<PAGE>
FILED PURSUANT TO RULE 424(b)(2)
REGISTRATION NUMBER 333-8439
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 10, 1996)
$285,005,924
[LOGO OF ICI FUNDING CORPORATION]
MASTER SERVICER AND SELLER
ICIFC SECURED ASSETS CORP.
COMPANY
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-2
The Mortgage Pass-Through Certificates, Series 1997-2 (collectively, the
"Certificates"), consist of all Classes identified in the chart below (the
"Offered Certificates") as well as certain additional Classes of Other
Certificates (as hereinafter defined) which are not being offered for sale
hereunder. It is a condition to their issuance that each Class of Certificates
receive the respective ratings (set forth under "Summary--Ratings") of Duff &
Phelps Credit Rating Co. and Standard & Poor's Ratings Services, a division of
The McGraw-Hill Companies, Inc.
(cover continued on next page)
THE CERTIFICATES DO NOT REPRESENT OBLIGATIONS OF OR INTERESTS IN THE COMPANY,
THE SELLER, THE TRUSTEE, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE COMPANY, THE SELLER, THE
MASTER SERVICER OR ANY OF THEIR AFFILIATES, OR ANY OTHER PERSON. DISTRIBUTIONS
ON THE CERTIFICATES WILL BE PAYABLE SOLELY FROM THE ASSETS TRANSFERRED OR
PLEDGED TO THE TRUST FOR THE BENEFIT OF CERTIFICATEHOLDERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$37,369,000 7.25% Class A-I-1 Certificates $54,827,000 8.00% Class A-I-8 Certificates
$18,298,000 7.05% Class A-I-2 Certificates $51,505,486 9.50% Class A-I-9 Certificates
$21,673,000 7.20% Class A-I-3 Certificates $22,154,296 8.00% Class A-II Certificates
$16,599,000 7.60% Class A-I-4 Certificates $ (1) (1) % Class X Certificates
$26,463,000 7.85% Class A-I-5 Certificates $ 6,556,000 8.00% Class B-1 Certificates
$11,145,514 7.65% Class A-I-6 Certificates $ 3,642,000 8.00% Class B-2 Certificates
$12,588,628 8.00% Class A-I-7 Certificates $ 2,185,000 8.00% Class B-3 Certificates
</TABLE>
- -------------------------------------------------------------------------------
(1) The Class X Certificates will have a notional principal amount ("Notional
Amount") equal to the aggregate Scheduled Principal Balances (as defined
herein) of the Mortgage Loans with Net Rates greater than 8.00% per annum
(the "Premium Mortgage Loans") and will bear interest on their Notional
Amount (initially approximately $275,312,264) at a variable Pass-Through
Rate equal to the excess of (a) the weighted average of the Net Rates of
the Premium Mortgage Loans over (b) 8.00% per annum. The Pass-Through Rate
for the Class X Certificates for the first Interest Accrual Period is
expected to be approximately 0.83664% per annum.
SEE "RISK FACTORS" BEGINNING ON PAGE S-26 HEREIN AND ON PAGE 11 OF THE
PROSPECTUS FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING AN INVESTMENT IN
THE OFFERED CERTIFICATES.
Each Class of Offered Certificates will be purchased by Salomon Brothers Inc
("Salomon Brothers" or the "Underwriter") from the Company and will be offered
by the Underwriter from time to time in negotiated transactions at varying
prices to be determined at the time of sale. Proceeds to the Company are
expected to be approximately 102.60% of the aggregate principal balance of
such Offered Certificates plus accrued interest thereon, but before deducting
expenses payable by the Company in connection with the Offered Certificates,
estimated to be $350,000.
The Offered Certificates are offered by the Underwriter when, as and if
issued, delivered to and accepted by the Salomon Brothers and subject to
certain other conditions. It is expected that delivery of the Offered
Certificates will be made in book entry form only, through the Same Day Funds
Settlement System of The Depository Trust Company, on or about June 30, 1997.
- ------------------------------------------
SALOMON BROTHERS INC
-----------------------------------------------------------------------
The date of this Prospectus Supplement is June 24, 1997.
<PAGE>
(cover continued from previous page)
The Offered Certificates and the Other Certificates will represent, in the
aggregate, the entire beneficial ownership interest in a trust (the "Trust")
consisting primarily of two groups ("Mortgage Loan Group I" \and "Mortgage
Loan Group II" \and each, a "Mortgage Loan Group") of conventional one- to
four-family, fixed rate, first lien residential mortgage loans ("Group I
Mortgage Loans" and "Group II Mortgage Loans," \respectively, and
collectively, the "Mortgage Loans"). All of the Mortgage Loans in Mortgage
Loan Group I have original terms to stated maturity of greater than 15 but not
more than 30 years, and all of the Mortgage Loans in Mortgage Loan Group II
have original terms to stated maturity of up to 15 years, in each case based
on the date of origination or any later modification. The characteristics of
the Mortgage Loans comprising each Mortgage Loan Group are described herein
under "Description of the Mortgage Loans" and in Annex A hereto. All the
Mortgage Loans will be acquired by ICIFC Secured Assets Corp. (the "Company")
from ICI Funding Corporation on the date of issuance of the Certificates.
Distributions of interest and principal on the Class A-I Certificates and on
the Class A-II Certificates will be equal to an amount based on interest and
principal received or advanced with respect to the Group I Mortgage Loans and
the Group II Mortgage Loans, respectively, except under the limited
circumstances described herein. The right of the holders of the Class X and
Class B Certificates (as defined herein) to receive distributions with respect
to the Mortgage Loans will be based upon interest and principal received or
advanced with respect to both Mortgage Loan Groups. Such right in the case of
the Class B Certificates will be subordinate to the rights of the holders of
the Senior Certificates (as defined herein). The rights of holders of each
Class of Class B Certificates will be subordinate to the rights of any Class
of Class B Certificates with a lower numerical Class designation.
Principal and interest on the Certificates are payable as described herein
on the 25th day of each month or, if such day is not a Business Day, then on
the next succeeding Business Day, beginning in July 1997 (each, a
"Distribution Date"). Interest will accrue on the Offered Certificates at the
applicable Pass-Through Rates described above and will be distributed in the
amounts as described under "Description of the Certificates--Distributions on
the Certificates--Interest" herein. Distributions of principal among the
Certificates will be made as described under "Description of the
Certificates--Distributions on the Certificates--Principal" herein. Realized
Losses (as defined under "Description of the Certificates--Allocation of
Realized Losses") on the Mortgage Loans will be allocated to the Certificates
as described under "Description of the Certificates--Allocation of Realized
Losses" herein.
This Prospectus Supplement contains an "Index of Principal Definitions" \at
the end hereof, and the Prospectus contains an "Index of Principal
Definitions" at the end of the Prospectus.
There is currently no secondary market for the Offered Certificates. The
Underwriter intend to make a secondary market in the Offered Certificates, but
is not obligated to do so. There can be no assurance that a secondary market
for the Offered Certificates will develop or, if it does develop, that it will
continue. The Offered Certificates will not be listed on any securities
exchange.
THE YIELD TO MATURITY OF EACH CLASS OF OFFERED CERTIFICATES WILL BE
SENSITIVE IN VARYING DEGREES TO THE RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS) ON THE MORTGAGE LOANS GENERALLY IN THE RELATED
MORTGAGE LOAN GROUP IN THE CASE OF THE CLASS A CERTIFICATES AND THE CLASS B
CERTIFICATES (EACH AS DEFINED HEREIN), AND THE PREMIUM MORTGAGE LOANS IN BOTH
MORTGAGE LOAN GROUPS IN THE CASE OF THE CLASS X CERTIFICATES. THE MORTGAGE
LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME WITHOUT PENALTY.
THE YIELD TO MATURITY OF A CLASS OF OFFERED CERTIFICATES PURCHASED AT A
DISCOUNT OR PREMIUM WILL BE MORE SENSITIVE TO THE RATE AND TIMING OF PAYMENTS
THEREON. HOLDERS OF THE OFFERED CERTIFICATES SHOULD CONSIDER, IN THE CASE OF
ANY SUCH CERTIFICATES PURCHASED AT A DISCOUNT THE RISK THAT A SLOWER THAN
ANTICIPATED RATE OF
S-2
<PAGE>
PRINCIPAL PAYMENTS ON THE APPLICABLE MORTGAGE LOANS COULD RESULT IN AN ACTUAL
YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD AND, IN THE CASE OF ANY OFFERED
CERTIFICATES PURCHASED AT A PREMIUM, INCLUDING THE CLASS X CERTIFICATES, THE
RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS ON THE
APPLICABLE MORTGAGE LOANS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD. HOLDERS OF THE CLASS X CERTIFICATES SHOULD CAREFULLY
CONSIDER THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS ON THE PREMIUM
MORTGAGE LOANS COULD RESULT IN THE FAILURE OF SUCH HOLDERS TO RECOVER FULLY
THEIR INITIAL INVESTMENTS. THE YIELD TO INVESTORS IN THE OFFERED CERTIFICATES
(PARTICULARLY THE CLASS B CERTIFICATES) ALSO WILL BE ADVERSELY AFFECTED BY
REALIZED LOSSES AND NET INTEREST SHORTFALLS (EACH AS DEFINED HEREIN) ON ALL OF
THE MORTGAGE LOANS. NO REPRESENTATION IS MADE AS TO THE ANTICIPATED RATE OF
PREPAYMENTS ON ANY MORTGAGE LOANS, THE AMOUNT AND TIMING OF REALIZED LOSSES OR
INTEREST SHORTFALLS (AS DEFINED HEREIN) OR AS TO THE RESULTING YIELD TO
MATURITY OF ANY CLASS OF OFFERED CERTIFICATES. SEE "SUMMARY OF TERMS--YIELD
AND PREPAYMENT CONSIDERATIONS" AND "YIELD AND PREPAYMENT CONSIDERATIONS"
HEREIN.
As described herein, a real estate mortgage investment conduit ("REMIC")
election will be made in connection with the Trust for federal income tax
purposes. As described more fully herein and in the Prospectus, all of the
Certificates (other than the Class R-1 Certificates) will be designated as
"regular interests" in the REMIC and the Class R-1 Certificates will represent
the "residual interests" in such REMIC. See "Federal Income Tax
Considerations" herein and in the Prospectus. The Class R-1 Certificates will
be subject to certain restrictions on transfer and may have tax liabilities
during the early years of the REMIC that substantially exceed the principal
and interest paid thereon during such period.
ICI Funding Corporation (the "Master Servicer") will act as master servicer
of the Mortgage Loans and will make certain limited representations and
warranties concerning the Mortgage Loans. The obligations of ICI Funding
Corporation (and any successor Master Servicer) to repurchase or substitute
for a Mortgage Loan as to which a breach has occurred and is continuing will
constitute the sole remedies available to Certificateholders with respect to a
breach of any representations or warranties concerning the Mortgage Loans. The
Company will not make any representations or warranties for the benefit of the
Certificateholders and will not have any liability to the Certificateholders.
----------------
THE CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE COMPANY PURSUANT TO ITS
PROSPECTUS DATED DECEMBER 10, 1996, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A
PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN,
AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE OFFERED CERTIFICATES MAY NOT BE CONSUMMATED
UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
S-3
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary............................................................. S-5
Risk Factors........................................................ S-26
Description of the Mortgage Pool.................................... S-27
Description of the Certificates..................................... S-41
Yield and Prepayment Considerations................................. S-62
The Pooling and Servicing Agreement................................. S-73
Federal Income Tax Consequences..................................... S-86
ERISA Considerations................................................ S-87
Legal Investment.................................................... S-90
Method of Distribution.............................................. S-90
Legal Opinions...................................................... S-90
Ratings............................................................. S-91
Index of Principal Definitions...................................... S-93
Annex A - Certain Characteristics of the Mortgage Loans............. S-97
PROSPECTUS
Table of Contents................................................... 2
Available Information............................................... 3
Reports to Certificateholders....................................... 3
Incorporation of Certain Information by Reference................... 4
Summary of Prospectus............................................... 5
Risk Factors........................................................ 12
The Mortgage Pools.................................................. 19
Servicing of Mortgage Loans......................................... 30
Description of the Certificates..................................... 37
Description of Credit Enhancement................................... 49
Purchase Obligations................................................ 57
Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder..... 58
The Company......................................................... 61
ICI Funding Corporation............................................. 61
Imperial Credit Mortgage Holdings, Inc.............................. 61
The Pooling Agreement............................................... 62
Yield Considerations................................................ 67
Maturity and Prepayment Considerations.............................. 69
Certain Legal Aspects of Mortgage Loans............................. 70
Federal Income Tax Consequences..................................... 82
State and Other Tax Consequences.................................... 108
ERISA Considerations................................................ 108
Legal Investment Matters............................................ 111
Use of Proceeds..................................................... 112
Methods of Distribution............................................. 113
Legal Matters....................................................... 114
Financial Information............................................... 114
Rating.............................................................. 114
Index of Principal Definitions...................................... 115
</TABLE>
S-4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned in the Prospectus. This Prospectus Supplement contains an "Index of
Principal Definitions" at the end hereof, and the Prospectus contains an "Index
of Principal Definitions" at the end of the Prospectus.
Title of Securities Mortgage Pass-Through Certificates, Series 1997-2.
Company ICIFC Secured Assets Corp. (the "Company"), a wholly-
owned subsidiary of ICI Funding Corporation ("ICI
Funding"). See "The Company" and "ICI Funding
Corporation" in the Prospectus.
Seller ICI Funding Corporation (the "Seller" or "ICI
Funding"), a non-consolidating subsidiary of Imperial
Credit Mortgage Holdings, Inc. ("ICMH"). See
"Description of the Mortgage Pool--The Seller" herein
and "ICI Funding Corporation" and "Imperial Credit
Mortgage Holdings, Inc." in the Prospectus.
Master Servicer ICI Funding Corporation (the "Master Servicer" or "ICI
Funding"), a non-consolidating subsidiary of Imperial
Credit Mortgage Holdings, Inc. ("ICMH"). The Mortgage
Loans will be subserviced by Wendover Funding, Inc.,
a wholly-owned subsidiary of State Street Bank and
Trust Company ("Wendover" or the "Sub-Servicer"). See
"Description of the Mortgage Pool--The Master
Servicer; the Sub-Servicer--Wendover" herein and "ICI
Funding Corporation" and "Imperial Credit Mortgage
Holdings, Inc." in the Prospectus.
Trustee Bankers Trust Company of California, N.A. (the
"Trustee").
Cut-off Date June 1, 1997 (the "Cut-off Date").
Closing Date On or about June 30, 1997 (the "Closing Date").
Offered Certificates The Offered Certificates and the Other Certificates
will represent in the aggregate the entire beneficial
ownership interest in a trust (the "Trust")
consisting primarily of Group I Mortgage Loans and
Group II Mortgage Loans, the Group I Mortgage Loans
and the Group II Mortgage Loans each constituting a
separate sub-trust, having aggregate principal
balances as of the Cut-off Date of approximately
$267,451,674 and $23,926,601, respectively. The
Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of the Cut-off
Date (the "Agreement") among the Company, as seller,
ICI Funding, as master servicer, and the Trustee, as
trustee.
S-5
<PAGE>
The Offered Certificates consist of the following
Classes with the indicated initial principal balances
and Pass-Through Rates:
<TABLE>
<S> <C> <C>
Class A-I-1 7.25% $37,369,000
Class A-I-2 7.05% $18,298,000
Class A-I-3 7.20% $21,673,000
Class A-I-4 7.60% $16,599,000
Class A-I-5 7.85% $26,463,000
Class A-I-6 7.65% $11,145,514
Class A-I-7 8.00% $12,588,628
Class A-I-8 8.00% $54,827,000
Class A-I-9 9.50% $51,505,486
Class A-II 8.00% $22,154,296
Class X Variable Rate $ (1)
Class B-1 8.00% $ 6,556,000
Class B-2 8.00% $ 3,642,000
Class B-3 8.00% $ 2,185,000
</TABLE>
--------------
(1) The Class X Certificates will have a notional
principal amount ("Notional Amount") equal to the
aggregate Scheduled Principal Balances (as defined
herein) of the Premium Mortgage Loans.
Other Certificates In addition to the Offered Certificates, the Trust will
issue Class PO, Class B-4, Class B-5, Class B-6 and
Class R-1 Certificates (collectively, the "Other
Certificates"). The Class PO Certificates will be
issued in aggregate original principal amounts of
approximately $543,974, are principal only
Certificates and will receive no interest. The Class
B-4, Class B-5 and Class B-6 certificates will be
issued in aggregate original principal amounts of
approximately $2,914,000, $1,457,000 and $1,457,277,
respectively. The Class R-1 Certificates will be
issued in nominal original principal amounts of $100.
Each of the Other Certificates (other than the Class
PO Certificates) will bear interest at the rate of
8.00% per annum.
Any information contained herein with respect to the
Other Certificates is provided only to permit a
better understanding of the Offered Certificates. The
Other Certificates are not offered hereby.
S-6
<PAGE>
Designations
Certificates Offered Certificates and Other Certificates.
Offered Certificates Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4,
Class A-I-5, Class A-I-6, Class A-I-7, Class A-I-8,
Class A-I-9, Class A-II, Class X, Class B-1, Class
B-2 and Class B-3 Certificates.
Other Certificates Class PO, Class B-4, Class B-5, Class B-6 and
Class R-1 Certificates (not offered hereby).
Class A-I Certificates Class A-I-1, Class A-I-2, Class A-I-3, Class A-I-4,
Class A-I-5, Class A-I-6, Class A-I-7, Class A-I-8,
and Class A-I-9 Certificates.
Class A Certificates Class A-I and Class A-II Certificates.
Class B Certificates Class B-1, Class B-2, Class B-3, Class B-4, Class B-5
and Class B-6 Certificates.
Senior Certificates Class A, Class PO, Class X and Class R-1
Certificates.
Subordinate Certificates Class B Certificates.
Regular Certificates All Classes of Certificates other than the
Class R-1 Certificates.
Residual Certificates Class R-1 Certificates.
Physical Certificates Class B-4, Class B-5, Class B-6 and Class R-1
Certificates.
Book-Entry Certificates The Offered Certificates and the Class PO
Certificates.
Denominations Each Class of Offered Certificates and the Class PO
Certificates will be Book-Entry Certificates and
will be registered as a single Certificate held by
a nominee of The Depository Trust Company, and
beneficial interests will be held by investors
through the book-entry facilities of The Depository
Trust Company, as described herein, in minimum
denominations of $25,000, and in each case
increments of $1 in excess thereof. One Certificate
of each Class of Book-Entry Certificates may be
issued in a different principal amount to
accommodate the remainder of the initial principal
amount of the Certificates of such Class.
The Physical Certificates will be issued in
certificated fully-registered form. The Class R-1
Certificates will be issued in single certificates
of $100 each.
The Mortgage Loans The Mortgage Loans will consist of conventional, one-
to four-family, fixed rate Mortgage Loans secured
by first liens on residential real properties (the
"Mortgaged Properties") and having an aggregate
principal balance as of the Cut-off Date of
approximately $291,378,275 (the "Cut-off Date
Scheduled Principal Balance"). The
S-7
<PAGE>
Mortgage Loans are divided into two groups (Mortgage
Loan Group I and Mortgage Loan Group II) designated
as the Group I Mortgage Loans and the Group II
Mortgage Loans, having aggregate principal balances
as of the Cut-off Date of approximately $267,451,674
and $23,926,601, respectively. All of the Mortgage
Loans in Mortgage Loan Group I have original terms to
stated maturity of greater than 15 but not more than
30 years, and all of the Mortgage Loans in Mortgage
Loan Group II have original terms to stated maturity
of up to 15 years, in each case based on the date of
origination or any later modification. All of the
Mortgage Loans will be acquired by the Company on the
date of issuance of the Certificates from ICI
Funding.
Group I Mortgage Loans. All of the Mortgage Loans in
Mortgage Loan Group I have original terms to stated
maturity of greater than 15 but not more than 30
years, based on the date of origination or any later
modification. As of the Cut-off Date, the weighted
average remaining term to maturity of the Group I
Mortgage Loans was approximately 358 months. The
original principal balances of the Group I Mortgage
Loans ranged from approximately $15,600 to
approximately $1,250,000 and the average principal
balance at origination was approximately $151,083. As
of the Cut-off Date, the outstanding principal
balances of the Group I Mortgage Loans ranged from
approximately $15,576 to approximately $1,250,000,
and the average outstanding principal balance as of
the Cut-off Date was approximately $150,762.
The Mortgage Rates on the Group I Mortgage Loans are
fixed rates ranging from 7.575% per annum to 14.700%
per annum, with a weighted average Mortgage Rate as
of the Cut-off Date of approximately 9.079% per
annum. The weighted average Net Rate on the Group I
Mortgage Loans as of the Cut-off Date is
approximately 8.814% per annum.
Approximately 36.29%, 16.58%, 9.16% and 8.21% of the
Group I Mortgage Loans (measured by aggregate
principal balance as of the Cut-off Date) are secured
by Mortgaged Properties located in California,
Florida, New Jersey and New York, respectively.
Group II Mortgage Loans. All of the Mortgage Loans in
Mortgage Loan Group II have original terms to stated
maturity of up to 15 years, based on the date of
origination or any later modification. As of the Cut-
off Date, the weighted average remaining term to
maturity of the Group II Mortgage Loans was
approximately 172 months. The original principal
balances of the Group II Mortgage Loans ranged from
approximately $40,000 to approximately $506,250 and
the average principal balance at origination was
approximately $108,860. As of the Cut-off Date, the
outstanding principal balances of the Group II
Mortgage
S-8
<PAGE>
Loans ranged from approximately $19,029 to
approximately $501,880, and the average outstanding
principal balance as of the Cut-off Date was
approximately $107,777.
The Mortgage Rates on the Group II Mortgage Loans are
fixed rates ranging from 4.750% per annum to 11.250%
per annum, with a weighted average Mortgage Rate as
of the Cut- off Date of approximately 8.609% per
annum. The weighted average Net Rate on the Group II
Mortgage Loans as of the Cut-off Date is
approximately 8.344% per annum.
Approximately 20.26%, 15.74%, 14.15%, 9.12% and 8.98%
of the Group II Mortgage Loans (measured by aggregate
principal balance as of the Cut-off Date) are secured
by Mortgaged Properties located in Florida, New York,
California, Texas and New Jersey, respectively.
For a further description of the Mortgage Loans, see
"Description of the Mortgage Pool" herein and Annex A
attached hereto.
Net Rate The "Net Rate" for each Mortgage Loan is the interest
rate borne by such Mortgage Loan (the "Mortgage
Rate"), less the sum of the Master Servicing Fee and
the Trustee's Fee attributable thereto (in each case
expressed as a per annum rate) (the "Aggregate
Expense Rate"). It is expected that with respect to
each Distribution Date, the Master Servicing Fee
(which includes the fee payable to the Sub-Servicer
(as defined herein)) for the Mortgage Loans will be
0.25% per annum, and the Trustee's Fee will be 0.015%
per annum, of the Scheduled Principal Balance of each
Mortgage Loan as of the Due Date in the month
preceding the month in which such Distribution Date
occurs. For any Distribution Date, the "Due Date"
will be the first day of the month in which such
Distribution Date occurs.
The "Scheduled Principal Balance" of a Mortgage Loan
with respect to a Distribution Date is (i) the unpaid
principal balance of such Mortgage Loan as of the
close of business on the Due Date in the month
preceding the month of the Distribution Date (i.e.,
taking account of the principal payment to be made on
such Due Date and irrespective of any delinquency in
its payment), as specified in the amortization
schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of
any bankruptcy or similar proceeding occurring after
the Cut-off Date (other than a Deficient Valuation,
as defined under "Description of the Certificates--
Allocation of Realized Losses" herein) or any or
grace period) less (ii) any Principal Prepayments and
the principal portion of any Net Liquidation Proceeds
(as defined herein) received during or prior to the
related Prepayment Period (as defined herein);
provided that the
S-9
<PAGE>
Scheduled Principal Balance of any Liquidated
Mortgage Loan (as defined herein) is zero.
Distribution Dates The 25th day of each month, or if such day is not a
Business Day, then the next succeeding Business Day,
beginning in July 1997 (each, a "Distribution Date").
Record Date The "Record Date" for each Distribution Date will be
the close of business on the last business day of the
month preceding the month in which such Distribution
Date occurs.
Due Period With respect to each Distribution Date, the period
commencing on the second day of the month preceding
the month in which the Distribution Date occurs and
ending at the close of business on the first day of
the month in which the Distribution Date occurs
(each, a "Due Period").
Prepayment Period With respect to each Distribution Date, the period from
the first day through the last day of the month
preceding the month of such Distribution Date (each,
a "Prepayment Period").
Distributions on the
Certificates General. On each Distribution Date, (i) the Senior
Certificates will be entitled to receive all amounts
distributable to them for such Distribution Date
before any distributions are made to the Classes of
Subordinate Certificates on such date and (ii) the
Subordinate Certificates of each Class will be
entitled to receive all amounts distributable to them
for such Distribution Date before any distributions
are made on such date on any Class of Subordinate
Certificates with a higher numerical Class
designation. In general, an amount equal to the Group
I Available Funds (as defined herein) for such
Distribution Date will be allocated first, to pay
interest due the holders of the Class A-I
Certificates and the Residual Certificates and Class
X Component I Accrued Certificate Interest (as
defined herein) and then to reduce the Current
Principal Amounts of the Class A-I Certificates and
the Residual Certificates and the Class PO Portion I
Principal Distribution Amount (as defined herein);
second, subject to the limitations described herein,
to pay the Class PO Deferred Amount for such
Distribution Date to the Class PO Certificates; and
third, to pay interest on and then principal of each
Class of Subordinate Certificates in the order of
their numerical Class designations. In general, an
amount equal to the Group II Available Funds (as
defined herein) for such Distribution Date will be
allocated first, to pay interest due on the Class A-
II Certificates and Class X Component II Accrued
Certificate Interest (as defined herein) and then to
reduce the Current Principal Amount of the Class A-II
Certificates and the Class PO Portion II Principal
Distribution Amount; second, subject to the
limitations described herein, to pay the Class PO
Deferred
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<PAGE>
Amount for such Distribution Date to the Class PO
Certificates; and third, to pay interest on and then
principal of each Class of Subordinate Certificates
in the order of their numerical Class designations.
The Group I Available Funds and the Group II
Available Funds in the aggregate (the "Available
Funds") will be allocated among the Classes of
Certificates in the manner set forth in "Description
of the Certificates--Distributions on the
Certificates--Allocation of Available Funds" herein.
No distribution of interest or principal from Group I
Available Funds or from Group II Available Funds will
be made on any Class of Subordinate Certificates on
any Distribution Date until all distributions of
interest and principal have been made on such date on
each Class of Certificates then entitled to such
distributions having a higher priority with respect
to the same Available Funds.
Interest. Interest will accrue during the preceding
Interest Accrual Period for each interest-bearing
Class of Certificates at the related rate described
below (each, a "Pass-Through Rate") on the Current
Principal Amount (as defined below) or Notional
Amount of such Class immediately preceding such
Distribution Date. The Class PO Certificates are
principal only Certificates and will not bear
interest. With respect to each Distribution Date, the
"Interest Accrual Period" for each Class of interest-
bearing Certificates will be the calendar month
preceding the month in which the Distribution Date
occurs. Interest will be calculated on the basis of a
360-day year comprised of twelve 30-day months.
Each interest-bearing Class of Offered Certificates
(other than the Class X Certificates) will bear
interest at the fixed Pass-Through Rates set forth on
the cover page hereof.
The Class X Certificates will bear interest on their
Notional Amount at a variable Pass-Through Rate equal
to the excess of (a) the weighted average of the Net
Rates of the Premium Mortgage Loans over (b) 8.00%
per annum. The Pass-Through Rate for the Class X
Certificates for the first Interest Accrual Period is
expected to be approximately 0.83664% per annum.
In order to calculate the source of interest due on the
Class X Certificates, the Class X Certificates are
deemed to consist of separate components, one of
which corresponds to the Class A-I Certificates, the
Class R-1 Certificates and a principal amount of the
Class B Certificates which derives its distributions
from the Group I Mortgage Loans ("Component I") and
one which corresponds to the Class A-II Certificates
and the principal amount of the Class B Certificates
which derives its distributions from the Group II
Mortgage Loans ("Component II").
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<PAGE>
Since interest on the Class X Certificates is based on
amounts paid on both the Group I Mortgage Loans and
the Group II Mortgage Loans, the Accrued Certificate
Interest for the Class X Certificates may also be
expressed as the sum of the Class X Component I
Accrued Certificate Interest and the Class X
Component II Accrued Certificate Interest (each as
defined herein.)
On each Distribution Date, interest will be
distributable on each interest-bearing Class of
Certificates from the Group I Available Funds and/or
Group II Available Funds, as described above, for
such Distribution Date in an aggregate amount equal
to the Accrued Certificate Interest for such Class on
such Distribution Date, plus any Accrued Certificate
Interest thereon remaining undistributed from
previous Distribution Dates.
The "Accrued Certificate Interest" for any interest-
bearing Certificate for any Distribution Date will
equal the interest accrued during the related
Interest Accrual Period at the applicable Pass-
Through Rate on the Current Principal Amount (or, in
the case of the Class X Certificates, the Notional
Amount) of such Certificate immediately prior to such
Distribution Date less (i) in the case of an
interest-bearing Senior Certificate, such
Certificate's share of any Net Interest Shortfall and
the interest portion of any Excess Losses (each as
defined herein) and, after the Distribution Date on
which the Current Principal Amounts of the
Subordinate Certificates are reduced to zero (the
"Cross-Over Date"), the interest portion of any
Realized Losses and (ii) in the case of a Subordinate
Certificate, such Certificate's share of any Net
Interest Shortfalls and the interest portion of any
Realized Losses and any Excess Losses.
Such shortfalls and losses will be allocated among the
Senior Certificates in proportion to the amount of
Accrued Certificate Interest that would have been
allocated thereto in the absence of such shortfalls
or losses. See "Description of the Certificates--
Distributions on the Certificates--Interest" and "--
Allocation of Realized Losses" herein.
Any Interest Shortfalls resulting from prepayments from
the first through the last day of such month will be
offset by the Master Servicer to the extent such
Interest Shortfalls do not exceed the lesser of (i)
the Master Servicing Fee in connection with such
Distribution Date or (ii) 1/12 of 0.125% of the
Scheduled Principal Balances of the Mortgage Loans
with respect to such Distribution Date (the amount of
such fee so used, a "Compensating Interest Payment").
No assurance can be given that the servicing
compensation available to cover Interest Shortfalls
will be sufficient therefor. See "The Pooling and
Servicing Agreement--Servicing Compensation and
Payment of Expenses" herein.
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<PAGE>
The "Current Principal Amount" of any Certificate
(other than a Class X Certificate) as of any
Distribution Date will equal such Certificate's
initial principal amount on the Closing Date as
reduced by (i) all amounts distributed on previous
Distribution Dates on such Certificate on account of
principal (including the Class PO Cash Shortfall with
respect to a Class PO Certificate), (ii) the
principal portion of all Realized Losses previously
allocated to such Certificate and (iii) in the case
of a Subordinate Certificate, such Certificate's
share, if any, of the Subordinate Certificate
Writedown Amount and the Class PO Deferred Payment
Writedown Amount (each, as defined herein) for
previous Distribution Dates.
The Class X Certificates will have a Notional Amount
equal to the aggregate Scheduled Principal Balances
of the Premium Mortgage Loans.
Principal. Principal will be distributable monthly on
the Senior Certificates (other than the Class X
Certificates) on each Distribution Date in an
aggregate amount equal to the sum of the Group I
Senior Optimal Principal Amount, the Class PO Portion
I Principal Distribution Amount, the Group II Senior
Optimal Principal Amount and the Class PO Portion II
Principal Distribution Amount (each as defined
herein) for such Distribution Date to the extent of
the Group I Available Funds or Group II Available
Funds, as applicable, subject to certain limited
exceptions, for such Distribution Date, remaining
after distributions of interest are made on the
related interest- bearing Senior Certificates on such
date. Subject to such limitation, the Group I Senior
Optimal Principal Amount, the Class PO Portion I
Principal Distribution Amount, the Group II Senior
Optimal Principal Amount and the Class PO Portion II
Principal Distribution Amount will be allocated among
the Senior Certificates in the manner described
herein.
In order to calculate the source of principal
distributable on the Class PO Certificates, the Class
PO Certificates are deemed to consist of separate
portions, one of which corresponds to the Class A-I
Certificates, the Class R-1 Certificates and a
principal amount of the Class B Certificates which
derives its distributions from the Group I Mortgage
Loans ("Portion I") and one which corresponds to the
Class A-II Certificates and the principal amount of
the Class B Certificates which derives its
distributions from the Group II Mortgage Loans
("Portion II").
Since amounts distributable on the Class PO
Certificates are based on amounts paid on both the
Group I Mortgage Loans and the Group II Mortgage
Loans, such amounts may be expressed as the sum of
the Class PO Portion I Principal Distribution Amount
and the Class PO Portion II Principal Distribution
Amount (each as defined herein). Such aggregate
amount is referred to herein as the "Class PO
Principal Distribution Amount."
S-13
<PAGE>
Principal will be distributed monthly on each Class of
Subordinate Certificates on each Distribution Date in
an aggregate amount equal to such Class's Allocable
Share (as defined herein) for such Distribution Date
to the extent of the sum of the Group I Available
Funds and the Group II Available Funds remaining
after (i) distributions of interest and principal
have been made on each Senior Certificate entitled
thereto as described herein, (ii) subject to the
limitations described herein, the Class PO Deferred
Amount for such Distribution Date has been
distributed in respect of the Class PO Certificates,
(iii) distributions of interest and principal have
been made on each Class of Subordinate Certificates,
if any, with a lower numerical Class designation than
such Class and (iv) distributions of interest have
been made on such Class of Subordinate Certificates.
Distributions of principal on a Class of Certificates
will be made on a pro rata basis among all
outstanding Certificates of such Class. See
"Description of the Certificates --Distributions on
the Certificates" herein.
Class PO Deferred Amount. On each Distribution Date,
the PO Percentage (as defined herein) of the
principal portion of any Realized Loss in respect of
a Discount Mortgage Loan (as defined herein) will be
allocated to the Class PO Certificates. See
"Description of the Certificates--Allocation of
Realized Losses" and "--Subordination" herein. On
each Distribution Date through the Cross-Over Date,
the Class PO Certificates will be entitled to
receive, to the extent of Group I Available Funds
remaining after distributions of interest and
principal on the Class A-I Certificates, the Residual
Certificates, Class X Component I Accrued Certificate
Interest and Class PO Portion I Principal
Distribution Amount (each as defined herein) have
been made from such funds on such Distribution Date,
and to the extent of Group II Available Funds
remaining after distributions of interest and
principal on the Class A-II Certificates and Class PO
Portion II Principal Distribution Amount (each as
defined herein) have been made from such funds on
such Distribution Date, any Class PO Deferred Amount
for such Distribution Date; provided, that
distributions in respect of the Class PO Deferred
Amount on any Distribution Date will not exceed the
excess, if any, of (x) the Available Funds (as
defined herein) remaining after giving effect to the
distributions pursuant to priorities (A) first
through third and (B) first through third under
"Description of the Certificates--Distributions on
the Certificates" herein over (y) the amount of
Accrued Certificate Interest for such Distribution
Date and Accrued Certificate Interest remaining
undistributed from previous Distribution Dates on all
Classes of Subordinate Certificates. Distributions in
respect of the Class PO Deferred Amount shall not
reduce the Current Principal Amount of the Class PO
Certificates. The "Class PO Deferred Amount" means,
as to each
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<PAGE>
Distribution Date through the Cross-Over Date, the
aggregate of all amounts allocable on such date to
the Class PO Certificates in respect of the
principal portion of Realized Losses (other than
Excess Losses) and Class PO Cash Shortfall (as
defined herein) and all amounts previously
allocated in respect of such losses (other than
Excess Losses) and Class PO Cash Shortfall to the
Class PO Certificates and not distributed on prior
Distribution Dates.
Additional Rights of the
Residual Certificates In addition to distributions of principal and
interest, the holders of the Residual Certificates
will be entitled to receive (i) the amount, if any,
of Available Funds remaining on any Distribution
Date after distributions of interest and principal
are made on the Certificates on such date and (ii)
the proceeds, if any, of the assets of the Trust
remaining after the Current Principal Amount of
each Class of Certificates has been reduced to
zero. It is not anticipated that any material
assets will be remaining for such distributions at
any such time.
Credit Enhancement--
Subordination The rights of the holders of each Class of
Subordinate Certificates to receive distributions
with respect to the Mortgage Loans will be
subordinated to such rights of the holders of the
related Senior Certificates and of each Class of
Subordinate Certificates having a lower numerical
Class designation than such Class. The
subordination of the Subordinate Certificates to
Senior Certificates, and the further subordination
among the Subordinate Certificates, are each
intended to increase the likelihood of timely
receipt by the holders of Certificates with higher
relative payment priority of the maximum amount to
which they are entitled on any Distribution Date
and to provide such holders protection against
losses resulting from defaults on Mortgage Loans to
the extent described herein. The Subordinate
Certificates also provide protection to a lesser
extent against Special Hazard Losses, Fraud Losses
and Bankruptcy Losses (each as defined herein) to
the extent described herein. However, in certain
circumstances, the amount of available
subordination (including the limited subordination
provided for certain types of losses) may be
exhausted and shortfalls in distributions on the
Offered Certificates could result. Except with
respect to the Class PO Certificates as described
below, holders of Senior Certificates will bear
their pro rata share of any Realized Losses with
respect to Mortgage Loans in both Mortgage Loan
Groups in excess of the available total
subordination amount. See "Description of the
Certificates-- Distributions on the Certificates,"
"-- Allocation of Realized Losses" and "--
Subordination" herein.
Since the Subordinate Certificates will absorb
Realized Losses on Mortgage Loans in both Loan
Groups, a
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<PAGE>
disproportionate amount of Realized Losses with
respect to Mortgage Loans in either Mortgage Loan
Group will adversely impact the availability of
subordination to the Certificates related to the
other Mortgage Loan Group.
As of the Closing Date, the aggregate Current Principal
Amounts of all classes of Subordinate Certificates
and of the Other Certificates will equal
approximately 6.25% and 2.19%, respectively, of the
aggregate Current Principal Amounts of all Classes of
Certificates.
In addition, to extend the period during which the
Subordinate Certificates remain available as credit
enhancement for the Senior Certificates, the entire
amount of any prepayments and certain other
unscheduled recoveries of principal with respect to
the Mortgage Loans will be allocated to the related
Senior Certificates to the extent described herein
during the first five years after the Cut-off Date
(with such allocation being subject to reduction
thereafter as described herein). This allocation has
the effect of accelerating the amortization of the
related Senior Certificates as a whole while, in the
absence of losses in respect of the Mortgage Loans,
increasing the percentage interest in the principal
balance of the Mortgage Loans in both Mortgage Loan
Groups evidenced by the Subordinate Certificates. See
"Description of the Certificates--Distributions on
the Certificates" and "-- Subordination" herein.
In certain other instances as described in paragraph
(D) under "Description of the Certificates--
Distributions on the Certificates--Allocation of
Available Funds," Principal Prepayments otherwise
distributable to the Class B Certificates will in
lieu thereof be distributed to Senior Certificates.
Monthly Advances The Master Servicer will be obligated to advance
delinquent scheduled payments of principal and
interest on the Mortgage Loans under certain
circumstances (each such advance, a "Monthly
Advance"). See "The Pooling and Servicing Agreement--
Monthly Advances" herein.
Allocation of Losses Subject to the limitations set forth below, Realized
Losses on the Mortgage Loans will be allocated as
follows: first, among the Subordinate Certificates in
the inverse order of their numerical Class
designations beginning with the Class B-6
Certificates and second, pro rata to the Classes of
Senior Certificates as described herein, until, in
each case, the Current Principal Amount of each such
Class of Certificates is reduced to zero. The
Subordinate Certificates will only be written down to
the extent of the amounts of Special Hazard Losses,
Fraud Losses and Bankruptcy Losses, which are
initially limited to $2,925,469, $5,827,566 and
$107,803, respectively. All of the foregoing amounts
are subject to periodic reduction as described
herein.
S-16
<PAGE>
Any Special Hazard Losses, Fraud Losses and Bankruptcy
Losses in excess of the respective amounts of
coverage therefor ("Excess Special Hazard Losses,"
"Excess Fraud Losses" and "Excess Bankruptcy Losses,"
respectively, and collectively, "Excess Losses") on
the Premium Mortgage Loans will be allocated on a pro
rata basis among the Senior Certificates (other than
the Class PO Certificates) and Subordinate
Certificates (any such Realized Losses so allocated
to such Senior Certificates will be allocated pro
rata without priority among the various Classes
thereof). The principal portion of such losses on the
Discount Mortgage Loans will be allocated to the
Class PO Certificates in an amount equal to the
related PO Percentage thereof, and the remainder of
such losses on Discount Mortgage Loans will be
allocated among the remaining Senior Certificates on
a pro rata basis as described above. The amount of
any Realized Loss (other than an Excess Loss)
allocated to the Class PO Certificates on or prior to
the Cross-Over Date will be treated as Class PO
Deferred Amount. After the Cross-Over Date, all
Realized Losses on the Mortgage Loans will be
allocated on a pro rata basis among the Senior
Certificates (other than the Class PO Certificates).
See "Description of the Certificates--Allocation of
Realized Losses; Subordination" herein.
Neither the Offered Certificates nor the Mortgage Loans
are insured or guaranteed by any governmental agency
or instrumentality or by the Company, the Trustee,
the Seller, the Master Servicer or any affiliate
thereof or any other person.
Yield and Prepayment
Considerations General Considerations. The yield to maturity of each
Class of Offered Certificates will be affected by the
amount and timing of principal payments on the
related Mortgage Loans, the allocation of Group I
Available Funds and/or Group II Available Funds, as
applicable, to such Class of Certificates, the
applicable Pass-Through Rate for such Class of
Certificates and the purchase price paid for such
Certificates. In addition, the yields to investors in
the Certificates will be adversely affected by
Realized Losses and Net Interest Shortfalls allocated
thereto. The interaction of the foregoing factors may
have different effects on the various Classes of
Certificates and the effects on any Class may vary at
different times during the life of such Class. No
representation is made as to the anticipated rate of
prepayments on any Mortgage Loans, the amount or
timing of Realized Losses or Net Interest Shortfalls
or the anticipated yield to maturity of any
Certificates. Prospective investors are urged to
consider their own estimates as to the anticipated
rate of future prepayments on the Mortgage Loans and
the suitability of the Certificates to their
investment objectives. In addition to the discussion
below, prospective investors should review the
discussion under "Yield and Prepayment
S-17
<PAGE>
Considerations" herein and "Yield Considerations" and
"Maturity and Prepayment Considerations" in the
Prospectus.
Mortgage Loan Payments. If prevailing mortgage rates
fall significantly below the Mortgage Rates on the
Mortgage Loans, the Mortgage Loans are likely to be
subject to higher prepayment rates than if prevailing
rates remain at or above the Mortgage Rates on the
Mortgage Loans. Other factors affecting prepayments
of Mortgage Loans include changes in Mortgagors'
housing needs, job transfers, unemployment, net
equity in the Mortgaged Properties and servicing
decisions. Amounts received by virtue of liquidations
of Mortgage Loans, repurchases of Mortgage Loans upon
breach of representations or warranties and optional
termination of the Trust also affect the receipt of
principal on the Mortgage Loans. In general, the
Mortgage Loans may be prepaid at any time without
penalty. In addition, the rate of prepayments will be
affected by the rate and timing of the sale of the
Mortgaged Properties because all of the Mortgage
Loans contain due-on-sale clauses.
Timing of Payments and Distributions. Unlike certain
corporate bonds, the timing and amount of principal
payments on the Certificates are not fixed because
they are generally determined by the timing and
amount of principal payments on the applicable
Mortgage Loans. The timing of payments on the
applicable Mortgage Loans may significantly affect an
investor's yield. In general, the earlier a
prepayment of principal on the applicable Mortgage
Loans, the greater will be the effect on an
investor's yield to maturity. As a result, the effect
on an investor's yield of principal prepayments
occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period
immediately following the issuance of the
Certificates will not be offset by a subsequent like
reduction (or increase) in the rate of principal
prepayments. Furthermore, the effective yield to
holders of interest-bearing Certificates will be
slightly lower than the yield otherwise produced by
the applicable Pass-Through Rate and purchase price
because, while interest generally will accrue on each
such Certificate from the first day of the month, the
distribution of such interest will not be made
earlier than the 25th day of the month following the
month of accrual. Moreover, to the extent any Net
Interest Shortfall or the interest portion of any
Realized Loss is allocated to a Class of Certificates
the yield to investors in such Class will be reduced.
