The telephone number
there is 202/872-7700.
<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. Some
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.
<PAGE>
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 Maintenance Charge payable in
connection with a principal prepayment on a mortgage loan and cannot assure that
any of these amounts will actually be available for distribution.
Disproportionately Large Mortgage Loans in Some Pools May Adversely Affect
Yield on Certificates. Each of Pool QM1010 and Pool QS1010 contains some loans
that have disproportionately large outstanding principal balances as compared to
the other loans in the pool. Specifically, as of March 1, 2000:
o Pool QM1010 included two mortgage loans that constituted approximately
49.3% and 19.3% (by principal balance) of the aggregate principal
balance of that pool; and
o Pool QS1010 included two mortgage loans that constituted approximately
14.8% and 9.5% (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 the yield on related Certificates 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 these 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
the pools. To the extent any disproportionately large loan bears interest at
rate, net of fees and expenses, in excess of the then applicable pass-through
rate on the Certificates related to the pool, principal payments on the loan
will lower the pass-through rate for the 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 March 1, 2000, Pool QM1010 included six mortgage loans.
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.
Character of Mortgage Loans in Some Pools May Result in an Increased
Likelihood of Prepayments. Each of the mortgage loans in the trust fund will
have a fixed rate term of ten years followed by an adjustable rate term of 20
years. The prepayment behavior of these loans may differ from that of other
mortgage loans. As an adjustable rate mortgage loan with an initial fixed rate
term approaches its initial adjustment date, the borrower may become more likely
to refinance the loan to avoid periodic changes to the periodic payment amount
or an increase in the interest rate after the initial fixed rate period, even if
fixed rate loans are available only at rates that are slightly lower or even
higher than the interest rate before adjustment.
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
The Trust Fund will consist primarily of two 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 the
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 $3.6 million, 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 million. "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
March 1, 2000 (the "Cut-off Date"), as adjusted for any scheduled principal
payments due on or before that 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 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 those Qualified Loans would materially alter the
characteristics of the 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 other characteristics of the Qualified Loans in the
pool may vary. Pursuant to the Sale Agreement, the related Seller has made
limited 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 April 13, 2000. The 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.
<PAGE>
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to a Trust Agreement, dated as of
June 1, 1996, as supplemented by an Issue Supplement dated as of the Cut-off
Date (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 specific 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 the pool occurs. The last three digits sequentially designate pools
with the same three loan identifiers. The table below summarizes Farmer Mac's
pool numbering system:
1st Digit 2nd Digit 3rd Digit
- --------- --------- ---------
A=15 year 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)
<PAGE>
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 that
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 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
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 the Certificates in the secondary market because some 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. The monthly Distribution Dates will occur
on the 25th day of each month and the 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 of those days 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 the
Distribution Date occurs.
<PAGE>
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 that class in an aggregate amount equal to the
Accrued Certificate Interest for that 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 the class immediately
prior to the 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 that 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 the 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, (that amount, the "Administrative Fee
Rate"). The weighted average Administrative Fee Rate as of the Cut-off Date for
each pool is set forth in "Annex I: 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 that pool
by its Net Mortgage Rate to derive the Qualified Loan's weighted interest amount
("Weighted Interest Amount"); (2) dividing the sum of all the 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 the 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 the 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 that pool due during the preceding Due Period, (ii) the scheduled principal
balance of each Qualified Loan included in that 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 the current Distribution
Date. A "Liquidated Qualified Loan" is generally any defaulted Qualified Loan as
to which it has been determined that all amounts to be received thereon have
been recovered.
Certificate Pool Factors. As soon as practicable following the fifth
Business Day of each month of a Distribution Date, Farmer Mac will make
available to financial publications and electronic services for each applicable
pool of Qualified Loans, among other things, the factor (carried to eight
decimal places) that, when multiplied by the original Certificate Balance of a
Certificate evidencing an interest in that pool, will equal the remaining
principal balance of the Certificate after giving effect to the distribution of
principal to be made on the Distribution Date in that 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 the payment is collected by the applicable central servicer, Farmer Mac,
as master servicer, will distribute that 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, a Yield Maintenance Charge represents the excess of
reinvestment earnings at the related Mortgage Interest Rate (net of the related
servicing fee rates) on the 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 the prepaid amount, all calculations being done on a 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
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
<PAGE>
Pursuant to the Trust Agreement, Farmer Mac will guarantee (the "Farmer
Mac Guarantee") the timely distribution of interest accrued on the Certificates
and the distribution of the full Principal Distribution Amount (including any
balloon payments) for the related pool and Distribution Date. In addition,
Farmer Mac is obligated to distribute on a timely basis the outstanding Class
Certificate Balance of each class of Certificates in full no later than the
related Final Distribution Date (as set forth on the cover hereof), whether or
not sufficient funds are available in the Certificate Account. The Farmer Mac
Guarantee will not cover the distribution to Holders of the related class of
Certificates of any uncollected Yield Maintenance Charge. See "Risk Factors" 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 "Risk Factors - Farmer Mac's
guarantee of the timely payment of interest on and principal of certificates is
limited" and "Description of the Trust Funds - The Assets in Each Trust Fund" in
the prospectus.
OUTSTANDING GUARANTEES
As of the Cut-off Date, Farmer Mac had outstanding guarantees on
approximately $2.3 billion aggregate principal amount of securities (including
approximately $381 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 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.
<PAGE>
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 the Qualified Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Qualified Loans, the rate of prepayment would be expected to decrease. There can
be no certainty as to the rate of prepayments on the Qualified Loans during any
period or over the lives of the Certificates. The rate of default on the
Qualified Loans will also affect the rate of payment of principal on the
Qualified Loans. Prepayments, liquidations and repurchases of the Qualified
Loans will result in distributions to Holders of the related class of
Certificates of amounts that would otherwise be distributed over the remaining
terms of the Qualified Loans.
Some of the Qualified Loans may 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 the
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 those 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 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. 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
the 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 those 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.