Discounts and Premiums. In the case of any Certificates
purchased at a discount, a slower than anticipated
rate of principal payments on the applicable Mortgage
Loans could result in an actual yield that is lower
than the anticipated yield. In the case of any
Certificates purchased at a premium, a faster than
anticipated rate of
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<PAGE>
principal payments on the Mortgage Loans could result
in an actual yield that is lower than the anticipated
yield. In the case of any Class X Certificates or any
other Certificates purchased at a premium, a faster
than anticipated rate of principal payments on the
Premium Mortgage Loans could result in an actual
yield that is lower than the anticipated yield. Under
certain circumstances, investors in the Class X
Certificates could fail to recover fully their
initial investments. A discount or premium would be
determined in relation to the price at which a
Certificate will yield its Pass-Through Rate, after
giving effect to any payment delay.
Reinvestment Risk. Because the Mortgage Loans may be
prepaid at any time, it is not possible to predict
the rate at which distributions on the Certificates
will be received. Since prevailing interest rates are
subject to fluctuation, there can be no assurance
that investors in the Certificates will be able to
reinvest the distributions thereon at yields equaling
or exceeding the yields on the Certificates. Yields
on any such reinvestment may be lower, and may even
be significantly lower, than yields on the
Certificates. Generally, when prevailing interest
rates increase, prepayment rates on mortgage loans
tend to decrease, resulting in a reduced rate of
return of principal to investors at a time when
reinvestment at such higher prevailing rates would be
desirable. Conversely, when prevailing interest rates
decline, prepayment rates on mortgage loans tend to
increase, resulting in a greater rate of return of
principal to investors at a time when reinvestment at
comparable yields may not be possible. Prospective
investors in the Certificates should consider
carefully the related reinvestment risks in light of
other investments that may be available to such
investors.
Subordination of Certain Classes of Certificates. The
rights of the holders of the Subordinate Certificates
to receive distributions with respect to each
Mortgage Loan will be subordinated to such rights of
the holders of the applicable Senior Certificates,
and to the rights of the holders of the Subordinate
Certificates having a lower numerical Class
designation, in each case, to the extent described
herein. The level of subordination available as
support to the Senior Certificates will be directly
affected by the rate and timing of prepayments and
the occurrence of Realized Losses.
Between Senior Certificates, on the one hand, and
Subordinate Certificates, on the other, prepayments
on each Mortgage Loan will be allocated solely to the
Senior Certificates during at least the first five
years after the Closing Date, and then such
allocation will decrease subject to meeting certain
loss and delinquency tests during the next four years
until Senior Certificates and Subordinate
Certificates share pro rata in such allocations.
Consequently, during not less than the first nine
years
S-19
<PAGE>
after the Closing Date, prepayments will have the
effect of accelerating the amortization of the Senior
Certificates while increasing the percentage interest
in the related Mortgage Loans evidenced by
Subordinate Certificates.
As among the Class A-I Certificates, amounts equal to
the prepayments on the Group I Mortgage Loans
generally will be allocated solely to such classes of
Certificates, other than the Class A-I-8
Certificates, during the first five years after the
Closing Date, and then such allocation will be
reduced over the next four years at which time such
Senior Certificates will share pro rata in such
allocations. Consequently, during the first nine
years after the Closing Date, prepayments will have
the effect of accelerating the amortization of such
Certificates then entitled to distributions, while
increasing the percentage interest in the Group I
Mortgage Loans evidenced by the other Classes of
Class A-I Certificates.
To the extent that Realized Losses are incurred, the
allocation of such Realized Losses to the Subordinate
Certificates will have the effect of increasing the
percentage interest in the Mortgage Loans, evidenced
by the Senior Certificates in the aggregate. See
"Description of the Certificates--Distributions on
the Certificates" and "--Allocation of Realized
Losses" herein.
Sequential Pay Senior Certificates. The Class A-I
Certificates are subject to various priorities for
payment of principal as described herein.
Distributions on Classes currently entitled to
receive principal payments will be immediately
affected by the prepayment rate of the related
Mortgage Loans at such time. Distributions on Classes
with a later priority of payment will not be directly
affected by the prepayment rate until such time as
principal is distributable on such Classes. However,
the timing of commencement of principal distributions
and the weighted average lives of such Classes will
be affected by the prepayment rate on the related
Mortgage Loans experienced both before and after the
commencement of principal distributions on such
Classes. In addition, because principal distributions
are paid to certain Classes of A-I Certificates
before other Classes of A-I Certificates, holders of
A-I Certificates that receive principal later bear a
greater risk of being allocated Realized Losses than
holders of such Classes that receive principal
earlier.
As a result of the allocation after the Cross-Over Date
of the principal portion of Realized Losses, if any,
applicable to Group I Mortgage Loans to all Senior
Certificates (other than the Class PO Certificates),
pro rata, the Current Principal Amount of the
Class A-I Certificates may exceed the outstanding
balance of the Group I Mortgage Loans. Consequently,
interest accrued at the weighted average of the Net
Rates on the aggregate principal balance of the Group
I Mortgage Loans may not be sufficient to pay
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<PAGE>
interest on the Current Principal Amount of the Class
A-I Certificates at the related Pass-Through Rate. As
described in paragraph (F) under "Description of the
Certificates--Distributions on the Certificates--
Allocation of Available Funds," certain excess
payments of interest on the Group II Mortgage Loans
over the amounts needed to pay interest on the Senior
Certificates (other than the Class A-I and Class PO
Certificates) and the interest on Component II of the
Class X Certificates will be available to pay some or
all of such shortfall in interest on the Class A-I
Certificates.
Class A-II Certificates. As a result of the allocation
after the Cross-Over Date of the principal portion of
Realized Losses, if any, applicable to Group II
Mortgage Loans to all Senior Certificates (other than
the Class PO Certificates), pro rata, the Current
Principal Amount of the Class A-II Certificates may
exceed the outstanding balance of the Group II
Mortgage Loans. Consequently, interest accrued at the
weighted average of the Net Rates on the aggregate
principal balance of the Group II Mortgage Loans may
not be sufficient to pay interest on the Current
Principal Amount of the Class A-II Certificates at
the related Pass-Through Rate. As described in
paragraph (F) under "Description of the
Certificates--Distributions on the Certificates--
Allocation of Available Funds," certain excess
payments of interest on the Group I Mortgage Loans
over the amounts needed to pay interest on the Senior
Certificates (other than the Class A-II and Class PO
Certificates) and the interest on Component I of the
Class X Certificates will be available to pay some or
all of such shortfall in interest on the Class A-II
Certificates.
Class X Certificates. Because the Notional Amount of
the Class X Certificates will equal the aggregate
Scheduled Principal Balances of the Premium Mortgage
Loans, the yield on the Class X Certificates will be
sensitive to the rate and timing of principal
prepayments on the Premium Mortgage Loans. A rapid
rate of principal prepayments on the Premium Mortgage
Loans will have a materially negative effect on the
yield to investors in the Class X Certificates.
Investors should fully consider the associated risks,
including the risk that a rapid rate of principal
prepayments could result in the failure of investors
in the Class X Certificates to recover fully their
initial investments. See "Yield and Prepayment
Considerations--Yield on Class X Certificates"
herein.
Since the Pass-Through Rate applicable to the Class X
Certificates will be based upon the weighted average
of the Net Rates of the Premium Mortgage Loans,
disproportionate prepayments of the Premium Mortgage
Loans with higher Net Rates will adversely affect the
yield on the Class X Certificates.
S-21
<PAGE>
Liquidity There is currently no secondary market for the
Certificates, and there can be no assurance that one
will develop. The Underwriter intends to establish a
market in the Classes of Offered Certificates being
underwritten by it, but it is not obligated to do so.
There is no assurance that any such market, if
established, will continue. Each Certificateholder
will receive monthly reports pertaining to the
Certificates as described under "Reports to
Certificateholders" in the Prospectus. There are a
limited number of sources which provide certain
information about mortgage pass-through certificates
in the secondary market, and there can be no
assurance that any of these sources will provide
information about the Certificates. Investors should
consider the effect of limited information on the
liquidity of the Certificates.
Optional Termination On any Distribution Date on which the aggregate unpaid
principal balance of the Mortgage Loans is less than
10% of the aggregate Scheduled Principal Balance of
the Mortgage Loans as of the Cut-off Date, the Master
Servicer or its designee may repurchase from the
Trust all Mortgage Loans remaining outstanding and
any REO Property remaining in the Trust at the
purchase price set forth in the Agreement. The Trust
may also be terminated and the Certificates retired
on any Distribution Date upon the Master Servicer's
determination, based upon an opinion of counsel, that
REMIC status has been lost or that a substantial risk
exists that such status will be lost for the then
current taxable year. Upon termination, the holders
of Certificates (other than the Class X Certificates)
will receive the Current Principal Amount of their
Certificates and any accrued but unpaid interest and
the holders of the Class X Certificates will receive
accrued but unpaid interest on their Certificates.
See "The Pooling and Servicing Agreement--
Termination" herein.
Federal Income Tax
Consequences An election will be made to treat the Mortgage Loans,
the Certificate Account and certain other assets
owned by the Trust as a real estate mortgage
investment conduit ("REMIC ") for federal income tax
purposes. The REMIC will issue "regular interests"
and one "residual interest." The Certificates (other
than the Class R-1 Certificates) will be designated
as regular interests in the REMIC. The Certificates
(other than the Class R-1 Certificates) are herein
referred to as the "Regular Certificates" or the
"REMIC Regular Certificates." The Class R-1
Certificates will be designated as the residual
interest in the REMIC (the "Residual Certificates" or
the "REMIC Residual Certificates"). See "Federal
Income Tax Considerations" herein and "Federal Income
Tax Consequences" in the Prospectus.
ERISA Considerations Fiduciaries of employee benefit plans subject to Title
I of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), should consider the ERISA
fiduciary investment standards before authorizing an
investment by
S-22
<PAGE>
a plan in the Certificates. In addition, fiduciaries
of employee benefit plans or other retirement
arrangements (such as individual retirement accounts
or certain Keogh plans) which are subject to Title I
of ERISA, and/or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"), as well as any
entity, including an insurance company general
account, whose underlying assets include plan assets
by reason of a plan or account investing in such
entity (collectively, "Plan(s)"), should consult with
their legal counsel to determine whether an
investment in the Certificates will cause the assets
of the Trust ("Trust Assets") to be considered plan
assets pursuant to the plan asset regulations set
forth in 29 C.F.R. (S)2510.3-101, thereby subjecting
the Plan to the prohibited transaction rules with
respect to the Trust Assets and the Trustee or the
Master Servicer to the fiduciary investment standards
of ERISA, or cause the excise tax provisions of
Section 4975 of the Code to apply to the Trust
Assets, unless some exemption granted by the
Department of Labor applies to the acquisition,
holding or transfer of the Certificates.
Subject to the considerations set forth under "ERISA
Considerations" herein and in the Prospectus, the
purchase or holding of the Senior Certificates (other
than Class PO Certificates) by, on behalf of, or with
plan assets of, a Plan may qualify for exemptive
relief under Prohibited Transaction Exemption 89-89
(the "Exemption").
The Class B Certificates generally may be purchased by,
on behalf of, or with plan assets of, a Plan, if the
proposed transferee provides the Trustee with a
satisfactory "Benefit Plan Opinion" or a
representation to the effect that a prohibited
transaction class exemption based on the identity of
the fiduciary making the decision to acquire such
Certificates on behalf of the Plan is applicable to
the acquisition, holding and transfer of the Class B
Certificates as further described in "ERISA
Considerations" herein.
Ratings It is a condition to their issuance that each Class of
Offered Certificates receives the ratings set forth
below from Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ("S&P")
and Duff & Phelps Credit Rating Co. ("DCR"). S&P and
DCR are referred to herein as the "Rating Agencies."
S-23
<PAGE>
<TABLE>
<CAPTION>
Rating
------
Class S&P DCR
----- --- ---
<S> <C> <C>
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAA AAA
Class A-I-9 AAA AAA
Class A-II AAA AAA
Class X AAAr AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
</TABLE>
The "r" symbol is appended to the rating by S&P of
those Certificates that S&P believes may experience
high volatility or high variability in expected
returns due to non-credit risks. The absence of an
"r" symbol in the ratings of the other Offered
Certificates should not be taken as an indication
that such Certificates will exhibit no volatility or
variability in total return.
The ratings of the Offered Certificates of any Class
should be evaluated independently from similar
ratings on other types of securities. A rating is not
a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time
by the Rating Agencies. See "Ratings" herein.
The Company has not requested a rating of the Offered
Certificates by any rating agency other than the
Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the
Offered Certificates or, if it does, what rating
would be assigned by such other rating agency. The
rating assigned by such other rating agency to the
Offered Certificates could be lower than the
respective ratings assigned by the Rating Agencies.
Legal Investment The Senior Certificates and the Class B-1 Certificates
will constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA") for so long as they are rated
in one of the two highest rating categories by at
least one nationally recognized statistical rating
organization, and, as such, will be legal investments
for certain entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. Certain
states have enacted legislation overriding the legal
investment provisions of SMMEA. The remaining Classes
of Certificates will not constitute
S-24
<PAGE>
"mortgage related securities" under SMMEA (the "Non-
SMMEA Certificates"). The appropriate
characterization of the Non-SMMEA Certificates under
various legal investment restrictions, and thus the
ability of investors subject to these restrictions to
purchase Non-SMMEA Certificates, may be subject to
significant interpretive uncertainties.
All investors whose investment activities are subject
to legal investment laws and regulations or to review
by certain regulatory authorities may be subject to
restrictions on investment in the Certificates. Any
such institution should consult its own legal
advisors in determining whether and to what extent
there may be restrictions on its ability to invest in
the Certificates. See "Legal Investment" herein and
"Legal Investment Matters" in the Prospectus.
Listing Application The Company does not currently intend to make an
application to list the Offered Certificates on a
national securities exchange or to quote the Offered
Securities in the automated quotation system of a
registered securities association.
Risk Factors There are material risks associated with an investment
in the Offered Certificates. See "Risk Factors"
beginning on page S-26 herein and on page 11 of the
Prospectus for a discussion of significant matters
affecting investments in the Certificates.
S-25
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
items discussed under "Risk Factors" in the Prospectus and the following factors
in connection with the purchase of the Certificates:
General. The yield to maturity of each Class of Offered Certificates will
be sensitive in varying degrees to the rate and timing of principal payments
(including prepayments) on the Mortgage Loans generally in the related Mortgage
Loan Group in the case of the Class A Certificates and the Class B Certificates
(each as defined herein), and the Premium Mortgage Loans in both Mortgage Loan
Groups in the case of the Class X Certificates. The Mortgage Loans generally may
be prepaid in full or in part at any time without penalty. The yield to maturity
of a Class of Offered Certificates purchased at a discount or premium will be
more sensitive to the rate and timing of payments thereon. Holders of the
Offered Certificates should consider, in the case of any such Certificates
purchased at a discount the risk that a slower than anticipated rate of
principal payments on the applicable Mortgage Loans could result in an actual
yield that is lower than the anticipated yield and, in the case of any Offered
Certificates purchased at a premium, including the Class X Certificates, the
risk that a faster than anticipated rate of principal payments on the applicable
Mortgage Loans could result in an actual yield that is lower than the
anticipated yield. Holders of the Class X Certificates should carefully consider
the risk that a rapid rate of principal payments on the Premium Mortgage Loans
could result in the failure of such holders to recover fully their initial
investments. The yield to investors in the Offered Certificates (particularly
the Class B Certificates) also will be adversely affected by Realized Losses and
Net Interest Shortfalls (each as defined herein) on all of the Mortgage Loans.
No representation is made as to the anticipated rate of prepayments on any
Mortgage Loans, the amount and timing of Realized Losses or Interest Shortfalls
(as defined herein) or as to the resulting yield to maturity of any Class of
Offered Certificates. See "Summary of Terms--Yield and Prepayment
Considerations" and "Yield and Prepayment Considerations" herein.
Underwriting. Approximately 1.87% of the Mortgage Loans (measured by Cut-
off Date Scheduled Principal Balance) were underwritten in accordance with
underwriting standards that are intended to provide one- to-four family mortgage
loans to borrowers whose creditworthiness and credit histories only satisfy the
requirements of typical "B/C" credit borrowers. The Mortgagors with respect to
such Mortgage Loans may have records of major derogatory credit such as credit
write-offs, outstanding judgments and prior bankruptcies. Such Mortgage Loans
generally bear higher rates of interest than mortgage loans made to "A" credit
borrowers. Such Mortgage Loans are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than
mortgage loans made to "A" credit borrowers.
Book-Entry System. Transactions in the Book-Entry Certificates generally
can be effected only through DTC, Participants and Indirect Participants. The
ability of Certificate Owners to pledge Book-Entry Certificates and the
liquidity of the Book-Entry Certificates in general may be limited due to the
lack of a physical certificate for such Book-Entry Certificates. In addition,
Certificate Owners may experience delays in their receipt of payments. See "Risk
Factors--Book-Entry Registration May Affect Liquidity" in the Prospectus.
Legal Proceedings. On March 5, 1997, Fortune Mortgage filed a complaint
against various parties, including the Master Servicer, ICMH, ICII and certain
individuals who are officers and/or directors of such entities. The claims arise
out of a sale of a group of loan production offices by ICII to Imperial First
Mortgage. The complaint alleges that the sale was induced by fraudulent
misrepresentations and omissions, including but not limited to an allegation
that the loan production offices were engaged in illegal kickback practices
which were not disclosed to the buyer, as well as misrepresentations concerning
the volume and profitability of the loan production offices. The prayer seeks
general damages, special and/or consequential damages, reasonable attorney's
fees and costs of suit on all of the causes of action. In addition, the prayer
also seeks exemplary and punitive damages. The complaint alleges specifically
that plaintiffs have been damaged in a sum in excess of $2.5 million by virtue
of the defendants' conduct, and that the defendants have been unjustly
S-26
<PAGE>
enriched in a sum in excess of $10 million. The matter will be arbitrated
before the American Arbitration Association. The Master Servicer intends
to vigorously defend the lawsuit; however, there can be no assurance that
an adverse decision in such lawsuit would not have a material adverse
affect on the ability of the Master Servicer to perform its obligations
under the Agreement (as defined herein).
See "Risk Factors" in the Prospectus for a description of certain other
risks and special considerations applicable to the Offered Certificates.
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
All of the Mortgage Loans are conventional (neither insured by the
Federal Housing Administration ("FHA") nor guaranteed by the Veterans'
Administration ("VA")) fixed-rate Mortgage Loans secured by first liens on
one- to four-family residential Mortgaged Properties. The aggregate
principal balance of the Mortgage Loans as of the Cut-off Date is referred
to as the "Cut-off Date Scheduled Principal Balance." The following
paragraphs and the tables contained in Annex A set forth certain additional
information with respect to the Mortgage Loans./*/
All of the Mortgage Loans will have been sold to the Company by ICI
Funding Corporation ("ICI Funding" or the "Master Servicer"), pursuant to a
mortgage loan purchase agreement among the Company, as purchaser, ICI
Funding, as seller, and ICI Funding's parent, Imperial Credit Mortgage
Holdings, Inc., as guarantor. The Mortgage Loans will have been acquired
by ICI Funding in accordance with the underwriting criteria described
herein. All of the Mortgage Loans have monthly payments due on the first
day of each month. Each Mortgage Rate will be fixed for the life of the
related Mortgage Loan.
The Cut-off Date Scheduled Principal Balance of the Mortgage Loans is
approximately $291,378,275. The Mortgage Loans are divided into two groups
(Mortgage Loan Group I and Mortgage Loan Group II) designated as the Group
I Mortgage Loans and the Group II Mortgage Loans, having Cut-off Date
Scheduled Principal Balances of approximately $267,451,674 and $23,926,601,
respectively. All of the Mortgage Loans in Mortgage Loan Group I have
original terms to stated maturity of greater than 15 but not more than 30
years, and all of the Mortgage Loans in Mortgage Loan Group II have
original terms to stated maturity of up to 15 years, in each case based on
the date of origination or any later modification.
Each Mortgage Loan with a Loan-to-Value Ratio at origination in excess of
80% (except for 8 Group I Mortgage Loans with an aggregate Cut-off Date
Scheduled Principal Balance of approximately $869,867) is insured by a
primary mortgage insurance policy ("Primary Insurance Policy"). Each such
Primary Insurance Policy provides coverage in an amount equal at least to
the excess of the original principal balance of the Mortgage Loan covered
thereby, plus accrued interest thereon and related foreclosure expenses
over 75% of the value of the related Mortgaged Property as determined at
the time of origination of the related Mortgage Loan. For these purposes
Loan-to-Value Ratio means the ratio, expressed as a percentage, of the
principal balance of the Mortgage Loan at origination to the original value
of the Mortgaged Property (i.e., the value at origination based upon an
appraisal or the selling price, whichever is less, or in the case of
certain
---------
/*/ The description herein of the Mortgage Loans is based upon estimates of
the composition of the Mortgage Loans as of the Cut-off Date, as
adjusted for all scheduled principal payments due on or before the Cut-
off Date. The Company believes that the estimated information set forth
herein with respect to the Mortgage Loans as presently constituted is
representative of the characteristics of the Mortgage Loans at the time
the Certificates are issued, although certain characteristics of the
Mortgage Loans may vary.
S-27
<PAGE>
refinancings, the value set forth in an appraisal). There can be no
assurance that the Loan-to-Value Ratio of any Mortgage Loan determined at
any time after origination is less than or equal to its original Loan-to-
Value Ratio.
None of the Mortgage Loans will be assumable. None of the Mortgage Loans
will be 30 or more days delinquent in payment as of the Closing Date, or
will have been 30 or more days delinquent more than once during the 12
months preceding the Closing Date. Eight Mortgage Loans with aggregate
Cut-off Date Scheduled Principal Balances of approximately $961,579 provide
for balloon payments.
Pursuant to its terms, each Mortgage Loan is required to be covered by a
standard hazard insurance policy in an amount equal to the lower of the
original principal loan amount or the replacement value of the improvements
on the Mortgaged Property. See "Primary Mortgage Insurance, Hazard
Insurance; Claims Thereunder--Hazard Insurance Policies" in the Prospectus.
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at the levels in effect on the date of
origination of the related Mortgage Loan. Approximately 36.29% and 14.15%
of the Group I Mortgage Loans and Group II Mortgage Loans, respectively,
(by Cut-off Date Scheduled Principal Balance) are secured by Mortgaged
Properties located in the State of California. Property values of
residential real estate in California have declined in recent years. If the
California residential real estate market should continue to experience an
overall decline in property values after the dates of origination of the
Mortgage Loans, the rates of delinquencies, foreclosures, bankruptcies and
losses on the Mortgage Loans may be expected to increase substantially.
CHARACTERISTICS OF THE MORTGAGE LOANS
Certain additional expected characteristics (as of the Cut-off Date) of
the Mortgage Loans are set forth in the tables appearing as Annex A to this
Prospectus Supplement.
THE SELLER
ICI Funding, a California corporation, is a mortgage banking conduit that
acquires conventional one-to four-family residential mortgage loans
nationwide. ICI Funding is a non-consolidating subsidiary of Imperial
Credit Mortgage Holdings, Inc., a publicly traded real estate investment
trust. ICI Funding primarily acquires mortgage loans from approved
correspondents.
Prior to November 1995, ICI Funding was a division of Imperial Credit
Industries, Inc. ("ICII"). In November 1995, ICII restructured its
operations pursuant to which ICI Funding became a separate corporation and
ICII contributed, among other things, all of the outstanding nonvoting
preferred stock of ICI Funding, which represents 99% of the economic
interest in ICI Funding, to Imperial Credit Mortgage Holdings, Inc.
("ICMH"), in exchange for approximately 10% of ICMH's common stock. The
common stock of ICI Funding was retained by ICII until March 1997 when it
was distributed to certain officers and/or directors of ICI Funding who are
also officers and/or directors of ICMH.
ICI Funding had sub-contracted with ICII to perform its mortgage loan
servicing, which included the processing and administration of mortgage
loan payments, in return for a sub-servicing fee through June 30, 1996.
Commencing on July 1, 1996, Wendover Funding, Inc., a wholly-owned
subsidiary of State Street Bank and Trust Company ("Wendover"), undertook
to perform ICI Funding's mortgage loan servicing for a sub-servicing fee.
At March 31, 1997, Wendover serviced approximately $9.9 billion outstanding
principal amount of mortgage loans. Wendover is hereinafter at times
referred to herein as the "Sub-Servicer." See "--The Master Servicer; the
Sub-Servicer" herein.
S-28
<PAGE>
At March 31, 1997, ICI Funding had approximately 115 employees. ICI
Funding's executive offices are located at 20371 Irvine Avenue, Santa Ana
Heights, California 92707, and its telephone number is (714) 556-0122.
UNDERWRITING STANDARDS
All of the Mortgage Loans were acquired by ICI Funding and substantially
all were underwritten pursuant to, or in accordance with, the standards of
either ICI Funding's Progressive Series Program or its Progressive
Express(TM) Program, each of which is described below.
The Progressive Series Program
General. The underwriting guidelines utilized in the Progressive Series
Program, as developed by ICI Funding, are intended to assess the borrower's
ability and willingness to repay the mortgage loan obligation and to assess
the adequacy of the mortgaged property as collateral for the mortgage loan.
The Progressive Series Program is designed to meet the needs of borrowers
with excellent credit, as well as those whose credit has been adversely
affected. The Progressive Series Program consists of six mortgage loan
programs. Each program has different credit criteria, reserve
requirements, qualifying ratios and Loan-to-Value Ratio restrictions.
Series I is designed for credit history and income requirements typical of
"A" credit borrowers. In the event a borrower does not fit the Series I
criteria, the borrower's mortgage loan is placed into either Series II,
III, III+, IV or V, depending on which series' mortgage loan parameters
meets the borrower's unique credit profile. Series II, III, III+, IV and V
allow for less restrictive standards because of certain compensating or
offsetting factors such as a lower Loan-to-Value Ratio, verified liquid
assets, job stability, pride of ownership and, in the case of refinance
mortgage loans, length of time owning the mortgaged property. The
philosophy of the Progressive Series Program is that no single borrower
characteristic should automatically determine whether an application for a
mortgage loan should be approved or disapproved. Lending decisions are
based on a risk analysis assessment after the review of the entire mortgage
loan file. Each mortgage loan is individually underwritten with emphasis
placed on the overall quality of the mortgage loan. The Progressive Series
I Program utilizes an average annual salary to calculate the debt service-
to-income ratio. Salaried borrowers are evaluated based on a 12 month
salary history, and self-employed and commission borrowers are evaluated on
a 24 month basis. The debt service-to-income ratio for Series I borrowers
is required to be within the range of 36% to 50%. The Progressive Series
II, III, III+, IV and V Program borrowers are required to have debt
service-to-income ratios within the range of 45% to 60% calculated on the
basis of monthly income and depending on the Loan-to-Value Ratio of the
Mortgage Loan.
Under the Progressive Series Program, ICI Funding underwrites one- to
four-family mortgage loans with Loan-to-Value Ratios at origination of up
to 95%, depending on, among other things, a borrower's credit history,
repayment ability and debt service-to-income ratio, as well as the type and
use of the mortgaged property. Second lien financing of the mortgaged
properties may be provided by lenders other than ICI Funding at
origination; however, the combined Loan-to-Value Ratio ("CLTV") generally
may not exceed 95% for mortgage loan amounts up to $400,000 and 90% for
mortgage loan amounts above $400,000. In certain circumstances, ICI
Funding may allow second lien financing with CLTVs of up to 100%. The
mortgage loans in the Progressive Series Program generally bear rates of
interest that are greater than those which are originated in accordance
with FHLMC and FNMA standards. In general, the maximum amount for mortgage
loans originated under the Progressive Series Program is $750,000; however,
ICI Funding may approve mortgage loans in excess of such amount on a case-
by-case basis.
All of the mortgage loans originated under the Progressive Series I
Program are underwritten either by employees of ICI Funding or by
contracted mortgage insurance companies or delegated conduit sellers. All
mortgage loans originated under the Series II and III Programs are
underwritten by employees of ICI Funding and/or Commonwealth Mortgage
Assurance Company. Substantially all of the mortgage loans
S-29
<PAGE>
originated under the Series III+, IV and V Programs are underwritten by
employees of ICI Funding or contracted due diligence firms. Substantially
all of the Series I Program mortgage loans and all of the Series II and III
Program mortgage loans with Loan-to-Value Ratios at origination in excess
of 80% are insured by a Primary Insurance Policy. None of the Series III+
Program Mortgage Loans with Loan-to-Value Ratios at origination in excess
of 80% will be insured by a Primary Insurance Policy. In general, all
Series IV and Series V Program Mortgage Loans have Loan-to-Value Ratios at
origination which are less than or equal to 80% and do not require a
Primary Insurance Policy. ICI Funding receives verbal verification from
ICI Funding's conduit seller of employment prior to funding or acquiring
each Progressive Series Program mortgage loan.
Full/Alternative Documentation and Reduced Documentation Progressive
Series Programs. Each prospective borrower completes a mortgage loan
application which includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. ICI Funding requires a credit report on each applicant from a
credit reporting company. The report typically contains information
relating to credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcies,
repossessions or judgments.
The Progressive Series Program allows for approval of an application
pursuant to the (a) Full/Alternative Documentation Program, or (b) the
Limited Documentation Program, the Lite Documentation Program, the "No
Ratio" Program or the "No Income, No Assets" Program (any of the foregoing,
a "Reduced Documentation Program"). The Full/Alternative Documentation
Program requires the following documents: (i) Uniform Residential Loan
Application (FNMA Form 1003 or FHLMC Form 65), (ii) Statement of Assets and
Liabilities (FNMA Form 1003A or FHLMC 65A), (iii) Residential Mortgage
Credit Report with records obtained from at least two separate
repositories, (iv) Verification of Employment Form providing a complete two
year employment history, (v) Verification of Deposit Form for all liquid
assets, verifying minimum cash reserves as required based upon the Loan-to-
Value Ratio and borrower's income, and (vi) a Uniform Residential Appraisal
Report (FNMA Form 1004 or FHLMC Form 70). The Full/Alternative
Documentation Program allows for the use of certain alternative documents
in lieu of the Verification of Deposit Form and Verification of Employment
Form. These include W-2 Statements, tax returns and one pay check from the
most recent full month for verification of income and the most recent three
months personal bank statements for verification of liquid assets. In
addition, self-employed borrowers must provide federal tax returns for the
previous two to three years, including K-l's, federal business tax returns
for two years, year-to-date financial statements, a business credit report
(for corporations) and a signed IRS Form 4506 (Request for Copy of Tax
Returns).
Under the Limited Documentation Program, which is available to borrowers
in every Progressive Series Program, ICI Funding obtains from prospective
borrowers either a verification of deposits or bank statements for the most
recent two-month period preceding the mortgage loan application. In
addition, the Lite Documentation Program is available to Series III+,
Series IV and Series V self-employed borrowers where the previous 12 months
bank statements are utilized in lieu of tax returns. Under these programs
the borrower provides income information on the mortgage loan application,
and the debt service-to-income ratio is calculated. However, income is not
verified. Permitted maximum Loan-to-Value Ratios (including secondary
financing) under the Limited Documentation and Lite Documentation Programs
generally are limited.
The Progressive Series Program also allows for approval of applications
pursuant to the "No Ratio" Program and "No Income, No Assets" Program. The
"No Ratio" Program, available to borrowers in the Series I and Series II
Programs, is designed for a mortgage loan which requires a minimum 20% down
payment from the borrower with employment information, but no income
information, stated on the application (and, therefore, the debt service-
to-income ratio is not calculated). The verification of assets is
confirmed by written verification of deposits and supported by bank
statements. With respect to the "No Ratio" Program, a mortgage loan with a
Loan-to-Value Ratio at origination in excess of 80% is not eligible.
The "No Income, No Assets" Program, available to borrowers in the Series
I Program, requires a much larger down payment than under the "No Ratio"
Program. Under this program, the borrower provides
S-30
<PAGE>
no income information, but provides employment and unverified asset
information on the mortgage loan application. With respect to the "No
Income, No Assets" Program, a mortgage loan with a Loan-to-Value Ratio at
origination in excess of 80% is generally not eligible.
Under all Progressive Series Programs, ICI Funding's conduit seller
verbally verifies the borrower's employment prior to closing. Credit
history, collateral quality and the amount of the down payment are
important factors in evaluating a mortgage loan submitted under one of the
Reduced Documentation Programs. In addition, in order to qualify for a
Reduced Documentation Program, a mortgage loan must conform to certain
criteria regarding maximum loan amount, property type and occupancy status.
Mortgage loans having a Loan-to-Value Ratio at origination in excess of 80%
for Series I, II and III and mortgage loans on mortgaged property used as a
second or vacation home by the prospective borrowers are not eligible for a
Reduced Documentation Program. In general, the maximum loan amount for
mortgage loans underwritten in accordance with Series I, II and III Reduced
Documentation Program is $750,000 for purchase transactions and rate-term
transactions and a maximum loan amount of $650,000 for cash out refinance
transactions. The maximum loan amount for mortgage loans underwritten in
accordance with Series III+, IV and V Reduced Documentation Program is
$450,000. Secondary financing is allowed in the origination of the Limited
Documentation Program but must meet the CLTV requirements described above
and certain other requirements for subordinate financing. Secondary
financing may also be allowed in the case of the "No Ratio" or the "No
Income, No Assets" Programs. In all cases, liquid assets must support the
level of income of the borrower as stated in proportion to the type of
employment of the borrower. Full Documentation is requested by the
underwriter if it is the judgment of the underwriter that the compensating
factors are insufficient for loan approval.
Credit History. The Progressive Series Program defines an acceptable
credit history in each of the Series I, II and III Programs. The Series I
Program defines an acceptable credit history as a borrower who has "A"
credit, meaning a minimum of five trade accounts, with 24 months credit
history, no 30-day delinquent mortgage payments in the last 24 months, and
a maximum of two 30-day delinquent payments on any installment credit
account within the past 24 months. No bankruptcies or foreclosures are
allowed in the past 24 months. No judgments, suits, liens, collections or
charge-offs are allowed within the past 24 months.
With respect to the Series II Program, a borrower must have a minimum of
five trade accounts with no late mortgage payments for the past 12 months
and may have one 30-day delinquent mortgage payment within the past 13th
through 24th months. A borrower may not have more than three 30-day
delinquent payments on any revolving credit account and a maximum of three
30-day delinquent payments within the past 24 months on any installment
credit account. All bankruptcies must be at least 24 months old, fully
discharged and the borrower must have re-established a satisfactory credit
history. Foreclosures are not allowed in the past 24 months.
With respect to the Series III Program, a borrower may not have more than
two 30-day delinquent mortgage payments within the past 24 months. The
borrower may not have more than three 30-day delinquent payments and one
60-day delinquent payment on revolving debt in the last 24 months and may
not have more than three 30-day delinquent and one 60-day delinquent
payment on any installment credit account in the past 24 months. Any open
judgment, suit, lien, collection or charge-off must be paid prior to
closing. Bankruptcies must be at least 24 months old, fully discharged and
the borrower must have re-established a satisfactory credit history. No
late mortgage payments are permitted on equity take-out refinances under
the Limited Documentation Program offered under the Progressive Series
Program.
With respect to the Series III+ Program, a borrower may not have more
than two 30-day delinquent mortgage payments within the past 12 months.
The borrower may not have more than two 30-day delinquent payments and one
60-day delinquent payment on revolving debt in the last 12 months and may
not have more than two 30-day delinquent payments and one 60-day delinquent
payment on any installment credit account in the past 12 months. Any open
judgments, suits, liens collections, charge-offs not to exceed $500 must be
S-31
<PAGE>
paid in full at closing. Bankruptcies must be at least 24 months old,
fully discharged and the borrower must have reestablished a satisfactory
credit history. Foreclosures are not allowed in the past 24 months.
With respect to the Series IV Program, a borrower may not have more than
four 30-day delinquent mortgage payments or three 30-day delinquent
mortgage payments and one 60-day delinquent mortgage payment within the
past 12 months. The borrower may not have more than four 30-day delinquent
payments or two 60-day delinquent payments or one 90-day delinquent payment
on revolving debt in the last 12 months and may not have more than four 30-
day delinquent payments or two 60-day delinquent payments or one 90-day
delinquent payment on any installment credit account in the past 12 months.
Any open judgments, suits, liens, collections, charge-offs not to exceed
$1,000 must be paid in full at closing. Bankruptcies must be at least 18
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 18
months.
With respect to the Series V Program, a borrower may not have more than
five 30-day delinquent mortgage payments or two 60-day delinquent mortgage
payments and one 90-day delinquent mortgage payment within the past 12
months. The borrower may not have more than six 30-day delinquent payments
or three 60-day delinquent payments or two 90-day delinquent payments on
revolving debt in the last 12 months and may not have more than six 30-day
delinquent payments or three 60-day delinquent payments or two 90-day
delinquent payments on any installment credit account in the past 12
months. Any open judgments, suits, liens, collections or charge-offs not
to exceed $4,000 must be paid in full at closing. Bankruptcies must be at
least 12 months old, fully discharged and the borrower must have re-
established a satisfactory credit history. Foreclosures are not allowed in
the past 12 months.
Quality Control. ICI Funding generally performs a pre-funding audit on
each Progressive Series Program mortgage loan. This audit includes a
review for compliance with Progressive Series Program parameters and
accuracy of the legal documents. ICI Funding performs a quality control
review on a minimum of 25% of the mortgage loans originated or acquired
under the Progressive Series Program for complete re-verification of
employment, income and liquid assets used to qualify for such mortgage
loan. Such review also includes procedures intended to detect evidence of
fraudulent documentation and/or imprudent activity during the processing,
funding, servicing or selling of the mortgage loan. Verification of
occupancy and applicable information is made by regular mail.
Appraisals. One- to four-family residential properties that are to secure
Progressive Series Program mortgage loans are appraised by qualified
independent appraisers who are approved by ICI Funding's correspondents.
Such appraisers inspect and appraise the subject property and verify that
such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a
similar home. All appraisals are required to conform to the Uniform
Standards of Professional Appraisal Practice adopted by the Appraisal
Standards Board of the Appraisal Foundation and must be on forms acceptable
to FNMA and FHLMC. As part of ICI Funding's quality control procedures,
either field or desk appraisal reviews are obtained on 10% of all mortgage
loans originated under the Progressive Series Program. Selected mortgage
loans will also be reviewed for compliance and document accuracy.
Historically, desk and/or field appraisal reviews have been required on all
mortgage loans originated under the Progressive Series Program with Loan-
to-Value Ratios in excess of 65% on mortgaged properties located in the
State of California, Loan-to-Value Ratios in excess of 70% on any
properties in all other states, loan amounts in excess of $350,000, non-
owner occupied properties, second home properties, cash-out refinance
mortgage loans and whenever in the underwriter's judgment it is necessary
to reverify the appraised value of the property. Effective February 3,
1997, each loan includes one full appraisal and an enhanced review
appraisal by a national appraisal company designated by ICI Funding. The
enhanced appraisal review is not required when the full appraisal is
ordered by the Conduit Seller from one of ICI Funding's approved national
appraisal companies.
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<PAGE>
Variations. ICI Funding uses the foregoing parameters as guidelines only.
On a case-by-case basis, ICI Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series
Program guidelines. An exception may be allowed if the loan application
reflects certain compensating factors, including (i) the prospective
mortgagor has demonstrated an ability to save and devote a greater portion
of income to basic housing needs; (ii) the prospective mortgagor may have a
potential for increased earnings and advancement because of education or
special job training, even if the prospective mortgagor has just entered
the job market; (iii) the prospective mortgagor has demonstrated an ability
to maintain a debt free position; (iv) the prospective mortgagor may have
short term income that is verifiable but could not be counted as stable
income because it does not meet the remaining term requirements; and (v)
the prospective mortgagor's net worth is substantial enough to suggest that
repayment of the loan is within the prospective mortgagor's ability.
The Progressive Express(TM) Program
General. In July 1996, ICI Funding developed an additional Series to the
Progressive Program, the "Progressive Express(TM) Program". The concept of
the Progressive Express(TM) Program is to underwrite the loan focusing on
the borrowers Fair Issac ("FICO") credit score, ability and willingness to
repay the mortgage loan obligation, and assess the adequacy of the mortgage
property as collateral for the loan. The FICO Score was developed by Fair,
Issac Co., Inc. of San Rafael, California. It is an electronic evaluation
of past and present credit accounts on the borrower's credit bureau report.
This includes all reported accounts as well as public records and
inquiries. The Progressive Express(TM) Program offers six levels of
mortgage loan programs. The Progressive Express(TM) Program has a minimum
FICO score that must be met by each of the borrowers and does not allow for
any exceptions to the FICO score requirement. The FICO Score requirement is
as follows: Progressive Express(TM) I 681 & above, Progressive Express(TM)
II 680-621, Progressive Express(TM) III 620-601, Progressive Express(TM) IV
600-581, Progressive Express(TM) V 580-551, and Progressive Express(TM) VI
550-500. Each Progressive Express(TM) program has different FICO score
requirements, credit criteria, reserve requirements, and Loan-to-Value
Ratio restrictions. Progressive Express(TM) I is designed for credit
history and income requirements typical of "A+" credit borrowers. In the
event a borrower does not fit the Progressive Express(TM) I criteria, the
borrower's mortgage loan is placed into either Progressive Express(TM) II,
III, IV, V, or VI, depending on which series' mortgage loan parameters
meets the borrower unique credit profile.
Under the Progressive Express(TM) Program, ICI Funding underwrites single
family dwellings with Loan-to-Value Ratios at origination of up to 95%. In
order for the property to be eligible for the Progressive Express(TM)
Program, it must be a single family residence (1 unit only), condominium,
and/or planned unit development (PUD). Each mortgage loan is individually
underwritten by an ICI Funding employee or by contracted Commonwealth
Mortgage Assurance Company staff on-site at ICI Funding. This program is
not offered to Conduit Sellers under their Delegated Underwriting program.
Progressive Express(TM) Programs I through IV with Loan-to-Value Ratios at
origination in excess of 80% are insured by Commonwealth Mortgage Assurance
Company. Loan-to-Value Ratios of 80.01% to 85% require 22% mortgage
insurance coverage and 85.01% to 90% require 30% mortgage insurance
coverage.
Each respective buyer completes a Progressive Express(TM) Doc loan
application and certifies the following when signing the application;
property is intended to be owner-occupied, funds are not from a gift,
borrower is presently employed, and the transaction is not a non-arms
length transaction. At the time of signing loan documents, Progressive
Express(TM) I - IV borrowers execute a "Borrower's Certification"
certifying the above and that the borrower has 4 months principal,
interest, taxes, and insurance reserves available, exclusive of cash-out
proceeds. The borrower must disclose employment and assets on the
application, however, there is no verification of the information. The
Conduit Seller obtains a Verbal Verification of Employment on each
borrower. ICI Funding uses the foregoing parameters as guidelines only.
Sellers may include certain criteria that ICI Funding may not enforce,
particularly, when a fixed rate loan includes an Addendum to the Note for a
prepayment penalty. Full documentation is requested by the underwriter if
it is
S-33
<PAGE>
the judgment of the underwriter that the compensating factors are
insufficient for loan approval under the Progressive Product Line.
Credit History. The Progressive Express(TM) Program defines an acceptable
credit history in each of the programs I through VI. Progressive
Express(TM) I defines an acceptable credit history as a borrower who has
"A+" credit, meaning a minimum of 5 trade accounts, no 30-day delinquent
mortgage payments in the past 24 months, and a maximum of two 30-day
delinquent payments on any revolving credit accounts within the past 24
months and one 30-day delinquent payment on any installment credit accounts
within the past 24 months. All bankruptcies must be at least 24 months old,
fully discharged and the borrower must have re-established a satisfactory
credit history. Foreclosures are not allowed in the past 3 years. No
judgments, suits, liens, collections or charge-offs are allowed within the
past 24 months. Tax liens are not allowed.
With respect to Progressive Express(TM) II, a borrower must have a
minimum of 5 trade accounts, no late mortgage payments for the past 12
months, and a maximum of two 30-day or no 60-day delinquent payments on any
revolving credit accounts and a maximum of one 30-day or no 60-day
delinquent payments on any installment credit accounts in the past 12
months. All bankruptcies must be at least 24 months old, fully discharged
and the borrower must have re-established a satisfactory credit history.
Foreclosures are not allowed in the past 3 years. Judgments, suits, liens,
collections or charge-offs must be paid prior to closing. Tax liens are not
allowed.
With respect to Progressive Express(TM) III, a borrower must have a
minimum of 5 trade accounts, no late mortgage payments for the past 12
months and may have one 30-day late mortgage payment within the past 13 and
24 months. A borrower may not have more than a maximum of three 30-day
delinquent payments on any revolving credit accounts or installment credit
accounts in the past 24 months. All bankruptcies must be at least 24 months
old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 3
years. Judgments, suits, liens, collections or charge-offs must be paid
prior to closing. Tax liens are not allowed.
With respect to Progressive Express(TM) IV, a borrower must have a
minimum of 5 trade accounts, no more than two 30-day late mortgage payments
in the past 12 months or three 30-day late mortgage payments in the past 24
months. A borrower may not have more than a maximum of three 30-day or one
60-day delinquent payments on any revolving credit accounts or installment
credit accounts in the past 24 months. All bankruptcies must be at least 24
months old, fully discharged and the borrower must have re-established a
satisfactory credit history. Foreclosures are not allowed in the past 3
years. Judgments, suits, liens, collections or charge-offs, not to exceed
$500, must be paid prior to closing. Tax liens are not allowed.
With respect to Progressive Express(TM) V, a borrower must have a minimum
of 3 trade accounts, no more than two 30-day late mortgage payments in the
past 12 months. A borrower may not have more than a maximum of two 30-day
or one 60-day delinquent payments on any revolving credit accounts or
installment credit accounts in the past 12 months. All bankruptcies must be
at least 24 months old, fully discharged and the borrower must have re-
established a satisfactory credit history. Foreclosures are not allowed in
the past 24 months. Judgments, suits, liens, collections or charge-offs,
not to exceed $500, must be paid at closing. Tax liens are not allowed.
With respect to Progressive Express(TM) VI, a borrower must have a
minimum of 3 trade accounts, no more than four 30-day or three 30-day and
one 60-day late mortgage payments in the past 12 months. A borrower may not
have more than a maximum of four 30-day or two 60-day or one 90-day
delinquent payments on any revolving credit accounts or installment credit
accounts in the past 12 months. All bankruptcies must be at least 18 months
old and fully discharged. Foreclosures are not allowed in the past 18
months. Judgments, suits, liens, collections or charge-offs, not to exceed
$1,000, must be paid at closing. Tax liens are not allowed.
S-34
<PAGE>
Quality Control. ICI Funding generally performs a pre-funding audit on
each Progressive Express(TM) Program mortgage loan. This audit includes a
review for compliance with Progressive Express(TM) Program parameters and
accuracy of the legal documents. ICI Funding performs a quality control
review on a minimum of 25% of the mortgage loans originated or acquired
under the Progressive Express(TM) Program for complete re-verification of
employment, income and liquid assets used to qualify for such mortgage
loan. Such review also includes procedures intended to detect evidence of
fraudulent documentation and/or imprudent activity during the processing,
funding, servicing or selling of the mortgage loan. Verification of
occupancy and applicable information is made by regular mail.
Appraisals. Each Progressive Express(TM) loan includes one full appraisal
and an enhanced review appraisal by a national appraisal company designated
by ICI Funding. The enhanced appraisal review is not required when the full
appraisal is ordered by the Conduit Seller from one of ICI Funding's
approved national appraisal companies. In full appraisals, appraisers
inspect and appraise the subject property and verify that such property is
in acceptable condition. Following each appraisal, the appraiser prepares a
report which includes a market value analysis based on recent sales of
comparable homes in the area and, when deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home. All full
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the
Appraisal Foundation and must be on forms acceptable to FNMA and FHLMC.
Selected mortgage loans will also be reviewed for compliance and document
accuracy.
ICI Funding commenced acquiring mortgage loans underwritten pursuant to
the Progressive Series Program in November 1995 and pursuant to the
Progressive Express(TM) Program in late 1996. Accordingly, ICI Funding does
not have sufficient historical delinquency or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of the Mortgage Loans underwritten pursuant to the Progressive
Series Program and the Progressive Express(TM) Program. There can be no
assurance that the delinquency experience of the servicing portfolio of ICI
Funding or of Wendover as described herein will correspond to the
delinquency experience of the Mortgage Loans underwritten pursuant to the
Progressive Series Program or the Progressive Express(TM) Program. It is
contemplated that all of the Progressive Series Program and Progressive
Express(TM) Program mortgage loans originated or acquired by ICI Funding
will also be underwritten with a view toward the resale thereof in the
secondary mortgage market.
Variations. ICI Funding uses the foregoing parameters as guidelines only.
On a case-by-case basis, ICI Funding may determine that the prospective
mortgagor warrants an exception outside the standard Progressive Series
Program guidelines. An exception may be allowed if the loan application
reflects certain compensating factors, including instances where the
prospective mortgagor (i) has demonstrated an ability to save and devote a
greater portion of income to basic housing needs; (ii) may have a potential
for increased earnings and advancement because of education or special job
training, even if the prospective mortgagor has just entered the job
market; (iii) has demonstrated an ability to maintain a debt free position;
(iv) may have short term income that is verifiable but could not be counted
as stable income because it does not meet the remaining term requirements;
and (v) has net worth substantial enough to suggest that repayment of the
loan is within the prospective mortgagor's ability. ICI Funding may also
underwrite loans from time to time pursuant to the Federal National
Mortgage Association guidelines for five and seven year balloon loans.
See "The Mortgage Pools--Underwriting Standards" in the Prospectus.
DELINQUENCY AND FORECLOSURE EXPERIENCE
Based solely upon information provided by the Master Servicer, the
following tables summarize, for the respective dates indicated, the
delinquency, foreclosure, bankruptcy and REO property status with respect
to all mortgage loans originated or acquired by the Seller. The indicated
periods of delinquency are based on the number of days past due on a
contractual basis. The monthly payments under all of such mortgage loans
are due on the first day of each calendar month.
S-35
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT MARCH 31, 1997
-------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding 11,996 $1,550,121 14,820 $1,941,671
DELINQUENCY(1)
Period of Delinquency:
30-59 Days 587 $ 66,272 693 $ 82,251
60-89 Days 118 15,089 151 $ 19,360
90 Days or More 3 95 108 $ 12,919
Total Delinquencies 708 $ 81,456 952 $ 114,530
====== ========== ====== ==========
Delinquencies as a Percentage of
Total Loans Outstanding 5.90% 5.25% 6.42% 5.90%
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT MARCH 31, 1997
---------------------------------------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FORECLOSURES PENDING(2) 180 $ 25,697 218 $ 26,117
Foreclosures Pending as a Percentage of Total Loans
Outstanding 1.50% 1.66% 1.47% 1.35%
BANKRUPTCIES PENDING(3) 55 $ 6,315 47 $ 5,272
Bankruptcies Pending as a Percentage of Total Loans
Outstanding 0.46% 0.41% 0.32% 0.27%
Total Delinquencies plus Foreclosures Pending and
Bankruptcies Pending 943 113,468 1,217 $ 145,919
Total Delinquencies plus Foreclosures Pending and
Bankruptcies Pending as a Percentage of Total Loans
Outstanding 7.86% 7.32% 8.21% 7.52%
REO PROPERTIES(4) 2 $ 429 19 $ 3,356
REO Properties as a Percentage of Total Loans
Outstanding 0.02% 0.03% 0.13% 0.17%
</TABLE>
- ------------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were in foreclosure at
the respective dates indicated ("Foreclosure Loans"), (b) delinquent
mortgage loans as to which the related mortgagor was in bankruptcy
proceedings at the respective dates indicated ("Bankruptcy Loans") and (c)
REO properties that have been purchased upon foreclosure of the related
mortgage loans. All Foreclosure Loans, Bankruptcy Loans and REO properties
have been segregated into the sections of the table entitled "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "30-59 Days," "60-89 Days," "90 Days or More" and
"Total Delinquencies" sections of the table. See the section of the table
entitled "Total Delinquencies plus Foreclosures Pending and Bankruptcies
Pending" for total delinquency balances, percentages and numbers which
include Foreclosure Loans
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<PAGE>
and Bankruptcy Loans, and see the section of the table entitled "REO
Properties" for delinquency balances, percentages and numbers related
to REO properties that have been purchased upon foreclosure of the
related mortgage loans.
(2) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated.
It is generally the Master Servicer's policy, with respect to mortgage
loans originated by the Seller, to commence foreclosure proceedings
when a mortgage loan is between 31 and 60 days delinquent.
(3) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
(4) REO properties that have been purchased upon foreclosure of the
related mortgage loans, including mortgaged properties that were
purchased by the Seller after the respective dates indicated.
The above data on delinquency, foreclosure, bankruptcy and REO
property status are calculated on the basis of the total mortgage loans
originated or acquired by the Seller that were originated as of the date
three months prior to the date indicated. However, the total amount of
mortgage loans on which the above data are based includes many mortgage
loans which were not, as of the respective dates indicated, outstanding
long enough to give rise to some of the indicated periods of delinquency or
to foreclosure or bankruptcy proceedings or REO property status. In the
absence of such mortgage loans, the delinquency, foreclosure, bankruptcy
and REO property percentages indicated above would be higher and could be
substantially higher. Because the Mortgage Pool will consist of a fixed
group of Mortgage Loans, the actual delinquency, foreclosure, bankruptcy
and REO property percentages with respect to the Mortgage Pool may
therefore be expected to be higher, and may be substantially higher, than
the percentages indicated above.
Based solely on information provided by the Seller, the following
table presents the changes in the Seller's charge-off and recoveries for
the period indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Charge-offs:
Mortgage Loan Properties 135
REO Properties 760
Recoveries:
Mortgage Loan Properties 62
REO Properties 18
Net charge-offs 815
Ratio of net charge-offs to average loans
outstanding during the three months ended
March 31, 1997 0.19%/*/
</TABLE>
- -------------------------
/*/ The ratio of net charge-offs was based upon annualized charge-offs
for the three months ended March 31, 1997. The average loans outstanding
during the three months ended March 31, 1997, was computed using monthly
averages.
S-37
<PAGE>
From November 1995 through December 1996, ICI Funding experienced no
charge-offs and no recoveries.
The above data on charge-offs and recoveries are calculated on the
basis of the total mortgage loans originated or acquired by the Seller.
However, the total amount of mortgage loans on which the above data are
based includes many mortgage loans which were not, as of the respective
data indicated, outstanding long enough to give rise to some of the
indicated charge-offs. In the absence of such mortgage loans, the charge-
off percentages indicated above would be higher and could be substantially
higher. Because the Mortgage Pool will consist of a fixed group of
Mortgage Loans, the actual charge-off percentages with respect to the
Mortgage Pool may thereofore be expected to be higher, and may be
substantially higher, than the percentage indicated above.
The information set forth in the preceding paragraphs concerning ICI
Funding has been provided by ICI Funding.
THE MASTER SERVICER; THE SUB-SERVICER
ICI Funding (in its capacity as master servicer, the "Master
Servicer") will act as master servicer for the Mortgage Loans pursuant to
the Agreement. As set forth above, Wendover will sub-service the Mortgage
Loans in exchange for a sub-servicing fee. See "Description of the
Mortgage Pool--The Seller" and "Risk Factors" herein.
Wendover. Wendover is a sub-servicer of residential, consumer and
commercial mortgage loans in 50 states. At March 31, 1997, Wendover
serviced approximately $9.9 billion outstanding amount of mortgage loans.
Additionally, Wendover provides contract master servicing for residential
mortgage loans, origination and servicing for Federal Housing Authority
home equity conversion mortgages, specialized asset management and default
servicing for non-performing loans, and special servicing activities for
government entities. As of March 31, 1997, Wendover employed 471
employees. Wendover is located in Greensboro, North Carolina. Wendover is
an approved servicer in good standing with FNMA and FHLMC.
Established in 1986, Wendover was originally owned by Sunbelt Savings
FSB, which was formed to receive the assets and certain liabilities of
Independent American Mortgage Services Inc. ("IAMSI") and other insolvent
Texas savings and loan associations. Wendover was a subsidiary of IAMSI
until it was purchased by Wendover Financial Services Corp. in June 1990.
In October 1992, Wendover was acquired by State Street Bank and Trust
Company ("State Street"). In April 1997, State Street announced that it
had entered into a definitive agreement to sell Wendover to Electronic Data
Systems. The transaction is subject to regulatory approval and is expected
to close by June 30, 1997.
The following table sets forth certain information concerning
delinquency experience including bankruptcies and foreclosures in progress
on one- to four-family residential mortgage, consumer, and commercial loans
included in Wendover's servicing portfolio at the dates indicated.
Consumer and commercial loans represented less than 3% of the overall
portfolio volume at March 31, 1997. As of December 31, 1993, 1994, 1995,
1996 and March 31, 1997, the total principal balance of loans being
serviced by Wendover was (in millions) $4,785.6, $7,160.8, $7,637.4,
$9,819.8 and $9,920.9, respectively. The indicated periods of delinquency
are based on the number of days past due on a contractual basis. No
mortgage, consumer, or commercial loan is considered delinquent for these
purposes until it is one month past due on a contractual basis.
S-38
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1993 1994 1995
--------------------- --------------------- ---------------------
Number Percent of Number Percent of Number Percent of
of Servicing of Servicing of Servicing
Loans Portfolio Loans Portfolio Loans Portfolio
------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
78,372 100% 96,270 100% 94,662 100%
====== ==== ====== ===== ====== =====
Period of Delinquency:
30-59 days 2,778 2.85% 4,093 4.73% 5,364 6.10%
60-89 days 679 0.66% 1,162 1.39% 1,291 1.46%
90 days or more 8,694 5.67% 10,082 5.98% 8,409 7.31%
------ ---- ------ ----- ------ -----
Total Delinquencies 12,151 9.18% 15,337 12.10% 15,064 14.87%
(excluding Foreclosures) ====== ==== ====== ===== ====== =====
Foreclosures Pending 1,962 3.70% 1,632 2.28% 4,041 4.86%
</TABLE>
<TABLE>
<CAPTION>
At December 31, At March 31,
--------------------- ---------------------
1996 1997
--------------------- ---------------------
Number Percent of Number Percent of
of Servicing of Servicing
Loans Portfolio Loans Portfolio
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
112,980 100% 112,076 100%
======= ===== ======= =====
Period of Delinquency:
30-59 days 5,273 4.67% 4,578 4.08%
60-89 days 1,311 1.16% 1,076 0.96%
90 days or more 6,097 5.40% 5,623 5.02%
------- ----- ------- -----
Total Delinquencies 12,681 11.22% 11,277 10.06%
(excluding Foreclosures) ======= ===== ======= =====
Foreclosures Pending 4,240 3.75% 3,859 3.44%
</TABLE>
- --------------------
(1) Includes purchased mortgage servicing rights owned by Wendover totaling
6,332 loans for $614.9 million unpaid principal balance, 9,004 loans for
$890.4 million unpaid principal balance and 9,093 loans for $887.0 million
unpaid principal balance as of December 31, 1995, 1996, and March 31, 1997,
respectively.
S-39
<PAGE>
Wendover sub-services for a variety of clients with portfolios that
include sub-performing and non-performing loans. In 1995 Wendover added
several new clients with an inordinate amount of loans that were severely
delinquent, in foreclosure, bankruptcy or the post-foreclosure claim
process. Clients with special needs or those with "B" or "C" quality
portfolios are assigned to Wendover's Asset Management Division. Such
division handles approximately 400 delinquent loans per employee and is
responsible for the collection, workout, foreclosure, bankruptcy or REO
management of each account in their respective portfolios. Standards for
these portfolios typically require intensive collection activity which
include collection contacts early and often, innovative workout programs
and fast track foreclosure processing where appropriate.
General. There can be no assurance that the delinquency and
foreclosure experience of the Mortgage Loans will correspond to the
delinquency and foreclosure experience of the servicing portfolio of
Wendover set forth in the foregoing tables. The statistics shown above
represent the respective delinquency and foreclosure experiences only at
the dates presented, whereas the aggregate delinquency and foreclosure
experience on the Mortgage Loans will depend on the results obtained over
the life of the Trust. Each servicing portfolio includes mortgage loans
with a variety of payment and other characteristics (including geographic
location) which are not necessarily representative of the payment and other
characteristics of the Mortgage Loans. In addition, Wendover's servicing
portfolio includes consumer and commercial loans. Each servicing portfolio
includes mortgage loans underwritten pursuant to guidelines not necessarily
representative of those applicable to the Mortgage Loans. It should be
noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by Wendover.
In addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Mortgage
Loans and, accordingly, the actual rates of delinquencies and foreclosures
with respect to the Mortgage Loans.
The information set forth in this section concerning the Master
Servicer and the Sub-Servicer has been provided by the Master Servicer and
the Sub-Servicer, respectively.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Pool and
the Mortgaged Properties is based upon the Mortgage Pool as constituted at
the close of business on the Cut-off Date, as adjusted for the scheduled
principal payments due on or before such date. Prior to the issuance of
the Senior Certificates, Mortgage Loans may be removed from the Mortgage
Pool as a result of incomplete documentation or otherwise, if the Company
deems such removal necessary or appropriate. A limited number of other
mortgage loans may be added to the Mortgage Pool prior to the issuance of
the Senior Certificates. The Company believes that the information set
forth herein will be substantially representative of the characteristics of
the Mortgage Pool as it will be constituted at the time the Senior
Certificates are issued although the range of Mortgage Rates and maturities
and certain other characteristics of the Mortgage Loans in the Mortgage
Pool may vary.
A Current Report on Form 8-K will be available to purchasers of the
Senior Certificates and will be filed, together with the Pooling and
Servicing Agreement, with the Securities and Exchange Commission within
fifteen days after the initial issuance of the Senior Certificates. In the
event Mortgage Loans are removed from or added to the Mortgage Pool as set
forth in the preceding paragraph, such removal or addition will be noted in
the Current Report on Form 8-K.
See "The Mortgage Pools" and "Certain Legal Aspects of Mortgage Loans"
in the Prospectus.
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DESCRIPTION OF THE CERTIFICATES
The following summaries describing certain provisions of the
Certificates do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, the Prospectus and the
provisions of the Agreement relating to the Certificates offered hereby.
GENERAL
The Mortgage Pass-Through Certificates, Series 1997-2 (the
"Certificates") will consist of the classes of Certificates offered hereby
(the "Offered Certificates") in addition to the Class PO, Class B-4, Class
B-5, Class B-6 and Class R-1 Certificates (the "Other Certificates"), which
are not being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
ownership interest in the Trust. The Trust will consist of (i) the Mortgage
Loans, (ii) such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the account (the "Protected Account")
established by the Master Servicer for the collection of payments on the
Mortgage Loans and in the Certificate Account and belonging to the Trust,
(iii) property acquired by foreclosure of such Mortgage Loans or by deed in
lieu of foreclosure; (iv) any applicable Primary Insurance Policies and
standard hazard insurance policies; and (v) all proceeds of the foregoing.
Each Class of Book-Entry Certificates will be represented initially by
a single certificate registered in the name of Cede & Co. ("Cede") as the
nominee of The Depository Trust Company ("DTC"), and beneficial interests
will be held by investors in minimum denominations of $25,000 and in each
case increments of $1 in excess thereof. One Certificate of each such
Class may be issued in a different principal amount to accommodate the
remainder of the initial principal amount of the Certificates of such
Class. No person acquiring an interest in the Book-Entry Certificates (a
"Certificate Owner") will be entitled to receive a certificate representing
such person's interest in the Trust, except in the event Definitive
Certificates are issued under the limited circumstances set forth below
under "--Definitive Certificates." Unless and until Definitive Certificates
are issued, all references to actions by holders of Book-Entry Certificates
shall refer to actions taken by DTC upon instructions from its Participants
(as defined below), and all references herein to distributions, notices,
reports and statements to holders of Book-Entry Certificates shall refer to
distributions, notices, reports and statements to DTC or Cede, as the
registered holder of the Book-Entry Certificates, as the case may be, for
distribution to Certificate Owners in accordance with DTC procedures.
Distributions of principal and interest as set forth below initially
will be made by the Trustee to Cede, as the registered holder of the Book-
Entry Certificates, and to the holders of the Physical Certificates. Upon
the issuance of Definitive Certificates to persons other than Cede,
distributions will be made by the Trustee to the persons in whose names
such Certificates are registered at the close of business on each Record
Date, which will be the last Business Day (as defined below) of the month
preceding the month in which the related Distribution Date occurs. Such
distributions will be made (i) by check mailed to each Certificateholder
entitled thereto at the address appearing in the Certificate Register to be
maintained in accordance with the provisions of the Agreement or (ii) upon
timely receipt by the Trustee of written instructions from a
Certificateholder holding Certificates representing an initial aggregate
Current Principal Amount or Notional Amount of not less than $1,000,000, by
wire transfer to a United States dollar account maintained by the payee at
any United States depository institution with appropriate facilities for
receiving such a wire transfer, provided, however, that the final payment
in respect of each Class of Certificates will be made only upon
presentation and surrender of such respective Certificates at the office or
agency of the Trustee specified in the notice to Certificateholders of such
final payment.
A "Business Day" is generally any day other than a Saturday, a Sunday
or a day on which the New York Stock Exchange is closed or on which banking
institutions in New York City or California are authorized or obligated by
law or executive order to be closed.
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BOOK-ENTRY REGISTRATION
DTC is a limited purpose trust company organized under the laws of the
State of New York and is a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the New York Uniform
Commercial Code, and a "clearing agency" registered pursuant to Section 17A
of the Securities Exchange Act of 1934. DTC was created to hold securities
for its participating organizations ("Participants") and to facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entries, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and
dealers (including Salomon Brothers Inc), banks, trust companies and
clearing corporations. Indirect access to the DTC system also is available
to others such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a Participant, either
directly or indirectly ("Indirect Participants").
Certificate Owners 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, Certificate Owners will receive
all distributions of principal and interest on the Book-Entry Certificates
through Participants. Under a book-entry format, Certificate Owners may
experience some delay in their receipt of payments, since such payments
will be forwarded to Cede, as nominee for DTC. DTC will forward such
payments to its Participants, which thereafter will forward them to
Indirect Participants or Certificate Owners. It is anticipated that,
except as provided below under "--Definitive Certificates," the only
"Certificateholder" with respect to the Book-Entry Certificates will be
Cede, as nominee for DTC. Certificate Owners will not be recognized by the
Trustee as Certificateholders, as such term is used in the Agreement, and
Certificate Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC will be required to make book-entry
transfers of Book-Entry Certificates among Participants and to receive and
transmit distributions of principal of, and interest on, Book-Entry
Certificates. Participants and Indirect Participants with which
Certificate Owners have accounts with respect to the Book-Entry
Certificates similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective
Certificate Owners. Accordingly, although Certificate Owners will not
possess physical certificates, the Rules provide a mechanism by which
Participants and Certificate Owners will receive payments and will be able
to transfer their interests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, and on behalf of certain banks, the
ability of a Certificate Owner to pledge Book-Entry Certificates to persons
or entities that do not participate in the DTC system, or to otherwise act
with respect to such Book-Entry Certificates, may be limited due to the
absence of physical certificates for such Book-Entry Certificates.
DTC has advised the Company that it will take any action permitted to
be taken by a holder of Book-Entry Certificates under the Agreement only at
the direction of one or more Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the
Company that it will take such action where the consent of specified
percentages of the Book-Entry Certificates is required under the Agreement
only at the direction of and on behalf of Participants whose interests
represent such specified percentages. DTC may take conflicting actions on
behalf of other Participants.
Neither the Company, the Master Servicer nor the Trustee will have any
liability for any aspect of the records relating to or payment made on
account of beneficial ownership interests of the Book-Entry Certificates
held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
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DEFINITIVE CERTIFICATES
The Offered Certificates will be issued in fully registered,
certificated form ("Definitive Certificates") to Certificate Owners or
their nominees, rather than to DTC or its nominee, only if (i) the Company
advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository with respect to the
Certificates and the Company is unable to locate a qualified successor
within 30 days or (ii) the Company, at its option, elects to terminate the
book-entry system through DTC.
Upon the occurrence of either event described in clause (i) or (ii) of
the immediately preceding paragraph, the Trustee is required to notify DTC,
which in turn will notify all Certificate Owners through Participants, of
the availability of Definitive Certificates. Upon surrender by Cede, as
nominee of DTC, of the Definitive Certificates representing the Book-Entry
Certificates and receipt of instructions for reregistration, the Trustee
will reissue the Book-Entry Certificates as Definitive Certificates to
Certificate Owners. Under no circumstances will Definitive Certificates of
any Class be issued in an amount representing an interest in, as of the
Cut-off Date, less than $25,000 principal amount of the respective Class of
Book-Entry Certificate.
Physical Certificates and Definitive Certificates will be transferable
and exchangeable on a "Certificate Register" to be maintained by the
Trustee at the office or agency of the Trustee maintained for that purpose
in Irvine, California. Physical Certificates and Definitive Certificates
surrendered to the Trustee for registration of transfer or exchange must be
accompanied by a written instrument of transfer in form satisfactory to the
Trustee. No service charge will be made for any registration of transfer
or exchange of Physical Certificates and Definitive Certificates, but
payment of a sum sufficient to cover any tax or other governmental charge
may be required. Such office or agency of the Trustee is currently located
at 3 Park Plaza, Irvine, CA 92714.
AVAILABLE FUNDS
Available funds for any Distribution Date will be determined
separately with respect to each Mortgage Loan Group ("Group I Available
Funds" and "Group II Available Funds," respectively,) and in each case will
be an amount equal to the aggregate of the following with respect to the
related Mortgage Loans: (a) all previously undistributed payments on
account of principal (including the principal portion of Monthly Payments,
Principal Prepayments and the principal amount of Liquidation Proceeds) and
all previously undistributed payments on account of interest received after
the Cut-off Date and on or prior to the related Determination Date, (b) any
Monthly Advances (including Certificate Account Advances, as defined under
"The Pooling and Servicing Agreement--Monthly Advances" herein) and
Compensating Interest Payments (as defined under "The Pooling and Servicing
Agreement--Servicing Compensation and Payment of Expenses" herein) by the
Master Servicer and (c) any amount reimbursed by the Master Servicer in
connection with losses on certain eligible investments, except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all Principal Prepayments and Liquidation Proceeds received
after the applicable Prepayment Period and all related payments of
interest;
(iii) all payments, other than Principal Prepayments, that
represent early receipt of scheduled payments due on a date or dates
subsequent to the Due Date in the month in which such Distribution
Date occurs;
(iv) amounts received on particular Mortgage Loans as late
payments of principal or interest and respecting which, and to the
extent that, there are any unreimbursed Monthly Advances or
Certificate Account Advances;
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(v) amounts of Monthly Advances or Certificate Account Advances
determined to be nonrecoverable;
(vi) amounts of Trustee's Fees for such Distribution Date; and
(vii) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i) through (xi) described under the
caption "The Pooling and Servicing Agreement--Certificate Account"
herein.
"Available Funds" for any Distribution Date will equal the sum of the Group
I Available Funds and the Group II Available Funds.
DISTRIBUTIONS ON THE CERTIFICATES
Allocation of Available Funds. Interest and principal on the
Certificates will be distributed monthly on each Distribution Date,
commencing in July 1997, in an aggregate amount equal to the Available
Funds for such Distribution Date.
(A) On each Distribution Date on or prior to the Distribution Date on
which the Current Principal Amounts of the Subordinate Certificates are
reduced to zero (the "Cross-Over Date"), an amount equal to the Group I
Available Funds will be distributed in the following order of priority
among the Certificates:
first, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, the Accrued
Certificate Interest on each such Class and the Class X Component I
Accrued Certificate Interest on such Component for such Distribution
Date;
second, to the interest-bearing Class A-I Certificates, the Residual
Certificates and Component I of the Class X Certificates, any Accrued
Certificate Interest and Class X Component I Accrued Certificate
Interest thereon remaining undistributed from previous Distribution
Dates, to the extent of remaining Group I Available Funds, any
shortfall in available amounts being allocated among such Classes and
Component in proportion to the amount of such Accrued Certificate
Interest and Class X Component I Accrued Certificate Interest
remaining undistributed for each such Class or Component for such
Distribution Date;
third, to the Class A-I Certificates, the Residual Certificates and
the Class PO Certificates in reduction of the Current Principal
Amounts thereof:
(a) the Group I Senior Optimal Principal Amount (as defined herein),
in the following order of priority:
(i) to the Class A-I-8 Certificates, up to the Class A-I-8
Prepayment Amount and the Class A-I-8 Pro Rata Optimal Principal
Amount (each as defined herein) for such Distribution Date;
(ii) to the Class R-1 Certificates until the Current Principal
Amount thereof has been reduced to zero;
(iii) 0.66666666667% and 0.3333333333% concurrently to the Class
A-I-1 Certificates and Class A-I-9 Certificates, until the Current
Principal Amount of the Class A-I-1 Certificates has been reduced to
zero;
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(iv) 0.61224489796% and 0.38775510204% concurrently to the
Class A-I-2 Certificates and Class A-I-9 Certificates, until the
Current Principal Amount of the Class A-I-2 Certificates has been
reduced to zero;
(v) 0.65217391304% and 0.34782608696% concurrently to the
Class A-I-3 Certificates and the Class A-I-9 Certificates until the
Current Principal Amount of the Class A-I-3 Certificates has been
reduced to zero;
(vi) 0.78947368421% and 0.21052631579% concurrently to the
Class A-I-4 Certificates and the Class A-I-9 Certificates until the
Current Principal Amount of the Class A-I-4 Certificates has been
reduced to zero;
(vii) 0.90909090909% and 0.09090909091% concurrently to the
Class A-I-5 Certificates and Class A-I-9 Certificates, until the
Current Principal Amount of the Class A-I-5 Certificates have been
reduced to zero;
(viii) 0.81081081081% and 0.18918918919% concurrently to the
Class A-I-6 Certificates and Class A-I-9 Certificates, until the
Current Principal Amounts thereof have been reduced to zero;
(ix) sequentially to the Class A-I-7 and Class A-I-8
Certificates, in that order, in each case until the Current Principal
Amount of each such Class of Certificates has been reduced to zero;
and
(b) the Class PO Portion I Principal Distribution Amount (as defined
herein) for such Distribution Date, to the Class PO Certificates until
the Current Principal Amount thereof has been reduced to zero; and
fourth, the Class PO Deferred Amount attributable to Portion I of the
Class PO Certificates for such Distribution Date to the Class PO
Certificates; provided, that (i) on any Distribution Date,
distributions pursuant to this priority (A) fourth, shall not exceed
the excess, if any, of (x) the Available Funds remaining after giving
effect to distributions pursuant to priorities (A) first through third
above and (B) first through third below over (y) the amount of Accrued
Certificate Interest for such Distribution Date and Accrued
Certificate Interest remaining undistributed from previous
Distribution Dates on all Classes of Subordinate Certificates then
outstanding, (ii) such distributions shall not reduce the Current
Principal Amount of the Class PO Certificates and (iii) no
distribution will be made in respect of the Class PO Deferred Amount
after the Cross-Over Date.
The "Class A-I-8 Prepayment Amount" for any Distribution Date
occurring prior to the Distribution Date in July 2002 will equal zero. The
Class A-I-8 Prepayment Amount for any Distribution Date occurring after the
first five years following the Closing Date will be as follows: for any
Distribution Date during the sixth year after the Closing Date, 30% of the
Class A-I-8 Pro Rata Prepayment Amount (as defined below) for such
Distribution Date; for any Distribution Date during the seventh year after
the Closing Date, 40% of the Class A-I-8 Pro Rata Prepayment Amount; for
any Distribution Date during the eighth year after the Closing Date, 60% of
the Class A-I-8 Pro Rata Prepayment Amount; for any Distribution Date
during the ninth year after the Closing Date, 80% of the Class A-I-8 Pro
Rata Prepayment Amount for such Distribution Date; and, thereafter, 100% of
the Class A-I-8 Pro Rata Prepayment Amount for such Distribution Date.
Notwithstanding the foregoing, on any Distribution Date on which all of the
Class A-I Certificates, other than the Class A-I-8 Certificates, have been
reduced to zero, the Class A-I-8 Prepayment Amount shall equal 100% of the
sum of items (ii), (iii), (iv) and (v) under the definition of the Group I
Senior Optimal Principal Amount for such Distribution Date.
For any Distribution Date, the "Class A-I-8 Pro Rata Prepayment
Amount" shall be an amount equal to the product of (x) the sum of items
(ii), (iii), (iv) and (v) under the definition of the Group I Senior
Optimal
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Principal Amount for such Distribution Date multiplied by (y) a fraction,
the numerator of which is the sum of the Current Principal Amounts of the
Class A-I-8 Certificates immediately prior to such Distribution Date and
the denominator of which is the aggregate Current Principal Amounts of all
Classes of Class A-I Certificates and Residual Certificates immediately
prior to such Distribution Date.
For any Distribution Date, the "Class A-I-8 Pro Rata Optimal Principal
Amount" shall be an amount equal to the product of (x) the Group I Senior
Optimal Principal Amount (excluding items (ii), (iii), (iv) and (v) under
the definition thereof) for such Distribution Date multiplied by (y) a
fraction, the numerator of which is the sum of the Current Principal
Amounts of the Class A-I-8 Certificates immediately prior to such
Distribution Date and the denominator of which is the aggregate Current
Principal Amounts of all Classes of Class A-I Certificates and Residual
Certificates immediately prior to such Distribution Date.
"Pro rata" distributions among Classes of Certificates will be made in
proportion to the then Current Principal Amounts of such Classes.
If, after distributions have been made pursuant to priorities (A)
first and second above on any Distribution Date, remaining Group I
Available Funds are less than the sum of the Group I Senior Optimal
Principal Amount and the Class PO Portion I Principal Distribution Amount
for such Distribution Date, such amounts shall be proportionately reduced,
and such remaining Group I Available Funds will be distributed on the Class
A-I and Residual Certificates and Class PO Certificates in accordance with
clauses (a) and (b) of priority (A) third above on the basis of such
reduced amounts. Notwithstanding any reduction in principal distributable
to the Class PO Certificates pursuant to this paragraph, the principal
balance of the Class PO Certificates shall be reduced by the difference
between (i) principal distributable to the Class PO Certificates in
accordance with clause (b) of priority (A) third above and (ii) principal
actually distributed to the Class PO Certificates after giving effect to
this paragraph (the "Class PO Portion I Cash Shortfall").
(B) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to the Group II Available Funds will be distributed in the
following order of priority among the Certificates:
first, to the Class A-II Certificates and Component II of the Class X
Certificates, the Accrued Certificate Interest on such Class and Class
X Component II Accrued Certificate Interest on such Component for such
Distribution Date;
second, to the Class A-II Certificates and Component II of the Class X
Certificates, any Accrued Certificate Interest and Class X Component
II Accrued Certificate Interest thereon remaining undistributed from
previous Distribution Dates, to the extent of the remaining Group II
Available Funds, any shortfall in available amounts being allocated
between such Class and Component in proportion to the amount of such
Accrued Certificate Interest and Class X Component II Accrued
Certificate Interest remaining undistributed for such Class or
Component for such Distribution Date; and
third, to the Class A-II Certificates and the Class PO Certificates in
reduction of the Current Principal Amounts thereof:
(a) the Group II Senior Optimal Principal Amount (as defined herein)
to the Class A-II Certificates until the Current Principal Amount
thereof has been reduced to zero; and
(b) the Class PO Portion II Principal Distribution Amount (as defined
herein) for such Distribution Date to the Class PO Certificates
until the Current Principal Amount thereof has been reduced to
zero;
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fourth, the Class PO Deferred Amount attributable to Portion II of the
Class PO Certificates for such Distribution Date to the Class PO
Certificates; provided, that (i) on any Distribution Date,
distributions pursuant to this priority (A) fourth, shall not exceed
the excess, if any, of (x) the Available Funds remaining after giving
effect to distributions pursuant to priorities (A) first through third
above and (B) first through third above over (y) the amount of Accrued
Certificate Interest for such Distribution Date and Accrued
Certificate Interest remaining undistributed from previous
Distribution Dates on all Classes of Subordinate Certificates then
outstanding, (ii) such distributions shall not reduce the Current
Principal Amount of the Class PO Certificates and (iii) no
distribution will be made in respect of the Class PO Deferred Amount
after the Cross-Over Date.
If, after distributions have been made pursuant to priorities (B)
first and second above on any Distribution Date, remaining Group II
Available Funds are less than the sum of the Group II Senior Optimal
Principal Amount and the Class PO Portion II Principal Distribution Amount
for such Distribution Date, such amounts shall be proportionately reduced,
and such remaining Group II Available Funds will be distributed on the
Class A-II and Class PO Certificates in accordance with clauses (a) and (b)
of priority (B) third above on the basis of such reduced amounts.
Notwithstanding any reduction in principal distributable to the Class PO
Certificates pursuant to this paragraph, the principal balance of the Class
PO Certificates shall be reduced by the difference between (i) principal
distributable to the Class PO Certificates in accordance with clause (b) of
priority (B) third above and (ii) principal actually distributed to the
Class PO Certificates after giving effect to this paragraph (the "Class PO
Portion II Cash Shortfall" and together with the Class PO Portion I Cash
Shortfall, the "Class PO Cash Shortfall"). The Class PO Cash Shortfall
with respect to any Distribution Date will be added to the Class PO
Deferred Amount.
(C) On each Distribution Date on or prior to the Cross-Over Date, an
amount equal to any remaining Group I Available Funds and Group II
Available Funds following the distributions in (A) and (B) above will be
distributed sequentially, in the following order, to the Class B-1, Class
B-2, Class B-3, Class B-4, Class B-5 and Class B-6 Certificates, in each
case up to an amount equal to and in the following order: (a) the Accrued
Certificate Interest thereon for such Distribution Date, (b) any Accrued
Certificate Interest thereon remaining undistributed from previous
Distribution Dates and (c) such Class's Allocable Share (as defined herein)
for such Distribution Date.
(D) On each Distribution Date prior to the occurrence of the Cross-
Over Date but after the reduction of the Current Principal Amounts of the
Class A-I Certificates or Class A-II Certificates to zero, the remaining
Class or Classes of Class A Certificates will be entitled to receive, in
addition to any Principal Prepayments related to such Class A Certificates'
respective Mortgage Loan Group, 100% of the Principal Prepayments on the
Loans in the other Mortgage Loan Group (in the case of Mortgage Loan Group
I, distributed in accordance with the priorities set forth in priority (A)
third above) in reduction of the Current Principal Amounts thereof. In
addition, if on any Distribution Date on which the aggregate Current
Principal Amount of the Class A-I Certificates or Class A-II Certificates
would be greater than the aggregate Scheduled Principal Balance of the
Mortgage Loans in the related Mortgage Loan Group (other than the related
PO Percentage (as defined herein) of the Discount Mortgage Loans in the
related Mortgage Loan Group) and Class B Certificates are still
outstanding, in each case after giving effect to distributions to be made
on such Distribution Date, 100% of the Principal Prepayments otherwise
allocable to the Class B Certificates on the Mortgage Loans in the other
Mortgage Loan Group will be distributed to such Class or Classes of Class A
Certificates (in the case of the Class A-I Certificates, in accordance with
the priorities set forth in priority (A) third above) in reduction of the
Current Principal Amounts thereof, until the aggregate Current Principal
Amount of the Class A-I Certificates or Class A-II Certificates, as
applicable, is an amount equal to the aggregate Scheduled Principal Amount
of the Mortgage Loans in the related Mortgage Loan Group (other than the
related PO Percentage of the Discount Mortgage Loans in the related
Mortgage Loan Group).
(E) On each Distribution Date after the Cross-Over Date,
distributions of principal on the outstanding Class A-I Certificates and
Residual Certificates will be made pro rata among all such Certificates,
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regardless of the allocation, or sequential nature, of principal payments
described in priority (A) third above, based upon the then Current
Principal Amounts of such Certificates, and interest will be distributed as
described above with respect to Distribution Dates on or prior to the
Cross-Over Date.
(F) On each Distribution Date, any Group I Available Funds and Group
II Available Funds remaining after payment of interest and principal as
described above will be distributed to the Class R-1 Certificates; provided
that if on any Distribution Date on or after the Cross-Over Date there are
any Group I Available Funds remaining after payment of interest and
principal as described in the preceding paragraphs, such Group I Available
Funds will be distributed to the Class A-II Certificates in accordance with
the priorities in paragraph (B) above until all amounts due to such
Certificates have been paid in full before any amounts are distributed to
the Residual Certificates. Similarly, if on any Distribution Date on or
after the Cross-Over Date there are any Group II Available Funds remaining
after payment of interest and principal as described in the preceding
paragraphs, such Group II Available Funds will be distributed to the Senior
Certificates (other than the Class A-II Certificates and Component II of
the Class X Certificates and Portion II of the Class PO Certificates) in
accordance with the priorities in paragraph (E) above until all amounts due
to such Senior Certificates have been paid in full before any amounts are
distributed to the Residual Certificates. It is not anticipated that there
will be any significant amounts remaining for such distribution.
Interest. Interest will accrue during the preceding Interest Accrual
Period for each interest-bearing Class of Certificates at its Pass-Through
Rate on the Current Principal Amount or Notional Amount of such Class
immediately preceding such Distribution Date. The effective yield to the
holders of Certificates will be lower than the yield otherwise produced by
the applicable Pass-Through Rate and purchase price, because interest will
not be distributed such Certificateholders until the 25th day (or if such
day is not a Business Day, then on the next succeeding Business Day) of the
month following the month in which interest accrues on the Mortgage Loans.
See "Yield and Prepayment Considerations" herein.
All interest-bearing Offered Certificates (other than the Class X
Certificates) will bear interest at the fixed Pass-Through Rates set forth
on the cover page hereof.
As a result of the allocation after the Cross-Over Date of the
principal portion of Realized Losses, if any, applicable to Mortgage Loans
from both loan groups to all Senior Certificates (other than the Class PO
Certificates), pro rata, the Current Principal Amount of the Class A-I and
Class A-II Certificates may exceed the outstanding balance of the Group I
Mortgage Loans and Group II Mortgage Loans, respectively. Consequently,
interest accrued at the weighted average of the Net Rates on the aggregate
principal balance of the Group I Mortgage Loans and the Group II Mortgage
Loans may not be sufficient to pay interest on the Current Principal Amount
of the Class A-I and the Class A-II Certificates, respectively, at the
related Pass-Through Rates. As described in paragraph (F) above under "--
Allocation of Available Funds," certain excess payments of interest on the
Group I Mortgage Loans over the amounts needed to pay interest on the
Senior Certificates (other than the Class A-II and Class PO Certificates)
and the interest on Component I of the Class X Certificates will be
available to pay some or all of such shortfall in interest on the Class A-
II Certificates.
The Class X Certificates will bear interest on their Notional Amount
at a variable Pass-Through Rate equal to the excess of (a) the weighted
average of the Net Rates of the Premium Mortgage Loans over (b) 8.00% per
annum. The Pass-Through Rate for the Class X Certificates for the first
Interest Accrual Period is expected to be approximately 0.83664% per annum.
In order to calculate the source of interest due on the Class X
Certificates, the Class X Certificates are deemed to consist of separate
components, one of which corresponds to the Class A-I Certificates, the
Class R-1 Certificates and a principal amount of the Class B Certificates
which derives its distributions from the Group I Mortgage Loans
("Component I") and one which corresponds to the Class A--II Certificates
and the principal amount of the Class B Certificates which derives its
distributions from the Group II Mortgage Loans ("Component II").
S-48
<PAGE>
Since interest on the Class X Certificates is based on amounts paid on
both the Group I Mortgage Loans and the Group II Mortgage Loans, the
Accrued Certificate Interest for the Class X Certificates may also be
expressed as the sum of the Class X Component I Accrued Certificate
Interest and the Class X Component II Accrued Certificate Interest (each as
defined below).
"Class X Component I Accrued Certificate Interest" for any
Distribution Date is equal to the excess of all interest accrued on the
Group I Mortgage Loans during the related Interest Accrual Period over the
sum of (x) all Accrued Certificate Interest on the Class A-I Certificates
and the Residual Certificates for such Distribution Date, (y) the portion
of the Accrued Certificate Interest on the Class B Certificates for such
Distribution Date that the Class B Group I Current Principal Amount as of
such Distribution Date bears to the aggregate Current Principal Amounts of
the Class B Certificates as of such Distribution Date, and (z) the portion
of (i) any Net Interest Shortfall and (ii) the interest portion of any
Excess Losses, and after the Cross-Over Date, (iii) the interest portion of
any Realized Losses, allocated to the Class X Certificates that the Class X
Component I Accrued Certificate Interest (determined without regard to this
clause (z)) bears to the total Accrued Certificate Interest on the Class X
Certificates (determined without regard to such Net Interest Shortfall, or
the interest portion of Excess Losses or Realized Losses, as applicable).
For this purpose, the "Class B Group I Current Principal Amount" as of any
Distribution Date equals the aggregate Current Principal Amounts of the
Class B Certificates as of such Distribution Date less the Class B Group II
Current Principal Amount (as defined below) as of such Distribution Date.
The Class X Component I Accrued Certificate Interest for any Distribution
Date on or after the Cross-Over Date shall equal the Accrued Certificate
Interest on the Class X Certificates for such Distribution Date.
"Class X Component II Accrued Certificate Interest" for any
Distribution Date is equal to the excess of all interest accrued on the
Group II Mortgage Loans during the related Interest Accrual Period over the
sum of (x) all Accrued Certificate Interest on the Class A-II Certificates
for such Distribution Date, (y) the portion of the Accrued Certificate
Interest on the Class B Certificates for such Distribution Date that the
Class B Group II Current Principal Amount as of such Distribution Date
bears to the aggregate Current Principal Amounts of the Class B
Certificates as of such Distribution Date, and (z) the portion of (i) any
Net Interest Shortfall and (ii) the interest portion of any Excess Losses,
and after the Cross-Over Date, (iii) the interest portion of any Realized
Losses, allocated to the Class X Certificates that the Class X Component II
Accrued Certificate Interest (determined without regard to this clause (z))
bears to the total Accrued Certificate Interest on the Class X Certificates
(determined without regard to such Net Interest Shortfall, or the interest
portion of Excess Losses or Realized Losses, as applicable). For this
purpose, the "Class B Group II Current Principal Amount" as of any
Distribution Date equals the sum of the Scheduled Principal Balances of the
Group II Mortgage Loans as of such Distribution Date less the Current
Principal Amount of the Class A-II Certificates as of such Distribution
Date. The Class X Component II Accrued Certificate Interest for any
Distribution Date on or after the Cross-Over Date shall be zero.