<PAGE>
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
those clauses unless the transferee of the related Mortgaged Property does not
meet the Underwriting Standards of Farmer Mac and the Servicing Contracts do not
require any 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. A 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 the Qualified Loan to the maturity date (or the
original amortization date if the Qualified Loan provides for a balloon payment)
for the 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 the 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 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
those periods, the effective interest rates on securities in which an investor
may choose to reinvest amounts received as principal payments on the 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 those periods, the amount of principal
payments available to an investor for reinvestment at 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 the 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 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
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 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 the delay).
<PAGE>
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 some 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 limited
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 U.S. Bank Trust National Association, a national banking
association organized and existing under the federal laws of the United States
with an office at 180 East Fifth Street, St. Paul, Minnesota 55101.
Servicing and Other Compensation And Payment of Expenses
Each central servicer will be paid a servicing fee calculated on a
loan-by-loan basis. Additional servicing compensation in the form of assumption
fees or similar fees (other than late payment charges in some 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
<PAGE>
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 the
Distribution Date whether or not that Distribution Date is a Distribution Date
for all 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 the 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 and the telephone number there is
202/872-7700.
FEDERAL INCOME TAX CONSEQUENCES
The following general discussion of 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 that 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 that Code section. If the value of the real property securing a
Qualified Loan is lower than the amount of the Qualified Loan, that 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."
Potential investors should consult their tax advisors before acquiring
Certificates.
<PAGE>
ERISA CONSIDERATIONS
The acquisition of Certificates by a plan subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or any individual
retirement account ("IRA") or any other plan subject to Code Section 4975 could,
in some instances, result in a prohibited transaction or other violations of the
fiduciary responsibility provisions of ERISA and Code Section 4975. 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 the
certificate under applicable law, but do not, solely by reason of the Plan's
holding of the certificate, include any of the mortgages underlying the
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 some 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.
<PAGE>
S-21
METHOD OF DISTRIBUTION
The Certificates are being offered and sold directly by Farmer Mac.
There is currently no secondary market for the Certificates of any class.
LEGAL MATTERS
Andrews & Kurth L.L.P. has acted as special tax counsel to the Trust Fund.
FORWARD-LOOKING STATEMENTS
Some 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.
<PAGE>
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following terms shall have the
meanings set forth on the pages indicated below.
Accrued Certificate Interest................................................S-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
Code........................................................................S-18
Cut-off Date.................................................................S-9
Depositor....................................................................S-3
Distribution Date...........................................................S-11
Due Period.............................................................S-4, 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
<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 that 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 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 those Qualified Loans would materially alter the
characteristics of the 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 other
characteristics of the Qualified Loans in the pool may vary.
The composition of each pool is subject to adjustment, with the amount of
the variance restricted to no more than 5% of the aggregate principal balance of
the Qualified Loans in the pool, as stated herein. The information set forth as
to the Qualified Loans will be revised to reflect any adjustments and included
on a Form 8-K to be filed with the Securities and Exchange Commission by April
13, 2000. The 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 the column.
<PAGE>
DESCRIPTION OF POOL QM1010
The Qualified Loans in Pool QM1010 will have had individual principal
balances as of the Cut-off Date of not less than $155,077 and not more than
$2,165,137. None of the Qualified Loans in Pool QM1010 will have been originated
prior to July 15, 1999. None of the Qualified Loans in Pool QM1010 will have a
scheduled maturity prior to August 1, 2024 nor later than November 1, 2024. The
Qualified Loans in Pool QM1010 will have a weighted average Administrative Fee
Rate as of the Cut-off Date of approximately 1.358%.
None of the Qualified Loans in Pool QM1010 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part.
Each Qualified Loan included in Pool QM1010 is an adjustable rate mortgage
loan that has an initial interest rate that will remain fixed for ten years from
the date of origination and then will adjust annually to an interest rate
determined by adding the margin indicated in the following schedule to the then
current average yield on U.S. Treasury securities, adjusted to a constant
maturity of one year, or one-year CMT.
All of the Qualified Loans in Pool QM1010 provide for the monthly payment
of principal and interest on a level basis to amortize fully each such Qualified
Loan over its stated term.
Zions First National Bank will be the central servicer with respect to all
of the Qualified Loans in Pool QM1010.
The following schedule provides specific information with respect to each
Qualified Loan in, and certain summary data with respect to, Pool QM1010.
<PAGE>
<TABLE>
<CAPTION>
Qualified Loan Schedule
Pool: QM1010
Cut-off Date: 03/01/2000
Loan Information:
- ----------------------------------------------------------------------------------------------------------------------
Next Next Balloon- Total
Next Pmt Cut-off Date Net Amort Interest Loan-to- to- Value Debt
Pmt Type Principal Mortgage Mortgage Maturity Type Reset Gross Value Ratio Coverage
Date (1) Balance Rate Rate Date (2) Date Margin Ratio (3) Ratio (4)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ID 4/1/00 PI $2,165,137 8.990% 7.550% 10/1/24 F 10/1/09 3.365% 67% N/A 1.56
IL 4/1/00 PI $ 155,077 8.500% 7.250% 9/1/24 F 9/1/09 3.250% 39% N/A 1.76
MI 4/1/00 PI $ 497,661 8.800% 7.250% 10/1/24 F 10/1/09 3.550% 58% N/A 1.26
UT 4/1/00 PI $ 496,422 8.300% 7.125% 8/1/24 F 8/1/09 3.175% 63% N/A 1.28
UT 4/1/00 PI $ 230,649 8.600% 7.250% 9/1/24 F 9/1/09 3.350% 15% N/A 1.38
WI 4/1/00 PI $ 846,692 8.540% 7.375% 11/1/24 F 11/1/09 3.165% 59% N/A 1.47
- ----------------------------------------------------------------------------------------------------------------------
Totals Count:6 $4,391,638
- ----------------------------------------------------------------------------------------------------------------------
Summary Information:
- -----------------------------------------------------------------------------------------------------------------------
Cut-off Date Net Adminis- Next Loan-to Total Debt
Principal Mortgage Mortgage trative Fee Maturity Interest Gross Value Coverage
Balance Rate Rate Rate Date (5) Reset Date Margin Ratio Ratio (4)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average $ 731,940 8.766% 7.407% 1.358% 10/1/24 10/1/09 3.321% 60% 1.47
Minimum $ 155,077 8.300% 7.125% 1.165% 8/1/24 8/1/09 3.165% 15% 1.26
Maximum $2,165,137 8.990% 7.550% 1.550% 11/1/24 11/1/09 3.550% 67% 1.76
- -----------------------------------------------------------------------------------------------------------------------
(1) PI= Principal and Interest for a full period. IO = The next payment will be interest only.