The Class X Certificates will have a Notional Amount equal to the
aggregate Scheduled Principal Balances of all of the Premium Mortgage
Loans, initially approximately $275,312,264.
The "Accrued Certificate Interest" for any interest-bearing
Certificate for any Distribution Date will equal the interest accrued
during the related Interest Accrual Period at the applicable Pass-Through
Rate on the Current Principal Amount (or, in the case of a Class X
Certificate, the Notional Amount) of such Certificate immediately prior to
such Distribution Date less (i) in the case of an interest-bearing Senior
Certificate, such Certificate's share of any Net Interest Shortfall (as
defined herein) and the interest portion of any Excess Losses and, after
the Cross-Over Date, the interest portion of any Realized Losses and (ii)
in the case of a Subordinate Certificate, such Certificate's share of any
Net Interest Shortfall and the interest portion of any Realized Losses.
Such shortfalls and losses will be allocated among the Senior Certificates
in proportion to the amount of Accrued Certificate Interest that would have
been allocated thereto in the absence of such shortfalls and losses.
Accrued Certificate Interest is calculated on the basis of a 360-day year
consisting of twelve 30-day months. No Accrued Certificate Interest will be
payable with respect to any Class of Certificates
S-49
<PAGE>
after the Distribution Date on which the outstanding principal balance (or
Notional Amount) of such Certificate has been reduced to zero.
The "Current Principal Amount" of any Certificate (other than a Class
X Certificate) as of any Distribution Date will equal such Certificate's
initial principal amount on the Closing Date as reduced by (i) all amounts
distributed on previous Distribution Dates on such Certificate on account
of principal (and the Class PO Cash Shortfall with respect to a Class PO
Certificate), (ii) the principal portion of all Realized Losses previously
allocated to such Certificate and (iii) in the case of a Subordinate
Certificate, such Certificate's share, if any, of the Subordinate
Certificate Writedown Amount and the Class PO Deferred Payment Writedown
Amount for previous Distribution Dates. With respect to any Class of
Certificates (other than the Class X Certificates), the Current Principal
Amount thereof will equal the sum of the Current Principal Amounts of all
Certificates in such Class.
As of any Distribution Date, the "Subordinate Certificate Writedown
Amount" will equal the amount by which (a) the sum of the Current Principal
Amounts of all of the Certificates (after giving effect to the distribution
of principal and the allocation of Realized Losses and the Class PO
Deferred Payment Writedown Amount in reduction of the Current Principal
Amounts of the Certificates on such Distribution Date) exceeds (b) the sum
of the Scheduled Principal Balances of the Mortgage Loans on the first day
of the month of such Distribution Date less any Deficient Valuation
occurring on or prior to the Bankruptcy Coverage Termination Date (as
defined herein). For any Distribution Date, the "Class PO Deferred Payment
Writedown Amount" will equal the amount, if any, distributed on such date
in respect of the Class PO Deferred Amount pursuant to priority (A) fourth
and (B) fourth under "--Allocation of Available Funds" above. The
Subordinate Certificate Writedown Amount and the Class PO Deferred Payment
Writedown Amount will be allocated to the Classes of Subordinate
Certificates in inverse order of their numerical Class designations, until
the Current Principal Amount of each such Class has been reduced to zero
and, from and after the Cross-Over Date, the Subordinate Certificate
Writedown Amount will be allocated pro rata among the Classes of Senior
Certificates (other than the Class X and Class PO Certificates) based on
their then-outstanding Current Principal Amounts.
With respect to any Distribution Date, the "Interest Shortfall" is
equal to the aggregate shortfall, if any, in collections of interest
(adjusted to the related Net Rates) resulting from (a) prepayments in full
received during the related Prepayment Period, (b) partial prepayments
received during the related Prepayment Period to the extent applied prior
to the Due Date in the month of the Distribution Date and (c) interest
payments on certain of the Mortgage Loans being limited pursuant to the
provisions of the Soldiers' and Sailors' Civil Relief Act of 1940 (the
"Relief Act"). Interest Shortfalls will result because (i) Mortgagors are
obligated to pay interest on prepayments in full only to the date of
prepayment by the Mortgagor, (ii) (a) partial prepayments are generally not
required to be accompanied by interest on the amount of such partial
prepayment and (b) partial prepayments applied prior to the Due Date in the
month of the Distribution Date will result in a reduction of the Scheduled
Principal Balance of the related Mortgage Loan without a corresponding
reduction of the Current Principal Amount of any Certificate and (iii) the
Relief Act limits, in certain circumstances, the interest rate required to
be paid by a Mortgagor in the military service, to 6% per annum. Interest
Shortfalls resulting from prepayments in full or in part in any calendar
month will be offset by the Master Servicer on the Distribution Date in the
following calendar month to the extent that such Interest Shortfalls do not
exceed the lesser of (i) the Master Servicing Fee in connection with such
Distribution Date or (ii) 1/12 of 0.125% of the Scheduled Principal
Balances of the Mortgage Loans with respect to such Distribution Date. The
amount of the Master Servicing Fee used to offset such Interest Shortfalls
is referred to herein as "Compensating Interest Payments." Interest
Shortfalls net of Compensating Interest Payments are referred to herein as
"Net Interest Shortfalls."
If on any Distribution Date the Group I Available Funds are less than
the Accrued Certificate Interest on the Class A-I and Residual Certificates
and the Class X Component I Accrued Certificate Interest on Component I of
the Class X Certificates or if the Group II Available Funds are less than
the Accrued Certificate Interest on the Class A-II Certificates and the
Class X Component II Accrued Certificate Interest on
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<PAGE>
Component II of the Class X Certificates, in each case for such
Distribution Date and prior to reduction for Net Interest Shortfall and the
interest portion of Realized Losses, the shortfall will be allocated among
the holders of each such respective Class or Component in proportion to the
respective amounts of Accrued Certificate Interest and Class X Component I
Accrued Certificate Interest or Class X Component II Accrued Certificate
Interest, as applicable, that would have been allocated thereto in the
absence of such Net Interest Shortfall and/or Realized Losses for such
Distribution Date on each such Class or Component. In addition, the amount
of any interest shortfalls with respect to the related Mortgage Loan Group
that are covered by subordination will constitute unpaid Accrued
Certificate Interest or unpaid Class X Component I Accrued Certificate
Interest or unpaid Class X Component II Accrued Certificate Interest and
will be distributable to holders of the Certificates of the related Classes
or Component entitled to such amounts on subsequent Distribution Dates, to
the extent of Group I Available Funds or Group II Available Funds, as
applicable, after interest distributions as required herein. Any such
amounts so carried forward will not bear interest. Shortfalls in interest
payments will not be offset by a reduction in the servicing compensation of
the Master Servicer or otherwise, except to the limited extent described
above.
Principal. An amount equal to all amounts payable in respect of
principal of the Group I Mortgage Loans will be allocated between (i) the
Senior Certificates (other than the Class A-II, Class PO and Class X
Certificates) and the Subordinate Certificates and (ii) the Class PO
Certificates, in each case based on the applicable Non-PO Percentage and
the applicable PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Rate less than 8.00% per annum (each such Mortgage Loan in Mortgage Loan
Group I, a "Group I Discount Mortgage Loan", in Mortgage Loan Group II, a
"Group II Discount Mortgage Loan" and, collectively, the "Discount Mortgage
Loans") will be equal to the Net Rate thereof divided by 8.00%. The "Non-PO
Percentage" with respect to any Premium Mortgage Loan will be 100%. The
"PO Percentage" with respect to any Discount Mortgage Loan will be the
fraction, expressed as a percentage, equal to 8.00% minus the Net Rate
thereof divided by 8.00%. The "PO Percentage" with respect to any Non-
Discount Mortgage Loan will be 0%.
Distributions in reduction of the Current Principal Amount of the
Class A-I Certificates and the Residual Certificates and the Class PO
Portion I Principal Distribution Amount will be made on each Distribution
Date pursuant to priority (A) third, the fourth paragraph following
priority (A) fourth and paragraphs (D), (E) and (F) above under "--
Allocation of Available Funds." In accordance with priority (A) third, the
Group I Available Funds remaining after distribution of interest on the
Class A-I Certificates, the Residual Certificates, Portion I of the Class
PO Certificates and Component I of the Class X Certificates on such
Distribution Date will be allocated to the Class A-I and the Residual
Certificates and Portion I of the Class PO Certificates in an aggregate
amount not to exceed the sum of the Group I Senior Optimal Principal Amount
and the Class PO Portion I Principal Distribution Amount for such
Distribution Date.
Distributions in reduction of the Current Principal Amount of the
Class A-II Certificates and the Class PO Portion II Principal Distribution
Amount will be made on each Distribution Date pursuant to priority (B)
third, the paragraph following priority (B) third and paragraphs (D) and
(F) under "-- Allocation of Available Funds" above. In accordance with
priority (B) third, the Group II Available Funds remaining after
distribution of interest on the Class A-II Certificates, Portion I of the
Class PO Certificates and Component I of the Class X Certificates on such
Distribution Date will be allocated to the Class A-II and Portion I of the
Class PO Certificates in an aggregate amount not to exceed the sum of the
Group II Senior Optimal Principal Amount and the Class PO Portion II
Principal Distribution Amount for such Distribution Date.
Distributions in reduction of the Current Principal Amounts of the
Subordinate Certificates will be made pursuant to paragraph (C) under "--
Allocation of Available Funds" above. The sum of the Group I Available
Funds and the Group II Available Funds, if any, remaining after
distributions of principal and interest on the Senior Certificates and
payments in respect of the Class PO Deferred Amount on such Distribution
Date will be allocated to the Subordinate Certificates in an amount equal
to each such Class's Allocable Share for such
S-51
<PAGE>
Distribution Date, provided that no distribution of principal will be made
on any such Class until any Class ranking prior thereto has received
distributions of interest and principal, and such Class has received
distributions of interest, on such Distribution Date.
In order to calculate the source of principal distributable on the
Class PO Certificates, the Class PO Certificates are deemed to consist of
separate portions, one of which corresponds to the Class A-I Certificates,
the Class R-1 Certificates and a principal amount of the Class B
Certificates which derives its distributions from the Group I Mortgage
Loans ("Portion I") and one which corresponds to the Class A-II
Certificates and the principal amount of the Class B Certificates which
derives its distributions from the Group II Mortgage Loans ("Portion II").
Since amounts distributable on the Class PO Certificates are based on
amounts paid on both the Group I Mortgage Loans and the Group II Mortgage
Loans, such amounts may be expressed as the sum of the Class PO Portion I
Principal Distribution Amount and the Class PO Portion II Principal
Distribution Amount (each as defined herein.) Such aggregate amount is
referred to herein as the "Class PO Principal Distribution Amount."
The amount to which the Senior Certificates (other than the Class PO
and Class X Certificates) are entitled as principal on any Distribution
Date will be determined separately for the Class A-I Certificates and the
Residual Certificates (the "Group I Senior Optimal Principal Amount") and
for the Class A-II Certificates (the "Group II Senior Optimal Principal
Amount") and in each case will be an amount equal to the sum of:
(i) the applicable Senior Percentage (as defined below) of the
applicable Non-PO Percentage of all scheduled payments of principal
due on each Mortgage Loan in the related Mortgage Loan Group on the
first day of the month in which the Distribution Date occurs, as
specified in the amortization schedule at the time applicable thereto
(after adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or
any moratorium or similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage (as defined
below) of the applicable Non-PO Percentage of the Scheduled Principal
Balance of each Mortgage Loan in the related Mortgage Loan Group which
was the subject of a prepayment in full received by the Master
Servicer during the applicable Prepayment Period (as defined below);
(iii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received on each Mortgage Loan in the related Mortgage Loan Group
during the applicable Prepayment Period;
(iv) the lesser of (a) the applicable Senior Prepayment
Percentage of the applicable Non-PO Percentage of the sum of (w) the
net liquidation proceeds allocable to principal on each Mortgage Loan
in the related Mortgage Loan Group which became a Liquidated Mortgage
Loan during the related Prepayment Period (other than Mortgage Loans
described in clause (x)) and (x) the Scheduled Principal Balance of
each Mortgage Loan in the related Mortgage Loan Group that was
purchased by a private mortgage insurer during the related Prepayment
Period as an alternative to paying a claim under the related insurance
policy, and (b) the applicable Senior Percentage of the applicable
Non-PO Percentage of the sum of (w) the Scheduled Principal Balance of
each Mortgage Loan in the related Mortgage Loan Group which became a
Liquidated Mortgage Loan during the related Prepayment Period (other
than Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Mortgage Loan in the related Mortgage Loan
Group that was purchased by a private mortgage insurer during the
related Prepayment Period as an alternative to paying a claim under
the related insurance policy less (y) in the case of clause (b), the
applicable
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<PAGE>
Senior Percentage of the applicable Non-PO Percentage of the principal
portion of Excess Losses (other than Debt Service Reductions) on each
Mortgage Loan in the related Mortgage Loan Group incurred during the
related Prepayment Period; and
(v) the applicable Senior Prepayment Percentage of the
applicable Non- PO Percentage of the sum of (a) the Scheduled
Principal Balance of each Mortgage Loan in the related Mortgage Loan
Group which was repurchased by the Master Servicer in connection with
such Distribution Date and (b) the difference, if any, between the
Scheduled Principal Balance of a Mortgage Loan in the related Mortgage
Loan Group that has been replaced by the Master Servicer with a
substitute Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such
substitute Mortgage Loan.
With respect to any Mortgage Loan and any Distribution Date, the
"Prepayment Period" is the period from the first day through the last day
of the month preceding the month of such Distribution Date.
The "Class A-I Senior Percentage" and the "Class A-II Senior
Percentage" (each, a "Senior Percentage") will initially equal
approximately 93.74% and 93.68%, respectively. Each Senior Percentage will
be recalculated with respect to each Distribution Date to equal the lesser
of (i) 100% and (ii) the percentage (carried to six places rounded up)
obtained by dividing the aggregate Current Principal Amounts of all of the
Class A-I Certificates and the Residual Certificates in the case of the
Class A-I Senior Percentage and the Class A-II Certificates in the case of
the Class A-II Senior Percentage immediately preceding such Distribution
Date by the aggregate Scheduled Principal Balance of all of the Mortgage
Loans in the related Mortgage Loan Group (other than the PO Percentage of
the Discount Mortgage Loans in the related Mortgage Loan Group) immediately
preceding such Distribution Date. The initial Class A-I Senior Percentage
is greater than the initial percentage interest in Mortgage Loan Group I
evidenced by the related Classes of Class A-I Certificates and Residual
Certificates in the aggregate, because each such percentage is calculated
without regard to the PO Percentage of the Scheduled Principal Balance of
each Group I Discount Mortgage Loan. The initial Class A-II Senior
Percentage is greater than the initial percentage interest in Mortgage Loan
Group II evidenced by the related Class A-II Certificates because each such
percentage is calculated without regard to the PO Percentage of the
Scheduled Principal Balance of each Group II Discount Mortgage Loan.
The "Senior Prepayment Percentage" with respect to each Mortgage Loan
Group on any Distribution Date occurring during the periods set forth below
will be as follows:
<TABLE>
<CAPTION>
PERIOD (DATES INCLUSIVE) SENIOR PREPAYMENT PERCENTAGE
- ------------------------ ----------------------------
<S> <C>
Through June 25, 2002..................... 100%
July 25, 2002 - June 25, 2003............. applicable Senior Percentage plus
70% of the Subordinate Percentage
July 25, 2003 - June 25, 2004............. applicable Senior Percentage plus
60% of the Subordinate Percentage
July 25, 2004 - June 25, 2005............. applicable Senior Percentage plus
40% of the Subordinate Percentage
July 25, 2005 - June 25, 2006............. applicable Senior Percentage plus
20% of the Subordinate Percentage
July 25, 2006 and thereafter.............. applicable Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Distribution Date the
applicable Senior Percentage exceeds the applicable Senior Percentage as of
the Cut-off Date, the related Senior Prepayment Percentage for such
Distribution Date will equal 100%. Upon reduction of the Current Principal
Amounts of the Class A-I Certificates and the Residual Certificates or the
Class A-II Certificates, as applicable, to zero, the related
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<PAGE>
Senior Prepayment Percentage will equal 0%; provided that in the
circumstances described in paragraph (D) above under "--Allocation of
Available Funds," prepayments resulting from Mortgage Loans in one Mortgage
Loan Group and otherwise distributable to the Subordinate Certificates will
be distributed to the Senior Certificates related to the other Mortgage
Loan Group (other than the Class PO and Class X Certificates).
In addition, no reduction of a Senior Prepayment Percentage shall
occur on any Distribution Date (such limitation being the "Senior
Prepayment Percentage Stepdown Limitation") unless, as of the last day of
the month preceding such Distribution Date, either (a)(i)(X) the aggregate
outstanding principal balance of Mortgage Loans in both Mortgage Loan
Groups delinquent 60 days or more (including for this purpose any Mortgage
Loans in foreclosure and Mortgage Loans with respect to which the related
Mortgaged Property has been acquired by the Trust), averaged over the last
six months, as a percentage of the aggregate Current Principal Amount of
the Subordinate Certificates averaged over the last six months, does not
exceed 50% or (Y) the aggregate outstanding principal balance of the
Mortgage Loans in both Mortgage Loan Groups delinquent 60 days or more
averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last
six months, does not exceed 2% and (ii) cumulative Realized Losses on the
Mortgage Loans in both Mortgage Loan Groups do not exceed (a) 30% of the
aggregate Current Principal Amounts of the Subordinate Certificates as of
the Cut-off Date (the "Original Subordinate Principal Balance") if such
Distribution Date occurs between and including July 2002 and June 2003, (b)
35% of the related Original Subordinate Principal Balance if such
Distribution Date occurs between and including July 2003 and June 2004, (c)
40% of the related Original Subordinate Principal Balance if such
Distribution Date occurs between and including July 2004 and June 2005, (d)
45% of the related Original Subordinate Principal Balance if such
Distribution Date occurs between and including July 2005 and June 2006, and
(e) 50% of the related Original Subordinate Principal Balance if such
Distribution Date occurs during or after July 2006 or (b)(i) the
outstanding principal balance of the Mortgage Loans in both Mortgage Loan
Groups delinquent 60 days or more averaged over the last six months, as a
percentage of the aggregate outstanding principal balance of all Mortgage
Loans averaged over the last six months, does not exceed 4% and (ii)
Realized Losses on the Mortgage Loans in both Mortgage Loan Groups to date
for such Distribution Date are less than 10% of the Original Subordinate
Principal Balance.
The "Class PO Portion I Principal Distribution Amount" with respect to
each Distribution Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Group I Discount Mortgage Loan on the first day
of the month in which the Distribution Date occurs, as specified in
the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or
any moratorium or similar waiver or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal
Balance of each Group I Discount Mortgage Loan which was the subject
of a prepayment in full received by the Master Servicer during the
applicable Prepayment Period;
(iii) the applicable PO Percentage of all partial prepayments of
principal on Group I Mortgage Loans received during the applicable
Prepayment Period;
(iv) the lesser of (a) the applicable PO Percentage of the sum
of (w) the net liquidation proceeds allocable to principal on each
Group I Discount Mortgage Loan which became a Liquidated Mortgage Loan
during the related Prepayment Period (other than Group I Discount
Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Group I Discount Mortgage Loan that was
purchased by a private mortgage insurer during the related Prepayment
Period as an alternative to paying a claim under the related insurance
policy, and (b) the applicable PO Percentage
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<PAGE>
of the sum of (w) the Scheduled Principal Balance of each Group I
Discount Mortgage Loan which became a Liquidated Mortgage Loan during
the related Prepayment Period (other than Group I Discount Mortgage
Loans described in clause (x)) and (x) the Scheduled Principal Balance
of each Group I Discount Mortgage Loan that was purchased by a private
mortgage insurer during the related Prepayment Period as an
alternative to paying a claim under the related insurance policy less
(y) in the case of clause (b), the applicable PO Percentage of the
principal portion of Excess Losses (other than Debt Service
Reductions) with respect to Group I Mortgage Loans incurred during the
related Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Group I Discount Mortgage Loan
which was repurchased by the Master Servicer in connection with such
Distribution Date and (b) the difference, if any, between the
Scheduled Principal Balance of a Group I Discount Mortgage Loan that
has been replaced by the Master Servicer with a substitute Group I
Discount Mortgage Loan pursuant to the Agreement in connection with
such Distribution Date and the Scheduled Principal Balance of such
substitute Group I Discount Mortgage Loan.
The "Class PO Portion II Principal Distribution Amount" with respect
to each Distribution Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Group II Discount Mortgage Loan on the first day
of the month in which the Distribution Date occurs, as specified in
the amortization schedule at the time applicable thereto (after
adjustment for previous principal prepayments and the principal
portion of Debt Service Reductions after the Bankruptcy Coverage
Termination Date, but before any adjustment to such amortization
schedule by reason of any other bankruptcy or similar proceeding or
any moratorium or similar waiver or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal
Balance of each Group II Discount Mortgage Loan which was the subject
of a prepayment in full received by the Master Servicer during the
applicable Prepayment Period;
(iii) the applicable PO Percentage of all partial prepayments of
principal on Group II Mortgage Loans received during the applicable
Prepayment Period;
(iv) the lesser of (a) the applicable PO Percentage of the sum
of (w) the net liquidation proceeds allocable to principal on each
Group II Discount Mortgage Loan which became a Liquidated Mortgage
Loan during the related Prepayment Period (other than Group II
Discount Mortgage Loans described in clause (x)) and (x) the Scheduled
Principal Balance of each Group II Discount Mortgage Loan that was
purchased by a private mortgage insurer during the related Prepayment
Period as an alternative to paying a claim under the related insurance
policy, and (b) the applicable PO Percentage of the sum of (w) the
Scheduled Principal Balance of each Group II Discount Mortgage Loan
which became a Liquidated Mortgage Loan during the related Prepayment
Period (other than Group II Discount Mortgage Loans described in
clause (x)) and (x) the Scheduled Principal Balance of each Group II
Discount Mortgage Loan that was purchased by a private mortgage
insurer during the related Prepayment Period as an alternative to
paying a claim under the related insurance policy less (y) in the case
of clause (b), the applicable PO Percentage of the principal portion
of Excess Losses (other than Debt Service Reductions) with respect to
Group II Mortgage Loans incurred during the related Prepayment Period;
and
(v) the applicable PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Group II Discount Mortgage Loan
which was repurchased by the Master Servicer in connection with such
Distribution Date and (b) the difference, if any, between the
Scheduled Principal Balance of a Group II Discount Mortgage Loan that
has been replaced by the Master Servicer with a substitute
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<PAGE>
Group II Discount Mortgage Loan pursuant to the Agreement in
connection with such Distribution Date and the Scheduled Principal
Balance of such substitute Group II Discount Mortgage Loan.
The "Subordinate Percentage" with respect to each Mortgage Loan Group,
which will initially equal approximately 6.25% with respect to each of
Mortgage Loan Group I and Mortgage Loan Group II, will be recalculated for
each Distribution Date to equal 100% minus the related Senior Percentage
for such Distribution Date. The "Subordinate Prepayment Percentage" with
respect to each Mortgage Loan Group on any Distribution Date will equal
100% minus the related Senior Prepayment Percentage, except that on any
Distribution Date after the Current Principal Amounts of the related Senior
Certificates (other than the Class PO Certificates) have each been reduced
to zero, the applicable Subordinate Prepayment Percentage will equal 100%.
The "Subordinate Optimal Principal Amount" with respect to each
Distribution Date will be an amount equal to the sum of the following (but
in no event greater than the aggregate Current Principal Amounts of the
Subordinate Certificates immediately prior to such Distribution Date):
(i) the applicable Subordinate Percentage of the applicable
Non-PO Percentage of all scheduled payments of principal due on each
Mortgage Loan in the related Mortgage Loan Group on the first day of
the month in which the Distribution Date occurs, as specified in the
amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments and the principal portion of Debt
Service Reductions after the Bankruptcy Coverage Termination Date, but
before any adjustment to such amortization schedule by reason of any
other bankruptcy or similar proceeding or any moratorium or similar
waiver or grace period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of
each Mortgage Loan in the related Mortgage Loan Group which was the
subject of a prepayment in full received by the Master Servicer during
the applicable Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received on Mortgage Loans in the Related Mortgage Loan Group during
the applicable Prepayment Period (plus, on the Distribution Date on
which the Current Principal Amounts of the related Senior Certificates
(other than the Class PO Certificates) have all been reduced to zero,
100% of any applicable Senior Optimal Principal Amount remaining
undistributed on such date);
(iv) the excess, if any, of the applicable Non-PO Percentage of
the sum of (a) the net liquidation proceeds allocable to principal
received during the related Prepayment Period in respect of each
Liquidated Mortgage Loan in the related Mortgage Loan Group (other
than Mortgage Loans described in clause (b)) and (b) the principal
balance of each Mortgage Loan in the related Mortgage Loan Group that
was purchased by a private mortgage insurer during the related
Prepayment Period as an alternative to paying a claim under the
related insurance policy over (c) the sum of the amounts distributable
to the related Senior Certificateholders pursuant to clause (iv) of
each of the definitions of Group I Senior Optimal Principal Amount,
Group II Senior Optimal Principal Amount, and the Class PO Principal
Distribution Amount on such Distribution Date; and
(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Mortgage Loan in the related Mortgage Loan Group which
was repurchased by the Master Servicer in connection with such
Distribution Date and (b) the difference, if any, between the
Scheduled Principal Balance of a Mortgage Loan in the related Mortgage
Loan Group that has been replaced by the Master Servicer
S-56
<PAGE>
with a substitute Mortgage Loan pursuant to the Agreement in
connection with such Distribution Date and the Scheduled Principal
Balance of such substitute Mortgage Loan.
The "Allocable Share" with respect to any Class of Subordinate
Certificates on any Distribution Date will generally equal such Class's pro
rata share (based on the Current Principal Amount of each Class entitled
thereto) of each of the components of the definition of the Subordinate
Optimal Principal Amount; provided, that, except as described in the second
succeeding sentence, no Class of Subordinate Certificates shall be entitled
on any Distribution Date to receive distributions pursuant to clauses (ii),
(iii) and (v) of the definition of the Subordinate Optimal Principal Amount
unless the Class Prepayment Distribution Trigger for the related Class is
satisfied for such Distribution Date. The "Class Prepayment Distribution
Trigger" for a Class of Subordinate Certificates for any Distribution Date
is satisfied if the fraction (expressed as a percentage), the numerator of
which is the aggregate Current Principal Amount of such Class and each
Class subordinate thereto, if any, and the denominator of which is the
Scheduled Principal Balances of all of the Mortgage Loans as of the Due
Date in the month next preceding such Distribution Date, equals or exceeds
such percentage calculated as of the Closing Date. If on any Distribution
Date the Current Principal Amount of any Class of Subordinate Certificates
for which the related Class Prepayment Distribution Trigger was satisfied
on such Distribution Date is reduced to zero, any amounts distributable to
such Class pursuant to clauses (ii), (iii) and (v) of the definition of
"Subordinate Optimal Principal Amount," to the extent of such Class's
remaining Allocable Share, shall be distributed to the remaining Classes of
Subordinate Certificates in reduction of their respective Current Principal
Amounts in the order of their numerical Class designations. If the Class
Prepayment Distribution Trigger is not satisfied for any Class of
Subordinate Certificates on any Distribution Date, this may have the effect
of accelerating the amortization of more senior Classes of Subordinate
Certificates. On any Distribution Date, any reduction in funds available
for distribution to the Classes of Subordinate Certificates resulting from
a distribution of the Class PO Deferred Amount will be allocated to the
Classes of Subordinate Certificates, in reduction of the Allocable Shares
thereof, in inverse order of their numerical Class designations.
"Determination Date" means the 18th day of the month of the
Distribution Date, or if such day is not a Business Day, the following
Business Day.
"Insurance Proceeds" are amounts paid by an insurer under any Primary
Insurance Policy, standard hazard insurance policy, flood insurance policy
or title insurance policy covering any Mortgage Loan or Mortgaged Property
other than amounts required to be paid over to the Mortgagor pursuant to
law or the related Mortgage Note and other than amounts used to repair or
restore the Mortgaged Property or to reimburse certain expenses.
"Repurchase Proceeds" are proceeds of any Mortgage Loan repurchased by
ICI Funding and any cash deposit in connection with the substitution of a
Mortgage Loan pursuant to the provisions described under "The Pooling and
Servicing Agreement--Assignment of Mortgage Loans" and "--Representations
and Warranties" herein.
"Principal Prepayment" is any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled Due Date
to the extent that it is not accompanied by an amount as to interest
representing scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment, including Insurance Proceeds
and Repurchase Proceeds, but excluding Liquidation Proceeds received at the
time a Mortgage Loan becomes a Liquidated Mortgage Loan.
"Monthly Payment" with respect to any Mortgage Loan and any month is
the scheduled payment or payments of principal and interest due during such
month on such Mortgage Loan which either is payable by a Mortgagor in such
month under the related Mortgage Note, or in the case of any Mortgaged
Property acquired through foreclosure or deed-in-lieu of foreclosure (each
such Mortgaged Property, an "REO Property"), would otherwise have been
payable under the related Mortgage Note.
S-57
<PAGE>
ALLOCATION OF REALIZED LOSSES
A "Realized Loss" with respect to a Mortgage Loan is (i) a Bankruptcy
Loss (as defined below) or (ii) as to any Liquidated Mortgage Loan, the
unpaid principal balance thereof plus accrued and unpaid interest thereon
at the Mortgage Rate through the last day through the month of liquidation
less the Net Liquidation Proceeds with respect to such Mortgage Loan and
the related Mortgaged Property. A "Liquidated Mortgage Loan" is any
defaulted Mortgage Loan as to which the Master Servicer has determined that
all amounts which it expects to recover from or on account of such Mortgage
Loan have been recovered.
"Liquidation Proceeds" are amounts received by the Master Servicer in
connection with the liquidation of a defaulted Mortgage Loan whether
through trustee's sale, foreclosure sale, proceeds of insurance policies,
condemnation proceeds or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are
Liquidation Proceeds net of expenses incurred by the Master Servicer in
connection with the liquidation of such Mortgage Loan and the related
Mortgaged Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less
than the then Outstanding Principal Balance of the Mortgage Loan secured by
such Mortgaged Property and could reduce the secured debt to such value.
In such case, the holder of such Mortgage Loan would become an unsecured
creditor to the extent of the difference between the Outstanding Principal
Balance of such Mortgage Loan and such reduced secured debt (such
difference, a "Deficient Valuation"). In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction of the amount of the monthly payment on
the related Mortgage Loan (a "Debt Service Reduction"). A "Bankruptcy Loss"
with respect to any Mortgage Loan is a Deficient Valuation or Debt Service
Reduction.
A "Fraud Loss" is any Realized Loss attributable to fraud in the
origination of the related Mortgage Loan.
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any
Realized Loss due to the presence or suspected presence of hazardous wastes
or substances on a Mortgaged Property) other than any such damage or loss
covered by a hazard policy or a flood insurance policy required to be
maintained in respect of such Mortgaged Property under the Agreement or any
loss due to normal wear and tear or certain other causes.
The applicable Non-PO Percentage of the principal portion of any
Realized Loss (other than Excess Losses) on a Mortgage Loan in either
Mortgage Loan Group for any Distribution Date will not be allocated to any
Senior Certificates until the Cross-Over Date. Prior to the Cross-Over
Date (and on such date under certain circumstances), the applicable Non-PO
Percentage of any such Realized Loss will be allocated among the
outstanding Classes of Subordinate Certificates, in inverse order of
priority, until the Current Principal Amount of each such Class has been
reduced to zero (i.e., such Realized Losses will be allocated first to the
Class B-6 Certificates while such Certificates are outstanding, second to
the Class B-5 Certificates, and so on). The applicable Non-PO Percentage
of the principal portion of any Excess Bankruptcy Loss (other than a Debt
Service Reduction), Excess Fraud Loss or Excess Special Hazard Loss for any
Distribution Date will be allocated pro rata among all outstanding Classes
of Certificates (other than the Class PO and Class X Certificates) based on
their Current Principal Amounts. An "Excess Bankruptcy Loss", "Excess
Fraud Loss" or "Excess Special Hazard Loss" is any Bankruptcy Loss, Fraud
Loss or Special Hazard Loss, respectively, occurring after the Bankruptcy
Coverage Termination Date, Fraud Coverage Termination Date and Special
Hazard Termination Date, respectively, as described more fully below.
Commencing on the Cross-Over Date, the applicable Non-PO Percentage of the
principal portion of any Realized Loss (other than a Debt Service
S-58
<PAGE>
Reduction) on a Mortgage Loan will be allocated among the outstanding
Classes of Senior Certificates (other than the Class PO and Class X
Certificates) pro rata based upon their Current Principal Amounts.
Since the Subordinate Certificates will absorb Realized Losses on
Mortgage Loans in both Mortgage Loan Groups, a disproportionate amount of
Realized Losses with respect to Mortgage Loans in either Mortgage Loan
Group will adversely impact the availability of subordination to the
Certificates related to the other Mortgage Loan Group.
On each Distribution Date, the applicable PO Percentage of the
principal portion of any Realized Loss on a Discount Mortgage Loan and
Class PO Cash Shortfall will be allocated to the Class PO Certificates
until the Current Principal Amount thereof is reduced to zero. With
respect to any Distribution Date through the Cross-Over Date, the aggregate
of all amounts so allocable to the Class PO Certificates on such date in
respect of Realized Losses (other than Excess Losses) and Class PO Cash
Shortfall and all amounts previously allocated in respect of such losses or
Class PO Cash Shortfall to the Class PO Certificates and not distributed on
prior Distribution Dates will be the "Class PO Deferred Amount." To the
extent Group I Available Funds are available therefor on any Distribution
Date through the Cross-Over Date, distributions in respect of the Class PO
Deferred Amount will be made on the Class PO Certificates in accordance
with priority (A) fourth and priority (B) fourth under "--Allocation of
Available Funds" above. Any distribution of Group I Available Funds in
respect of the Class PO Deferred Amount will not reduce the Class PO
Current Principal Amount. No interest will accrue on the Class PO Deferred
Amount. On each Distribution Date through the Cross-Over Date, the Current
Principal Amount of the lowest ranking Class of Subordinate Certificates
then outstanding having the highest numerical Class designation will be
reduced by the amount of any distributions in respect of the Class PO
Deferred Amount on such Distribution Date, through the operation of the
Class PO Deferred Payment Writedown Amount. After the Cross-Over Date, no
more distributions will be made in respect of, and Realized Losses and
Class PO Cash Shortfalls allocated to the Class PO Certificates will not be
added to, the Class PO Deferred Amount.
No reduction of the Current Principal Amount of any Class shall be
made on any Distribution Date on account of Realized Losses to the extent
that such reduction would have the effect of reducing the aggregate Current
Principal Amount of all of the Certificates as of such Distribution Date to
an amount less than the Scheduled Principal Balances of all of the Mortgage
Loans as of the first day of the month of such Distribution Date, less any
Deficient Valuations occurring on or prior to the Bankruptcy Coverage
Termination Date (such limitation being the "Loss Allocation Limitation").
The principal portion of Debt Service Reductions will not be allocated
in reduction of the Current Principal Amount of any Certificate. However,
after the Bankruptcy Coverage Termination Date, the amounts distributable
under clause (i) of each of the definitions of Group I Senior Optimal
Principal Amount or Group II Senior Optimal Principal Amount, Class PO
Principal Distribution Amount and Subordinate Optimal Principal Amount will
be reduced by the amount of any Debt Service Reductions. Regardless of
when they occur, Debt Service Reductions may reduce the amount of Available
Funds otherwise available for distribution on a Distribution Date. As a
result of the subordination of the Subordinate Certificates in right of
distribution, any Debt Service Reductions prior to the Bankruptcy Coverage
Termination Date will be borne by the Subordinate Certificates (to the
extent then outstanding) in inverse order of priority.
All allocations of Realized Losses will be accomplished on a
Distribution Date by reducing the Current Principal Amount of the
applicable Classes by their appropriate shares of any such losses occurring
during the month preceding the month of such Distribution Date and,
accordingly, will be taken into account in determining the distributions of
principal and interest on the Certificates commencing on the following
Distribution Date, except that the aggregate amount of the principal
portion of any Realized Losses to be allocated to the Class PO Certificates
on any Distribution Date through the Cross-Over Date will also be taken
into account in determining distributions in respect of the Class PO
Deferred Amount for such Distribution Date.
S-59
<PAGE>
The interest portion of all Realized Losses will be allocated among
the outstanding Classes of Certificates offered hereby to the extent
described under "Distributions on the Certificates--Interest" above.
Any Deficient Valuation will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Bankruptcy
Coverage Termination Date. The "Bankruptcy Coverage Termination Date" is
the Distribution Date upon which the Bankruptcy Loss Amount has been
reduced to zero or a negative number (or the Cross-Over Date, if earlier).
On each Distribution Date, the "Bankruptcy Loss Amount" will equal
approximately $107,803 (approximately .037% of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date), subject
to reduction as described in the Agreement, minus the aggregate amount of
previous Bankruptcy Losses. The Bankruptcy Loss Amount and the related
coverage levels described above may be reduced or modified upon written
confirmation from S&P and DCR (each as defined herein) that such reduction
or modification will not adversely affect the then current ratings of the
Senior Certificates by S&P and DCR. Such reduction may adversely affect
the coverage provided by subordination with respect to Bankruptcy Losses.
Any Fraud Loss will on each Distribution Date be allocated solely to
the outstanding Subordinate Certificates until the Fraud Coverage
Termination Date. The "Fraud Coverage Termination Date" is the
Distribution Date upon which the Fraud Loss Amount has been reduced to zero
or a negative number (or the Cross-Over Date, if earlier). Upon the
initial issuance of the Certificates, the "Fraud Loss Amount" will equal
approximately 2.0% (approximately $5,827,566) of the aggregate Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date. As of any
Distribution Date prior to the first anniversary of the Cut-off Date, the
Fraud Loss Amount will equal approximately $5,827,566, minus the aggregate
amount of Fraud Losses that would have been allocated to the Subordinate
Certificates in the absence of the Loss Allocation Limitation since the
Cut-off Date. As of any Distribution Date from the first through the fifth
anniversaries of the Cut- off Date, the Fraud Loss Amount will equal (1)
the lesser of (a) the Fraud Loss Amount as of the most recent anniversary
of the Cut-off Date and (b) 1.0% of the aggregate outstanding principal
balance of all of the Mortgage Loans as of the most recent anniversary of
the Cut-off Date minus (2) the Fraud Losses that would have been allocated
to the Subordinate Certificates in the absence of the Loss Allocation
Limitation since the most recent anniversary of the Cut-off Date. After
the fifth anniversary of the Cut-off Date, the Fraud Loss Amount shall be
zero.
Any Special Hazard Loss will on each Distribution Date be allocated
solely to the outstanding Subordinate Certificates until the Special Hazard
Termination Date. The "Special Hazard Termination Date" is the
Distribution Date upon which the Special Hazard Loss Amount has been
reduced to zero or a negative number (or the Cross-Over Date, if earlier).
Upon the initial issuance of the Certificates, the "Special Hazard Loss
Amount" will equal approximately 1.0% (approximately $2,925,469) of the
aggregate Scheduled Principal Balances of the Mortgage Loans as of the Cut-
off Date. As of any Distribution Date, the Special Hazard Loss Amount will
equal approximately $2,925,469, minus the sum of (i) the aggregate amount
of Special Hazard Losses that would have been previously allocated to the
Subordinate Certificates in the absence of the Loss Allocation Limitation
and (ii) the Adjustment Amount. For each anniversary of the Cut-off Date,
the "Adjustment Amount" shall be equal to the amount, if any, by which the
Special Hazard Loss Amount (without giving effect to the deduction of the
Adjustment Amount for such anniversary) exceeds the lesser of (A) an amount
calculated by the Company and approved by each of S&P and DCR, which amount
shall not be less than $500,000, and (B) the greater of (x) 1.0% (or if
greater than 1.0%, the highest percentage of Mortgage Loans by principal
balance secured by Mortgaged Properties in any California zip code) of the
outstanding principal balance of all the Mortgage Loans on the Distribution
Date immediately preceding such anniversary and (y) twice the outstanding
principal balance of the Mortgage Loan which has the largest outstanding
principal balance on the Distribution Date immediately preceding such
anniversary.
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<PAGE>
SUBORDINATION
Priority of Senior Certificates. As of the Closing Date, the
aggregate Current Principal Amounts of all classes of Subordinate
Certificates and the Other Certificates will equal approximately 6.25 % and
2.19%, respectively, of the aggregate Current Principal Amounts of all
Classes of Certificates. The rights of the holders of each Class of
Subordinate Certificates to receive distributions with respect to the Group
I Mortgage Loans and Group II Mortgage Loans will be subordinated to such
rights of the holders of the related Senior Certificates and of each Class
of Subordinate Certificates having a lower numerical Class designation than
such Class, to the extent described above. The subordination of the
Subordinate Certificates to the Senior Certificates, and the further
subordination among the Subordinate Certificates, are each intended to
increase the likelihood of timely receipt by the holders of the
Certificates with higher relative payment priorities of the maximum amount
to which they are entitled on any Distribution Date and to provide such
holders protection against losses resulting from defaults on the applicable
Mortgage Loans to the extent described above.
However, in certain circumstances, the amount of available
subordination (including the limited subordination provided for Excess
Losses) may be exhausted and shortfalls in distributions on the Offered
Certificates could result. Holders of Senior Certificates will bear their
proportionate share of Realized Losses in excess of the total subordination
amount. The allocation of the principal portion of the Non-PO Percentage
of any Realized Loss, and of the Class PO Deferred Payment Writedown
Amount, to the Subordinate Certificates on any Distribution Date will
decrease the protection provided to the Senior Certificates then
outstanding on future Distribution Dates by reducing the aggregate Current
Principal Amount of the Subordinate Certificates then outstanding.
In addition, in order to extend the period during which the
Subordinate Certificates remain available as credit enhancement for the
Senior Certificates, the entire amount of any prepayment or other
unscheduled recovery of principal with respect to a Mortgage Loan will be
allocated to the applicable Senior Certificates to the extent described
herein during the first five years after the Closing Date (with such
allocation being subject to reduction thereafter as described herein).
This allocation has the effect of accelerating the amortization of the
applicable Senior Certificates while, in the absence of losses in respect
of the related Mortgage Loans, increasing the percentage interest in the
principal balance of the related Mortgage Loans evidenced by the
Subordinate Certificates.
In certain other circumstances as described in paragraph (D) under
"--Distributions on the Certificates--Allocation of Available Funds,"
Principal Prepayments otherwise distributable to the Subordinate
Certificates will in lieu thereof be distributed to Senior Certificates.
As among the Class A-I Certificates, amounts equal to the prepayments
on the Group I Mortgage Loans generally will be allocated solely to such
classes of Certificates, other than Class A-I-8 Certificates, during the
first five years after the Closing Date, and then such allocation will be
reduced over the next four years at which time such Senior Certificates
will share pro rata in such allocations. Consequently, during the first
nine years after the Closing Date, prepayments will have the effect of
accelerating the amortization of such Certificates then entitled to
distributions, while increasing the percentage interest in the Group I
Mortgage Loans evidenced by the other Classes of Class A-I Certificates.
After the payment of amounts distributable in respect of the Senior
Certificates on each Distribution Date, the Subordinate Certificates will
be entitled on such date to the remaining portion, if any, of the Group I
Available Funds and Group II Available Funds in an aggregate amount equal
to the Accrued Certificate Interest on the Subordinate Certificates for
such date, any remaining undistributed Accrued Certificate Interest thereon
from previous Distribution Dates and the sum of the Allocable Shares of the
Subordinate Certificates. Amounts so distributed to Subordinate
Certificateholders will not be available to cover any delinquencies or any
Realized Losses on Mortgage Loans in respect of subsequent Distribution
Dates.
S-61
<PAGE>
Priority Among Subordinate Certificates. On each Distribution Date,
the holders of any particular Class of Subordinate Certificates will have a
preferential right to receive the amounts due them on such Distribution
Date out of Available Funds, prior to any distribution being made on such
date on each Class of Certificates subordinated to such Class. In
addition, except as described herein, the Non-PO Percentage of the
principal portion of any Realized Loss with respect to a Mortgage Loan and
any Class PO Deferred Payment Writedown Amount will be allocated, to the
extent set forth herein, in reduction of the Current Principal Amounts of
the related Classes of Subordinate Certificates in the inverse order of
their numerical Class designation. The effect of the allocation of such
Realized Losses and of any Class PO Deferred Payment Writedown Amount to a
Class of Subordinate Certificates will be to reduce future distributions
allocable to such Class and increase the relative portion of distributions
allocable to more senior Classes of Subordinate Certificates.
In order to maintain the relative levels of subordination among the
related Classes of Subordinate Certificates, the applicable Non-PO
Percentage of prepayments and certain other unscheduled recoveries of
principal in respect of the Mortgage Loans (which generally will not be
distributable to such Certificates for at least the first five years) will
not be distributable to the holders of any Class of Subordinate
Certificates on any Distribution Date for which the related Class
Prepayment Distribution Trigger is not satisfied, except as described
above. See "Description of the Certificates--Distributions on the
Certificates--Principal." If the Class Prepayment Distribution Trigger is
not satisfied with respect to any Class of Subordinate Certificates, the
amortization of more senior Classes of Subordinate Certificates may occur
more rapidly than would otherwise have been the case and, in the absence of
losses in respect of the Mortgage Loans, the percentage interest in the
principal balance of the Mortgage Loans evidenced by such Subordinate
Certificates may increase.
As a result of the subordination of any Class of Subordinate
Certificates, such Class of Certificates will be more sensitive than more
senior Classes of Certificates to the rate of delinquencies and defaults on
the Mortgage Loans, and under certain circumstances investors in such
Certificates may not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the Certificates
will be affected by the amount and timing of principal payments on the
Mortgage Loans and the allocation of Available Funds to various Classes of
Certificates. Investors should carefully consider the associated risks
discussed under the headings "Summary--Yield and Prepayment Considerations"
and "Summary--Legal Investment" herein and under the headings "Yield
Considerations," "Maturity and Prepayment Considerations" and "Legal
Investment Matters" in the Prospectus.
ASSUMED FINAL DISTRIBUTION DATE
The "Assumed Final Distribution Date" for distributions on the
Certificates is July 25, 2028. The Assumed Final Distribution Date is the
first anniversary of the Distribution Date immediately following the latest
scheduled maturity date of any Mortgage Loan. Since the rate of payment
(including prepayments) of principal on the Mortgage Loans can be expected
to exceed the scheduled rate of payments, and could exceed the scheduled
rate by a substantial amount, the disposition of the last remaining
Mortgage Loan may be earlier, and could be substantially earlier, than the
Assumed Final Distribution Date. In addition, the Master Servicer or its
designee may, at its option, repurchase all the Mortgage Loans from the
Trust on or after any Distribution Date on which the aggregate unpaid
principal balance of the Mortgage Loans is less than 10% of the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the Cut-off Date.
See "The Pooling and Servicing Agreement--Termination" herein.
S-62
<PAGE>
WEIGHTED AVERAGE LIVES
The weighted average life of a security refers to the average amount
of time that will elapse from the date of its issuance until each dollar of
principal of such security will be distributed to the investor. The
weighted average life of a Certificate is determined by (a) multiplying the
amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate
referred to in clause (a). The weighted average lives of the Certificates
will be influenced by, among other factors, the rate at which principal is
paid on Mortgage Loans in the applicable Mortgage Loan Group. Principal
payments of such Mortgage Loans may be in the form of scheduled
amortization or prepayments including as a result of foreclosure
proceedings or by virtue of the purchase of a Mortgage Loan in advance of
its stated maturity as required or permitted by the Agreement. In general,
the Mortgage Loans may be prepaid by the Mortgagors at any time without
payment of any prepayment fee or penalty. The actual weighted average life
and term to maturity of each Class of Certificates, in general, be
shortened if the level of such prepayments of principal on the applicable
Mortgage Loan Group increases.
The prepayment model used in this Prospectus Supplement (the
"Prepayment Assumption") represents an assumed rate of prepayment each
month relative to the then outstanding principal balance of a pool of
mortgage loans. A 100% Prepayment Assumption assumes a Constant Prepayment
Rate ("CPR") of 4.0% per annum of the then outstanding principal balance of
such mortgage loans in the first month of the life of the mortgage loans
and an additional amount of approximately 1.090909% (precisely 12/11%) per
annum in each month thereafter until the twelfth month. Beginning in the
twelfth month and in each month thereafter during the life of the mortgage
loans, a 100% Prepayment Assumption assumes a CPR of 16% per annum each
month. As used in the table below, a 50% Prepayment Assumption assumes
prepayment rates equal to 50% of the Prepayment Assumption.
Correspondingly, a 150% Prepayment Assumption assumes prepayment rates
equal to 150% of the Prepayment Assumption, and so forth. The Prepayment
Assumption does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any
pool of mortgage loans, including the Mortgage Loans.
PRICING ASSUMPTION
The Certificates were structured assuming, among other things, a 100%
Prepayment Assumption with respect to the Certificates. The prepayment
assumptions to be used for pricing purposes for the respective Classes may
vary as determined at the time of sale. The actual rate of prepayment may
vary considerably from the rate used for any prepayment assumption.
DECREMENT TABLES
The following tables entitled "Percent of Initial Principal Amount
Outstanding" indicate the percentages of the initial principal amount (or
Notional Amount) of each Class of Offered Certificates that would be
outstanding after each of the dates shown at various constant percentages
of the Prepayment Assumption and the corresponding weighted average lives
of such Classes of Offered Certificates.
S-63
<PAGE>
The following tables have been prepared based on the assumptions that:
(i) the Group I Mortgage Loans consist of 2 Mortgage Loans with the following
characteristics:
<TABLE>
<CAPTION>
Discount 30-Year Mortgage Loans
-------------------------------
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- --------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$11,169,962 8.07370% 7.80870% 360 349
</TABLE>
<TABLE>
<CAPTION>
Premium 30-Year Mortgage Loans
------------------------------
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- --------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$256,281,712 9.122983% 8.857983% 360 358
</TABLE>
(ii) the Group II Mortgage Loans consist of 4 Mortgage Loans with the following
characteristics:
<TABLE>
<CAPTION>
Discount 15-Year Mortgage Loans
-------------------------------
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- --------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$3,934,470 8.061274% 7.796274% 180 178
</TABLE>
<TABLE>
<CAPTION>
Premium 15-Year Mortgage Loans
------------------------------
Original Term Remaining Term
Principal Approximate Approximate to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months)
- --------- ------------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
$19,030,552 8.814273% 8.549273% 180 178
</TABLE>
<TABLE>
<CAPTION>
Discount Balloon Loans
----------------------
Original
Amortization Original Term Remaining Term
Principal Approximate Approximate Term to Maturity to Maturity
Balance Mortgage Rate Net Rate (in months) (in months) (in months)
- --------- ------------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
$401,836 5.461688% 5.196688% 360 60 18
$559,744 7.752213% 7.487213% 360 84 53
</TABLE>
(iii) the Mortgage Loans prepay at the specified constant percentages of the
Prepayment Assumption, (iv) no defaults in the payment by Mortgagors of
principal of and interest on the Mortgage Loans are experienced, (v) scheduled
payments on the Mortgage Loans are received on the first day of each month
commencing in July 1997 and are computed prior to giving effect to prepayments
received on the last day of the prior month, (vi) prepayments are allocated as
described herein without giving effect to loss and delinquency tests, (vii)
there are no Net Interest Shortfalls and prepayments represent prepayments in
full of individual Mortgage Loans and are received on the last day of each
month, commencing in June 1997, (viii) the scheduled monthly payment for each
Mortgage Loan has been calculated based on its outstanding balance, interest
rate and
S-64
<PAGE>
remaining term to maturity such that each Mortgage Loan will amortize in
amounts sufficient to repay the balance of such Mortgage Loan by its
remaining term to maturity, (ix) the initial principal or notional amounts
of the Certificates are as set forth on the cover page hereof and under
"Summary--Other Certificates," (x) interest accrues on each Class of
Certificates at the applicable interest rate or in the amounts described
herein, (xi) distributions in respect of the Certificates are received in
cash on the 25th day of each month, commencing in July 1997, (xii) the
Offered Certificates are purchased on June 30, 1997 and (xiii) the Master
Servicer does not exercise the option to repurchase the Mortgage Loans
described under the caption "The Pooling and Servicing Agreement--
Termination." While it is assumed that each of the Mortgage Loans prepays
at the specified constant percentages of the Prepayment Assumption, this is
not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans that will be delivered to the Trustee and the
characteristics of the Mortgage Loans assumed in preparing the tables. To
the extent that the Mortgage Loans have characteristics which differ from
those assumed in preparing the tables, the Certificates may mature earlier
or later than indicated by the tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Certificates (other than the
Class X Certificates) and set forth the percentages of the initial Current
Principal Amount of each such Class that would be outstanding after the
Distribution Date in June of each of the years indicated, assuming that the
Mortgage Loans prepay at the percentage of the Prepayment Assumption
indicated therein. Neither the Prepayment Assumption nor any other
prepayment model or assumption purports to be a historical description of
prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. Variations in
the actual prepayment experience and the balance of the Mortgage Loans that
prepay may increase or decrease the percentage of initial Current Principal
Amount (and weighted average life) shown in the following tables. Such
variations may occur even if the average prepayment experience of all such
Mortgage Loans equals any of the specified percentages of the Prepayment
Assumption.
S-65
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-I-1 CERTIFICATES CLASS A-I-2 CERTIFICATES
------------------------------------- -------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
------ ---- --- --- --- --- ---- --- --- --- ---
Initial Percent 100 100 100 100 100 100 100 100 100 100
June 1998 98 69 40 11 0 100 100 100 100 66
June 1999 95 31 0 0 0 100 100 47 0 0
June 2000 92 0 0 0 0 100 94 0 0 0
June 2001 89 0 0 0 0 100 34 0 0 0
June 2002 86 0 0 0 0 100 0 0 0 0
June 2003 82 0 0 0 0 100 0 0 0 0
June 2004 78 0 0 0 0 100 0 0 0 0
June 2005 73 0 0 0 0 100 0 0 0 0
June 2006 68 0 0 0 0 100 0 0 0 0
June 2007 63 0 0 0 0 100 0 0 0 0
June 2008 57 0 0 0 0 100 0 0 0 0
June 2009 50 0 0 0 0 100 0 0 0 0
June 2010 43 0 0 0 0 100 0 0 0 0
June 2011 36 0 0 0 0 100 0 0 0 0
June 2012 27 0 0 0 0 100 0 0 0 0
June 2013 18 0 0 0 0 100 0 0 0 0
June 2014 8 0 0 0 0 100 0 0 0 0
June 2015 0 0 0 0 0 94 0 0 0 0
June 2016 0 0 0 0 0 71 0 0 0 0
June 2017 0 0 0 0 0 46 0 0 0 0
June 2018 0 0 0 0 0 18 0 0 0 0
June 2019 0 0 0 0 0 0 0 0 0 0
June 2020 0 0 0 0 0 0 0 0 0 0
June 2021 0 0 0 0 0 0 0 0 0 0
June 2022 0 0 0 0 0 0 0 0 0 0
June 2023 0 0 0 0 0 0 0 0 0 0
June 2024 0 0 0 0 0 0 0 0 0 0
June 2025 and
thereafter 0 0 0 0 0 0 0 0 0 0
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)** 11.1 1.5 0.9 0.6 0.5 19.8 3.8 2.0 1.4 1.1
- -------------
</TABLE>
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-66
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-I-3 CERTIFICATES CLASS A-I-4 CERTIFICATES
------------------------------------- -------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
------ ---- --- --- --- --- ---- --- --- --- ---
Initial Percent 100 100 100 100 100 100 100 100 100 100
June 1998 100 100 100 100 100 100 100 100 100 100
June 1999 100 100 100 50 0 100 100 100 100 44
June 2000 100 100 47 0 0 100 100 100 0 0
June 2001 100 100 0 0 0 100 100 48 0 0
June 2002 100 82 0 0 0 100 100 0 0 0
June 2003 100 43 0 0 0 100 100 0 0 0
June 2004 100 9 0 0 0 100 100 0 0 0
June 2005 100 0 0 0 0 100 71 0 0 0
June 2006 100 0 0 0 0 100 35 0 0 0
June 2007 100 0 0 0 0 100 7 0 0 0
June 2008 100 0 0 0 0 100 0 0 0 0
June 2009 100 0 0 0 0 100 0 0 0 0
June 2010 100 0 0 0 0 100 0 0 0 0
June 2011 100 0 0 0 0 100 0 0 0 0
June 2012 100 0 0 0 0 100 0 0 0 0
June 2013 100 0 0 0 0 100 0 0 0 0
June 2014 100 0 0 0 0 100 0 0 0 0
June 2015 100 0 0 0 0 100 0 0 0 0
June 2016 100 0 0 0 0 100 0 0 0 0
June 2017 100 0 0 0 0 100 0 0 0 0
June 2018 100 0 0 0 0 100 0 0 0 0
June 2019 90 0 0 0 0 100 0 0 0 0
June 2020 60 0 0 0 0 100 0 0 0 0
June 2021 28 0 0 0 0 100 0 0 0 0
June 2022 0 0 0 0 0 88 0 0 0 0
June 2023 0 0 0 0 0 27 0 0 0 0
June 2024 and
thereafter 0 0 0 0 0 0 0 0 0 0
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)** 23.3 5.9 3.0 2.0 1.5 25.6 8.7 4.0 2.7 2.0
</TABLE>
- ---------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Date by the number of
years from the date of issuance to the second such Distribution Date, (b)
summing the results and (c) dividing the sum by the aggregate amount of the
reductions in the principal balance of such Certificate.
S-67
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-I-5 CERTIFICATES CLASS A-I-6 CERTIFICATES
-------------------------------------- --------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
------ ---- ---- --- --- --- ---- ---- --- --- ---
Initial Percent 100 100 100 100 100 100 100 100 100 100
June 1998 100 100 100 100 100 100 100 100 100 100
June 1999 100 100 100 100 100 100 100 100 100 100
June 2000 100 100 100 93 0 100 100 100 100 63
June 2001 100 100 100 0 0 100 100 100 80 0
June 2002 100 100 59 0 0 100 100 100 0 0
June 2003 100 100 9 0 0 100 100 100 0 0
June 2004 100 100 0 0 0 100 100 43 0 0
June 2005 100 100 0 0 0 100 100 0 0 0
June 2006 100 100 0 0 0 100 100 0 0 0
June 2007 100 100 0 0 0 100 100 0 0 0
June 2008 100 86 0 0 0 100 100 0 0 0
June 2009 100 68 0 0 0 100 100 0 0 0
June 2010 100 52 0 0 0 100 100 0 0 0
June 2011 100 37 0 0 0 100 100 0 0 0
June 2012 100 23 0 0 0 100 100 0 0 0
June 2013 100 11 0 0 0 100 100 0 0 0
June 2014 100 0 0 0 0 100 98 0 0 0
June 2015 100 0 0 0 0 100 75 0 0 0
June 2016 100 0 0 0 0 100 55 0 0 0
June 2017 100 0 0 0 0 100 35 0 0 0
June 2018 100 0 0 0 0 100 17 0 0 0
June 2019 100 0 0 0 0 100 1 0 0 0
June 2020 100 0 0 0 0 100 0 0 0 0
June 2021 100 0 0 0 0 100 0 0 0 0
June 2022 100 0 0 0 0 100 0 0 0 0
June 2023 100 0 0 0 0 100 0 0 0 0
June 2024 71 0 0 0 0 100 0 0 0 0
June 2025 18 0 0 0 0 100 0 0 0 0
June 2026 0 0 0 0 0 16 0 0 0 0
June 2027 and
thereafter 0 0 0 0 0 0 0 0 0 0
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)** 27.4 13.3 5.3 3.4 2.5 28.8 19.3 7.0 4.2 3.1
</TABLE>
- --------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-68
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-I-7 CERTIFICATES CLASS A-I-8 CERTIFICATES
--------------------------------------- ---------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
--------------------------------------- ---------------------------------------
PERIOD 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
------ ---- ---- ---- --- --- ---- ---- ---- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100
June 1998 100 100 100 100 100 99 99 99 99 99
June 1999 100 100 100 100 100 99 99 99 99 99
June 2000 100 100 100 100 100 98 98 98 98 98
June 2001 100 100 100 100 0 97 97 97 97 83
June 2002 100 100 100 10 0 96 96 96 96 46
June 2003 100 100 100 0 0 95 92 89 69 25
June 2004 100 100 100 0 0 94 88 82 48 12
June 2005 100 100 97 0 0 92 82 72 34 6
June 2006 100 100 70 0 0 91 76 61 25 3
June 2007 100 100 58 0 0 89 68 50 18 2
June 2008 100 100 48 0 0 88 62 42 14 1
June 2009 100 100 39 0 0 86 56 34 10 1
June 2010 100 100 32 0 0 84 50 28 8 1
June 2011 100 100 26 0 0 82 45 23 6 *
June 2012 100 100 21 0 0 79 40 19 4 *
June 2013 100 100 17 0 0 76 36 15 3 *
June 2014 100 100 14 0 0 74 31 12 2 *
June 2015 100 100 11 0 0 70 28 10 2 *
June 2016 100 100 9 0 0 67 24 8 1 *
June 2017 100 100 7 0 0 63 21 6 1 *
June 2018 100 100 6 0 0 59 18 5 1 *
June 2019 100 100 4 0 0 54 15 4 * *
June 2020 100 84 3 0 0 49 13 3 * *
June 2021 100 69 2 0 0 44 10 2 * *
June 2022 100 55 2 0 0 38 8 2 * *
June 2023 100 42 1 0 0 31 6 1 * *
June 2024 100 29 1 0 0 24 4 1 * *
June 2025 100 18 * 0 0 16 3 * * *
June 2026 100 8 * 0 0 8 1 * * *
June 2027 and
thereafter 0 0 0 0 0 0 0 0 0 0
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)** 29.5 25.6 12.2 4.8 3.5 20.9 14.2 11.1 7.9 5.3
</TABLE>
- ---------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-69
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS A-I-9 CERTIFICATES CLASS A-II CERTIFICATES
------------------------------------- ------------------------------------
% OF PREPAYMENT ASSUMPTION % OF PREPAYMENT ASSUMPTION
------------------------------------- ------------------------------------
PERIOD 0% 50% 100% 150% 200% 0% 50% 100% 150% 200%
------ ---- --- --- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100
June 1998 99 89 78 68 56 97 90 84 78 71
June 1999 98 75 52 30 14 92 79 66 55 44
June 2000 97 62 29 10 3 88 69 52 38 27
June 2001 96 49 14 4 0 83 60 41 26 16
June 2002 95 37 8 0 0 77 50 31 17 8
June 2003 93 28 6 0 0 71 43 23 11 4
June 2004 92 21 2 0 0 66 36 18 7 2
June 2005 90 16 0 0 0 60 30 13 5 1
June 2006 88 13 0 0 0 53 24 10 3 *
June 2007 87 11 0 0 0 46 19 7 2 *
June 2008 84 9 0 0 0 38 15 5 1 *
June 2009 82 9 0 0 0 29 10 3 1 *
June 2010 79 8 0 0 0 20 6 2 * *
June 2011 77 7 0 0 0 9 3 1 * *
June 2012 74 6 0 0 0 0 0 0 0 0
June 2013 70 6 0 0 0 0 0 0 0 0
June 2014 67 5 0 0 0 0 0 0 0 0
June 2015 62 4 0 0 0 0 0 0 0 0
June 2016 57 3 0 0 0 0 0 0 0 0
June 2017 52 2 0 0 0 0 0 0 0 0
June 2018 45 1 0 0 0 0 0 0 0 0
June 2019 39 * 0 0 0 0 0 0 0 0
June 2020 32 0 0 0 0 0 0 0 0 0
June 2021 25 0 0 0 0 0 0 0 0 0
June 2022 18 0 0 0 0 0 0 0 0 0
June 2023 12 0 0 0 0 0 0 0 0 0
June 2024 9 0 0 0 0 0 0 0 0 0
June 2025 6 0 0 0 0 0 0 0 0 0
June 2026 1 0 0 0 0 0 0 0 0 0
June 2027 and
thereafter 0 0 0 0 0 0 0 0 0 0
WEIGHTED
AVERAGE LIFE
TO MATURITY
(YEARS)** 18.8 5.1 2.4 1.6 1.2 8.8 5.9 4.1 3.0 2.3
</TABLE>
- ---------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-70
<PAGE>
PERCENT OF INITIAL PRINCIPAL AMOUNT OUTSTANDING
<TABLE>
<CAPTION>
CLASS B-1, B-2 AND B-3 CERTIFICATES
---------------------------------------
% OF PREPAYMENT ASSUMPTION
---------------------------------------
PERIOD 0% 50% 100% 150% 200%
------ ---- ---- ---- --- ---
<S> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100
June 1998 99 99 99 99 99
June 1999 98 98 98 98 98
June 2000 97 97 97 97 97
June 2001 96 96 96 96 96
June 2002 94 94 94 94 94
June 2003 93 91 88 86 83
June 2004 91 86 81 75 70
June 2005 90 80 72 63 55
June 2006 88 74 61 49 39
June 2007 86 66 50 37 26
June 2008 84 59 41 27 17
June 2009 81 53 33 20 11
June 2010 79 47 27 15 8
June 2011 76 42 22 11 5
June 2012 73 37 18 8 3
June 2013 70 33 14 6 2
June 2014 68 29 12 4 1
June 2015 65 26 9 3 1
June 2016 61 22 7 2 1
June 2017 58 19 6 2 *
June 2018 54 17 5 1 *
June 2019 50 14 4 1 *
June 2020 45 12 3 1 *
June 2021 40 10 2 * *
June 2022 35 8 1 * *
June 2023 29 6 1 * *
June 2024 22 4 1 * *
June 2025 15 3 * * *
June 2026 7 1 * * *
June 2027 and
thereafter 0 0 0 0 0
WEIGHTED AVERAGE
LIFE TO MATURITY
(YEARS)** 19.9 13.7 10.9 9.5 8.6
</TABLE>
- ---------------
* Less than 0.5% but greater than 0%.
** The weighted average life of a Certificate is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance of such
Certificate from one Distribution Date to the next Distribution Date by the
number of years from the date of issuance to the second such Distribution
Date, (b) summing the results and (c) dividing the sum by the aggregate
amount of the reductions in the principal balance of such Certificate.
S-71
<PAGE>
YIELD ON CLASS X CERTIFICATES
The significance of the effects of prepayments on the Class X
Certificates is illustrated in the following table entitled "Sensitivity of
the Class X Certificates to Prepayments," which shows the pre-tax yield (on
a corporate bond equivalent basis) to holders of such Certificates under
different constant percentages of the Prepayment Assumption. The yields of
such Certificates set forth in the following table were calculated using
the assumptions specified above under "--Decrement Tables" and assuming
that the purchase price, excluding accrued interest, of the Class X
Certificates is approximately $7,124,311 for 100% of such Class of
Certificates and such Certificates are purchased on June 30, 1997.
AS INDICATED IN THE FOLLOWING TABLE, THE YIELD TO INVESTORS IN THE
CLASS X CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS) OF THE PREMIUM MORTGAGE LOANS (ESPECIALLY
THOSE WITH HIGH NET RATES), WHICH GENERALLY CAN BE PREPAID AT ANY TIME. ON
THE BASIS OF THE ASSUMPTIONS DESCRIBED ABOVE, THE YIELD TO MATURITY ON THE
CLASS X CERTIFICATES WOULD BE 0% IF PREPAYMENTS WERE TO OCCUR AT A CONSTANT
RATE OF APPROXIMATELY 179% OF THE PREPAYMENT ASSUMPTION. USING SUCH
ASSUMPTIONS, IF THE ACTUAL PREPAYMENT RATE OF THE MORTGAGE LOANS WERE TO
EXCEED THE FOREGOING RATE FOR AS LITTLE AS ONE MONTH (WHILE EQUALING SUCH
RATE FOR ALL OTHER MONTHS), INVESTORS IN THE CLASS X CERTIFICATES WOULD NOT
RECOVER FULLY THEIR INITIAL INVESTMENTS.
It is not likely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be
no assurance that the Mortgage Loans will prepay at any of the rates shown
in the table or at any other particular rate. The timing of changes in the
rate of prepayments may affect significantly the yield realized by a holder
of a Class X Certificate and there can be no assurance that the pre-tax
yield to an investor in the Class X Certificates will correspond to any of
the pre-tax yields shown herein. Each investor must make its own decision
as to the appropriate prepayment assumptions to be used in deciding whether
or not to purchase a Class X Certificate.
The yields set forth in the following table were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Class X Certificates, would cause
the discounted present value of such assumed stream of cash flows to equal
the assumed purchase price of the Class X Certificates indicated below and
converting such monthly rates to corporate bond equivalent rates. Such
calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as payments of interest on the Class X Certificates and consequently
does not purport to reflect the return on any investment in the Class X
Certificates when such reinvestment rates are considered.
SENSITIVITY OF THE CLASS X
CERTIFICATES TO PREPAYMENTS
(PRE-TAX YIELDS TO MATURITY)
<TABLE>
<CAPTION>
% OF PREPAYMENT ASSUMPTION
------------------------------------------
<S> <C> <C> <C> <C> <C>
0% 50% 100% 150% 200%
----- ----- ----- ---- ------
Pre-Tax Yield to Maturity 32.53% 23.94% 15.00% 5.64% (4.19)%
</TABLE>
S-72
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement. Reference
is made to the Prospectus for important information additional to that set
forth herein regarding the terms and conditions of the Agreement and the
Certificates. The Company will provide to a prospective or actual
Certificateholder without charge, upon written request, a copy (without
exhibits) of the Agreement. Requests should be addressed to ICIFC Secured
Assets Corp., 20371 Irvine Avenue, Santa Ana Heights, California 92707.
VOTING RIGHTS
Voting rights of the Trust in general will be allocated 1% to the
Class X Certificates with the balance allocated among the Classes of
Certificates based upon their respective Current Principal Amounts.
ASSIGNMENT OF MORTGAGE LOANS
At the time of issuance of the Certificates, the Company will cause
the Mortgage Loans, together with all principal and interest due on or with
respect to such Mortgage Loans after the Cut-off Date, to be sold to the
Trustee. The Mortgage Loans will be identified in a schedule appearing as
an exhibit to the Agreement with the Group I Mortgage Loans and the Group
II Mortgage Loans separately identified. Such schedule will include
information as to the principal balance of each Mortgage Loan as of the
Cut-off Date, as well as information including, among other things, the
Mortgage Rate, the Net Rate, the Monthly Payment, the maturity date of each
Mortgage Note, and the Loan-to-Value Ratio.
In addition, the Company will deposit with the Trustee, with respect
to each Mortgage Loan, the original Mortgage Note, endorsed without
recourse to the order of the Trustee and showing an unbroken chain of
endorsements from the original payee thereof to the person endorsing it to
the Trustee; the original Mortgage which shall have been recorded, with
evidence of such recording indicated thereon; the assignment (which may be
in the form of a blanket assignment) to the Trustee of the Mortgage, with
evidence of recording with respect to each Mortgage Loan in the name of the
Trustee thereon; all intervening assignments of the Mortgage, if any, with
evidence of recording thereon; the original or a copy of the policy or
certificate of primary mortgage guaranty insurance, if any; the original
policy of title insurance or mortgagee's certificate of title insurance or
commitment or binder for title insurance; originals of all assumption and
modification agreements; provided, however, that in lieu of the foregoing,
the Company may deliver certain other documents, under the circumstances
set forth in the Agreement. The documents delivered to the Trustee with
respect to each Mortgage Loan are referred to collectively as the "Mortgage
File." The Master Servicer will cause the Mortgage and intervening
assignments, if any, and the assignment of the Mortgage to be recorded not
later than 180 days after the Closing Date.
The Trustee will review each item of the Mortgage File within 45 days
of the Closing Date (and will review each document permitted to be
delivered to the Trustee after the Closing Date, if received by the Trustee
after the initial 45-day period, promptly after its delivery to the
Trustee). If, as a result of its review, the Trustee determines that any
document is missing, does not appear regular on its face, or appears to be
unrelated to the Mortgage Loans identified in the Mortgage Loan schedules
(a "Material Defect"), the Trustee shall notify ICI Funding of such
Material Defect. ICI Funding shall correct or cure any such Material
Defect within 60 days from the date of notice from the Trustee of the
Material Defect and if ICI Funding does not correct or cure such Material
Defect within such period and such defect materially and adversely affects
the interests of the Certificateholders in the related Mortgage Loan, ICI
Funding will, within 90 days of the date of notice, provide the Trustee
with a substitute Mortgage Loan (if within two years of the Closing Date)
or purchase the related Mortgage Loan at the applicable Repurchase Price.
S-73
<PAGE>
The Trustee also will review the Mortgage Files within 180 days of the
Closing Date. If the Trustee discovers a Material Defect, the Trustee
shall notify ICI Funding of such Material Defect. ICI Funding shall
correct or cure any such Material Defect within 60 days from the date of
notice from the Trustee of the Material Defect and if ICI Funding does not
correct or cure such Material Defect within such period and such defect
materially and adversely affects the interests of the Certificateholders in
the related Mortgage Loan, ICI Funding will, within 90 days of the date of
notice, provide the Trustee with a substitute Mortgage Loan (if within two
years of the Closing Date) or purchase the related Mortgage Loan at the
applicable Repurchase Price.
The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on
the Outstanding Principal Balance at the related Mortgage Rate through and
including the last day of the month of repurchase reduced by (ii) any
portion of the Master Servicing Fee (as defined under "--Servicing
Compensation and Payment of Expenses" herein) or advances payable to the
purchaser of the Mortgage Loan.
As of any time of determination, the "Outstanding Principal Balance"
of a Mortgage Loan is the principal balance of such Mortgage Loan remaining
to be paid by the Mortgagor or, in the case of an REO Property, the
principal balance of the related Mortgage Loan remaining to be paid by the
Mortgagor at the time such property was acquired by the Trust.
REPRESENTATIONS AND WARRANTIES
In the purchase agreement pursuant to which the Company purchased the
Mortgage Loans, ICI Funding made certain representations and warranties to
the Company concerning the Mortgage Loans. The Company will assign to the
Trustee all of its right, title and interest in such purchase agreement
insofar as it relates to such representations and warranties, as well as
the repurchase and substitution remedies provided for breach of such
representations and warranties. The representations and warranties of ICI
Funding include, among other things, that as of the Closing Date:
(a) the information set forth in the Mortgage Loan schedules
delivered to the Trustee is true and correct in all material respects;
(b) each Mortgage relating to a Mortgage Loan is a valid and
enforceable first lien on the property securing the related Mortgage
Note and each Mortgaged Property is owned by the Mortgagor in fee
simple (except with respect to common areas in the case of
condominiums, PUDs and de minimis PUDs) or by leasehold for a term
longer than the term of the related Mortgage, subject only to certain
permitted exceptions;
(c) as of the Cut-off Date, no payment of principal of or
interest on or in respect of any Mortgage Loan is 30 or more days past
due:
(d) there is no valid offset, defense or counterclaim to any
Mortgage Note or Mortgage, including the obligation of the Mortgagor
to pay the unpaid principal and interest on such Mortgage Note;
(e) a lender's title insurance policy (on an ALTA or CLTA form)
or binder, or other assurance of title customary in the relevant
jurisdiction therefor, was issued on the date of the origination of
each Mortgage Loan, each such policy, binder or assurance is valid and
remains in full force and effect;
(f) the original principal amount of each Mortgage Loan is not
more than 95% of the Original Value; with the exception of 8 Group I
Mortgage Loans with an aggregate Cut-off Date
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Scheduled Principal Balance of approximately $869,867, each Mortgage
Loan with a Loan-to-Value Ratio in excess of 80% at origination is
covered by a Primary Insurance Policy issued by a private mortgage
insurer insuring against default under the Mortgage Note in an amount
at least equal to the excess of such outstanding principal amount over
75% of such Original Value until the principal balance of such
Mortgage Loan is reduced below 80% of the Original Value or, based
upon a new appraisal, the principal balance of such Mortgage Loan
represents less than 80% of the new appraised value; each Mortgage
Loan originated under the Seller's Progressive Express(TM) Program for
which the outstanding principal balance as of the Cut-off Date of the
related Mortgage Note is between 80% and up to and including 85% of
the Original Value is covered by a Primary Mortgage Insurance Policy
in an amount equal to a maximum of 22% of the Original Value and for
which the outstanding principal balance as of the Cut-off Date of the
related Mortgage Note exceeded 85% of the Original Value is covered by
a Primary Mortgage Insurance Policy in an amount equal to a maximum of
30% of the Original Value;
(g) approximately 50.54% and 71.83% of the Group I Mortgage Loans
and Group II Mortgage Loans, respectively, (by Cut-off Date Scheduled
Principal Balance) were underwritten pursuant to, or in accordance
with the standards of, the Progressive Series I Program, 3.69% and
1.10% pursuant to, or in accordance with the standards of, the
Progressive Series II Program, 2.30% and 0.53% pursuant to, or in
accordance with the standards of, the Progressive Series III Program,
0.96% and 0.42% pursuant to, or in accordance with the standards of,
the Progressive Series III+ Program, 0.31% and 0.00% pursuant to, or
in accordance with the standards of, the Progressive Series IV
Program, none pursuant to, or in accordance with the standards of, the
Progressive Series V Program, and 41.77% and 21.89% pursuant to, or in
accordance with the Progressive Express(TM) Program;
(h) at the time of origination of the Mortgage Loans, at least
92.90% of the Group I Mortgage Loans and 82.89% of the Group II
Mortgage Loans (by aggregate principal balance) were secured by
Mortgages on properties which were owner-occupied primary residences;
(i) the improvements on each Mortgaged Property securing such
Mortgage Loan is insured (by an insurer which is acceptable to ICI
Funding) against loss by fire and such hazards as are covered under a
standard extended coverage endorsement in the locale where the
Mortgaged Property is located, in an amount which is not less than the
lesser of the maximum insurable value of the improvements securing
such Mortgage Loan and the outstanding principal balance of the
Mortgage Loan but in no event in an amount less than an amount that is
required to prevent the Mortgagor from being deemed to be a co-insurer
thereunder; if the improvement on the Mortgaged Property is a
condominium unit, it is included under the coverage afforded by a
blanket policy for the condominium project; if upon origination of the
Mortgage Loan, the improvements on the Mortgaged Property were in an
area identified as a federally designated flood area, a flood
insurance policy is in effect in an amount representing coverage not
less than the least of (i) the outstanding principal balance of the
Mortgage Loan, (ii) the restorable cost of improvements located on
such Mortgaged Property and (iii) the maximum coverage available under
federal law; and each Mortgage obligates the Mortgagor thereunder to
maintain the insurance referred to above at the Mortgagor's cost and
expense;
(j) there is no material monetary default existing under any
Mortgage or the related Mortgage Note and there is no material event
which, with the passage of time or with notice and the expiration of
any grace or cure period, would constitute a default, breach or event
of acceleration; and neither ICI Funding nor any of its affiliates has
taken any action to waive any material default, breach or event of
acceleration; no foreclosure action is threatened or has been
commenced with respect to the Mortgage Loan;
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(k) to ICI Funding's knowledge, no Mortgagor, at the time of
origination of the applicable Mortgage, was a debtor in any state or
federal bankruptcy or insolvency proceeding; and
(l) to ICI Funding's knowledge, except to the extent insurance is
in place which will cover such damage, the physical property subject
to any Mortgage is free of material damage and is in good repair and
there is no proceeding pending or threatened for the total or partial
condemnation of any Mortgaged Property.
Upon discovery or receipt of notice by ICI Funding, the Company or the
Trustee of a breach of any representation or warranty relating to the
Mortgage Loans which materially and adversely affects the value of the
interests of Certificateholders or the Trustee in any of the Mortgage
Loans, the party discovering or receiving notice of such breach shall give
prompt written notice to the others. In the case of any such breach,
within 60 days from the date of discovery by ICI Funding, or the date ICI
Funding is notified by the party discovering or receiving notice of such
breach (whichever occurs earlier), ICI Funding will (i) cure such breach in
all material respects, (ii) purchase the affected Mortgage Loan at the
applicable Repurchase Price (or, if such Mortgage Loan or the related
Mortgaged Property acquired in respect thereof has been sold, pay the
excess of the Repurchase Price over the Net Liquidation Proceeds (as
defined herein)) to the Trust or (iii) if within two years of the Closing
Date, substitute a qualifying substitute Mortgage Loan in exchange for such
Mortgage Loan. The obligations of ICI Funding to cure, purchase or
substitute a qualifying substitute Mortgage Loan shall constitute the
Certificateholders' sole and exclusive remedy respecting a breach of such
representations or warranties.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer will use its reasonable efforts to ensure that all
payments required under the terms and provisions of the Mortgage Loans are
collected, and shall follow collection procedures comparable to the
collection procedures of prudent mortgage lenders servicing mortgage loans
for their own account, to the extent such procedures shall be consistent
with the Agreement. Consistent with the foregoing, the Master Servicer may
in its discretion (i) waive or permit to be waived any late payment or
prepayment charge, assumption fee or any penalty interest in connection
with the prepayment of a Mortgage Loan and (ii) suspend or reduce or permit
to be suspended or reduced regular monthly payments for a period of up to
six months or arrange or permit an arrangement with a Mortgagor for a
schedule for the liquidation of delinquencies. In the event the Master
Servicer shall consent to the deferment of due dates for payments due on a
Mortgage Note, the Master Servicer shall nonetheless continue to make
advances as described herein to the same extent as if such installment were
due, owing and delinquent and had not been deferred through liquidation of
the Mortgaged Property, but the obligation of the Master Servicer to
advance shall apply only to the extent that the Master Servicer believes,
in good faith, that such advances are recoverable from future payments on
any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the Master Servicer has knowledge thereof, the Master
Servicer will accelerate the maturity of the Mortgage Loan, to the extent
permitted by the terms of the related Mortgage Note and applicable law. If
it reasonably believes that the due-on-sale clause cannot be enforced under
applicable law, the Master Servicer may enter into an assumption agreement
with the person to whom such property has been or is about to be conveyed,
pursuant to which such person becomes liable under the Mortgage Note and
the Mortgagor, to the extent permitted by applicable law, remains liable
thereon. The Master Servicer will retain any fee collected for entering
into an assumption agreement, as additional servicing compensation. In
regard to circumstances in which the Master Servicer may be unable to
enforce due-on-sale clauses, see "Certain Legal Aspects of Mortgage Loans--
Enforceability of Certain Provisions" in the Prospectus. In connection
with any such assumption, the Mortgage Rate borne by the related Mortgage
Note may not be changed. No Mortgage Loan may be assumed unless coverage
under any existing Primary Insurance Policy continues as to that Mortgage
Loan after such assumption.
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The Master Servicer, and any permitted sub-servicer, will establish
and maintain, in addition to the Protected Account described below under
"--Protected Account," one or more accounts (each, a "Servicing Account")
in a depository institution the deposits of which are insured by the FDIC
to the maximum extent permitted by law. The Master Servicer or such sub-
servicers will deposit and retain therein all collections from the
Mortgagors for the payment of taxes, assessments, insurance premiums, or
comparable items as agent of the Mortgagors and in trust as provided in the
Agreement. Amounts in any Servicing Account may relate to mortgage loans in
more than one mortgage pool or to mortgage loans not yet included in a
mortgage pool. Each Servicing Account shall be fully insured by the FDIC
and to the extent that the balance in such account exceeds the limits of
such insurance, such excess must be transferred to another fully-insured
account in another institution the accounts of which are insured by the
FDIC or must be invested in certain investments permitted by the Agreement
("Permitted Investments"). Such Permitted Investments must be held in trust
by the Master Servicer or such sub-servicers, as described above. In
addition, the Master Servicer may permit a sub-servicer to establish
Servicing Accounts not conforming to the foregoing requirements to the
extent that such Servicing Accounts meet the requirements of each of the
Rating Agencies for the maintenance of the ratings on the Certificates.
Withdrawals of amounts from the Servicing Accounts may be made only to
effect timely payment of taxes, assessments, insurance premiums, or
comparable items, to reimburse the Master Servicer or any sub-servicer for
any advances made with respect to such items, to refund to any Mortgagors
any sums as may be determined to be overages, to pay interest, if required,
to Mortgagors on balances in the Servicing Accounts, to pay earnings not
required to be paid to Mortgagors to the Master Servicer or the related
sub-servicer or to clear and terminate the Servicing Accounts at or at any
time after the termination of the Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
Primary Insurance Policy, the Master Servicer will maintain and keep, or
cause to be maintained and kept, with respect to each such Mortgage Loan,
in full force and effect a Primary Insurance Policy with respect to the
portion of each such Mortgage Loan, if any, in excess at origination of the
percentage of value set forth under "Description of the Mortgage Pool--
General" herein, at least until such excess has been eliminated. Pursuant
to applicable state law, the Master Servicer may permit the Primary
Insurance Policy to be terminated if a reappraisal of the Mortgaged
Property indicates a new appraised value of which the then outstanding
principal balance of the Mortgage Loan does not exceed 80%. Primary
Insurance Policies may be replaced by substantially equivalent insurance
but such replacement is subject to the condition, to be evidenced by a
writing from each Rating Agency, that it would not cause the ratings on the
Certificates to be downgraded or withdrawn.
The Master Servicer will require each sub-servicer to maintain errors
and omissions insurance and fidelity bonds in certain specified amounts.
HAZARD INSURANCE
The Master Servicer will maintain and keep, or cause to be maintained
and kept, with respect to each Mortgage Loan, in full force and effect for
each Mortgaged Property a hazard insurance policy equal to at least the
lesser of the Outstanding Principal Balance of the Mortgage Loan or the
current replacement cost of the Mortgaged Property and containing a
standard mortgagee clause; provided, however, that the amount of hazard
insurance may not be less than the amount necessary to prevent loss due to
the application of any co-insurance provision of the related policy. Unless
a higher deductible is required by law, the deductible on such hazard
insurance policy may be no more than $1,000 or 1% of the applicable amount
of coverage, whichever is less. In the case of a condominium unit or a
unit in a planned unit development, required hazard insurance will take the
form of a multiperil policy covering the entire condominium project or
planned unit development, in an amount equal to at least 100% of the
insurable value based on replacement cost. Any amounts collected by the
Master Servicer under any such hazard insurance policy (other than amounts
to be applied to the restoration or repair of the Mortgaged Property or
amounts released to the Mortgagor in accordance with normal servicing
procedures) shall be deposited in a Protected Account. Any cost incurred
in maintaining any such hazard insurance policy shall not be added to the
amount owing under the Mortgage
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Loan for the purpose of calculating monthly distributions to
Certificateholders, notwithstanding that the terms of the Mortgage Loan so
permit. Such costs shall be recoverable by the Master Servicer out of
related late payments by the Mortgagor or out of Insurance Proceeds or
Liquidation Proceeds or any other amounts in the Certificate Account. The
right of the Master Servicer to reimbursement for such costs incurred will
be prior to the right of Certificateholders to receive any related
Insurance Proceeds or Liquidation Proceeds or any other amounts in the
Certificate Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the
property by fire, lightning, explosion, smoke, windstorm and hail, riot,
strike and civil commotion, subject to the conditions and exclusions
particularized in each policy. Although the policies relating to the
Mortgage Loans will be underwritten by different insurers and therefore
will not contain identical terms and conditions, the basic terms thereof
are dictated by state law. Such policies typically do not cover any
physical damage resulting from the following: war, revolution, governmental
actions, floods and other water-related causes, earth movement (including
earthquakes, landslides and mud flows), nuclear reactions, wet or dry rot,
vermin, rodents, insects or domestic animals, theft and, in certain cases,
vandalism and malicious mischief. The foregoing list is merely indicative
of certain kinds of uninsured risks and is not intended to be all-
inclusive.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured
at all times to carry insurance of a specified percentage (generally 80% to
90%) of the full replacement value of the improvements on the property in
order to recover the full amount of any partial loss. If the insured's
coverage falls below this specified percentage, such clause provides that
the insurer's liability in the event of partial loss does not exceed the
greater of (i) the replacement cost of the improvements less physical
depreciation, or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal
balances owing thereon decrease, and since residential properties have
historically appreciated in value over time, in the event of partial loss,
hazard insurance proceeds may be insufficient to restore fully the damaged
property.
Where the property securing a Mortgage Loan is located at the time of
origination in a federally designated flood area, the Master Servicer will
cause with respect to such Mortgage Loan flood insurance to the extent
available and in accordance with industry practices to be maintained. Such
flood insurance will be in an amount equal to the lesser of (i) the
Outstanding Principal Balance of the related Mortgage Loan and (ii) the
minimum amount required under the terms of coverage to compensate for any
damage or loss on a replacement cost basis, but not more than the maximum
amount of such insurance available for the related Mortgaged Property under
either the regular or emergency programs of the National Flood Insurance
Program (assuming that the area in which such Mortgaged Property is located
is participating in such program). Unless applicable state law requires a
higher deductible, the deductible on such flood insurance may not exceed
$1,000 or 1% of the applicable amount of coverage, whichever is less.
The Master Servicer, on behalf of the Trustee and Certificateholders,
will present claims to the insurer under any applicable Primary Insurance
Policy or hazard insurance policy. As set forth above, all collections by
the Master Servicer under such policies that are not applied to the
restoration or repair of the related Mortgaged Property or released to the
Mortgagor in accordance with normal servicing procedures are to be
deposited in a Protected Account.