(2) Amortization Type - B = Balloon Loan, F = Fully Amortizing.
(3) The Balloon-to-Value Ratio is the percentage of the Balloon Payment of each Qualified Balloon Loan in the
Pool to the appraised value of the related Mortgaged Property.
(4) Total Debt Coverage Ratio is the ratio determined by dividing the borrower's total annual net income (net of living
expenses and taxes) from all sources by the borrower's total annual debt service obligations (including capital lease
payments).
(5) The Weighted Average Maturity Date is rounded to the closest payment date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table provides information with respect to the commodities
produced on Mortgaged Properties securing Qualified Loans in Pool QM1010.
Pool - QM1010
Distribution by Commodity Group (1)
- ---------------------------------------------------------------------------------
Percentage of
Aggregate
Aggregate Principal
Number of Principal Balance Balance As of
Commodity Group Loans As of Cut-off Date Cut-off Date
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Dairy 5 $ 1,264,888 28.8%
Feed Grains 6 $ 1,793,739 40.8%
Food Grains 1 $ 1,082,569 24.7%
Oilseeds 1 $ 38,769 0.9%
Sugarbeets, Cane and Other Crops 1 $ 211,673 4.8%
- ---------------------------------------------------------------------------------
Grand Total $ 4,391,638 100.0%
- ---------------------------------------------------------------------------------
(1) The number of loans in each commodity group will not equal the total number
of loans because a Mortgaged Property may be used to produce multiple
commodities and thus the related Qualified Loan may be allocated to more than
one commodity group. As to any Qualified Loan allocated to more than one
commodity group, the principal balance thereof is allocated among commodity
groups based on the proportion of the Mortgaged Property used for the production
of each commodity.
</TABLE>
<PAGE>
DESCRIPTION OF POOL QS1010
The Qualified Loans in Pool QS1010 will have had individual principal
balances as of the Cut-off Date of not less than $95,000 and not more than
$2,400,000. None of the Qualified Loans in Pool QS1010 will have been originated
prior to July 12, 1999. None of the Qualified Loans in Pool QS1010 will have a
scheduled maturity prior to July 1, 2024 nor later than July 1, 2025. The
Qualified Loans in Pool QS1010 will have a weighted average Administrative Fee
Rate as of the Cut-off Date of approximately 1.350%.
None of the Qualified Loans in Pool QS1010 require the payment of a Yield
Maintenance Charge in connection with any principal prepayment, in whole or in
part.
Each Qualified Loan included in Pool QS1010 is an adjustable rate mortgage
loan that has an initial interest rate that will remain fixed for ten years from
the date of origination and then will adjust annually to an interest rate
determined by adding the margin indicated in the following schedule to the then
current average yield on U.S. Treasury securities, adjusted to a constant
maturity of one year, or one-year CMT.
All of the Qualified Loans in Pool QS1010 provide for the semi-annual
payment of principal and interest on a level basis to amortize fully each such
Qualified Loan over its stated term.
Zions First National Bank will be the central servicer with respect to all
of the Qualified Loans in Pool QS1010.
The following schedule provides specific information with respect to each
Qualified Loan in, and certain summary data with respect to, Pool QS1010.
<PAGE>
<TABLE>
<CAPTION>
Qualified Loan Schedule
Pool: QS1010
Cut-off Date: 03/01/2000
Loan Information:
- -------------------------------------------------------------------------------------------------------------------------
Next Cut-off Next Loan-
Next Pmt Date Net Interest to- Balloon- Total Debt
Pmt Type Principal Mortgage Mortgage Maturity Amort Reset Gross Value to-Value Coverage
Date (1) Balance Rate Rate Date Type (2) Date Margin Ratio Ratio (3) Ratio (4)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CA 7/1/00 IO $1,540,000 9.000% 7.610% 7/1/25 F 7/1/10 4.015% 70% N/A 1.49
CA 7/1/00 PI $ 721,000 8.690% 7.485% 1/1/25 F 7/1/10 4.115% 69% N/A 1.81
CA 7/1/00 PI $ 685,000 8.760% 7.360% 1/1/25 F 1/1/10 3.600% 46% N/A 1.73
CA 7/1/00 PI $ 650,000 8.910% 7.485% 1/1/25 F 1/1/10 3.510% 65% N/A 1.72
CA 7/1/00 PI $ 445,000 8.790% 7.485% 1/1/25 F 1/1/10 4.115% 56% N/A 1.51
CA 7/1/00 PI $ 355,000 8.790% 7.485% 1/1/25 F 7/1/10 3.665% 48% N/A 1.71
CA 7/1/00 IO $ 195,000 9.250% 7.860% 7/1/25 F 7/1/10 3.500% 55% N/A 1.75
CA 7/1/00 PI $ 193,000 8.750% 7.235% 1/1/25 F 7/1/10 3.250% 57% N/A 3.48
CO 7/1/00 PI $2,400,000 8.700% 7.485% 1/1/25 F 7/1/10 3.060% 56% N/A 1.38
CO 7/1/00 IO $ 500,000 9.100% 7.735% 7/1/25 F 1/1/10 3.250% 37% N/A 1.45
CO 7/1/00 PI $ 350,000 9.000% 7.360% 1/1/25 F 1/1/10 3.535% 39% N/A 1.37
FL 7/1/00 IO $ 700,000 8.500% 7.610% 7/1/25 F 1/1/10 3.165% 49% N/A 2.27
IA 7/1/00 PI $ 260,000 8.650% 7.235% 1/1/25 F 1/1/10 3.415% 62% N/A 1.85
IA 7/1/00 PI $ 258,400 8.400% 7.360% 7/1/24 F 1/1/10 3.415% 57% N/A 1.34