REALIZATION UPON DEFAULTED MORTGAGE LOANS; PURCHASES OF DEFAULTED MORTGAGE
LOANS
The Master Servicer will use its reasonable efforts to maximize the
receipt of principal and interest on Defaulted Mortgage Loans and foreclose
upon or otherwise comparably convert the ownership of
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properties securing Defaulted Mortgage Loans as to which no satisfactory
collection arrangements can be made. The Master Servicer will service the
property acquired by the Trust through foreclosure or deed-in-lieu of
foreclosure and use its reasonable efforts to maximize the receipt of
principal and interest on Defaulted Mortgage Loans; provided, however, that
the Master Servicer will not be required to expend its own funds in
connection with any foreclosure or towards the restoration of any property
unless it determines in good faith (i) that such foreclosure or restoration
will increase the proceeds of liquidation of the Mortgage Loan to the
Certificateholders after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable to it through Liquidation Proceeds
or insurance proceeds (respecting which it shall have priority for purposes
of reimbursements from the Certificate Account).
Since Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by the Master Servicer, no insurance payments will result
in a recovery to Certificateholders which exceeds the principal balance of
the Defaulted Mortgage Loan together with accrued interest thereon at its
Net Rate.
Notwithstanding the foregoing, under the Agreement, the Master
Servicer will have the option (but not the obligation) to purchase any
Mortgage Loan as to which the Mortgagor has failed to make unexcused
payment in full of three or more scheduled payments of principal and
interest (a "Defaulted Mortgage Loan"). Any such purchase will be for a
price equal to the Repurchase Price of such Mortgage Loan. The purchase
price for any Defaulted Mortgage Loan will be deposited in the Certificate
Account on the Business Day prior to the Distribution Date on which the
proceeds of such purchase are to be distributed to the Certificateholders.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer shall be entitled to receive the Master Servicing
Fee (as defined below) from full payments of accrued interest on each
Mortgage Loan as compensation for its activities under the Agreement.
However, Interest Shortfalls resulting from prepayments in full or in part
in any calendar month will be offset by the Master Servicer on the
Distribution Date in the following calendar month to the extent such
Interest Shortfalls do not exceed the lesser of (i) the Master Servicing
Fee in connection with such Distribution Date or (ii) 1/12 of 0.125% of the
Scheduled Principal Balances of the Mortgage Loans for such Distribution
Date (the amount of the Master Servicing Fee used to offset Interest
Shortfalls is referred to herein as "Compensating Interest Payments"). To
the extent insufficient to cover all such Interest Shortfall, Compensating
Interest Payments will be allocated between Mortgage Loan Group I and
Mortgage Loan Group II pro rata based on the amount of such Interest
Shortfalls experienced by the Group I Mortgage Loans and the Group II
Mortgage Loans, respectively. The remaining amount of Interest Shortfalls
after applying Compensating Interest Payments is referred to herein as "Net
Interest Shortfalls."
In addition to the primary compensation described above, the Master
Servicer will retain all prepayment charges, if any, assumption fees, tax
service fees, fees for statement of account payoff and late payment
charges, all to the extent collected from Mortgagors. The Master Servicer
will also be entitled to retain, as additional servicing compensation, (a)
amounts in respect of interest paid by borrowers in connection with any
principal prepayment received by the Master Servicer from the first day
through the last day of the month preceding the month of the Cut-off Date,
(b) any income earned on the Certificate Account and certain other accounts
and (c) any Excess Liquidation Proceeds (i.e., the amount, if any, by which
Liquidation Proceeds with respect to a Liquidated Mortgage Loan exceeds the
sum of (i) the Outstanding Principal Balance of such Mortgage Loan and
accrued but unpaid interest at the related Mortgage Rate through the
related Liquidation Date, plus (ii) related liquidation expenses, to the
extent that such amount is not required by law to be paid to the related
Mortgagor), but only to the extent that transfers or withdrawals from the
Certificate Account with respect thereto are permitted under the Agreement.
The Master Servicer or any sub-servicer will pay all expenses incurred
in connection with its servicing responsibilities (subject to limited
reimbursement as described herein). On each Distribution Date, the Trustee
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will pay itself the respective fees and reimbursable expenses to which it
is entitled for the month of such Distribution Date from amounts in the
Certificate Account.
In the event a successor Trustee is appointed by the
Certificateholders pursuant to the Agreement, that portion, if any, of the
successor Trustee's fees which exceeds the Trustee's fees established at
the time of issuance of the Certificates will be borne by the
Certificateholders.
The "Master Servicing Fee" in respect of each Mortgage Loan will be
0.25% per annum of the Outstanding Principal Balance of such Mortgage Loan.
The Master Servicing Fee consists of (a) servicing compensation payable to
the Master Servicer in respect of its master servicing activities and (b)
sub-servicing and other related compensation payable to the Sub-Servicer.
PROTECTED ACCOUNT
The Master Servicer and each permitted sub-servicer will establish and
maintain an account (each, a "Protected Account") into which it will
deposit daily all collections of principal and interest on any Mortgage
Loan, including Principal Prepayments, Insurance Proceeds, Liquidation
Proceeds, the Repurchase Price for any Mortgage Loans repurchased, and
advances made from the Master Servicer's own funds (less servicing
compensation as permitted above). All Protected Accounts shall be held in
a depository institution, the accounts of which are insured by the FDIC to
the maximum extent permitted by law, segregated on the books of such
institution and held in trust. The amount at any time credited to a
Protected Account shall be fully insured by the FDIC to the maximum extent
permitted by law or, to the extent that such balance exceeds the limits of
such insurance, such excess must be transferred to an account or invested
in permitted investments meeting the requirements of the Rating Agencies or
to the Certificate Account. Certain payments may be required to be
transferred into noncommingled accounts on an accelerated basis.
Prior to each Distribution Date, the Master Servicer shall withdraw or
shall cause to be withdrawn from the Protected Accounts and any other
permitted accounts and shall deposit or cause to be deposited in the
Certificate Account amounts representing the following collections and
payments (other than with respect to principal of or interest on the
Mortgage Loans due on or before the Cut-off Date):
(i) Scheduled payments on the related Mortgage Loans received
or advanced by the Master Servicer which were due on the related Due
Date, net of servicing fees due the Master Servicer;
(ii) Full principal prepayments and any Liquidation Proceeds
received by the Master Servicer with respect to such Mortgage Loans in
the related Prepayment Period, with interest to the date of prepayment
or liquidation, net of servicing fees due the Master Servicer; and
(iii) Partial prepayments of principal received by the Master
Servicer for such Mortgage Loans in the related Prepayment Period.
CERTIFICATE ACCOUNT
The Trustee shall establish and maintain in the name of the Trustee,
for the benefit of the Certificateholders, an account (the "Certificate
Account") as a non-interest bearing trust account. The Certificate Account
shall have two separate subaccounts, one each for all funds with respect to
each Mortgage Loan Group. The Trustee will deposit in the appropriate
subaccount of the Certificate Account, as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account or other
permitted account;
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(ii) Any Monthly Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received by
the Master Servicer which were not deposited in a Protected Account or
other permitted account;
(iv) The Repurchase Price with respect to any Mortgage Loans
repurchased and all proceeds of any Mortgage Loans or property
acquired in connection with the optional termination of the Trust;
(v) Any amounts required to be deposited with respect to losses
on Permitted Investments; and
(vi) Any other amounts received by the Master Servicer or the
Trustee and required to be deposited in the Certificate Account
pursuant to the Agreement.
All amounts deposited to the Certificate Account shall be held by the
Trustee in the name of the Trustee in trust for the benefit of the
Certificateholders in accordance with the terms and provisions of the
Agreement, subject to the right of the Master Servicer to require the
Trustee to make withdrawals therefrom as provided below. The amount at any
time credited to the Certificate Account shall be in general (i) fully
insured by the FDIC to the maximum coverage provided thereby or (ii) at the
written direction of the Master Servicer invested, in the name of the
Trustee, in such Permitted Investments as the Master Servicer may direct or
deposited in demand deposits with such depository institutions as
designated by the Master Servicer, provided that time deposits of such
depository institutions would be a Permitted Investment.
The Trustee will, from time to time on demand of the Master Servicer,
make or cause to be made such withdrawals or transfers from the appropriate
subaccount of the Certificate Account as the Master Servicer has designated
for such transfer or withdrawal for the following purposes:
(i) to reimburse the Master Servicer or a Sub-Servicer for any
Monthly Advance of its own funds or any advance of such Sub-Servicer's
own funds, the right of the Master Servicer or a Sub-Servicer to
reimbursement pursuant to this subclause (i) being limited to amounts
received on a particular Mortgage Loan (including, for this purpose,
the Repurchase Proceeds, Insurance Proceeds and Liquidation Proceeds)
which represent late payments or recoveries of the principal of or
interest on such Mortgage Loan respecting which such Monthly Advance
or advance was made;
(ii) to reimburse the Master Servicer or a Sub-Servicer from
Insurance Proceeds or Liquidation Proceeds relating to a particular
Mortgage Loan for amounts expended by the Master Servicer or a Sub-
Servicer in good faith in connection with the restoration of the
related Mortgaged Property which was damaged by an uninsured cause or
in connection with the liquidation of such Mortgage Loan;
(iii) to reimburse the Master Servicer or a Sub-Servicer to the
extent permitted by the Agreement from Insurance Proceeds relating to
a particular Mortgage Loan for expenses incurred with respect to such
Mortgage Loan and to reimburse the Master Servicer or a Sub-Servicer
from Liquidation Proceeds from a particular Mortgage Loan for
liquidation expenses incurred with respect to such Mortgage Loan;
(iv) to pay the Master Servicer or a Sub-Servicer to the extent
permitted by the Agreement from Liquidation Proceeds or Insurance
Proceeds received in connection with the liquidation of a Mortgage
Loan, the amount which the Master Servicer or a Sub-Servicer would
have been entitled to receive under subclause (ix) below as servicing
compensation on account of each defaulted scheduled payment on such
Mortgage Loan if paid in a timely manner by the related Mortgagor;
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(v) to pay the Master Servicer or a Sub-Servicer to the extent
permitted by the Agreement from the Repurchase Price for any Mortgage
Loan, the amount which the Master Servicer or a Sub-Servicer would
have been entitled to receive under subclause (ix) below as servicing
compensation;
(vi) to reimburse the Master Servicer or a Sub-Servicer for
certain advances of funds made to protect a Mortgaged Property, the
right to reimbursement pursuant to this subclause being limited to
amounts received on the related Mortgage Loan (including, for this
purpose, the Repurchase Proceeds, Insurance Proceeds and Liquidation
Proceeds) which represent late recoveries of the payments for which
such advances were made;
(vii) to pay the Master Servicer or a Sub-Servicer with respect
to each Mortgage Loan that has been repurchased, all amounts received
thereon, representing recoveries of principal that reduce the
Outstanding Principal Balance of the related Mortgage Loan below the
Outstanding Principal Balance used in calculating the Repurchase Price
or representing interest included in the calculation of the Repurchase
Price or accrued after the end of the month during which such
repurchase occurs;
(viii) to reimburse the Master Servicer or a Sub-Servicer for any
Monthly Advance or advance, if a Realized Loss is to be allocated with
respect to the related Mortgage Loan on the related Distribution Date,
if the advance has not been reimbursed pursuant to clauses (i) and
(vi);
(ix) to pay the Master Servicer and a Sub-Servicer servicing
compensation as set forth above;
(x) to reimburse the Master Servicer for expenses, costs and
liabilities incurred by and reimbursable to it pursuant to the
Agreement, which, if not specifically allocable to a Mortgage Loan
Group, shall be allocated to each subaccount, pro rata, based on the
Schedule Principal Balances of the Group I Mortgage Loans and the
Group II Mortgage Loans;
(xi) to pay to the Master Servicer, as additional servicing
compensation, any Excess Liquidation Proceeds;
(xii) to clear and terminate the Certificate Account; and
(xiii) to remove amounts deposited in error.
On each Distribution Date, the Trustee shall make the following
payments from the funds in the Certificate Account:
(i) First, the Trustee's Fees shall be paid to the Trustee;
and
(ii) Second, the amount distributable to the Certificateholders
shall be paid in accordance with the provisions set forth under
"Description of the Certificates--Distributions on the Certificates."
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement will provide that the Master Servicer may not resign
from its obligations and duties thereunder, except upon determination that
the performance of such duties is no longer permissible under applicable
law. No such resignation will become effective until the Trustee or a
successor has assumed the obligations and duties of the Master Servicer to
the extent required under the Agreement. The Master Servicer, however, has
the right to assign, sell or transfer its rights and delegate its duties
and obligations under the Agreement; provided that the rating of the
Certificates in effect immediately prior to such assignment, sale, transfer
or delegation is not qualified, downgraded or withdrawn as a result of such
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assignment, sale, transfer or delegation and the purchaser or transferee
accepting such assignment, sale, transfer or delegation (i) is qualified to
service mortgage loans for FNMA or FHLMC, (ii) is reasonably satisfactory
to the Trustee, (iii) has a net worth of not less than $10,000,000 and (iv)
executes and delivers to the Trustee an agreement, in form and substance
reasonably satisfactory to the Trustee, which contains an assumption by
such purchaser or transferee of the due and punctual performance and
observance of each covenant and condition to be performed or observed by
the Master Servicer under the Agreement from and after the date of such
agreement.
The Agreement will further provide that neither the Master Servicer
nor any of its directors, officers, employees and agents shall be under any
liability to the Trustee, the Trust or the Certificateholders for taking
any action or for refraining from taking any action in good faith pursuant
to the Agreement, or for errors in judgment; provided, however, that
neither the Master Servicer nor any such person will be protected against
any breach of warranties or representations made in the Agreement or any
liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties or
by reason of reckless disregard of obligations and duties thereunder. The
Agreement will further provide that the Master Servicer and its directors,
officers, employees and agents are entitled to indemnification from the
Certificate Account and will be held harmless thereby against any loss,
liability or expense incurred in connection with any legal proceeding
relating to the Agreement or the Certificates, other than any loss,
liability or expense related to any specific Mortgage Loans (except as
otherwise reimbursable under the Agreement) or incurred by reason of
willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and
duties thereunder. In addition, the Agreement will provide that the Master
Servicer is under no obligation to appear in, prosecute or defend any legal
action which is not incidental to its duties under the Agreement and which
in its opinion may involve it in any expense or liability. The Master
Servicer may, however, in its discretion undertake any such action which it
may deem necessary or desirable in respect of the Agreement and the rights
and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs
of such action and any liability resulting therefrom will be expenses,
costs and liabilities of the Trust and the Master Servicer will be entitled
to be reimbursed therefor from the Certificate Account. Any such
indemnification or reimbursement to the Trustee which is not specifically
related to a Mortgage Loan Group shall be charged against the subaccounts
of the Certificate Account pro rata based upon the respective outstanding
principal amounts of the Group I Mortgage Loans and the Group II Mortgage
Loans.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party, or any corporation
succeeding to the business of the Master Servicer will be the successor of
the Master Servicer under the Agreement, provided that any such successor
to the Master Servicer shall be qualified to service Mortgage Loans on
behalf of FNMA or FHLMC.
EVENTS OF DEFAULT
"Events of Default" under the Agreement consist of (i) failure by the
Master Servicer to cause to be deposited in the Certificate Account amounts
required to be deposited by the Master Servicer pursuant to the Agreement,
and such failure continues unremedied for two Business Days, (ii) failure
by the Master Servicer to observe or perform in any material respect any
other material covenants and agreements set forth in the Certificates or
the Agreement to be performed by it, and such failure continues unremedied
for 60 days after the date on which written notice of such failure has been
given to the Master Servicer by the Trustee or to the Master Servicer and
the Trustee by the holders of Certificates aggregating ownership of not
less than 25% of the Trust, (iii) the entry against the Master Servicer of
a decree or order by a court or agency or supervisory authority having
jurisdiction in the premises for the appointment of a conservator, receiver
or liquidator in any insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings, or for the winding up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 60 consecutive days, or the
commencement of an involuntary case against the Master Servicer
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under any applicable insolvency or reorganization statute which case is not
dismissed within 60 days, (iv) consent by the Master Servicer to the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings of or relating to the Master Servicer or substantially all of
its property, admission by the Master Servicer in writing of its inability
to pay its debts generally as they become due, filing of a petition to take
advantage of any applicable insolvency or reorganization statute, any
assignment for the benefit of its creditors, or voluntary suspension of
payment of its obligations or (v) assignment or delegation by the Master
Servicer of its duties or rights under the Agreement in contravention of
the provisions permitting such assignment or delegation under the
Agreement.
In each and every such case, so long as such Event of Default with
respect to the Master Servicer shall not have been remedied, the Trustee or
the holders of Certificates aggregating ownership of not less than 51% of
the Trust may in each case by notice in writing to the Master Servicer (and
to the Trustee if given by such Certificateholders), with a copy to the
Rating Agencies, terminate all of the rights and obligations (but not the
liabilities) of the Master Servicer under the Agreement and in and to the
Mortgage Loans serviced by the Master Servicer and the proceeds thereof.
Upon the receipt by the Master Servicer of such written notice, all
authority and power of the Master Servicer under the Agreement, whether
with respect to the Certificates, the Mortgage Loans or under any other
related agreements (but only to the extent that such other agreements
relate to the Mortgage Loans) shall, subject to the provisions of the
Agreement, automatically and without further action pass to and be vested
in the Trustee.
Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally
unable to act or to delegate its duties to a person which is legally able
to act, the Trustee shall automatically become the successor in all
respects to the Master Servicer in its capacity under the Agreement and the
transactions set forth or provided for therein and shall thereafter be
subject to all the responsibilities, duties, liabilities and limitations on
liabilities relating thereto placed on the Master Servicer by the terms and
provisions hereof; provided, however, that the Trustee (i) shall be under
no obligation to repurchase any Mortgage Loan; and (ii) shall have no
obligation whatsoever with respect to any liability incurred by the Master
Servicer at or prior to the time of receipt by such Master Servicer of such
notice or of such opinion of counsel. As compensation therefor, the
Trustee shall be entitled to all funds relating to the Mortgage Loans which
the Master Servicer would have been entitled to retain if the Master
Servicer had continued to act as such, except for those amounts due the
Master Servicer as reimbursement for advances previously made.
Notwithstanding the above, the Trustee may, if it shall be unwilling so to
act, or shall, if it is legally unable so to act, appoint, or petition a
court of competent jurisdiction to appoint, any established housing and
home finance institution which is a FNMA or FHLMC-approved servicer having
a net worth of not less than $10,000,000, as the successor to the Master
Servicer under the Agreement in the assumption of all or any part of the
responsibilities, duties or liabilities of the Master Servicer under the
Agreement. Pending appointment of a successor to the Master Servicer under
the Agreement, the Trustee shall act in such capacity as provided under the
Agreement. In connection with such appointment and assumption, the Trustee
may make such arrangements for the compensation of such successor out of
payments on Mortgage Loans as it and such successor shall agree; provided,
however, that no such compensation shall be in excess of that permitted the
Trustee as provided above, and that such successor shall undertake and
assume the obligations of the Trustee to pay compensation to any third
person acting as an agent or independent contractor in the performance of
master servicing responsibilities under the Agreement.
MONTHLY ADVANCES
If the scheduled payment on a Mortgage Loan which was due on the Due
Date in the month of a Distribution Date and is delinquent other than as a
result of application of the Relief Act exceeds the amount deposited in the
appropriate subaccount of the Certificate Account which will be used for a
Certificate Account Advance (as defined below) with respect to such
Mortgage Loan, the Master Servicer will deposit in the appropriate
subaccount of the Certificate Account not later than the fourth Business
Day immediately preceding the Distribution Date an amount equal to such
deficiency net of the related Master Servicing Fee
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except to the extent the Master Servicer determines any such advance to be
nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future
payments on the Mortgage Loan for which such advance was made. Subject to
the foregoing, such advances will be made through liquidation of the
related Mortgaged Property. Any amount used as a Certificate Account
Advance shall be replaced by the Master Servicer by deposit in the
appropriate subaccount of the Certificate Account on or before any future
date to the extent that funds in the appropriate subaccount of the
Certificate Account on such date are less than the amount required to be
transferred to the appropriate subaccount of the Certificate Account. If
applicable, on the fifth Business Day preceding each Distribution Date, the
Master Servicer shall present an Officer's Certificate to the Trustee (i)
stating that the Master Servicer elects not to make a Monthly Advance in a
stated amount and (ii) detailing the reason it deems the advance to be
nonrecoverable.
As of any Determination Date, a "Certificate Account Advance" is the
amount on deposit in a Protected Account or another permitted account which
is not required to be transferred to the Certificate Account for
distribution during the calendar month in which such Determination Date
occurs but which is used to make a distribution to Certificateholders
during such calendar month on account of scheduled payments on the Mortgage
Loans due on the Due Date for such month not being paid on or before the
Determination Date except insofar as such unpaid amounts are the result of
application of the Relief Act.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, a written report will be provided to each
holder of Certificates setting forth certain information with respect to
the composition of the payment being made, the Current Principal Amount or
Notional Amount of an individual Certificate following the payment and
certain other information relating to the Certificates and the Mortgage
Loans.
TERMINATION
The obligations of the Master Servicer and the Trustee created by the
Agreement will terminate upon (i) the later of the making of the final
payment or other liquidation, or any advance with respect thereto, of the
last Mortgage Loan subject thereto or the disposition of all property
acquired upon foreclosure or acceptance of a deed in lieu of foreclosure of
any such Mortgage Loans and (ii) the payment to Certificateholders of all
amounts required to be paid to them pursuant to such Agreement.
On any Distribution Date on which the aggregate unpaid principal
balance of the Mortgage Loans is less than 10% of the aggregate Scheduled
Principal Balance as of the Cut-off Date, the Master Servicer or its
designee may repurchase from the Trust all Mortgage Loans remaining
outstanding at a purchase price equal to (a) the unpaid principal balance
of such Mortgage Loans (other than Mortgage Loans related to REO Property),
net of the principal portion of any unreimbursed Monthly Advances made by
the purchaser, plus accrued but unpaid interest thereon at the applicable
Mortgage Rate to the next Due Date, plus (b) the appraised value of any REO
Property (but not more than the unpaid principal balance of the related
Mortgage Loan, together with accrued but unpaid interest on that balance at
the applicable Mortgage Rate to the next Due Date), less the good faith
estimate of the Master Servicer of liquidation expenses to be incurred in
connection with its disposal thereof. The Trust may also be terminated and
the Certificates retired on any Distribution Date upon the Master
Servicer's determination, based upon an opinion of counsel, that the REMIC
status of REMIC I or REMIC II has been lost or that a substantial risk
exists that such status will be lost for the then current taxable year.
Upon termination, the holders of Certificates (other than the Class X
Certificates) will receive the Current Principal Amount of their
Certificates, if any, and accrued but unpaid interest and the holders of
the Class X Certificates will receive accrued but unpaid interest on their
Certificates.
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THE TRUSTEE
The Trustee may resign at any time, in which event the Master Servicer
will be obligated to appoint a successor Trustee. The Trustee also may be
removed at any time by the Master Servicer, if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
incapable of acting, bankrupt, insolvent or if a receiver or public officer
takes charge of the Trustee or its property. The Trustee may also be
removed at any time by the holders of Certificates evidencing ownership of
not less than 51% of the Trust. In the event that the Certificateholders
remove the Trustee, the compensation of any successor Trustee shall be paid
by the Certificateholders to the extent that such compensation exceeds the
amount agreed to by the Master Servicer and the Trustee. Any resignation
or removal of the Trustee and appointment of a successor Trustee will not
become effective until acceptance of the appointment by the successor
Trustee.
FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Mortgage Loans, the Certificate
Account and certain assets owned by the Trust as a REMIC ("REMIC") for
federal income tax purposes. The REMIC will issue "regular interests" and
one "residual interest." The Certificates (other than the Class R-1
Certificates) will be designated as regular interests in the REMIC. The
Certificates (other than the Class R-1 Certificates) are herein referred to
as "Regular Certificates" or "REMIC Regular Certificates". The Class R-1
Certificates will be designated as the residual interest in the REMIC
(collectively, the "Residual Certificates" or the "REMIC Residual
Certificates"). All Certificateholders are advised to see "Federal Income
Tax Consequences" in the Prospectus for a discussion of the anticipated
federal income tax consequences of the purchase, ownership and disposition
of the REMIC Regular Certificates and the REMIC Residual Certificates.
Because the REMIC Regular Certificates will be considered REMIC
regular interests, they generally will be taxable as debt obligations under
the Internal Revenue Code of 1986, as amended (the "Code"), and interest
paid or accrued on the Regular Certificates, including original issue
discount with respect to any Regular Certificates issued with original
issue discount, will be taxable to Certificateholders in accordance with
the accrual method of accounting. The Class PO Certificates will be
treated as issued with original issue discount. Some or all of the other
Classes of Regular Certificates may also be subject to the original issue
discount provisions. See "Federal Income Tax Consequences--REMICS--
Taxation of Owners of REMIC Regular Certificates--Original Issue Discount"
in the Prospectus. All purchasers of REMIC Regular Certificates are urged
to consult their tax advisors for advice regarding the effect, if any, of
the OID Regulations on the purchase of the Regular Certificates. The
prepayment assumption that will be used in determining the rate of accrual
of original issue discount with respect to the Certificates is 100% of the
Prepayment Assumption. The Prepayment Assumption represents a rate of
payment of unscheduled principal on a pool of mortgage loans, expressed as
an annualized percentage of the outstanding principal balance of such
mortgage loans at the beginning of each period. However, no representation
is made as to the rate at which prepayments actually will occur. In
addition, other Classes of Regular Certificates may be treated as having
been issued at a premium. See "Certain Federal Income Tax Consequences--
REMICS--Taxation of Owners of REMIC Regular Certificates--Premium" in the
Prospectus.
The Certificates possess certain special tax attributes by virtue of
the REMIC Provisions of the Code. See "Federal Income Tax Consequences--
REMICS--Characterization of Investments in REMIC Certificates" in the
Prospectus. The Small Business Job Protection Act of 1996 repeals the bad
debt reserve method of accounting for mutual savings banks, domestic
building and loan associations and cooperative banks without capital stock
for tax years beginning after December 31, 1995. As a result, Section
593(d) of the Code is no longer applicable to treat REMIC regular
interests, including the Certificates, as "qualifying real property loans."
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ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans subject to Title I of ERISA
should consider the ERISA fiduciary investment standards before authorizing
an investment by a plan in the Certificates. In addition, fiduciaries of
employee benefit plans subject to Title I of ERISA, as well as certain
plans or other retirement arrangements not subject to ERISA, but which are
subject to Section 4975 of the Code (such as individual retirement accounts
and Keogh plans covering only a sole proprietor, or partners), or any
entity whose underlying assets include plan assets by reason of a plan or
account investing in such entity, including an insurance company general
account (collectively, "Plan(s)"), should consult with their legal counsel
to determine whether an investment in the Certificates will cause the
assets of the Trust ("Trust Assets") to be considered plan assets pursuant
to the plan asset regulations set forth at 29 C.F.R. (S)2510.3-101 (the
"Plan Asset Regulations"), thereby subjecting the Plan to the prohibited
transaction rules with respect to the Trust Assets and the Trustee or the
Master Servicer to the fiduciary investments standards of ERISA, or cause
the excise tax provisions of Section 4975 of the Code to apply to the Trust
Assets, unless an exemption granted by the Department of Labor applies to
the purchase, sale, transfer or holding of the Certificates. In
particular, investors that are insurance companies should consult with
their legal counsel with respect to the United States Supreme Court case,
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank,
114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets
held in an insurance company's general account may be deemed to be plan
assets under certain circumstances. Investors should analyze whether that
decision or recent federal legislation enacted affecting insurance company
general accounts (see Section 1460 of the Small Job Protection Act of 1996)
may have an impact with respect to purchases of Certificates.
Prohibited Transaction Exemption 89-89 (the "Exemption") may apply
with respect to the purchase, sale, transfer or holding of the Senior
Certificates (other than the Class PO Certificates) by a Plan.
The Exemption contains a number of conditions which are dependent on
facts unknown to the Company or which it cannot control, such as those
relating to the circumstances of the Plan purchaser or the Plan fiduciary
making the decision to purchase such Class of Senior Certificates and that
the Plan be an "accredited investor" as defined under Rule 501(a)(1) of
Regulation D of the Securities and Exchange Commission under the Securities
Act of 1933, as amended. Before purchasing a Senior Certificate (other
than a Class PO Certificate), a fiduciary of a Plan should make its own
determination as to the availability of exemptive relief provided by the
Exemption or the availability of any other prohibited transaction
exemptions, and whether the conditions of any such exemption will be
applicable to such Senior Certificates. See "ERISA Considerations" in the
Prospectus.
The Exemption, issued by the Department of Labor to Salomon Brother
Inc, generally exempts from the application of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions pursuant to Section 4975(a) and (b) of the Code,
certain transactions, among others, relating to the servicing and operation
of mortgage pools and the initial purchase, holding and subsequent resale
of mortgage pass-through certificates underwritten by an Underwriter (as
hereinafter defined), provided that certain conditions set forth in the
Exemption are satisfied. For purposes of this Section "ERISA
Considerations", the term "Underwriter" shall include (a) Salomon Brothers
Inc, (b) any person directly or indirectly, through one or more
intermediates, controlling, controlled by or under common control with
Salomon Brothers Inc and (c) any member of the underwriting syndicate or
selling group of which a person described in (a) or (b) is a manager or co-
manager with respect to a Class of securities.
The Exemption sets forth six general conditions which must be
satisfied for the Exemption to apply. First, the acquisition of securities
by a Plan or with Plan Assets must be on terms that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party. Second, the Exemption only applies to securities
evidencing rights and interests that are not subordinated to the rights and
interests evidenced by other securities of the same trust. Third, the
securities at the time of acquisition by a Plan or with Plan Assets must be
rated in one of the three highest generic rating categories by Standard &
Poor's
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Ratings Services, a division of McGraw-Hill Companies, Inc., Moody's
Investors Service, Inc., Duff & Phelps Credit Rating Co. or Fitch Investors
Service, L.P. (collectively, the "Exemption Rating Agencies"). Fourth, the
Trustee cannot be an affiliate of any member of the "Restricted Group"
which consists of any Underwriter, the Depositor, the Trustee, the Master
Servicer, any sub-servicer and any obligor with respect to assets included
in the Trust Fund constituting more than 5% of the aggregate unamortized
principal balance of the assets in the Trust Fund as of the date of initial
issuance of the securities. Fifth, the sum of all payments made to and
retained by the Underwriter must represent not more than reasonable
compensation for underwriting the securities; the sum of all payments made
to and retained by the Depositor pursuant to the assignment of the assets
to the related Trust Fund must represent nor more than the fair market
value of such obligations; and the sum of all payments made to and retained
by the Master Servicer and any sub-servicer must represent not more than
reasonable compensation for such person's services under the related
Agreement and reimbursement of such person's reasonable expenses in
connection therewith. Sixth, the Exemption states that the investing Plan
or Plan Asset investor must be an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Commission under the Securities Act of
1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type
that the been included in other investment pools; (ii) securities
evidencing interests in such other investment pools must have been rated in
one of the three highest categories of one of the Exemption Rating Agencies
for at least one year prior to the acquisition of securities by or on
behalf of a Plan or with Plan Assets; and (iii) securities evidencing
interests in such other investment pools must have been purchased by
investors other than Plans for at least one year prior to any acquisition
of securities by or on behalf of a Plan or with Plan Assets .
A fiduciary of a Plan or any person investing Plan Assets to purchase
a Certificate must make its own determination that the conditions set forth
above will be satisfied with respect to such Certificate.
If the general condition of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a)
and 407(a) of ERISA, and the excise taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of the
Code, in connection with the direct or indirect sale, exchange, transfer,
holding or the direct or indirect acquisition or disposition in the
secondary market of securities by a Plan or with Plan Assets. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E),
406(a)(2) and 407 of ERISA for the acquisition or holding of a Certificate
on behalf of an "Excluded Plan" by any person who has discretionary
authority or renders investment advice with respect to the assets of such
Excluded Plan. For purposes of the securities, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied,
the Exemption may provide an exemption from the restrictions imposed by
Section 406(b)(1) and (b)(2) of ERISA, and the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of
the Code, in connection with (1) the direct or indirect sale, exchange or
transfer of securities in the initial issuance of securities between the
Depositor or an Underwriter and a Plan when the person who has
discretionary authority or renders investment advice with respect to the
investment of Plan Assets in the securities is (a) a mortgagor with respect
to 5% or less of the fair market value of the Trust Fund Assets or (b) an
affiliate of such a person, (2) the direct or indirect acquisition or
disposition in the secondary market of securities by a Plan and (3) the
holding of securities by a Plan or with Plan Assets.
Further, if certain specific conditions of the Exemption are
satisfied, the Exemption may provide an exemption for the restrictions
imposed by Section 406(a), 406(b) and 407 of ERISA, and the excise taxes
imposed by Section 4975(a) and (b) of the Code by reason of Section 4975(c)
of the code for transactions in connection with the servicing, management
and operation of the Trust Fund. The Depositor expects that the specific
conditions of the Exemption required for this purpose will be satisfied
with respect to the securities so that the Exemption would provide an
exemption for the restrictions imposed by Sections 406(a) and (b) of
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ERISA (as well as the excise taxes imposed by Section 4975(a) and (b) of
the Code by reason of Section 4975(c) of the Code) for transactions in
connection with the servicing, management and operation of the Trust Fund,
provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption form the restrictions
imposed by Section 406(a) and 407(a) of ERISA, and the excise taxes imposed
by Section 4975(a) and (b) of the Code by reason of Section 4975(c)(I)(A)
through (D) of the Code if such restrictions are deemed to otherwise apply
merely because a person is deemed to be a Party in Interest with respect to
an investing Plan by virtue of providing services to the Plan (or by virtue
of having certain specified relationships to such a person) solely as a
result of the Plan's ownership of securities.
The Exemption does not apply to the Class B Certificates because the
rights and interests evidenced by such Class B Certificates are
subordinated to the rights and interests evidenced by other Classes of
Certificates issued by the Trust.
The Exemption does not apply to the Class PO Certificates because the
Underwriter nor any of its affiliates is either underwriting or acting as a
selling or placement agent with respect to the Class PO Certificates.
However, if the Class PO Certificates were to be made available for
purchase in the secondary market through an underwriting or sale or
placement by an entity (including the Underwriter) which has been granted
an underwriters' prohibited transaction exemption similar to the Exemption,
such Class PO Certificates, as applicable would be eligible for purchase by
Plans, subject to the same considerations set forth herein with respect to
the other Classes of Senior Certificates.
The Class PO and Class B Certificates may be acquired for or on behalf
of a purchaser which is acquiring such Certificates directly or indirectly
for or on behalf of a Plan, provided that the proposed transferee provides
a Benefit Plan Opinion to the Trustee or a representation letter to the
same effect. A "Benefit Plan Opinion" is an opinion of counsel
satisfactory to the Trustee (and upon which the Trustee and the Master
Servicer are authorized to rely) to the effect that neither the proposed
transfer and/or holding of a Certificate nor the servicing, management and
operation of the Trust (i) will result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code which will not be covered
under an individual or class prohibited transaction exemption including but
not limited to Department of Labor Prohibited Transaction Exemption ("PTE")
84-14 (Class Exemption for Plan Asset Transactions Determined by
Independent Qualified Professional Asset Managers); PTE 91-38 (Class
Exemption for Certain Transactions Involving Bank Collective Investment
Funds); PTE 90-1 (Class Exemption for Certain Transactions Involving
Insurance Company Pooled Separate Accounts), PTE 95-60 (Class Exemption for
Certain Transactions Involving Insurance Company General Accounts), and
PTCE 96-23 (Class Exemption for Plan Asset Transactions Determined by In-
House Asset Managers) or (ii) will give rise to any additional fiduciary
duties under ERISA on the part of the Master Servicer or the Trustee. A
Benefit Plan Opinion shall not be an expense of the Trustee or the Master
Servicer.
In the event that the Class PO Certificates are made available for
purchase in the secondary market through an underwriting or sale or
placement by an entity (including the Underwriter) which has been granted
an underwriter's prohibited transaction exemption similar to the Exemption,
no Benefit Plan Opinion shall be required for the Class PO Certificates to
be acquired by, or transferred to, an entity which is acquiring such
Certificates directly or indirectly for or on behalf of, a Benefit Plan
Investor.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its own counsel with respect to the
potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of the Senior Certificates. Assets of a Plan should not be
invested in the Senior Certificates unless it is clear that the Exemptions
or any other prohibited transaction exemption will apply and exempt all
potential prohibited transactions.
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A governmental plan as defined in Section 3(32) of ERISA is not
subject to ERISA, or Code Section 4975. However, such governmental plan
may be subject to Federal, state and local law, which is, to a material
extent, similar to the provisions of ERISA or a Code Section 4975 ("Similar
Law"). A fiduciary of a governmental plan should make its own
determination as to the propriety of such investment under applicable
fiduciary or other investment standards, and the need for and the
availability of any exemptive relief under any Similar Law.
LEGAL INVESTMENT
The Senior Certificates and the Class B-1 Certificates will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") for so long as they are rated in one of
the two highest rating categories by at least one nationally recognized
statistical rating organization, and, as such, will be legal investments
for certain entities to the extent provided in SMMEA, subject to state laws
overriding SMMEA. Certain states have enacted legislation overriding the
legal investment provisions of SMMEA. The remaining Classes of
Certificates will not constitute "mortgage related securities" under SMMEA
(the "Non-SMMEA Certificates"). The appropriate characterization of the
Non-SMMEA Certificates under various legal investment restrictions, and
thus the ability of investors subject to these restrictions to purchase
Non-SMMEA Certificates, may be subject to significant interpretive
uncertainties.
All investors whose investment activities are subject to legal
investment laws and regulations or to review by certain regulatory
authorities may be subject to restrictions on investment in the
Certificates. Any such institution should consult its own legal advisors
in determining whether and to what extent there may be restrictions on its
ability to invest in the Certificates. See "Legal Investment Matters" In
the Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting
Agreement, the Offered Certificates are being purchased from the Company by
Salomon Brothers Inc (the "Underwriter") upon issuance. The Underwriter
has agreed to purchase 100% of each Class of Offered Certificates, Credit
Suisse First Boston has agreed to purchase 100% of the Class B-4, Class B-5
and Class B-6 Certificates, and ICI Funding has agreed to purchase 100% of
the Class PO and Class R-1 Certificates. ICI Funding is an affiliate of
the Company. Distribution of such Certificates will be made from time to
time in negotiated transactions or otherwise at varying prices to be
determined at the time of sale. Proceeds to the Company are expected to be
approximately 102.60% of the aggregate principal balance of the Offered
Certificates, as of the Cut-off Date, plus accrued interest thereon, but
before deducting expenses payable by the Company in connection with the
Offered Certificates. In connection with the purchase and sale of the
Offered Certificates, the Underwriter may be deemed to have received
compensation from the Company in the form of underwriting discounts.
The Company will indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended, or will contribute to payments the Underwriter may be required to
make in respect thereof.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Company by Freshman, Marantz, Orlanski, Cooper & Klein and for the
Underwriter by Thacher Proffitt & Wood.
S-90
<PAGE>
RATINGS
It is a condition to the issuance of each Class of Offered
Certificates that it receives the ratings set forth below from S&P and DCR.
<TABLE>
<CAPTION>
Rating
----------
Class S&P DCR
- ----- ---- ---
<S> <C> <C>
Class A-I-1 AAA AAA
Class A-I-2 AAA AAA
Class A-I-3 AAA AAA
Class A-I-4 AAA AAA
Class A-I-5 AAA AAA
Class A-I-6 AAA AAA
Class A-I-7 AAA AAA
Class A-I-8 AAA AAA
Class A-I-9 AAA AAA
Class A-II AAA AAA
Class X AAAr AAA
Class B-1 AA AA
Class B-2 A A
Class B-3 BBB BBB
</TABLE>
S&P's ratings on mortgage pass-through certificates address the
likelihood of the receipt by Certificateholders of payments required under
the Agreement. S&P's ratings take into consideration the credit quality of
the mortgage pool, structural and legal aspects associated with the
Certificates, and the extent to which the payment stream in the mortgage
pool is adequate to make payments required under the Certificates. S&P's
rating on the Offered Certificates does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. The "r"
symbol is appended to the rating by S&P of those Certificates that S&P
believes may experience high volatility or high variability in expected
returns due to non-credit risks. The absence of an "r" symbol in the
ratings of the other Offered Certificates should not be taken as an
indication that such Certificates will exhibit no volatility or variability
in total return.
The ratings assigned by DCR to mortgage pass-through certificates
address the likelihood of the receipt by Certificateholders of all
distributions to which they are entitled under the transaction structure.
DCR's ratings reflect its analysis of the riskiness of the Mortgage Loans
and its analysis of the structure of the transaction as set forth in the
operative documents. DCR's ratings do not address the effect on the
Certificates' yield attributable to prepayments or recoveries on the
underlying Mortgage Loans. Further, in the case of the Class X
Certificates, the rating does not address whether investors will recoup the
purchase price of the Certificates.
The ratings of the Rating Agencies do not address the possibility
that, as a result of principal prepayments (i) Certificateholders might
suffer a lower than anticipated yield and (ii) if there is a rapid rate of
principal payments (including principal prepayments) on the Premium
Mortgage Loans, investors in the Class X Certificates could fail to fully
recover their initial investments.
The ratings assigned to the Offered Certificates should be evaluated
independently from similar ratings on other types of securities. A rating
is not a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the Rating Agencies.
S-91
<PAGE>
The Company has not requested a rating of the Offered Certificates by
any rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates or, in such event, what rating would be assigned to the
Offered Certificates by such other rating agency. The ratings assigned by
such other rating agency to the Offered Certificates may be lower than the
ratings assigned by the Rating Agencies.
S-92
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrued Certificate Interest S-12, S-49
Adjustment Amount S-60
Aggregate Expense Rate S-9
Agreement S-5
Allocable Share S-57
Asumed Final Distribution Date S-62
Available Funds S-11, S-44
Bankruptcy Coverage Termination Date S-60
Bankruptcy Loans S-36
Bankruptcy Loss S-58
Bankruptcy Loss Amount S-60
Benefit Plan Opinion S-23, S-89
Book-Entry Certificates S-7
Business Day S-41
Cede S-41
Certificate Account S-80
Certificate Account Advance S-85
Certificate Owner S-41
Certificate Register S-43
Certificates S-1, S-7, S-41
CLTV S-29
Class A Certificates S-7
Class A-I Certificates S-7
Class A-I Senior Percentage S-53
Class A-II Senior Percentage S-53
Class A-I-8 Prepayment Amount S-45
Class A-I-8 Pro Rata Optimal Principal Amount S-46
Class A-I-8 Pro Rata Prepayment Amount S-45
Class A-II Senior Percentage S-53
Class B Certificates S-7
Class B Group I Current Principal Amount S-49
Class B Group II Current Principal Amount S-49
Class PO Cash Shortfall S-47
Class PO Deferred Amount S-14, S-59
Class PO Deferred Payment Writedown Amount S-50
Class PO Portion I Cash Shortfall S-46
Class PO Portion II Cash Shortfall S-47
Class PO Portion I Principal Distribution Amount S-54
Class PO Portion II Principal Distribution Amount S-55
Class PO Principal Distribution Amount S-13, S-52
Class Prepayment Distribution Trigger S-57
Class X Component I Accrued Certificate Interest S-49
Class X Component II Accrued Certificate Interest S-49
Closing Date S-5
Code S-23, S-86
Company S-2, S-5
Compensating Interest Payments S-12, S-50
Component I S-11, S-48
Component II S-11, S-48
</TABLE>
S-93
<PAGE>
<TABLE>
<S> <C>
CPR S-63
Cross-Over Date S-12
Current Principal Amount S-13, S-50
Cut-off Date Scheduled Principal Balance S-7, S-27
Cut-off Date S-5
DCR S-1, S-23
Debt Service Reduction S-58
Defaulted Mortgage Loan S-79
Deficient Valuation S-58
Definitive Certificates S-43
Determination Date S-57
Discount Mortgage Loans S-51
Distribution Date S-2, S-10
DTC S-41
Due Date S-9
Due Period S-10
ERISA S-22
Events of Default S-83
Excess Bankruptcy Loss S-58
Excess Bankruptcy Losses S-17
Excess Fraud Loss S-58
Excess Fraud Losses S-17
Excess Losses S-17
Excess Special Hazard Loss S-58
Excess Special Hazard Losses S-17
Exemption S-23, S-87
Exemption Rating Agencies S-88
FHA S-27
FICO S-33
Foreclosure Loans S-36
Fraud Coverage Termination Date S-60
Fraud Loss S-58
Fraud Loss Amount S-60
Group I Available Funds S-43
Group II Available Funds S-43
Group I Discount Mortgage Loan S-51
Group II Discount Mortgage Loan S-51
Group I Mortgage Loans S-2
Group II Mortgage Loans S-2
Group I Senior Optimal Principal Amount S-52
Group II Senior Optimal Principal Amount S-52
IAMSI S-38
ICI Funding S-5, S-27
ICII S-28
ICMH S-5 S-28
Indirect Participants S-42
Insurance Proceeds S-57
Interest Accrual Period S-11
Interest Shortfall S-50
Liquidated Mortgage Loan S-58
Liquidation Proceeds S-58
Loss Allocation Limitation S-59
Master Servicer S-3, S-5, S-27, S-38
</TABLE>
S-94
<PAGE>
<TABLE>
<S> <C>
Master Servicing Fee S-80
Material Defect S-73
Monthly Advance S-16
Monthly Payment S-57
Mortgage File S-73
Mortgage Loan Group S-2
Mortgage Loan Group I S-2
Mortgage Loan Group II S-2
Mortgage Loans S-2
Mortgage Rate S-9
Mortgaged Properties S-7
Net Interest Shortfalls S-50, S-79
Net Liquidation Proceeds S-58
Net Rate S-9
Non-PO Percentage S-51
Non-SMMEA Certificates S-25
Notional Amount S-1, S-6
Offered Certificates S-1, S-7, S-41
Original Subordinate Principal Balance S-54
Other Certificates S-6, S-7, S-41
Outstanding Principal Balance S-74
Participants S-42
Pass-Through Rate S-1
Permitted Investments S-77
Physical Certificates S-7
Plan Asset Regulations S-87
Plan(s) S-23, S-87
PO Percentage S-51
Portion I S-13, S-52
Portion II S-13, S-52
Premium Mortgage Loans S-1
Prepayment Assumption S-63
Prepayment Period S-10, S-53
Primary Insurance Policy S-27
Principal Prepayment S-57
Pro rata S-46
Protected Account S-41
PTE S-89
Rating Agencies S-23
Realized Loss S-58
Record Date S-10
Regular Certificates S-7
Relief Act S-50
REMIC S-3, S-22, S-86
REMIC Regular Certificates S-22, S-86
REMIC Residual Certificates S-22, S-86
REO Property S-57
Repurchase Price S-74
Repurchase Proceeds S-57
Residual Certificates S-7
Restricted Group S-88
Rules S-42
S&P S-1, S-23
</TABLE>
S-95
<PAGE>
<TABLE>
<S> <C>
Scheduled Principal Balance S-9
Seller S-5
Senior Certificates S-7
Senior Percentage S-53
Senior Prepayment Percentage S-53
Senior Prepayment Percentage Stepdown Limitation S-54
Servicing Account S-77
Similar Law S-90
SMMEA S-24, S-90
Special Hazard Loss S-58
Special Hazard Loss Amount S-60
Special Hazard Termination Date S-60
State Street S-38
Sub-Servicer S-5
Subordinate Certificate Writedown Amount S-50
Subordinate Certificates S-7
Subordinate Optimal Principal Amount S-56
Subordinate Percentage S-56
Subordinate Prepayment Percentage S-56
Sub-Servicer S-5
Trust S-2, S-5
Trust Assets S-23
Trustee S-5
Underwriter S-1, S-87, S-90
VA S-27
Wendover S-5, S-28
</TABLE>
S-96
<PAGE>
ANNEX A
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
The tables below set forth estimates of certain expected characteristics
(as of the Cut-off Date) of the Group I Mortgage Loans and the Group II Mortgage
Loans. In each of the following tables, the percentages are based on the Cut-off
Date Scheduled Principal Balances and have been rounded and, as a result, may
not total 100.00%.