IA 7/1/00 IO $ 205,000 9.010% 7.735% 7/1/25 F 7/1/10 3.850% 70% N/A 2.09
ID 7/1/00 IO $ 290,000 8.900% 7.735% 7/1/25 F 1/1/10 3.750% 56% N/A 1.94
ID 7/1/00 IO $ 290,000 8.790% 7.735% 7/1/25 F 7/1/10 3.450% 60% N/A 1.28
ID 7/1/00 PI $ 225,000 8.700% 7.360% 1/1/25 F 7/1/10 3.265% 62% N/A 1.42
ID 7/1/00 PI $ 95,000 9.100% 7.485% 1/1/25 F 7/1/10 3.500% 32% N/A 2.42
IN 7/1/00 IO $ 374,000 8.890% 7.735% 7/1/25 F 1/1/10 3.370% 51% N/A 1.29
IN 7/1/00 IO $ 230,000 8.900% 7.735% 7/1/25 F 1/1/10 3.625% 66% N/A 1.38
KS 7/1/00 IO $ 718,000 9.290% 7.735% 7/1/25 F 7/1/10 3.475% 70% N/A 1.90
MI 7/1/00 IO $ 450,000 9.250% 7.735% 7/1/25 F 1/1/10 3.150% 65% N/A 1.55
MO 7/1/00 PI $ 422,424 8.500% 7.360% 7/1/24 F 1/1/10 3.325% 53% N/A 1.89
MO 7/1/00 PI $ 150,000 8.620% 7.360% 1/1/25 F 7/1/10 3.625% 53% N/A 1.84
MT 7/1/00 IO $ 322,000 9.640% 7.735% 7/1/25 F 7/1/10 3.275% 67% N/A 1.36
MT 7/1/00 IO $ 213,000 9.740% 7.735% 7/1/25 F 7/1/10 3.000% 55% N/A 1.30
NM 7/1/00 IO $ 257,800 9.410% 7.860% 7/1/25 F 7/1/10 3.660% 70% N/A 1.53
SD 7/1/00 PI $ 425,000 9.240% 7.235% 1/1/25 F 1/1/10 3.525% 40% N/A 2.12
SD 7/1/00 PI $ 318,761 8.850% 7.360% 7/1/24 F 1/1/10 3.315% 55% N/A 1.42
UT 7/1/00 PI $ 725,000 8.290% 7.235% 1/1/25 F 7/1/10 3.385% 41% N/A 1.37
WA 7/1/00 IO $ 906,475 9.350% 7.610% 7/1/25 F 7/1/10 3.165% 43% N/A 1.36
WA 7/1/00 IO $ 350,000 8.810% 7.860% 7/1/25 F 1/1/10 3.725% 34% N/A 1.63
- ------------------------------------------------------------------------------------------------------------------------
Totals Count:33 $16,219,860
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summary Information:
- ------------------------------------------------------------------------------------------------------------------
Cut-off Next Loan-
Date Net Adminis- Interest to- Total Debt
Principal Mortgage Mortgage trative Fee Maturity Reset Gross Value Coverage
Balance Rate Rate Rate Date Date Margin Ratio Ratio(4)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Weighted Average $ 491,511 8.890% 7.539% 1.350% 7/01/25 5/01/10 3.468% 56% 1.62
Minimum $ 95,000 8.290% 7.235% 0.890% 7/01/24 1/01/10 3.000% 32% 1.28
Maximum $ 2,400,000 9.740% 7.860% 2.005% 7/01/25 7/01/10 4.115% 70% 3.48
- ------------------------------------------------------------------------------------------------------------------
(1) PI= Principal and Interest for a full period. IO = The next payment will be interest only.
(2) Amortization Type - B = Balloon Loan, F = Fully Amortizing.
(3) The Balloon-to-Value Ratio is the percentage of the Balloon Payment of each Qualified Balloon Loan in the Pool
to the appraised value of the related Mortgaged Property.
(4) Total Debt Coverage Ratio is the ratio determined by dividing the borrower's total annual net income (net of living
expenses and taxes) from all sources by the borrower'stotal annual debt service obligations (including capital lease
payments).
(5) The Weighted Average Maturity Date is rounded to the closest payment date.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table provides information with respect to the commodities produced on
Mortgaged Properties securing Qualified Loans in Pool QS1010.
Pool - QS1010
Distribution by Commodity Group (1)
- ---------------------------------------------------------------------------------------------------------
Aggregate Principal Percentage of Aggregate
Number of Balance As of Cut-off Principal Balance As of
Commodity Group Loans Date Cut-off Date
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cotton/Tobacco 3 $ 593,000 3.7%
Dairy 4 $ 752,257 4.6%
Feed Grains 16 $ 2,960,378 18.2%
Food Grains 10 $ 2,512,311 15.5%
Greenhouse/ Nursery 1 $ 450,000 2.8%
Oilseeds 9 $ 2,485,874 15.3%
Permanent Plantings 5 $ 3,646,000 22.5%
Potatoes, Tomatoes, and Other Vegetables 8 $ 845,240 5.2%
Sheep, Lambs and Other Livestock 1 $ 500,000 3.1%
Sugarbeets, Cane and Other Crops 6 $ 1,474,800 9.1%
- ---------------------------------------------------------------------------------------------------------
Grand Total $ 16,219,860 100.0%
- ---------------------------------------------------------------------------------------------------------
(1) The number of loans in each commodity group will not equal the total number of loans
because a Mortgaged Property may be used to produce multiple commodities and thus the
related Qualified Loan may be allocated to more than one commodity group. As to any
Qualified Loan allocated to more than one commodity group, the principal balance thereof is
allocated among commodity groups based on the proportion of the Mortgaged Property used
for the production of each commodity.
</TABLE>
<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:
- hold pools of agricultural real estate mortgage loans and other
assets; and
- 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.
Consider carefully the risk factors beginning on page 11 in this prospectus
before purchasing any certificate.
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.
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.
March 29, 2000
TABLE OF CONTENTS
Page
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 INFORMATIONBY 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
Page
Distributions of Principal of the Certificates...........................37
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....................................................55
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.................................................58
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
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:
-agricultural real estate mortgage loans that meet our
qualifications; or
-portions of agricultural mortgage loans guaranteed by the
United States Secretary of Agriculture; or
-mortgage pass-through certificates or other mortgage-backed
securities representing interests in or secured by these
agricultural mortgage loans; or
-other agricultural mortgage-backed securities guaranteed by
Farmer Mac; or
-any combination of the assets listed above; and
(2) proceeds and collections 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.
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.
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.
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:
-are used for the production of agricultural commodities; and
-include at least five acres or produce annual receipts of
at least $5,000;
(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:
-a citizen or permanent resident of the United States; or
-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:
-are fixed over their terms; or
-adjust from time to time; or
-are partially fixed and partially floating; or
-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:
-scheduled payments to maturity;
-payments that adjust from time to time to accommodate
changes in the mortgage interest rate or for other reasons;
or
-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.
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:
-similar due dates for scheduled payments;
-similar mortgage interest rates or methods of calculating
mortgage interest rates; and
-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.
Tax Status of the Certificates
The certificates of each series will be considered either:
-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
-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.
<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.
<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.
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 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:
- issued and maintained on the book-entry system of the federal
reserve banks; or
- 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
- 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:
- 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
- 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:
- 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;
- the aggregate principal amount and distribution dates relating
to the series and, if applicable, the initial and final
scheduled distribution dates for each class;
- information about the assets comprising the trust fund,
including the general characteristics of the assets;
- the circumstances, if any, under which the trust fund may be
subject to early termination;
- additional information with respect to the method of
distribution of the certificates;
- whether one or more REMIC elections will be made and
designation of the regular interests and residual interests;
- information as to the terms of Farmer Mac's guarantee of the
certificates;
- whether the certificates will be initially issued in
definitive or book-entry form; and
- 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 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
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, 1999, 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 and in the registration
statement in reliance 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.
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:
-specified assets that we call Qualified Assets,
-proceeds and collections on the Qualified Assets, deposited
in, or held as investments in, one or more accounts, and
-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. section 921 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
(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 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:
- are used for the production of one or more agricultural
commodities; and
- 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:
- a citizen or national of the United States or an alien
lawfully admitted for permanent residence in the United
States; or
- 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 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:
-is fixed over its term; or
-adjusts from time to time; or
-is partially fixed and partially floating; or
-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.
<PAGE>
Each Qualified Loan may provide for:
-scheduled payments to maturity;
-payments that adjust from time to time to accommodate
changes in the mortgage interest rate or to reflect the
occurrence of specified events; or
-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:
-a pro forma debt-to-asset ratio, on a market value basis,
of 50% or less, after closing the new loan;
-a pro forma cash flow to debt service coverage ratio of not
less than 1:1 on the property;
-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
-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:
-it is at least three years old,
-has a loan-to-value ratio based on an updated appraisal of
60% or less if the loan is at least five years old or 70%
or less if the loan is less than five years old,
-there have been no payments more than 30 days past due
during the three years prior to pooling, and
-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;
(2) the borrower generates sufficient income from all sources to
repay all creditors, as determined by two tests:
- the borrower's monthly house payment-to-income ratio is
28% or less, and
- 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
appraisals meet expectations communicated in the engagement
process and identify apparent departures from Farmer Mac's
Appraisal Standards.
Farmer Mac will review selected appraisals to ensure compliance with the
Appraisal Standards and of the administration of the appraisal function
conducted by Sellers.
<PAGE>
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:
-similar due dates for scheduled payments;
-similar mortgage interest rates or methods of calculating
mortgage interest rates; and
-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:
- food grains,
- feed crops,
- cotton/tobacco,
- oilseeds,
- potatoes, tomatoes and other vegetables,
- permanent plantings,
- sugarbeets, cane and other crops,
- timber,
- dairy,
- cattle and calves, and
- 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 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;
(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. 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:
-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
-the lender has failed to remit to the Owner the payment
made by the borrower on the Guaranteed Portion or any
related loan subsidy within thirty (30) days of the
lender's receipt thereof.
If the lender does not repurchase the Guaranteed Portion as provided
above, the Secretary 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.
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, legal and other factors may influence the rate at
which principal prepayments and defaults occur on the Qualified Loans
including, without limitation:
-the age of the Qualified Loans,
-the payment terms of the Qualified Loans,
-the availability of agricultural mortgage credit,
-enforceability of due-on-sale clauses,
-servicing decisions,
-the extent of the borrower's net equity in the related
mortgaged property,
-the characteristics of the borrowers,
-agricultural mortgage market interest rates in relation to
the effective interest rates on the Qualified Loans, and
-other unforeseeable variables, both domestic and
international, affecting particular commodity groups and
the farming industry in general.
Generally, however, if prevailing interest rates fall significantly below the
mortgage interest rates on the Qualified Loans comprising or underlying the
Qualified Assets in a particular trust fund, such Qualified Loans are likely
to be the subject of higher principal prepayments than if prevailing rates
remain at or above the rates borne by such Qualified Loans. In this regard,
it should be noted that certain Qualified Assets may consist of Qualified
Loans with different mortgage interest rates and the stated pass-through or
pay-through interest rate of certain QMBS may be a number of percentage
points higher or lower than certain of the underlying Qualified Loans. The
rate of principal payments on some or all of the classes of certificates of a
series will correspond to the rate of principal payments on the Qualified
Assets in the related trust fund and is likely to be affected by the
existence of lock-out periods and prepayment premium or yield maintenance
provisions of the Qualified Loans underlying or comprising such Qualified
Assets, and by the extent to which the servicer of any such Qualified Loan is
able to enforce such provisions. Qualified Loans with a lock-out period or a
prepayment premium or yield maintenance provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal
prepayments than otherwise identical Qualified Loans without such provisions,
with shorter lock-out periods or with lower prepayment premiums or yield
maintenance.
If the purchaser of a certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the certificate,
the actual yield to maturity will be lower than that so calculated.