The description herein of the Mortgage Loans is based upon estimates of the
composition of the Mortgage Loans as of the Cut-off Date, as adjusted for all
scheduled principal payments due on or before the Cut-off Date. The Company
believes that the estimated information set forth herein with respect to the
Mortgage Loans as presently constituted is representative of the characteristics
of the Mortgage Loans as they will be constituted at the time the Certificates
are issued, although certain characteristics of the Mortgage Loans may vary.
YEARS OF FIRST PAYMENT OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
YEAR OF FIRST PAYMENT LOANS PRINCIPAL BALANCE BALANCE
- --------------------- ---------- ----------------- -------------
<S> <C> <C> <C>
1992 2 $ 693,482 0.26%
1993 1 116,800 0.04%
1994 18 2,148,234 0.80%
1996 31 4,495,130 1.68%
1997 1,722 259,998,029 97.21%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
- --------------------
(1) As of the Cut-off Date, the weighted average seasoning of the Mortgage
Loans is expected to be approximately 2 months.
TYPES OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
PROPERTY TYPE LOANS PRINCIPAL BALANCE BALANCE
- ------------- ---------- ----------------- -------------
<S> <C> <C> <C>
Single-Family 1,351 $213,952,060 80.00%
Planned Unit Development 202 28,228,721 10.55%
Condominium 149 14,663,867 5.48%
Two- to Four-Family 71 10,517,275 3.93%
De Minimis Planned Unit
Development 1 89,750 0.03%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
S-97
<PAGE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY SECURING
GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF SCHEDULED SCHEDULED
MORTGAGE PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
- ----- --------- ------------ ------------
<S> <C> <C> <C>
Arizona 45 $ 4,898,888 1.83%
Arkansas 1 66,327 0.02%
California 490 97,050,850 36.29%
Colorado 16 2,544,595 0.95%
Connecticut 26 3,685,519 1.38%
District of Columbia 3 617,234 0.23%
Florida 402 44,331,938 16.58%
Georgia 26 3,865,005 1.45%
Hawaii 7 1,392,985 0.52%
Idaho 2 94,388 0.04%
Illinois 12 1,863,422 0.70%
Indiana 2 223,409 0.08%
Kansas 5 982,383 0.37%
Kentucky 2 121,917 0.05%
Louisiana 1 124,940 0.05%
Maine 2 545,000 0.20%
Maryland 30 5,894,102 2.20%
Massachusetts 39 6,748,498 2.52%
Michigan 6 600,246 0.22%
Minnesota 1 164,720 0.06%
Mississippi 4 396,498 0.15%
Missouri 1 52,969 0.02%
Montana 4 442,846 0.17%
Nebraska 1 44,738 0.02%
Nevada 52 6,617,606 2.47%
New Hampshire 1 93,700 0.04%
New Jersey 164 24,489,860 9.16%
New Mexico 4 630,789 0.24%
New York 144 21,970,584 8.21%
North Carolina 23 3,995,376 1.49%
Ohio 1 60,762 0.02%
Oklahoma 8 814,869 0.30%
Oregon 17 1,818,822 0.68%
Pennsylvania 25 2,443,529 0.91%
Rhode Island 15 2,039,158 0.76%
South Carolina 3 329,491 0.12%
South Dakota 1 79,881 0.03%
Tennessee 8 1,265,239 0.47%
Texas 81 9,818,475 3.67%
Utah 18 3,081,256 1.15%
Vermont 1 125,749 0.05%
Virginia 27 4,026,369 1.51%
Washington 51 6,771,256 2.53%
West Virginia 1 69,666 0.03%
Wisconsin 1 155,820 0.06%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
(1) As of the Cut-off Date, no more than approximately 0.67% of the Cut-off
Date Scheduled Principal Balance of the Mortgage Loans is expected to be
secured by properties located in any one zip code.
S-98
<PAGE>
LOAN PURPOSES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
LOAN PURPOSE LOANS PRINCIPAL BALANCE BALANCE
- ------------ ------------- ---------------------- ---------------
<S> <C> <C> <C>
Purchase 1,219 $174,909,795 65.40%
Cash-Out Refinance 338 53,364,390 19.95%
Rate and Term Refinance 201 36,344,659 13.59%
Rate and Term Construction 16 2,832,831 1.06%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
DISTRIBUTION OF ORIGINAL GROUP I MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL MORTGAGE LOAN AMOUNT LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------- ------------- ---------------------- ---------------
<S> <C> <C> <C>
$50,000 or less 101 $ 4,313,918 1.61%
$50,001 - $100,000 498 38,466,314 14.38%
$100,001 - $150,000 517 64,126,214 23.98%
$150,001 - $200,000 288 49,847,281 18.64%
$200,001 - $250,000 156 34,784,128 13.01%
$250,001 - $300,000 96 26,393,712 9.87%
$300,001 - $350,000 42 13,750,494 5.14%
$350,001 - $400,000 27 10,211,430 3.82%
$400,001 - $450,000 14 5,929,763 2.22%
$450,001 - $500,000 18 8,555,799 3.20%
$500,001 - $550,000 3 1,573,101 0.59%
$550,001 - $600,000 4 2,273,179 0.85%
$600,001 - $650,000 7 4,430,482 1.66%
$700,001 - $750,000 1 746,297 0.28%
$750,001 - $800,000 1 799,563 0.30%
$1,200,001 - $1,250,000 1 1,250,000 0.47%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the average Cut-off Date Scheduled Principal
Balance of the Mortgage Loans is expected to be approximately $150,762.
S-99
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL LOAN-TO-VALUE RATIOS LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------- --------- ------------------ ------------
<S> <C> <C> <C>
50.00% or less 85 $ 10,018,646 3.75%
50.01% - 55.00% 29 3,730,693 1.39%
55.01% - 60.00% 63 7,098,276 2.65%
60.01% - 65.00% 74 12,406,140 4.64%
65.01% - 70.00% 131 18,682,283 6.99%
70.01% - 75.00% 265 46,015,754 17.21%
75.01% - 80.00% 502 77,326,314 28.91%
80.01% - 85.00% 111 12,492,199 4.67%
85.01% - 90.00% 514 79,681,368 29.79%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 78.17%.
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE BALANCE
- ---------------- --------- ------------------ ------------
<S> <C> <C> <C>
Primary Residence 1,574 $248,468,924 92.90%
Second Home 103 11,134,310 4.16%
Investor Property 97 7,848,439 2.93%
----- ------------ ------
Total 1,774 $267,451,674 100.00%
===== ============ ======
</TABLE>
__________________
(1) Based on representations of the Mortgagor at the time of Mortgage Loan
origination.
S-100
<PAGE>
MORTGAGE RATES OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
MORTGAGE RATE LOANS PRINCIPAL BALANCE BALANCE
- ------------- --------- ----------------- ------------
<S> <C> <C> <C>
7.575% 1 $ 193,248 0.07%
7.750% 2 320,515 0.12%
7.755% 2 278,682 0.10%
7.825% 2 291,531 0.11%
7.875% 3 275,507 0.10%
7.955% 1 172,637 0.06%
8.000% 14 3,456,603 1.29%
8.005% 6 544,073 0.20%
8.090% 1 75,764 0.03%
8.125% 8 1,943,217 0.73%
8.205% 1 161,131 0.06%
8.215% 1 76,468 0.03%
8.250% 25 3,380,585 1.26%
8.375% 43 8,494,510 3.18%
8.395% 1 124,914 0.05%
8.500% 77 12,718,352 4.76%
8.625% 100 16,527,699 6.18%
8.750% 117 18,383,176 6.87%
8.875% 254 39,715,083 14.85%
9.000% 205 34,261,750 12.81%
9.125% 157 25,776,523 9.64%
9.250% 241 33,806,815 12.64%
9.375% 166 23,261,254 8.70%
9.500% 125 15,682,916 5.86%
9.625% 42 5,766,773 2.16%
9.750% 33 4,599,532 1.72%
9.875% 40 5,728,428 2.14%
9.950% 1 91,735 0.03%
10.000% 17 2,503,098 0.94%
10.125% 7 889,420 0.33%
10.250% 14 1,647,186 0.62%
10.375% 10 1,090,293 0.41%
10.500% 8 640,315 0.24%
10.550% 1 39,638 0.01%
10.625% 6 805,087 0.30%
10.740% 1 15,576 0.01%
10.750% 5 369,447 0.14%
10.800% 1 49,865 0.02%
10.875% 5 371,947 0.14%
10.990% 1 41,739 0.02%
11.000% 5 369,994 0.14%
11.125% 2 283,665 0.11%
11.250% 2 146,601 0.05%
11.375% 4 609,329 0.23%
11.500% 3 238,327 0.09%
11.600% 2 173,652 0.06%
11.750% 1 224,932 0.08%
11.825% 1 107,575 0.04%
12.000% 2 80,909 0.03%
12.125% 1 46,174 0.02%
12.250% 2 401,446 0.15%
12.500% 1 34,904 0.01%
12.750% 1 34,230 0.01%
13.500% 1 52,014 0.02%
14.700% 1 74,890 0.03%
----- ------------ --------
Total 1,774 $267,451,674 100.00%
===== ============ ========
</TABLE>
- ------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 9.079% per annum.
S-101
<PAGE>
ORIGINAL TERMS OF THE GROUP I MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL TERM (MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- ---------------------- --------- ------------------ ------------
<S> <C> <C> <C>
240 Months 2 $ 182,993 0.07%
360 Months 1,772 267,268,681 99.93%
----- ------------ --------
Total 1,774 $267,451,674 100.00%
===== ============ ========
</TABLE>
- ------------------
(1) As of the Cut-off Date, the remaining scheduled term of the Mortgage Loans
is expected to be approximately 358 months.
DOCUMENTATION TYPES OF THE GROUP I MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
DOCUMENTATION TYPE LOANS PRINCIPAL BALANCE BALANCE
- ------------------ --------- ----------------- ------------
<S> <C> <C> <C>
Full 237 $ 31,569,079 11.80%
Limited 470 74,469,060 27.84%
No Ratio 201 34,233,822 12.80%
Alternative 16 2,220,233 0.83%
No Income-No Asset 95 12,619,895 4.72%
Lite 3 632,944 0.24%
Express 752 111,706,641 41.77%
----- ------------ --------
Total 1,774 $267,451,674 100.00%
===== ============ ========
</TABLE>
YEARS OF FIRST PAYMENT OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
YEAR OF FIRST PAYMENT LOANS PRINCIPAL BALANCE BALANCE
- --------------------- --------- ----------------- ------------
<S> <C> <C> <C>
1993 2 $ 206,679 0.86%
1994 5 598,903 2.50%
1996 4 313,430 1.31%
1997 211 22,807,590 95.32%
----- ------------ --------
Total 222 $ 23,926,601 100.00%
===== ============ ========
</TABLE>
- ------------------
(1) As of the Cut-off Date, the weighted average seasoning of the Mortgage
Loans is expected to be approximately 3 months.
S-102
<PAGE>
TYPES OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
PROPERTY TYPE LOANS PRINCIPAL BALANCE BALANCE
- ------------- --------- ----------------- ------------
<S> <C> <C> <C>
Single-Family 158 $ 17,292,781 72.27%
Planned Unit Development 22 3,000,212 12.54%
Condominium 17 1,413,394 5.91%
Two- to Four-Family 24 2,180,319 9.11%
Condo/Hotel 1 39,895 0.17%
----- ------------ --------
Total 222 $ 23,926,601 100.00%
===== ============ ========
</TABLE>
GEOGRAPHICAL DISTRIBUTION OF THE MORTGAGED PROPERTY SECURING
GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
STATE LOANS PRINCIPAL BALANCE BALANCE
- ----- --------- ----------------- ------------
<S> <C> <C> <C>
Arizona 1 $ 55,517 0.23%
Arkansas 1 179,502 0.75%
California 28 3,385,658 14.15%
Colorado 2 202,512 0.85%
Connecticut 4 332,805 1.39%
Delaware 2 259,365 1.08%
Florida 54 4,848,098 20.26%
Georgia 3 201,130 0.84%
Hawaii 2 455,058 1.90%
Illinois 4 559,488 2.34%
Indiana 2 244,432 1.02%
Kentucky 1 53,559 0.22%
Louisiana 1 139,600 0.58%
Maine 1 59,515 0.25%
Maryland 5 625,993 2.62%
Massachusetts 6 752,504 3.15%
Michigan 2 315,055 1.32%
Mississippi 1 99,445 0.42%
Missouri 2 137,320 0.57%
Nevada 2 251,180 1.05%
New Jersey 18 2,149,109 8.98%
New York 28 3,767,169 15.74%
North Carolina 4 247,158 1.03%
Oregon 2 114,787 0.48%
Pennsylvania 7 547,809 2.29%
Rhode Island 5 362,235 1.51%
Texas 20 2,182,157 9.12%
Utah 3 549,401 2.30%
Virginia 2 94,496 0.39%
Washington 5 506,975 2.12%
Wyoming 4 247,569 1.03%
----- ------------ --------
Total 222 $ 23,926,601 100.00%
===== ============ ========
</TABLE>
(1) As of the Cut-off Date, no more than approximately 2.10% of the Cut-off
Date Scheduled Principal Balance of the Mortgage Loans is expected to be
secured by properties located in any one zip code.
S-103
<PAGE>
LOAN PURPOSES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
LOAN PURPOSE LOANS PRINCIPAL BALANCE BALANCE
- ------------ --------- ------------------ -------------
<S> <C> <C> <C>
Purchase 91 $ 9,832,259 41.09%
Cash-Out Refinance 83 8,052,831 33.66%
Rate and Term Refinance 45 5,662,281 23.67%
Rate and Term Construction 3 379,230 1.58%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
DISTRIBUTION OF ORIGINAL GROUP II MORTGAGE LOAN AMOUNTS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL MORTGAGE LOAN AMOUNT LOANS PRINCIPAL BALANCE BALANCE
- ----------------------------- --------- ------------------ -------------
<S> <C> <C> <C>
$50,000 or less 26 $ 1,163,360 4.86%
$50,001 - $100,000 103 7,558,972 31.59%
$100,001 - $150,000 49 6,029,243 25.20%
$150,001 - $200,000 26 4,413,145 18.44%
$200,001 - $250,000 9 1,940,023 8.11%
$250,001 - $300,000 5 1,372,274 5.74%
$300,001 - $350,000 3 947,703 3.96%
$500,001 - $550,000 1 501,880 2.10%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the average Cut-off Date Scheduled Principal
Balance of the Mortgage Loans is expected to be approximately $107,777.
S-104
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL LOAN-TO-VALUE RATIO LOANS PRINCIPAL BALANCE BALANCE
- ---------------------------- --------- ------------------ ------------
<S> <C> <C> <C>
50.00% or less 47 $ 3,687,800 15.41%
50.01% - 55.00% 17 1,547,349 6.47%
55.01% - 60.00% 13 1,303,132 5.45%
60.01% - 65.00% 14 1,625,568 6.79%
65.01% - 70.00% 26 2,260,320 9.45%
70.01% - 75.00% 30 4,418,455 18.47%
75.01% - 80.00% 53 6,287,961 26.28%
80.01% - 85.00% 3 497,840 2.08%
85.01% - 90.00% 19 2,298,174 9.61%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the weighted average Loan-to-Value Ratio at
origination of the Mortgage Loans is expected to be approximately 68.73%.
OCCUPANCY OF MORTGAGED PROPERTIES SECURING GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
OCCUPANCY STATUS LOANS PRINCIPAL BALANCE BALANCE
- ---------------- --------- ------------------ ------------
<S> <C> <C> <C>
Primary Residence 173 $19,833,039 82.89%
Investor Property 28 2,155,106 9.01%
Second Home 21 1,938,456 8.10%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
- ------------------
(1) Based on representations of the Mortgagor at the time of Mortgage Loan
origination.
S-105
<PAGE>
MORTGAGE RATES OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
MORTGAGE RATE LOANS PRINCIPAL BALANCE BALANCE
- ------------- --------- ----------------- ------------
<S> <C> <C> <C>
4.750% 1 $ 43,243 0.18%
5.000% 1 94,640 0.40%
5.125% 1 163,435 0.68%
6.750% 1 100,517 0.42%
7.625% 2 424,787 1.78%
7.750% 4 587,321 2.45%
7.875% 2 347,240 1.45%
8.000% 9 720,886 3.01%
8.125% 6 1,212,619 5.07%
8.250% 11 1,201,360 5.02%
8.375% 14 1,419,123 5.93%
8.500% 35 3,717,237 15.54%
8.625% 18 1,983,505 8.29%
8.750% 29 2,840,497 11.87%
8.875% 41 4,581,679 19.15%
9.000% 17 1,913,735 8.00%
9.125% 8 570,231 2.38%
9.250% 6 496,368 2.07%
9.375% 4 370,779 1.55%
9.500% 5 401,178 1.68%
9.625% 1 78,553 0.33%
9.750% 2 419,790 1.75%
10.000% 1 100,000 0.42%
10.375% 1 46,917 0.20%
10.500% 1 40,500 0.17%
11.250% 1 50,459 0.21%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 8.609% per annum.
S-106
<PAGE>
ORIGINAL TERMS OF THE GROUP II MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
ORIGINAL TERM (MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- ---------------------- --------- ----------------- ------------
<S> <C> <C> <C>
60 Months 4 $ 401,836 1.68%
84 Months 4 559,744 2.34%
180 Months 214 22,965,022 95.98%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
- ------------------
(1) As of the Cut-off Date, the remaining scheduled term of the Mortgage Loans
is expected to be approximately 172 months.
DOCUMENTATION TYPES OF THE GROUP II MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF
CUT-OFF DATE
NUMBER OF CUT-OFF DATE SCHEDULED
MORTGAGE SCHEDULED PRINCIPAL
DOCUMENTATION TYPE LOANS PRINCIPAL BALANCE BALANCE
- ------------------ --------- ----------------- ------------
<S> <C> <C> <C>
Full 37 $ 3,311,717 13.84%
Limited 89 9,963,091 41.64%
No Ratio 37 3,942,207 16.48%
Alternative 2 98,436 0.41%
No Income-No Asset 15 1,373,731 5.74%
Express 42 5,237,420 21.89%
--- ----------- ------
Total 222 $23,926,601 100.00%
=== =========== ======
</TABLE>
S-107
<PAGE>
PROSPECTUS
Mortgage Pass-Through Certificates
ICIFC Secured Assets Corp.
The mortgage pass-through certificates (the "Offered Certificates") offered
hereby and by the supplements hereto (each, a "Prospectus Supplement") will be
offered from time to time in series. The Offered Certificates of each series,
together with any other mortgage pass-through certificates of such series, are
collectively referred to herein as the "Certificates."
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a trust fund (with respect to any series, the
"Trust Fund") to be established by ICIFC Secured Assets Corp. (the "Company").
Each Trust Fund will consist primarily of a segregated pool (a "Mortgage
Pool") of one- to four-family and/or multifamily residential first and/or
junior mortgage loans or manufactured housing conditional sales contracts and
installment loan agreements (collectively, the "Mortgage Loans") or interests
therein (which may include Mortgage Securities as defined herein), acquired by
the Company from one or more affiliated or unaffiliated institutions (the
"Sellers"). See "The Company" and "The Mortgage Pools." The Mortgage Loans and
other assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates (the "Certificateholders")
pursuant to a pooling and servicing or other agreement (in either case, a
"Pooling Agreement") as more fully described herein under "Description of the
Certificates" and in the related Prospectus Supplement. Information regarding
the Offered Certificates of a series, and the general characteristics of the
Mortgage Loans and other assets in the related Trust Fund, will be set forth
in the related Prospectus Supplement.
Each series of Certificates will include one or more classes. Each class of
Certificates of any series will represent the right, which right may be senior
or subordinate to the rights of one or more of the other classes of the
Certificates, to receive a specified portion of payments of principal or
interest (or both) on the Mortgage Loans and other assets in the related Trust
Fund in the manner described herein under "Description of the Certificates"
and in the related Prospectus Supplement. A series may include one or more
classes of Certificates entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. A
series may include two or more classes of Certificates which differ as to the
timing, sequential order, priority of payment, pass-through rate or amount of
distributions of principal or interest or both. See "Description of the
Certificates."
THE COMPANY'S ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF CERTIFICATES WILL
BE PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY,
EXCEPT AS PROVIDED IN THE RELATED PROSPECTUS SUPPLEMENT. THE MASTER SERVICER
(THE "MASTER SERVICER") FOR ANY SERIES OF CERTIFICATES WILL BE NAMED IN THE
RELATED PROSPECTUS SUPPLEMENT. THE PRINCIPAL OBLIGATIONS OF THE MASTER
SERVICER WILL BE PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH
INCLUDE ITS LIMITED OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF
DELINQUENCIES IN PAYMENTS ON THE RELATED MORTGAGE LOANS). SEE "DESCRIPTION OF
THE CERTIFICATES."
If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include any one or any combination of a mortgage
pool insurance policy, letter of credit, bankruptcy bond, special hazard
insurance policy, reserve fund or other form of credit support. In addition to
or in lieu of the foregoing, credit enhancement may be provided by means of
subordination of one or more classes of Certificates. See "Description of
Credit Enhancement."
The rate of payment of principal of each class of Certificates entitled to a
portion of principal payments on the Mortgage Loans and other assets in the
related Mortgage Pool will depend on the priority of payment of such class and
the rate and timing of principal payments (including by reason of prepayments,
defaults, liquidations and repurchases of Mortgage Loans) on such Mortgage
Loans and other assets. A rate of principal payment slower or faster than that
anticipated may affect the yield on a class of Certificates in the manner
described herein under "Yield Considerations" and in the related Prospectus
Supplement.
One or more separate elections may be made to treat a Trust Fund or a
designated portion thereof as a real estate mortgage investment conduit
("REMIC") for federal income tax purposes. If applicable, the Prospectus
Supplement for a series of Certificates will specify which class or classes of
the related series of Certificates will be considered to be regular interests
in the related REMIC and which class of Certificates or other interests will
be designated as the residual interest in the related REMIC. See "Federal
Income Tax Consequences" herein.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 HEREIN AND ON PAGE S-24 OF THE RELATED
PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING
INVESTMENTS IN THE CERTIFICATES.
PROCEEDS OF THE ASSETS IN THE RELATED TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE COMPANY, THE MASTER SERVICER OR ANY OF THEIR RESPECTIVE
AFFILIATES. NEITHER THE CERTIFICATES OF ANY SERIES NOR THE UNDERLYING MORTGAGE
LOANS OR MORTGAGE SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY OR BY THE COMPANY, THE MASTER SERVICER OR ANY OF
THEIR RESPECTIVE AFFILIATES, UNLESS OTHERWISE SPECIFIED IN THE RELATED
PROSPECTUS SUPPLEMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
The Offered Certificates may be offered through one or more different methods,
including offerings through underwriters, as more fully described herein under
"Methods of Distribution" and in the related Prospectus Supplement.
There will be no secondary market for the Offered Certificates of any series
prior to the offering thereof. There can be no assurance that a secondary
market for any of the Offered Certificates will develop or, if it does
develop, that it will continue. The Offered Certificates will not be listed on
any securities exchange.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of securities offered hereby unless accompanied by a
Prospectus Supplement. This Prospectus contains in "Index of Principal
Definitions" beginning on page 115 herein.
The date of this Prospectus is December 10, 1996.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND ANY
PROSPECTUS SUPPLEMENT WITH RESPECT HERETO AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS AND
ANY PROSPECTUS SUPPLEMENT WITH RESPECT HERETO DO NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
CERTIFICATES OFFERED HEREBY AND THEREBY OR AN OFFER OF SUCH CERTIFICATES TO
ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH OFFER WOULD BE
UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE; HOWEVER,
IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE
DELIVERED, THIS PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY OF PROSPECTUS...................................................... 5
RISK FACTORS............................................................... 12
THE MORTGAGE POOLS......................................................... 19
General................................................................. 19
The Mortgage Loans...................................................... 21
Underwriting Standards.................................................. 25
Federal Home Loan Mortgage Corporation ("Freddie Mac").................. 26
Qualifications of Originators and Sellers............................... 27
Representations by Sellers.............................................. 27
SERVICING OF MORTGAGE LOANS................................................ 30
General................................................................. 30
The Master Servicer..................................................... 30
Collection and Other Servicing Procedures; Mortgage Loan Modifications.. 30
Subservicers............................................................ 32
Special Servicers....................................................... 33
Realization Upon or Sale of Defaulted Mortgage Loans.................... 33
Servicing and Other Compensation and Payment of Expenses; Spread........ 35
Evidence as to Compliance............................................... 36
DESCRIPTION OF THE CERTIFICATES............................................ 37
General................................................................. 37
Form of Certificates.................................................... 38
Assignment of Trust Fund Assets......................................... 39
Certificate Account..................................................... 42
Distributions........................................................... 45
Distributions of Interest and Principal on the Certificates............. 46
Distributions on the Certificates in Respect of Prepayment Premiums or
in Respect of Equity Participations................................ 47
Allocation of Losses and Shortfalls..................................... 47
Advances................................................................ 47
Reports to Certificateholders........................................... 48
DESCRIPTION OF CREDIT ENHANCEMENT.......................................... 49
General................................................................. 49
Subordinate Certificates................................................ 50
Letter of Credit........................................................ 51
Mortgage Pool Insurance Policies........................................ 51
Special Hazard Insurance Policies....................................... 53
Bankruptcy Bonds........................................................ 54
Reserve Funds........................................................... 54
Maintenance of Credit Enhancement....................................... 55
Reduction or Substitution of Credit Enhancement......................... 57
PURCHASE OBLIGATIONS....................................................... 57
PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE; CLAIMS THEREUNDER............ 58
General................................................................. 58
Primary Mortgage Insurance Policies..................................... 58
Hazard Insurance Policies............................................... 59
FHA Insurance........................................................... 60
</TABLE>
<TABLE>
<S> <C>
THE COMPANY................................................................. 61
ICI FUNDING CORPORATION..................................................... 61
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC...................................... 61
THE POOLING AGREEMENT....................................................... 62
General.................................................................. 62
Certain Matters Regarding the Master Servicer and the Company............ 62
Events of Default........................................................ 63
Rights Upon Event of Default............................................. 64
Amendment................................................................ 64
Termination; Retirement of Certificates.................................. 65
The Trustee.............................................................. 66
Limitations on the Duties of the Trustee................................. 66
Certain Matters Regarding the Trustee.................................... 66
Resignation and Removal of the Trustee................................... 67
YIELD CONSIDERATIONS........................................................ 67
MATURITY AND PREPAYMENT CONSIDERATIONS...................................... 69
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS..................................... 70
Single Family Loans and Multifamily Loans................................ 70
Contracts................................................................ 71
Foreclosure on Mortgages................................................. 73
Repossession with respect to Contracts................................... 74
Rights of Redemption..................................................... 75
Anti-Deficiency Legislation and Other Limitations on Lenders............. 76
Junior Mortgages......................................................... 77
Consumer Protection Laws with respect to Contracts....................... 78
Environmental Legislation................................................ 79
Enforceability of Certain Provisions..................................... 79
Subordinate Financing.................................................... 80
Applicability of Usury Laws.............................................. 80
Alternative Mortgage Instruments......................................... 81
Formaldehyde Litigation with respect to Contracts........................ 81
Soldiers' and Sailors' Civil Relief Act of 1940.......................... 81
FEDERAL INCOME TAX CONSEQUENCES............................................. 82
General.................................................................. 82
REMICS................................................................... 83
Grantor Trust Funds...................................................... 98
STATE AND OTHER TAX CONSEQUENCES............................................ 108
ERISA CONSIDERATIONS........................................................ 108
Plan Asset Regulations................................................... 108
Tax Exempt Investors..................................................... 111
Consultation With Counsel................................................ 111
LEGAL INVESTMENT MATTERS.................................................... 111
USE OF PROCEEDS............................................................. 112
METHODS OF DISTRIBUTION..................................................... 113
LEGAL MATTERS............................................................... 114
FINANCIAL INFORMATION....................................................... 114
RATING...................................................................... 114
INDEX OF PRINCIPAL DEFINITIONS.............................................. 115
</TABLE>
2
<PAGE>
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE RELATED OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS
PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT
AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Company can be
inspected and copied at the public reference facilities maintained by the
Commission at its Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and its Regional Offices located as follows: Chicago
Regional Office, 500 West Madison, 14th Floor, Chicago, Illinois 60661; New
York Regional Office, Seven World Trade Center, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates and electronically through the Commission's Electronic Data
Gathering, Analysis and Retrieval System at the Commission's Web Site
(http://www.sec.gov.). The Company does not intend to send any financial
reports to Certificateholders.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Company has filed with the Commission under the Securities
Act of 1933 (the "Securities Act") and to which reference is hereby made.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or other designated person will be required to provide
periodic unaudited reports concerning each Trust Fund to all registered
holders of Offered Certificates. Such information will be provided in
accordance with the requirements of recent SEC No-Action Letters. Such
information will include, among other things, the following: (i) with respect
to each series of Offered Certificates, a form 8-K will be filed within
fifteen days after the issuance of such series and will include the relevant
Pooling Agreement for such series; (ii) pursuant to the Pooling Agreement for
the related series, concurrently with each distribution on each distribution
date, the holders of each class of Registered Certificates will receive a
monthly statement setting forth material information pertaining to each
distribution, as required by the Pooling Agreement; (iii) for so long as the
Pool Insurer, if any, is eligible to use Form S-3 and is making reports
pursuant to the Exchange Act, incorporated by reference into the appropriate
Monthly Statements, on a quarterly and annual basis, the current financial
statements of the Pool Insurer, if any, for such series; (iv) for so long as
the Company has a duty to file periodic reports with respect to any Trust Fund
and series pursuant to the Exchange Act, a form 8-K will be filed with the
Commission within fifteen days after the related distribution to
Certificateholders of any series is made containing the Monthly Statement; (v)
if any monthly (or other periodic) distribution to Certificateholders of a
series is not made as required by the related Pooling Agreement, or in the
event of any material change in the procedures or forms described above for
the reports to the Certificateholders or Trustee, the Company will file within
fifteen days of the due date for such distribution, a Form 8-K responding to
Item 5 thereof, to the extent applicable to the related Trust Fund the
Registered Certificates of such series, describing such failure to make
payment or such change in reporting; (vi) within fifteen days under Item 5 of
Form 8-K, any matters that have occurred during any month that would be
reportable under Item 1, 2, 4 or 5 of Part II of Form 10-Q, to the extent
applicable; (vii) on or prior to 90 days following the Company's fiscal year
end, an annual report on Form 10-K containing information required under Items
2, 3, 4, 5, 9, 12, 13 and 14 thereof, to the extent material to the operations
of the Trust Fund and required by recent SEC No-Action Letters. The Company
will not provide Quarterly Reports on Form 10-Q since pertinent information
will be covered in the Form 8-Ks to be filed with the Commission as described
above. See "Description of the Certificates-Reports to Certificateholders."
3
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein and in the related Prospectus Supplement by
reference all documents and reports filed or caused to be filed by the Company
with respect to a Trust Fund pursuant to Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act, prior to the termination of the offering of the Offered
Certificates of the related series. The Company 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 Offered Certificates,
upon written or oral request of such person, a copy of any or all such reports
incorporated herein by reference, in each case to the extent such reports
relate to one or more of such classes of such Offered Certificates, other than
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents. Requests should be directed in
writing to ICIFC Secured Assets Corp., 20371 Irvine Avenue, Suite 200, Santa
Ana Heights, California 92707, or by telephone at (714) 556-0122. The Company
has determined that its financial statements will not be material to the
offering of any Offered Certificates.
4
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each series of Certificates contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Offered Certificates of such series. Capitalized terms used in this
summary that are not otherwise defined shall have the meanings ascribed thereto
elsewhere in this Prospectus. An "Index of Principal Definitions" indicating
where certain capitalized terms used herein are defined appears in this
Prospectus beginning on page 115.
<TABLE>
<C> <S>
Securities Offered.................... Mortgage pass-through certificates.
The mortgage pass-through certificates
(the "Offered Certificates") offered
hereby and by the various Prospectus
Supplements with respect hereto will
be offered from time to time in
series. The Offered Certificates of
each series, together with any other
mortgage pass-through certificates of
such series, are collectively referred
to herein as the "Certificates."
Company............................... ICIFC Secured Assets Corp. (the
"Company"), a wholly-owned subsidiary
of ICI Funding Corporation ("ICI
Funding"). See "The Company" and "ICI
Funding Corporation."
Master Servicer....................... The master servicer (the "Master
Servicer"), if any, for a series of
Certificates will be specified in the
related Prospectus Supplement and may
either be an entity not affiliated
with the Company or an affiliate of
the Company, including ICI Funding,
the Company's parent and a non-
consolidating subsidiary of Imperial
Credit Mortgage Holdings, Inc.
("ICMH"). See "ICI Funding
Corporation," "Imperial Credit
Mortgage Holdings, Inc." and
"Servicing of Mortgage Loans--The
Master Servicer."
Special Servicer...................... The special servicer (the "Special
Servicer"), if any, for a series of
Certificates will be specified, or the
circumstances under which a Special
Servicer will be appointed will be
described, in the related Prospectus
Supplement. Any Special Servicer may
either be an entity unaffiliated with
the Company or an affiliate of the
Company. See "Servicing of Mortgage
Loans--Special Servicers."
Trustee............................... The trustee (the "Trustee") for each
series of Certificates will be
specified in the related Prospectus
Supplement. See "The Pooling
Agreement--The Trustee."
The Certificates...................... Each series of Certificates will
include one or more classes of
Certificates which will represent in
the aggregate the entire beneficial
ownership interest in a segregated
pool of Mortgage Loans (exclusive of
any portion of interest payments (the
"Spread") relating to each Mortgage
Loan retained by the Company or any of
its affiliates) or interests therein
(which may include Mortgage Securities
as defined herein), and certain other
assets as described below
(collectively, a "Trust Fund"), and
will be issued pursuant to a pooling
and servicing
</TABLE>
5
<PAGE>
<TABLE>
<C> <S>
agreement or other agreement specified
in the related Prospectus Supplement
(in either case, a "Pooling
Agreement"). Except for certain Strip
Certificates and REMIC Residual
Certificates (each as hereinafter
described), each series of
Certificates, or class of Certificates
in the case of a series consisting of
two or more classes, will have a
stated principal balance and will be
entitled to distributions of interest
based on a specified interest rate or
rates (each, a "Pass-Through Rate").
Each series or class of Certificates
may have a different Pass-Through
Rate, which may be a fixed, variable
or adjustable Pass-Through Rate, or
any combination of two or more such
Pass-Through Rates. The related
Prospectus Supplement will specify the
Pass-Through Rate or Rates for each
series or class of Certificates, or
the initial Pass-Through Rate or Rates
and the method for determining
subsequent changes to the Pass-Through
Rate or Rates.
A series may include one or more
classes of Certificates ("Strip
Certificates") entitled (i) to
principal distributions, with
disproportionate, nominal or no
interest distributions, or (ii) to
interest distributions, with
disproportionate, nominal or no
principal distributions. In addition,
a series may include two or more
classes of Certificates which differ
as to timing, sequential order,
priority of payment, pass-through rate
or amount of distributions of
principal or interest or both, or as
to which distributions of principal or
interest or both on any class may be
made upon the occurrence of specified
events, in accordance with a schedule
or formula, or on the basis of
collections from designated portions
of the Mortgage Pool, which series may
include one or more classes of
Certificates ("Accrual Certificates"),
as to which certain accrued interest
will not be distributed but rather
will be added to the principal balance
thereof on each Distribution Date, as
hereinafter defined, in the manner
described in the related Prospectus
Supplement.
If so provided in the related
Prospectus Supplement, a series of
Certificates may include one or more
classes of Certificates (collectively,
the "Senior Certificates") which are
senior to one or more classes of
Certificates (collectively, the
"Subordinate Certificates") in respect
of certain distributions of principal
and interest and allocations of losses
on Mortgage Loans. In addition,
certain classes of Senior (or
Subordinate) Certificates may be
senior to other classes of Senior (or
Subordinate) Certificates in respect
of such distributions or losses. As to
each series, one or more elections may
be made to treat the related Trust
Fund or a designated portion thereof
as a "real estate mortgage investment
conduit" or "REMIC" as defined in the
Internal Revenue Code of 1986, as
amended (the "Code"). See "Description
of the Certificates."
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The Certificates will not be
guaranteed or insured by any
governmental agency or
instrumentality, by the Company, the
Master Servicer or any of their
respective affiliates or by any other
person, unless otherwise specified in
the related Prospectus Supplement.
The Mortgage Pools.................... Each Trust Fund will consist primarily
of a segregated pool (a "Mortgage
Pool") of mortgage loans and/or
manufactured housing conditional sales
and installment loan agreements
(collectively, the "Mortgage Loans").
Each Mortgage Loan will be secured by
a first or junior lien on or security
interest in (i) a one- to four-family
residential property, (ii) a
residential property consisting of
five or more rental or cooperatively
owned dwelling units or (iii) a new or
used manufactured home (each, a
"Mortgaged Property"). The Mortgaged
Properties may be located in any one
of the 50 states, the District of
Columbia or the Commonwealth of Puerto
Rico. For a description of the types
of Mortgage Loans that may be included
in the Mortgage Pools, see "The
Mortgage Pools--The Mortgage Loans."
The Mortgage Loans will not be
guaranteed or insured by the Company,
any of its affiliates or, unless
otherwise specified in the related
Prospectus Supplement, by any
governmental agency or instrumentality
or any other person.
If specified in the related Prospectus
Supplement, Mortgage Loans which are
converting or converted from an
adjustable-rate to a fixed-rate or
certain Mortgage Loans for which the
Mortgage Rate has been reset may be
repurchased by the Company or
purchased by the related Master
Servicer, the applicable Seller or
another party, or a designated
remarketing agent will use its best
efforts to arrange the sale thereof as
further described herein under "The
Mortgage Pools--The Mortgage Loans."
If so specified in the related
Prospectus Supplement, some Mortgage
Loans may be delinquent or non-
performing as of the date of their
deposit in the related Trust Fund.
If specified in the related Prospectus
Supplement, a Trust Fund may include
or consist solely of mortgage
participations or pass-through
certificates evidencing interests in
Mortgage Loans ("Mortgage
Securities"), as described herein. See
"The Mortgage Pools--General" herein.
Each Mortgage Loan and Mortgage
Security included in a Trust Fund will
have been selected by the Company from
among those purchased, either directly
or indirectly, from a prior holder
thereof (a "Seller"), which prior
holder may or may not be the
originator of such Mortgage Loan or
the issuer of such Mortgage Security
and may be an affiliate of the
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Company. A Mortgage Security included
in a Trust Fund, however, may also
have been issued previously by the
Company or an affiliate thereof.
A Current Report on Form 8-K will be
available upon request to purchasers
of the Offered Certificates of the
related series and will be filed,
together with the related Pooling
Agreement, with the Securities and
Exchange Commission within fifteen
days after such initial issuance.
Interest Distributions................ Except as otherwise specified in the
related Prospectus Supplement,
interest on each class of Offered
Certificates of each series, other
than Strip Certificates or Accrual
Certificates (prior to the time when
accrued interest becomes payable
thereon), will accrue at the
applicable Pass-Through Rate (which
may be a fixed, variable or adjustable
rate or any combination thereof) on
such class's principal balance
outstanding from time to time and will
be remitted on the 25th day (or, if
such day is not a business day, on the
next succeeding business day) of each
month, commencing with the month
following the month in which the Cut-
off Date (as defined in the applicable
Prospectus Supplement) occurs (each, a
"Distribution Date"). Distributions,
if any, with respect to interest on
Strip Certificates will be calculated
and made on each Distribution Date as
described herein under "Description of
the Certificates--Distribution of
Interest and Principal on the
Certificates" and in the related
Prospectus Supplement. Interest that
has accrued but is not yet payable on
any Accrual Certificates will be added
to the principal balance of such class
on each Distribution Date, and will
thereafter bear interest.
Distributions of interest with respect
to one or more classes of Offered
Certificates (or, in the case of a
class of Accrual Certificates, accrued
interest to be added to the principal
balance thereof) may be reduced as a
result of the occurrence of certain
delinquencies not covered by advances,
losses, prepayments and other
contingencies described herein and in
the related Prospectus Supplement. See
"Yield Considerations" and
"Description of the Certificates--
Distributions of Interest and
Principal on the Certificates."
Principal Distributions............... Except as otherwise specified in the
related Prospectus Supplement,
principal distributions on the
Certificates of each series will be
payable on each Distribution Date,
commencing with the Distribution Date
in the month following the month in
which the Cut-off Date occurs, to the
holders of the Certificates of such
series, or of the class or classes of
Certificates then entitled thereto, on
a pro rata basis among all such
Certificates or among the Certificates
of any such class, in proportion to
their respective outstanding principal
balances, or in the priority and
manner otherwise specified in the
related Prospectus Supplement. Strip
Certificates with no
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principal balance will not receive
distributions in respect of principal.
Distributions of principal with
respect to any series of Certificates,
or with respect to one or more classes
included therein, may be reduced to
the extent of certain delinquencies
not covered by advances or losses not
covered by the applicable form of
credit enhancement. See "The Mortgage
Pools," "Maturity and Prepayment
Considerations" and "Description of
the Certificates."
Credit Enhancement.................... If so specified in the Prospectus
Supplement, the Trust Fund with
respect to any series of Certificates
may include any one or any combination
of a letter of credit, mortgage pool
insurance policy, special hazard
insurance policy, bankruptcy bond or
reserve fund to provide partial
coverage for certain defaults and
losses relating to the Mortgage Loans.
Credit support also may be provided in
the form of subordination of one or
more classes of Certificates in a
series under which losses are first
allocated to any Subordinate
Certificates up to a specified limit.
Any form of credit enhancement will
have certain limitations and
exclusions from coverage thereunder,
which will be described in the related
Prospectus Supplement. Losses not
covered by any form of credit
enhancement will be borne by the
holders of the related Certificates
(or certain classes thereof). The
amount and types of coverage, the
identification of any entity providing
the coverage, the terms of any
subordination and related information
will be set forth in the Prospectus
Supplement relating to a series of
Certificates. See "Description of
Credit Enhancement."