Conversely, if the purchaser of a certificate offered at a premium calculates
its anticipated yield to maturity based on an assumed rate of distributions
of principal that is slower than that actually experienced on the
certificate, the actual yield to maturity will be lower than that so
calculated. In either case, if so provided in the prospectus supplement for
a series of certificates, the effect on yield on one or more classes of the
certificates of such series of prepayments of the Qualified Assets in the
related trust fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
A prepayment of principal, whether full or partial, is applied so as to
reduce the outstanding principal balance of the related Qualified Loan as of
the due date following the date on which such prepayment is received. As a
result, a prepayment on a Qualified Loan will not reduce the amount of
interest passed through to holders for each related interest accrual period.
The timing of changes in the rate of principal payments on the
Qualified Assets may significantly affect an investor's actual yield to
maturity, even if the average rate of distributions of principal is
consistent with an investor's expectation. In general, the earlier a
principal payment is received on the Qualified Assets and distributed on a
certificate, the greater the effect on such investor's yield to maturity.
The effect on an investor's yield of principal payments occurring at a rate
higher, or lower, than the rate anticipated by the investor during a given
period may not be offset by a subsequent like decrease, or increase, in the
rate of principal payments.
Prepayments, Maturity and Weighted Average Lives
The rates at which principal payments are received on the Qualified
Assets included in or comprising a trust fund for the related series of
certificates may affect the ultimate maturity and the weighted average life
of each class of such series. Prepayments on the Qualified Loans comprising
or underlying the Qualified Assets in a particular trust fund will generally
accelerate the rate at which principal is paid on some or all of the classes
of the certificates of the related series.
As described in the related prospectus supplement for a series of
certificates, each class of certificates will have a final scheduled
distribution date, which is the date on or prior to which the certificate
balance thereof is required to be reduced to zero, calculated on the basis of
the assumptions applicable to such series set forth 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 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 of the Farm Credit Act of 1971, as
amended (12 U.S.C. section 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, 1999, Farmer Mac's regulatory capital as
reported on its Annual Report on Form 10-K for the year ended December 31,
1999 was $88.8 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 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");
(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 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 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 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 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,
(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
-be issued and maintained only on the book-entry system of
the Federal Reserve Banks (the "Fed System"), or
-be represented by one or more single certificates
registered in the name of a nominee for the depository
identified in the prospectus supplement (the "Depository").
The Fed System
Book-Entry Certificates issued and maintained under the Fed System may
be held of record only by entities eligible to maintain book-entry accounts
with the Federal Reserve Banks. Such entities whose names appear on the
book-entry records of the Federal Reserve Banks as the entities for whose
accounts the certificates have been deposited are herein referred to as
"Holders of Book-Entry Certificates." A Holder of Book-Entry Certificates is
not necessarily the Beneficial Owner of a Book-Entry Certificate. Beneficial
Owners 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:
-regulations governing Farmer Mac's use of the book-entry
system, and
-such procedures, insofar as applicable, as may from time to
time be established by regulations of the United States
Department of the Treasury governing United States
securities, as now set forth in Treasury Department
Circular Number 300, 31 C.F.R. Part 306 (other than Subpart
O).
The Book-Entry Certificates are also governed by applicable operating
circulars and letters of the Federal Reserve Banks.
A Depository System
Any Depository will be a limited-purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform Commercial
Code ("UCC") and a "clearing agency" registered pursuant to the provisions of
section 17A of the Exchange Act. The Depository will have been created to
hold securities for its participating organizations ("Participants") and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants,
which maintain accounts with the Depository, will include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to a Depository system will
also be available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("Indirect Participants").
Generally, investors that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. In addition, such investors ("Beneficial Owners")
will receive all distributions on the Book-Entry Certificates through the
Depository and its Participants. Under a book-entry format, Beneficial
Owners will receive payments after the related distribution date because,
while payments are required to be forwarded to the nominee, as nominee for
the Depository, on each such date, the Depository will forward such payments
to its Participants which thereafter will be required to forward them to
Indirect Participants or Beneficial Owners. So long as a certificate is in
book-entry form, the only Holder of Book-Entry Certificates will be the
nominee for the Depository. 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
(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 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:
- the address of the related mortgaged property and type of
such property;
- the mortgage interest rate and, if applicable, the
applicable index, margin, adjustment date and any rate
cap information;
- the original and remaining term to maturity; and
- the original and outstanding principal balance; and
(2) in respect of each QMBS included in the trust fund,
including:
- the QMBS Issuer, QMBS Servicer and QMBS Trustee;
- the pass-through or bond rate or formula for determining
the pass-through or bond rate;
- the issue date and original and remaining term to
maturity, if applicable;
- the original and outstanding principal amount; and
- payment provisions, if applicable.
With respect to each Qualified Loan, 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:
-the original mortgage note endorsed, without recourse, in
blank or to the order of the trustee,
-the original mortgage (or a certified copy thereof) with
evidence of recording indicated thereon, and
-an assignment of the mortgage to the trustee in recordable
form.
The related Agreements will require that 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:
-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;
-the existence of title insurance insuring, or a title
opinion assuring, the lien priority of the Qualified Loan;
-the authority of the Seller to sell the Qualified Loan;
-the payment status of the Qualified Loan and the status of
payments of taxes, assessments and other charges affecting
the related mortgaged property;
-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
-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 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
-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
-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:
-all payments on account of principal, including principal
prepayments, on the Qualified Assets;
-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;
-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");
-any Advances made by the central servicer or other entity
as described under "Description of the Certificates -
Advances in Respect of Delinquencies";
-to the extent required to be distributed to holders of
certificates any amounts representing prepayment premiums
and yield maintenance charges paid by borrowers; and
-proceeds from the operation of foreclosed mortgaged
properties held in the trust fund ("REO Proceeds").
Withdrawals
Generally, all such deposits in a Collection Account with respect to a
trust fund will, to the exent specified in the prospectus supplement, be net
of the following amounts to be retained by the central servicer:
-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 on interest on, and principal of, the
particular Qualified Loans with respect to which the
Advances were made;
-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;
-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 reimbursement
to be made from amounts collected on other assets in the
trust fund; and
-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
-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
-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
-the amount of such insufficiency,
-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
-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.
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:
-towards the distribution to holders of certificates in
federal funds of the amount to be distributed on such
distribution date;
-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;
-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
-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
-the new borrower qualifies under Farmer Mac's credit
underwriting standards,
-the Qualified Loan will continue to be secured by a first
mortgage lien pursuant to the terms of the mortgage,
-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
-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 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:
-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,
-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
-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
-terminate all obligations and duties imposed upon Farmer
Mac (other than its obligations under Farmer Mac's
guarantee) under the trust agreement, and
-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:
-add to the covenants of Farmer Mac;
-evidence the succession of another person or persons to
Farmer Mac pursuant to the trust agreement;
-eliminate any right reserved to or conferred upon Farmer
Mac;
-take such action to cure any ambiguity or correct or
supplement any provision of the trust agreement; or
-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
-compliance by Farmer Mac with any of the terms of the
related trust agreement may be waived, or
-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:
-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
-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 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 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 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. section 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:
-restructuring of loans,
-mediation prior to foreclosure,
-moratoria on foreclosures or payments,
-access by a dispossessed borrower to previously planted
crops,
-redemption provisions that are more favorable to farm
borrowers than to other commercial borrowers, and
-restrictions on disposition of agricultural property
acquired through foreclosure.
Section 8.6(b)(5) of 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:
(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.
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
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.
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
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 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
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 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 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 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 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 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.
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 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.
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 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 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.
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 less than its then remaining
stated redemption price at maturity, the holder will be entitled to offset a
portion of the OID that accrues in each subsequent accrual period by a
portion of that excess.
In the event a holder acquires a REMIC Regular Certificate at a premium
(i.e., for an amount greater than its then remaining stated redemption price
at maturity), the holder may elect to amortize such premium under a constant
yield method. Amortized premium under these rules will be treated as an
offset to interest income on such certificate, and the tax basis of the
certificate will be reduced to the extent that amortizable premium is applied
to offset interest payments. A holder that elects to amortize premium under
these rules will be deemed to have made an election to amortize premium with
respect to all debt instruments (i.e., not only with respect to REMIC
interests) having amortizable bond premium that such holder holds during the
year of the election or acquires thereafter.
Because of the absence of applicable regulations, it is not clear
whether, and if so, how, the Prepayment Assumption should be taken into
account in computing the amortization of premium under these rules. However,
the applicable legislative history generally states that the same rules that
apply to the accrual of market discount (which rules require use of a
prepayment assumption in accruing market discount with respect to REMIC
Regular Certificates, without regard to whether such certificates have OID)
will also apply in amortizing bond premium under these rules.
Election to Treat All Interest as OID. The OID Regulations permit a
holder of a REMIC Regular Certificate to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method. If such an election
were to be made with respect to a REMIC Regular Certificate with market
discount, the holder would be deemed to have made an election to include
market discount in income currently with respect to all other debt
instruments having market discount that such holder acquires during the year
of the election or thereafter. Similarly, a holder that makes this election
for a certificate that is acquired at a premium will be deemed to have made
an election to amortize bond premium on a constant yield method with respect
to all debt instruments having amortizable bond premium that such holder owns
in the year of the election or thereafter acquires. The election to accrue
interest, discount and premium on a constant yield method with respect to a
certificate is irrevocable.
Sale or Other Disposition of a REMIC Regular Certificate. If a REMIC
Regular Certificate is sold, exchanged, redeemed or otherwise disposed of,
the seller will recognize gain or loss equal to the difference between the
amount received on the sale or other disposition and the seller's adjusted
tax basis in the certificate. Such adjusted basis generally will equal the
initial cost of the certificate to the seller, increased by any OID and
market discount previously included in the seller's gross income with respect
to the certificate, and reduced (but not below zero) by payments previously
received by the seller of amounts included in the certificate's stated
redemption price at maturity and by any amortized premium previously
recognized by the seller. A holder who receives a final payment on a REMIC
Regular Certificate that is less than the holder's adjusted tax basis in the
certificate will generally be entitled to recognize a loss. Except as
provided in the following paragraphs and as provided under " Market
Discount" above, any such gain or loss will be capital gain or loss, provided
that the REMIC Regular Certificate is held as a capital asset.
Gain from the sale or other disposition of a REMIC Regular Certificate
that would otherwise be treated as capital gain will instead be treated as
ordinary income to the extent that such gain does not exceed the excess, if
any, of (i) the amount that would have been includible in such holder's
income with respect to the REMIC Regular Certificate had income accrued
thereon at a rate equal to 110% of the "applicable federal rate" as defined
in 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.
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 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.
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 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 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 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 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.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may
be purchased, transferred or sold, directly or indirectly, without the
express written consent of the trustee and/or the master servicer. The
trustee and/or master servicer will grant such consent to a proposed transfer
only if it receives the following: (i) an affidavit from the proposed
transferee to the effect that it is not a disqualified organization and is
not acquiring the REMIC Residual Certificate as a nominee or agent for a
disqualified organization and (ii) a covenant by the proposed transferee to
the effect that the proposed transferee agrees to be bound by and to abide by
the transfer restrictions applicable to the REMIC Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC rules disregard,
for federal income tax purposes, any transfer of a "noneconomic REMIC
Residual Certificate" to a U.S. Person (or generally to a non-U.S. Person
that holds the REMIC Residual Certificate in connection with a U.S. trade or
business) unless no significant purpose of the transfer is to enable the
transferor to impede the assessment or collection of tax. A "noneconomic
REMIC Residual Certificate" is any REMIC Residual Certificate (including a
REMIC Residual Certificate with a positive value at issuance), unless, at the
time of transfer, taking into account the Prepayment Assumption and any
required or permitted clean up calls or required liquidation provided for in
the REMIC's organizational documents, (i) the present value of the expected
future distributions on the REMIC Residual Certificate at least equals the
product of the present value of the anticipated excess inclusions and the
highest corporate income tax rate in effect for the year in which the
transfer occurs and (ii) the transferor reasonably expects that the
transferee will receive distributions from the REMIC at or after the time at
which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax is treated as existing if the transferor, at
the time of the transfer, either knew or should have known that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. A transferor is presumed not to have such
knowledge if (A) the transferor conducted a reasonable investigation of the
transferee and (B) the transferee acknowledges to the transferor that the
REMIC Residual Certificate may generate tax liabilities in excess of the cash
flow and the transferee represents that it intends to pay such taxes as they
become due. If a transfer of a noneconomic REMIC Residual Certificate is
disregarded, the transferor would continue to be treated as the owner of the
certificate and would continue to be subject to tax on its allocable portion
of the net income of the REMIC.
Non-U.S. Persons. The REMIC rules provide that the transfer of a REMIC
Residual Certificate that has a "tax avoidance potential" to a non-U.S.
Person will be disregarded for federal income tax purposes. This rule
appears to apply to a transferee who is not a U.S. Person, unless such
transferee's income in respect of the REMIC Residual Certificate is
effectively connected with the conduct of a United States trade or business.
A REMIC Residual Certificate is deemed to have a tax avoidance potential
unless, at the time of transfer, the transferor reasonably expect that the
REMIC will distribute to the transferee amounts that will equal at least 30
percent of each excess inclusion, and that such amounts will be distributed
at or after the time the excess inclusion accrues and not later than the end
of the calendar year following the year of accrual. If the non-U.S. Person
transfers the REMIC Residual Certificate to a U.S. Person, the transfer will
be disregarded, and the foreign transferor will continue to be treated as the
owner, if the transfer has the effect of allowing the transferor to avoid tax
on accrued excess inclusions. The Agreement will provide that no record or
beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the trustee and/or the master servicer with a duly completed IRS
Form 4224 and the trustee and/or master servicer consents to such transfer in
writing.
Any attempted transfer or pledge in violation of the transfer
restrictions will be absolutely null and void and shall vest no rights in any
purported transferee. Investors in REMIC Residual Certificates are advised
to consult their own tax advisors with respect to transfers of the REMIC
Residual Certificates and, in addition, pass-through entities are advised to
consult their own tax advisors with respect to any taxes which may be imposed
on a pass-through entity.
d. Tax-Exempt Holders of REMIC Residual Certificates
As noted above under " b. Taxation of Holders of REMIC Residual
Certificates - Excess Inclusions," any holder of a REMIC Residual Certificate
that is a pension fund or other entity that is subject to federal income
taxation only on its "unrelated business taxable income" within the meaning
of 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 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.
ERISA imposes restrictions on:
-employee benefit plans and other retirement arrangements
subject to ERISA ("Plans"), and
-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,
-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
-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,
(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:
-PTCE 84-14 - Class Exemption for Plan Asset Transactions
Determined by Independent Qualified Professional Asset
Managers;
-PTCE 96-23 - Class Exemption for Plan Asset Transactions
Determined by In-House Asset Managers;
-PTCE 91-38 - Class Exemption for Certain Transactions
Involving Bank Collective Investment Funds;
-PTCE 90-1 - Class Exemption for Certain Transactions
Involving Insurance Company Pooled Separate Accounts; or
-PTCE 95-60 - Class Exemption for Certain Transactions
Involving Insurance Company General Accounts.
There can be no assurance that any of these class exemptions will apply with
respect to any particular Plan desiring to invest in the certificates or,
even if it were to apply, that the exemption would apply to all transactions
involving the trust fund.
Before purchasing any certificates in reliance on 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.
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
-persons,
-trusts,
-corporations,
-partnerships,
-associations,
-business trusts, and
-business entities, including depository institutions, life
insurance companies and pension funds
created pursuant to or existing under the laws of the United States or,
except as indicated below, of any state, 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
(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:
-the name or names of the underwriters,
-the purchase price of the certificates,
-the proceeds from the sale, and
-in the case of an underwritten fixed price offering, the
initial public offering price, the discounts and
commissions to the underwriters and any discounts or
concessions allowed or reallowed to certain dealers.
The certificates of a series may be acquired by underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The obligations of any
underwriters will be subject to certain conditions precedent and such
underwriters will be severally obligated to purchase all of the certificates
of a series offered by the prospectus supplement for such series if any are
purchased. If the certificates of a series are offered other than through
underwriters, the prospectus supplement for such series will contain
information regarding the nature of such offering and any agreements to be
entered into with respect to the purchase of such certificates.
The place and time of delivery for the certificates of a series in
respect of which this prospectus is delivered will be set forth in the
prospectus supplement for such series.
In addition to purchasing the certificates pursuant to the underwriting
agreements among Farmer Mac, 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.
INDEX OF PRINCIPAL TERMS
Unless the context indicates otherwise, the following capitalized terms
shall have the meanings set forth on the pages indicated below:
Accrual Certificates........................................................35
accrual period..........................................................63, 73
Accrued Certificate Interest................................................36
acquisition premium.........................................................65
adjusted issue price................................................63, 73, 81
Advance(s) 37
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..........................................................35
disqualified organization...................................................84
Eligible Depository.........................................................47
Eligible Investments........................................................47
excess servicing fee........................................................67
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..........................................40
Indirect Participants.......................................................41
Insurance Proceeds..........................................................48
issue price 63
Liquidation Proceeds........................................................48
Mortgage Notes..............................................................56
Net income from foreclosure property........................................86
New Withholding Regulations.................................................70
noneconomic REMIC Residual Certificate......................................85
<PAGE>
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...................................................68, 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...................................................73
Record Date 35
Related Proceeds............................................................37
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..............................................34
Stripped Principal Certificates.............................................34
System Institution..........................................................34
U.S. Person 70
Underlying QMBS.............................................................25
Unguaranteed Portion........................................................28
yield to maturity.......................................................63, 73
<PAGE>
$20,611,498
Guaranteed Agricultural
Mortgage-Backed
Securities
Federal Agricultural
Mortgage Corporation
PROSPECTUS SUPPLEMENT
March 29, 2000