Advances.............................. If and to the extent described in the
related Prospectus Supplement, and
subject to any limitations specified
therein, the Master Servicer for any
Trust Fund will be obligated to make,
or have the option of making, certain
advances with respect to delinquent
scheduled payments on the Mortgage
Loans in such Trust Fund. Any such
advance made by the Master Servicer
with respect to a Mortgage Loan is
recoverable by it as described herein
under "Description of the
Certificates--Advances" either from
recoveries on or in respect of the
specific Mortgage Loan or, with
respect to any advance subsequently
determined to be nonrecoverable from
recoveries on or in respect of the
specific Mortgage Loan, out of funds
otherwise distributable to the holders
of the related series of Certificates,
which may include the holders of any
Senior Certificates of such series. If
and to the extent provided in the
Prospectus Supplement for a series of
Certificates, the Master Servicer will
be entitled to receive interest on its
advances for the period that they are
outstanding payable from amounts in
the related Trust Fund. As specified
in the Prospectus Supplement with
respect to any series of Certificates
as to which the Trust Fund includes
Mortgage Securities, the advancing
obligations in respect of the
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underlying Mortgage Loans will be
pursuant to the terms of such Mortgage
Securities, as may be supplemented by
the terms of the applicable Pooling
Agreement, and may differ from the
provisions described herein.
Optional Termination.................. The Master Servicer, the Company or,
if specified in the related Prospectus
Supplement, the holder of the residual
interest in a REMIC may at its option
either (i) effect early retirement of
a series of Certificates through the
purchase of the assets in the related
Trust Fund or (ii) purchase, in whole
but not in part, the Certificates
specified in the related Prospectus
Supplement; in each case under the
circumstances and in the manner set
forth herein under "The Pooling
Agreement--Termination; Retirement of
Certificates" and in the related
Prospectus Supplement.
Legal Investment...................... At the date of issuance, as to each
series, each class of Offered
Certificates will be rated at the
request of the Company in one of the
four highest rating categories by one
or more nationally recognized
statistical rating agencies (each, a
"Rating Agency"). Unless otherwise
specified in the related Prospectus
Supplement, each class of Offered
Certificates that is rated in one of
the two highest rating categories by
at least one Rating Agency will
constitute "mortgage related
securities" for purposes of the
Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). Investors whose
investment authority is subject to
legal restrictions should consult
their own legal advisors to determine
whether and to what extent the Offered
Certificates of any series constitute
legal investments for them. See "Legal
Investment Matters."
ERISA Considerations.................. A fiduciary of an employee benefit
plan and certain other retirement
plans and arrangements, including
individual retirement accounts and
annuities, Keogh plans, and collective
investment funds and separate accounts
in which such plans, accounts,
annuities or arrangements are
invested, that is subject to the
Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or
Section 4975 of the Code (each, a
"Plan") should carefully review with
its legal advisors whether the
purchase or holding of Offered
Certificates could give rise to a
transaction that is prohibited or is
not otherwise permissible either under
ERISA or Section 4975 of the Code.
Investors are advised to consult their
counsel and to review "ERISA
Considerations" herein and in the
related Prospectus Supplement.
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Federal Income Tax Consequences....... Offered Certificates of each series
will constitute either (i) interests
("Grantor Trust Certificates") in a
Trust Fund treated as a grantor trust
under applicable provisions of the
Code, or (ii) "regular interests"
("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual
Certificates") in a Trust Fund, or a
portion thereof, treated as a REMIC
under Sections 860A through 86OG of
the Code.
Investors are advised to consult their
tax advisors as to the tax
consequences of an investment in the
Certificates in light of each
investor's individual circumstances
and to review "Federal Income Tax
Consequences" herein and in the
related Prospectus Supplement for a
general discussion of material tax
matters related to the Certificates.
Such discussion, to the extent it
relates to matters of law or legal
conclusions with respect thereto,
represents the opinion of counsel to
the Company, subject to any
qualifications set forth therein. See
"Federal Income Tax Consequences."
Ratings............................... It is a condition to the issuance of
any class of Offered Certificates that
they shall have been rated not lower
than investment grade, that is, in one
of the four highest rating categories,
by at least one Rating Agency. Ratings
on mortgage pass-through certificates
address the likelihood of receipt by
the holders thereof of all collections
on the underlying mortgage assets to
which such holders are entitled. These
ratings address the structural, legal
and issuer-related aspects associated
with such certificates, the nature of
the underlying mortgage assets and the
credit quality of the guarantor, if
any. Ratings on mortgage pass-through
certificates do not represent any
assessment of the likelihood of
principal prepayments by borrowers or
of the degree by which such
prepayments might differ from those
originally anticipated. As a result,
Certificateholders might suffer a
lower than anticipated yield, and, in
addition, holders of stripped interest
certificates in extreme cases might
fail to recoup their initial
investments.
Listing Application................... The Company does not currently intend
to make an application to list the
Offered Certificates on a national
securities exchange or to quote the
Offered Securities in the automated
quotation system of a registered
securities association.
Risk Factors.......................... There are material risks associated
with an investment in the
Certificates. See "Risk Factors"
beginning on page 12 herein and on
page S-24 of the Prospectus Supplement
for a discussion of significant
matters affecting investments in the
Certificates.
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates:
Limited Liquidity. There can be no assurance that a secondary market for the
Offered Certificates of any series will develop or, if it does develop, that
it will provide Certificateholders with liquidity of investment or that it
will continue for the life of the Offered Certificates of any series. The
Prospectus Supplement for any series of Offered Certificates may indicate that
an underwriter specified therein intends to establish a secondary market in
such Certificates, however no underwriter will be obligated to do so. The
Offered Certificates will not be listed on any securities exchange.
Limited Obligations. The Offered Certificates will not represent an interest
in or obligation of the Company, the Master Servicer or any of their
respective affiliates. The only obligations of the foregoing entities with
respect to the Certificates, the Mortgage Loans or any Mortgage Securities
will be the obligations (if any) of the Company pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Mortgage Securities, the Master Servicer's servicing obligations under the
related Pooling Agreement (including, if and to the extent described in the
related Prospectus Supplement, its limited obligation to make certain advances
in the event of delinquencies on the Mortgage Loans) and pursuant to the terms
of any Mortgage Securities, and, if and to the extent expressly described in
the related Prospectus Supplement, certain limited obligations of the Master
Servicer in connection with a Purchase Obligation or an agreement to purchase
or act as remarketing agent with respect to a Convertible Mortgage Loan upon
conversion to a fixed rate. Unless otherwise specified in the related
Prospectus Supplement, neither the Certificates nor the underlying Mortgage
Loans or Mortgage Securities will be guaranteed or insured by any governmental
agency or instrumentality, by the Company, the Master Servicer or any of their
respective affiliates or by any other person. Proceeds of the assets included
in the related Trust Fund for each series of Certificates (including the
Mortgage Loans or Mortgage Securities and any form of credit enhancement) will
be the sole source of payments on the Certificates, and there will be no
recourse to the Company, the Master Servicer or any other entity in the event
that such proceeds are insufficient or otherwise unavailable to make all
payments provided for under the Certificates.
Limitations, Reduction and Substitution of Credit Enhancement. With respect
to each series of Certificates, credit enhancement will be provided in limited
amounts to cover certain types of losses on the underlying Mortgage Loans.
Credit enhancement will be provided in one or more of the forms referred to
herein, including, but not limited to: subordination of other classes of
Certificates of the same series; a Letter of Credit; a Purchase Obligation; a
Mortgage Pool Insurance Policy; a Special Hazard Insurance Policy; a
Bankruptcy Bond; a Reserve Fund; or any combination thereof. See "Description
of Credit Enhancement" herein. Regardless of the form of credit enhancement
provided, the amount of coverage will be limited in amount and in most cases
will be subject to periodic reduction in accordance with a schedule or
formula. Furthermore, such credit enhancements may provide only very limited
coverage as to certain types of losses or risks, and may provide no coverage
as to certain other types of losses or risks. In the event losses exceed the
amount of coverage provided by any credit enhancement or losses of a type not
covered by any credit enhancement occur, such losses will be borne by the
holders of the related Certificates (or certain classes thereof). The Company,
the Master Servicer or other specified person will generally be permitted to
reduce, terminate or substitute all or a portion of the credit enhancement for
any series of Certificates, if each applicable Rating Agency indicates that
the then-current rating(s) thereof will not be adversely affected. The
rating(s) of any series of Certificates by any applicable Rating Agency may be
lowered following the initial issuance thereof as a result of the downgrading
of the obligations of any applicable credit support provider, or as a result
of losses on the related Mortgage Loans in excess of the levels contemplated
by such Rating Agency at the time of its initial rating analysis. Neither the
Company, the Master Servicer nor any of their respective affiliates will have
any obligation to replace or supplement any credit enhancement, or to take any
other action to maintain any rating(s) of any series of Certificates. See
"Description of Credit Enhancement--Reduction of Substitution of Credit
Enhancement" herein.
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Risks of Declining Property Values and High Loan-to-Value Ratios. An
investment in securities such as the Certificates which generally represent
interests in mortgage loans and/or manufactured housing conditional sales
contracts and installment loan agreements may be affected by, among other
things, a decline in real estate values and changes in the borrowers'
financial condition. No assurance can be given that values of the Mortgaged
Properties have remained or will remain at their levels on the dates of
origination of the related Mortgage Loans. If the residential real estate
market should experience an overall decline in property values such that the
outstanding balances of the Mortgage Loans, and any secondary financing on the
Mortgaged Properties, in a particular Mortgage Pool become equal to or greater
than the value of the Mortgaged Properties, the actual rates of delinquencies,
foreclosures and losses could be higher than those now generally experienced
in the mortgage lending industry. Mortgaged Properties subject to high Loan-
to-Value Ratios are at greater risk since such properties initially have less
equity than Mortgaged Properties with low Loan-to-Value ratios and therefore a
decline in property values could dissipate equity more quickly. Delinquencies,
foreclosures and losses due to declining values of Mortgaged Properties,
especially those with high Loan-to-Value Ratios, would cause losses to the
Trust and, to the extent not covered by credit enhancement, would adversely
affect the yield to maturity on the Certificates.
Risks of Negatively Amortizing Loans. In the case of Mortgage Loans that are
subject to negative amortization, due to the addition to principal balance of
Deferred Interest, the principal balances of such Mortgage Loans could be
increased to an amount equal to or in excess of the value of the underlying
Mortgaged Properties, thereby increasing the likelihood of default. To the
extent that such losses are not covered by any reserve fund or instrument of
credit enhancement in the related Trust Fund, holders of Certificates of the
series evidencing interests in the related Mortgage Pool will bear all risk of
loss resulting from default by Mortgagors and will have to look primarily to
the value of the Mortgaged Properties for recovery of the outstanding
principal and unpaid interest on the defaulted Mortgage Loans. Certain of the
types of loans which may be included in the Mortgage Pools may involve
additional uncertainties not present in traditional types of loans.
Risks of Buydown Mortgage Loans. Certain of the Mortgage Loans contained in
a Mortgage Pool may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference
to be made up from (i) an amount (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds")
contributed by the seller of the Mortgaged Property or another source and
placed in a custodial account (the "Buydown Account"), (ii) if the Buydown
Funds are contributed on a present value basis, investment earnings on such
Buydown Funds or (iii) additional buydown funds to be contributed over time by
the Mortgagor's employer or another source. See "Description of the
Certificates--Certificate Account." Generally, the Mortgagor under each
Buydown Mortgage Loan will be qualified at the applicable lower monthly
payment. Accordingly, the repayment of a Buydown Mortgage Loan is dependent on
the ability of the Mortgagor to make larger level monthly payments after the
Buydown Funds have been depleted and, for certain Buydown Mortgage Loans,
during the Buydown Period. The inability of a Mortgagor to make such larger
monthly payments could lead to losses on the Mortgage Loans, and to the extent
not covered by credit enhancement, may adversely affect the yield to maturity
on the Certificates.
Geographic Concentration of Mortgaged Properties. Certain geographic regions
of the United States from time to time will experience weaker regional
economic conditions and housing markets, and, consequently, will experience
higher rates of loss and delinquency than will be experienced on mortgage
loans generally. For example, a region's economic condition and housing market
may be directly, or indirectly, adversely affected by natural disasters or
civil disturbances such as earthquakes, hurricanes, floods, eruptions or
riots. The economic impact of any of these types of events may also be felt in
areas beyond the region immediately affected by the disaster or disturbance.
The Mortgage Loans underlying certain series of Certificates may be
concentrated in these regions, and such concentration may present risk
considerations in addition to those generally present for similar mortgage-
backed securities without such concentration. Moreover, as described below,
any Mortgage Loan for which a breach of a representation or warranty exists
will remain in the related Trust Fund in the event
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that a Seller is unable, or disputes its obligation, to repurchase such
Mortgage Loan and such a breach does not also constitute a breach of any
representation made by any other person. In such event, any resulting losses
will be borne by the related form of credit enhancement, to the extent
available.
Risks of Loans With Balloon Payments. Certain of the Mortgage Loans included
in a Trust Fund, particularly those secured by Multifamily Properties, may not
be fully amortizing (or may not amortize at all) over their terms to maturity
and, thus, will require substantial payments of principal and interest (that
is, balloon payments) at their stated maturity. Mortgage Loans of this type
involve a greater degree of risk than self-amortizing loans because the
ability of a Mortgagor to make a balloon payment typically will depend upon
its ability either to fully refinance the loan or to sell the related
Mortgaged Property at a price sufficient to permit the Mortgagor to make the
balloon payment. The ability of a Mortgagor to accomplish either of these
goals will be affected by a number of factors, including the value of the
related Mortgaged Property, the level of available mortgage rates at the time
of sale or refinancing, the Mortgagor's equity in the related Mortgaged
Property, prevailing general economic conditions, the availability of credit
for loans secured by comparable real properties and, in the case of
Multifamily Properties, the financial condition and operating history of the
Mortgagor and the related Mortgaged Property, tax laws and rent control laws.
Risks of Lending on Non-Owner Occupied Properties. It is anticipated that
some or all of the Mortgage Loans included in any Trust Fund, particularly
Mortgage Loans secured by Multifamily Properties, will be nonrecourse loans or
loans for which recourse may be restricted or unenforceable. As to those
Mortgage Loans, recourse in the event of Mortgagor default will be limited to
the specific real property and other assets, if any, that were pledged to
secure the Mortgage Loan. However, even with respect to those Mortgage Loans
that provide for recourse against the Mortgagor and its assets generally,
there can be no assurance that enforcement of such recourse provisions will be
practicable, or that the other assets of the Mortgagor will be sufficient to
permit a recovery in respect of a defaulted Mortgage Loan in excess of the
liquidation value of the related Mortgaged Property.
Mortgage Loans made on the security of Multifamily Properties may entail
risks of delinquency and foreclosure, and risks of loss in the event thereof,
that are greater than similar risks associated with loans made on the security
of Single Family Properties. The ability of a borrower to repay a loan secured
by an income-producing property typically is dependent primarily upon the
successful operation of such property rather than upon the existence of
independent income or assets of the borrower; thus, the value of an income-
producing property is directly related to the net operating income derived
from such property. If the net operating income of the property is reduced
(for example, if rental or occupancy rates decline or real estate tax rates or
other operating expenses increase), the borrower's ability to repay the loan
may be impaired. In addition, the concentration of default, foreclosure and
loss risk for a pool of Mortgage Loans secured by Multifamily Properties may
be greater than for a pool of Mortgage Loans secured by Single Family
Properties of comparable aggregate unpaid principal balance because the pool
of Mortgage Loans secured by Multifamily Properties is likely to consist of a
smaller number of higher balance loans.
Risks of Non-Conforming Loans. Mortgage Loans to be included in a Mortgage
Pool may be non-conforming Mortgage Loans. Non-conforming Mortgage Loans are
Mortgage Loans that do not qualify for purchase by government sponsored
agencies such as Fannie Mae and Freddie Mac due to credit characteristics that
to not satisfy such Fannie Mae and Freddie Mac guidelines, including
mortgagors whose creditworthiness and repayment ability do not satisfy such
Fannie Mae and Freddie Mac underwriting guidelines and mortgagors who may have
a record of credit write-offs, outstanding judgments, prior bankruptcies and
other derogatory credit items. Accordingly, non-conforming Mortgage Loans are
likely to experience rates of delinquency, foreclosure and loss that are
higher, and that may be substantially higher, than mortgage loans originated
in accordance with Fannie Mae or Freddie Mac underwriting guidelines. The
principal differences between conforming Mortgage Loans and non-conforming
Mortgage Loans include the applicable Loan-to-Value Ratios, the credit and
income histories of the related Mortgagors, the documentation required for
approval of the related Mortgage Loans, the types of properties securing the
Mortgage Loans, the loan sizes and the Mortgagors'
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occupancy status with respect to the Mortgaged Properties. As a result of
these and other factors, the interest rates charged on non-conforming Mortgage
Loans are often higher than those charged for conforming Mortgage Loans. The
combination of different underwriting criteria and higher rates of interest
may also lead to higher delinquency, foreclosure and losses on non-conforming
Mortgage Loans as compared to conforming Mortgage Loans.
Risks of Underwriting Standards of Unaffiliated Sellers. Mortgage Loans to
be included in a Mortgage Pool will have been purchased by the Company, either
directly or indirectly from Sellers. Such Mortgage Loans will generally have
been originated in accordance with underwriting standards acceptable to the
Company and generally described herein under "The Mortgage Pools--Underwriting
Standards" as more particularly described in the underwriting criteria
included in the related Prospectus Supplement. Nevertheless, in some cases,
particularly those involving Unaffiliated Sellers, the Company may not be able
to establish the underwriting standards used in the origination of the related
Mortgage Loans. In those cases, the related Prospectus Supplement will include
a statement to such effect and will reflect what, if any, re-underwriting of
the related Mortgage Loans was completed by the Company or any of its
affiliates. To the extent the Mortgage Loans cannot be re-underwritten or the
underwriting criteria cannot be verified, the Mortgage Loans might suffer
losses greater than they would had they been directly underwritten by the
Company or an affiliate thereof. Any such losses, to the extent not covered by
credit enhancement, may adversely affect the yield to maturity of the
Certificates.
Risks Associated With Limited or No Documentation Loans. Mortgage Loans to
be included in a Mortgage Pool may have been originated in accordance with
underwriting standards that require documentation from Mortgagors that is more
limited than that required under standard loan underwriting programs or that
require no documentation from Mortgagors. Such programs rely on a combination
of independent credit ratings, asset evaluations, collateral value, work
history, and lower Loan-to Value Ratios. Such Mortgage Loans could experience
rates of delinquency, foreclosure and loss that are higher, and may be
substantially higher, than Mortgage Loans originated in accordance with
underwriting standards that require full documentation.
Risks Associated with Junior Lien Mortgage Loans. Certain of the Mortgage
Pools may contain Mortgage Loans secured by junior liens and the related
senior liens may not be included in the Mortgage Pool. An overall decline in
the residential real estate market could adversely affect the values of the
Mortgaged Properties securing the Mortgage Loans with junior liens such that
the outstanding principal balances, together with any senior financing
thereon, exceeds the value of the Mortgaged Properties. Since Mortgage Loans
secured by junior (i.e., second, third, etc.) lines are subordinate to the
rights of the beneficiaries under the related senior deeds of trust or senior
mortgages, such a decline would adversely affect the position of the related
junior beneficiary or junior mortgagee before having such an effect on the
position of the related senior beneficiaries or senior mortgagees. A rise in
interest rates over a period of time, the general condition of the Mortgaged
Property and other factors may also have the effect of reducing the value of
the Mortgaged Property from the value oat the time the junior lien Mortgage
Loan was originated. As a result, the Loan-to-Value Ratio may exceed the ratio
in effect at the time the Mortgage Loan was originated. Such an increase may
reduce the likelihood that, in the event of a default by the related
Mortgagor, liquidation or other proceeds will be sufficient to satisfy the
junior lien Mortgage Loan after satisfaction of any senior liens and the
payment of any liquidation expenses.
Other factors may affect the prepayment rate of junior lien Mortgage Loans,
such as the amounts of, and interest on, the related senior mortgage loans and
the use of senior lien mortgage loans as long-term financing for home
purchases and junior lien mortgage loans as shorter-term financing for a
variety of purposes, such as home improvement, educational expenses and
purchases of consumer durable such as automobiles. Accordingly, junior lien
Mortgage Loans may experience a higher rate of prepayments that traditional
senior lien mortgage loans. In addition, any future limitations on the rights
of borrowers to deduct interest payments on junior lien Mortgage Loans for
federal income tax purposes may further increase the rate of prepayments on
such junior lien Mortgage Loans.
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Risks of Nonperfection of Security Interests. Any Contract included in a
Mortgage Pool will be secured by a security interest in a Manufactured Home.
Perfection of security interests in Manufactured Homes and enforcement of
rights to realize upon the value of the Manufactured Homes as collateral for
the Contracts are subject to a number of federal and state laws, including the
UCC as adopted in each state and each state's certificate of title statutes.
The steps necessary to perfect the security interest in a Manufactured Home
will vary from state to state. In the event the Master Servicer fails, due to
clerical errors or otherwise, to take the appropriate steps to perfect such a
security interest, the Trustee may not have a first priority security interest
in the Manufactured Home securing a Contract. Additionally, courts in many
states have held that manufactured homes may, under certain circumstances,
become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. The failure to properly perfect a valid, first priority
security interest in a Manufactured Home securing a Contract could lead to
losses that may adversely affect the yield to maturity of the Certificates.
Risks Relating to Liquidation of Mortgaged Properties. Substantial delays
can be encountered in connection with the liquidation of defaulted Mortgage
Loans and corresponding delays in the receipt of related proceeds by the
Certificateholders could occur. An action to foreclose on a Mortgaged Property
securing a Mortgage Loan is regulated by state statutes, rules and judicial
decisions and is subject to many of the delays and expenses of other lawsuits
if defenses or counterclaims are interposed, sometimes requiring several years
to complete. Furthermore, in some states an action to obtain a deficiency
judgment is not permitted following a nonjudicial sale of a Mortgaged
Property. In the event of a default by a Mortgagor, these restrictions, among
other things, may impede the ability of the Master Servicer to foreclose on or
sell the Mortgaged Property or to obtain Liquidation Proceeds sufficient to
repay all amounts due on the related Mortgage Loan. The Master Servicer will
be entitled to deduct from Liquidation Proceeds all expenses reasonably
incurred in attempting to recover amounts due on the related Liquidated
Mortgage Loan and not yet repaid, including payments to prior lienholders,
accrued Servicing Fees, legal fees and costs of legal action, real estate
taxes, and maintenance and preservation expenses. In the event that any
Mortgaged Properties fail to provide adequate security for the related
Mortgage Loans and insufficient funds are available from any applicable credit
enhancement, Certificateholders could experience a loss on their investment.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer takes the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as
it would in the case of a defaulted mortgage loan having a larger principal
balance, the amount realized after expenses of liquidation would be less as a
percentage of the outstanding principal balance of the smaller principal
balance mortgage loan than would be the case with a larger principal balance
loan.
Environmental Risks. The Mortgaged Properties are subject to certain
environmental risks. Under various federal, state and local environmental
laws, ordinances and regulations, a current or previous owner of real property
may be liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operation knew of, or was responsible for, the
presence of such hazardous or toxic substances. A lender also risks such
liability on foreclosure of the mortgage on such property. In addition, the
presence of hazardous or toxic substances, or the failure to properly
remediate such property, may adversely affect the owner's or operator's
ability to sell such property. Although the incidence of environmental
contamination of residential properties is less common than that for
commercial properties, Mortgage Loans contained in a Mortgage Pool may be
secured by Mortgaged Properties in violation of environmental laws, ordinances
or regulations. The Master Servicer is generally prohibited from foreclosing
on a Mortgaged Property unless it has taken adequate steps to ensure
environmental compliance with respect to such Mortgaged Property. However, to
the extent the Master Servicer errs and forecloses on Mortgaged Property that
is subject to environmental law violations, and to the extent a Seller does
not provide adequate representations and warranties against such violations,
or is unable to honor such obligations, including the obligation to repurchase
a Mortgage Loan upon the breach of a representation or warranty, a Mortgage
Pool could experience losses.
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Limited Nature of Ratings. It is a condition to the issuance of the
Certificates that each series of Certificates be rated in one of the four
highest rating categories by a nationally recognized statistical rating
agency. A security rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time. No person
is obligated to maintain the rating on any Certificate, and accordingly, there
can be no assurance that the ratings assigned to any Certificate on the date
on which such Certificate is originally issued will not be lowered or
withdrawn by a Rating Agency at any time thereafter. in the event any rating
is revised or withdrawn, the liquidity or the market value of the related
Certificate may be adversely affected. See "Rating" herein.
Limited Representations by and Against the Seller. Each Seller will have
made representations and warranties in respect of the Mortgage Loans and/or
Mortgage Securities sold by such Seller and evidenced by a series of
Certificates. In the event of a breach of a Seller's representation or
warranty that materially adversely affects the interests of the
Certificateholders in a Mortgage Loan or Mortgage Security, unless otherwise
specified in the related Prospectus Supplement, the related Seller will be
obligated to cure the breach or repurchase or, if permitted, replace such
Mortgage Loan or Mortgage Security as described below. However, there can be
no assurance that a Seller will honor its obligation to cure, repurchase or,
if permitted, replace any Mortgage Loan or Mortgage Security as to which such
a breach of a representation or warranty arises. A Seller's failure or refusal
to honor its repurchase obligation could lead to losses that, to the extent
not covered by credit enhancement, may adversely affect the yield to maturity
of the Certificates.
In instances where a Seller is unable, or disputes its obligation, to
purchase affected Mortgage Loans and/or Mortgage Securities, the Master
Servicer may negotiate and enter into one or more settlement agreements with
such Seller that could provide for, among other things, the purchase of only a
portion of the affected Mortgage Loans and/or Mortgage Securities. Any such
settlement could lead to losses on the Mortgage Loans and/or Mortgage
Securities which would be borne by the related Certificates. Neither the
Company nor the Master Servicer will be obligated to purchase a Mortgage Loan
or Mortgage Security if a Seller defaults on its obligation to do so, and no
assurance can be given that the Sellers will carry out such purchase
obligations. Such a default by a Seller is not a default by the Company or by
the Master Servicer. Any Mortgage Loan or Mortgage Security not so purchased
or substituted for shall remain in the related Trust Fund and any losses
related thereto shall be allocated to the related credit enhancement, to the
extent available, and otherwise to one or more classes of the related series
of Certificates.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and
warranties were made will be a date prior to the date of initial issuance of
the related series of Certificates or, in the case of a Designated Seller
Transaction, will be the date of closing of the related sale by the applicable
Seller. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of
initial issuance of the related series of Certificates. Accordingly, the
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) will not arise if, during the period
commencing on the date of sale of a Mortgage Loan or Mortgage Security by the
Seller, an event occurs that would have given rise to such an obligation had
the event occurred prior to sale of the affected Mortgage Loan or Mortgage
Security, as the case may be. The occurrence of events during this period that
are not covered by a Seller's purchase obligation could lead to losses that,
to the extent not covered by credit enhancement, may adversely affect the
yield to maturity of the Certificates.
Subordination of Certain Classes of Certificates. Credit support for a
particular series of Certificates may be provided in the form of subordination
of one or more classes of Certificates in a series under which losses are
first allocated to any Subordinate Certificates up to a specified limit.
Losses not covered by any form of credit enhancement will be borne by the
holders of the related Certificates (or certain classes thereof). Therefore,
in the event of substantial losses in any Mortgage Pool, such losses may be
borne by such holders.
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Book Entry Registration May Affect Liquidity. Because transfers and pledges
of DTC Registered Securities can be effected only through book entries at DTC
through Participants, the liquidity of the secondary market for DTC Registered
Securities may be reduced to the extent that some investors are unwilling to
hold Certificates in book entry form in the name of DTC and the ability to
pledge DTC Registered Securities may be limited due to the lack of a physical
certificate. Beneficial Owners of DTC Registered Securities may, in certain
cases experience delay in the receipt of payments of principal and interest
such payments will be forwarded by the related Trustee to DTC who will then
forward payment to the Participants who will thereafter forward payment to
Beneficial Owners. In the event of the insolvency of DTC or a Participant in
whose name DTC Registered Securities are recorded, the ability of Beneficial
Owners to obtain timely payment and (if the limits of applicable insurance
coverage is otherwise unavailable) ultimate payment of principal and interest
on DTC Registered Securities may be impaired.
Yield to Maturity May Vary. The yield to maturity of the Offered
Certificates of each series will depend on, among other things, the rate and
timing of principal payments (including prepayments, liquidations due to
defaults, and repurchases due to conversion of ARM Loans to fixed interest
rate loans or breaches of representations and warranties) on the related
Mortgage Loans and the price paid by Certificateholders. Such yield may be
adversely affected by a higher or lower than anticipated rate of prepayments
on the related Mortgage Loans. The yield to maturity on Strip Certificates
will be extremely sensitive to the rate of prepayments on the related Mortgage
Loans. In addition, the yield to maturity on certain other types of classes of
Certificates, including Accrual Certificates, Certificates with a Pass-Through
Rate which fluctuates inversely with an index or certain other classes in a
series including more than one class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Certificates. Prepayments are influenced by a number of factors,
including prevailing mortgage market interest rates, local and regional
economic conditions and homeowner mobility. In addition, to the extent amounts
in any Pre-Funding Account have not been used to purchase additional Mortgage
Loans, holders of the Certificates may receive an additional prepayment. See
"Yield Considerations" and "Maturity and Prepayment Considerations" herein.
ERISA Considerations. Generally, ERISA applies to investments made by
employee benefit plans and transactions involving the assets of such plans.
Due to the complexity of regulations that govern such plans, prospective
investors that are subject to ERISA are urged to consult their own counsel
regarding consequences under ERISA of acquisition, ownership and disposition
of the Offered Certificates of any series. See "ERISA Considerations".
Federal Tax Considerations Regarding REMIC Residual Certificates. Holders of
REMIC Residual Certificates will be required to report on their federal income
tax returns as ordinary income their pro rata share of the taxable income of
the REMIC, regardless of the amount or timing of their receipt of cash
payments, as described under "Federal Income Tax Consequences--REMICs".
Accordingly, under certain circumstances, holders of Offered Certificates that
constitute REMIC Residual Certificates may have taxable income and tax
liabilities arising from such investment during a taxable year in excess of
the cash received during such period. The requirement that holders of REMIC
Residual Certificates report their pro rata share of the taxable income and
net loss of the REMIC will continue until the principal balances of all
classes of Certificates of the related series have been reduced to zero, even
though holders of REMIC Residual Certificates have received full payment of
their stated interest and principal. A portion (or, in certain circumstances,
all) of such Certificateholder's share of the REMIC taxable income may be
treated as "excess inclusion" income to such holder, which (i) generally will
not be subject to offset by losses from other activities, (ii) for a tax-
exempt holder, will be treated as unrelated business taxable income and (iii)
for a foreign holder, will not qualify for exemption from withholding tax.
Individual holders of REMIC Residual Certificates may be limited in their
ability to deduct servicing fees and other expenses of the REMIC. In addition,
REMIC Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of REMIC Residual Certificates, the
taxable income arising in a given year on a REMIC Residual Certificate will
not be equal to the taxable income associated with investment in a corporate
bond or stripped instrument having similar cash flow characteristics and pre-
tax yield. Therefore, the after-tax yield on a REMIC Residual Certificate may
be significantly less than that of a corporate bond or stripped instrument
having similar cash flow characteristics.
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Risks of Optional Termination. The Master Servicer or the Company will have
the option to purchase, in whole but not in part, the Certificates specified
in the related Prospectus Supplement in the manner set forth in the related
Prospectus Supplement. Upon the purchase of such Certificates or at any time
thereafter, at the option of the Master Servicer or the Company, the assets of
the Trust Fund may be sold, thereby effecting a retirement of the Certificates
and the termination of the Trust Fund, or the Certificates so purchased may be
held or resold by the Master Servicer or the Company.
Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the
option of the Master Servicer or the Company at the price specified in the
related Prospectus Supplement. The exercise of such right will effect early
retirement of the Certificates of that series, and will be subject to the
aggregate principal balance of the Mortgage Loans and/or Mortgage Securities
in the Trust Fund for that series as of the Distribution Date on which the
purchase proceeds are to be distributed to Certificateholders being less than
the percentage specified in the related Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans and/or Mortgage Securities at the
Cut-off Date for that series. The Prospectus Supplement for each series of
Certificates will set forth the amounts that the holders of such Certificates
will be entitled to receive upon such early retirement. A Trust Fund may also
be terminated and the Certrificates retired upon the Master Servicer's
determination, based upon an opinion of counsel, that the REMIC status of the
Trust Fund has been lost or that a substantial risk exists that such status
will be lost for the then current taxable year. The termination of a Trust
Fund and the early retirement of Certificates by the Master Servicer or the
Company may adversely affect the yield to holders of certain classes of such
Certificates.
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist primarily of Mortgage Loans, minus the
Spread, if any, or any other interest retained by the Company or any affiliate
of the Company. The Mortgage Loans may consist of Single Family Loans,
Multifamily Loans and Contracts, each as described below.
The Mortgage Loans (other than the Contracts) will be evidenced by
promissory notes ("Mortgage Notes") and secured by mortgages, deeds of trust
or other similar security instruments ("Mortgages") that, in each case, create
a first or junior lien on the related Mortgagor's fee or leasehold interest in
the related Mortgaged Property. The Mortgaged Properties for such loans may
consist of attached or detached one-family dwelling units, two- to four-family
dwelling units, condominiums, townhouses, row houses, individual units in
planned-unit developments and certain other individual dwelling units (a
"Single Family Property" and the related loans, "Single Family Loans"), which
in each case may be owner-occupied or may be a vacation, second or non-owner-
occupied home. The Mortgaged Properties for such loans may also consist of
residential properties consisting of five or more rental or cooperatively
owned dwelling units in high-rise, mid-rise or garden apartment buildings or
projects ("Multifamily Properties" and the related loans, "Multifamily
Loans").
The "Contracts" will consist of manufactured housing conditional sales
contracts and installment loan agreements each secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, each Contract
will be fully amortizing and will bear interest at its Mortgage Rate. Unless
specified otherwise in the related Prospectus Supplement, Contracts will all
have individual principal balances at origination of not less than $10,000 and
not more than $1,000,000 and original terms to maturity of 5 to 40 years. The
"Manufactured Homes" securing the Contracts will consist of manufactured homes
within the meaning of 42 United States Code, Section 5402(6), which defines a
"manufactured home" as "a structure, transportable in one or more sections,
which in the traveling mode, is eight body feet or more in width or forty body
feet or more in length, or, when erected on site, is three hundred twenty or
more square feet, and which is built on a permanent chassis and designed to be
used as a dwelling with or without a permanent foundation when connected to
the required utilities, and includes the plumbing, heating, air conditioning,
and electrical systems contained therein; except that such term shall include
any structure which meets all the requirements of this paragraph
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except the size requirements and with respect to which the manufacturer
voluntarily files a certification required by the Secretary of Housing and
Urban Development and complies with the standards established under this
chapter."
The related Prospectus Supplement will specify for the Contracts contained
in the related Trust Fund, among other things, the date of origination of the
Contracts; the Mortgage Rate on the Contracts; the Contract Loan-to-Value
Ratios; the minimum and maximum outstanding principal balances as of the Cut-
Off Date and the average outstanding principal balance; the outstanding
principal balances of the Contracts included in the related Trust Fund; and
the original maturities of the Contracts and the last maturity date of any
Contract.
Mortgaged Properties may be located in any one of the 50 states, the
District of Columbia or the Commonwealth of Puerto Rico.
The Mortgage Loans will not be guaranteed or insured by the Company, any of
its affiliates or, unless otherwise specified in the related Prospectus
Supplement, by any governmental agency or instrumentality or other person.
However, if so specified in the related Prospectus Supplement, the Mortgage
Loans may be insured by the Federal Housing Administration (the "FHA" and such
loans, "FHA Loans"). See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder--FHA Insurance."
A Mortgage Pool may include Mortgage Loans that are delinquent or non-
performing as of the date the related series of Certificates is issued. In
that case, the related Prospectus Supplement will set forth, as to each such
Mortgage Loan, available information as to the period of such delinquency or
nonperformance and any other information relevant for a prospective purchaser
to make an investment decision.
Each Mortgage Loan will be selected by the Company for inclusion in a
Mortgage Pool from among those purchased by the Company, either directly or
through its affiliates, from banks, savings and loan associations, mortgage
bankers, investment banking firms, the Resolution Trust Corporation (the
"RTC"), the Federal Deposit Insurance Corporation (the "FDIC") and other
mortgage loan originators or sellers not affiliated with the Company
("Unaffiliated Sellers") or from affiliates of the Company, including ICI
Funding and ICMH (collectively "Affiliated Sellers"; Unaffiliated Sellers and
Affiliated Sellers are collectively referred to herein as "Sellers"). If a
Mortgage Pool is composed of Mortgage Loans acquired by the Company directly
from Unaffiliated Sellers, the related Prospectus Supplement will specify the
extent of Mortgage Loans so acquired. The characteristics of the Mortgage
Loans are as described in the related Prospectus Supplement. Other mortgage
loans available for purchase by the Company may have characteristics which
would make them eligible for inclusion in a Mortgage Pool but were not
selected for inclusion in such Mortgage Pool.
Under certain circumstances, the Mortgage Loans to be included in a Mortgage
Pool will be delivered either directly or indirectly to the Company by one or
more Sellers identified in the related Prospectus Supplement, concurrently
with the issuance of the related series of Certificates (a "Designated Seller
Transaction"). Such Certificates may be sold in whole or in part to any such
Seller in exchange for the related Mortgage Loans, or may be offered under any
of the other methods described herein under "Methods of Distribution." The
related Prospectus Supplement for a Mortgage Pool composed of Mortgage Loans
acquired by the Company pursuant to a Designated Seller Transaction will
generally include information, provided by the related Seller, about the
Seller, the Mortgage Loans and the underwriting standards applicable to the
Mortgage Loans. None of the Company or, unless it is the Seller, ICI Funding
or any of their affiliates will make any representation or warranty with
respect to such Mortgage Loans, or any representation as to the accuracy or
completeness of such information provided by the Seller.
If specified in the related Prospectus Supplement, the Trust Fund for a
series of Certificates may include mortgage participations and pass-through
certificates evidencing interests in Mortgage Loans ("Mortgage Securities"),
as described herein. The Mortgage Securities may have been issued previously
by the Company or an affiliate thereof, a financial institution or other
entity engaged generally in the business of mortgage lending or a limited
purpose corporation organized for the purpose of, among other things,
acquiring and depositing mortgage loans into such trusts, and selling
beneficial interests in such trusts. Except as otherwise set forth in the
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related Prospectus Supplement, such Mortgage Securities will be generally
similar to Certificates offered hereunder. As to any such series of
Certificates, the related Prospectus Supplement will include a description of
such Mortgage Securities and any related credit enhancement, and the Mortgage
Loans underlying such Mortgage Securities will be described together with any
other Mortgage Loans included in the Mortgage Pool relating to such series. To
the extent the issuance of such Mortgage Securities has been registered under
the Exchange Act, the underlying securities will be registered and the
underlying issuer will be a reporting entity pursuant to Sections 12 or 15(d)
of the Exchange Act. Additionally, the material terms of such underlying
securities will be disclosed in the related Prospectus Supplement.
Furthermore, the Company will include only Mortgage Securities acquired in the
secondary market and not in a public offering of such securities.
THE MORTGAGE LOANS
Each of the Mortgage Loans will be a type of mortgage loan described or
referred to in paragraphs numbered (1) through (8) below, with any variations
thereto described in the related Prospectus Supplement:
(1) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of not more than approximately 15
years;
(2) Fixed-rate, fully-amortizing mortgage loans (which may include
mortgage loans converted from adjustable-rate mortgage loans or otherwise
modified) providing for level monthly payments of principal and interest
and terms at origination or modification of more than 15 years, but not
more than approximately 25 or 30 years;
(3) Fully-amortizing adjustable-rate mortgage loans ("ARM Loans") having
an original or modified term to maturity of not more than approximately 25
or 30 years with a related interest rate (a "Mortgage Rate") which
generally adjusts initially either three months, six months or one, three,
five or seven years subsequent to the initial payment date, and thereafter
at either three-month, six-month, one-year or other intervals (with
corresponding adjustments in the amount of monthly payments) over the term
of the mortgage loan to equal the sum of a fixed percentage set forth in
the related Mortgage Note (the "Note Margin") and an index./1/ The related
Prospectus Supplement will set forth the relevant index and the highest,
lowest and weighted average Note Margin with respect to the ARM Loans in
the related Mortgage Pool. The related Prospectus Supplement will also
indicate any periodic or lifetime limitations on changes in any per annum
Mortgage Rate at the time of any adjustment. If specified in the related
Prospectus Supplement, an ARM Loan may include a provision that allows the
Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at some
point during the term of such ARM Loan generally not later than six to ten
years subsequent to the initial payment date;
(4) Negatively-amortizing ARM Loans having original or modified terms to
maturity of not more than approximately 25 or 30 years with Mortgage Rates
which generally adjust initially on the payment date referred to in the
related Prospectus Supplement, and on each of certain periodic payment
dates thereafter, to equal the sum of the Note Margin and the index. The
scheduled monthly payment will be adjusted as and when described in the
related Prospectus Supplement to an amount that would fully amortize the
Mortgage Loan over its remaining term on a level debt service basis;
provided that increases in the scheduled monthly payment may be subject to
certain limitations as specified in the related Prospectus Supplement. If
an adjustment to the Mortgage Rate on a Mortgage Loan causes the amount of
interest accrued thereon in any month to exceed the scheduled monthly
payment on such mortgage loan, the resulting amount of interest that has
accrued but is not then payable ("Deferred Interest") will be added to the
principal balance of such Mortgage Loan;
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/1/The index (the "Index") for a particular Mortgage Pool will be specified in
the related Prospectus Supplement and may include one of the following
indexes: (i) the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of either six months or one year, (ii) the weekly
auction average investment yield of U.S. Treasury bills of six months, (iii)
the daily Bank Prime Loan rate made available by the Federal Reserve Board,
(iv) the cost of funds of member institutions for the Federal Home Loan Bank
of San Francisco, (v) the interbank offered rates for U.S. dollar deposits
in the London market, each calculated as of a date prior to each scheduled
interest rate adjustment date which will be specified in the related
Prospectus Supplement or (vi) another index substantially similar to the
indexes described in (i) through (v) above as described in the related
Prospectus Supplement.
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(5) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 15 years with
monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate on such mortgage loan. Such monthly payments increase at the beginning
of the second year by a specified percentage of the monthly payment during
the preceding year and each year thereafter to the extent necessary to
amortize the mortgage loan over the remainder of its approximately 15-year
term. Deferred Interest, if any, will be added to the principal balance of
such mortgage loans;
(6) Fixed-rate, graduated payment mortgage loans having original or
modified terms to maturity of not more than approximately 25 or 30 years
with monthly payments during the first year calculated on the basis of an
assumed interest rate which is a specified percentage below the Mortgage
Rate. Such monthly payments increase at the beginning of the second year by
a specified percentage of the monthly payment during the preceding year and
each year thereafter to the extent necessary to fully amortize the mortgage
loan within its approximately 25- or 30-year term. Deferred Interest, if
any, will be added to the principal balance of such mortgage loan;
(7) Mortgage loans ("Balloon Loans") having payment terms similar to
those described in one of the preceding paragraphs numbered (1) through
(6), calculated on the basis of an assumed amortization term, but providing
for a payment (a "Balloon Payment") of all outstanding principal and
interest to be made at the end of a specified term that is shorter than
such assumed amortization term; or
(8) Another type of mortgage loan having terms substantially similar to
those described in one or more of the preceding paragraphs numbered (1)
through (7) as described in the related Prospectus Supplement.
If provided in the related Prospectus Supplement, certain of the Mortgage
Pools may contain Single Family and Multifamily Loans secured by junior liens,
and the related senior liens ("Senior Liens") may not be included in the
Mortgage Pool. The primary risk to holders of such Mortgage Loans secured by
junior liens is the possibility that adequate funds will not be received in
connection with a foreclosure of the related Senior Liens to satisfy fully
both the Senior Liens and the Mortgage Loan. In the event that a holder of a
Senior Lien forecloses on a Mortgaged Property, the proceeds of the
foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate
taxes, third in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the holder
of the Senior Liens. The claims of the holders of the Senior Liens will be
satisfied in full out of proceeds of the liquidation of the related Mortgaged
Property, if such proceeds are sufficient, before the Trust Fund as holder of
the junior lien receives any payments in respect of the Mortgage Loan. If the
Master Servicer were to foreclose on any such Mortgage Loan, it would do so
subject to any related Senior Liens. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure
sale of such Mortgage Loan would have to bid an amount sufficient to pay off
all sums due under the Mortgage Loan and the Senior Liens or purchase the
Mortgaged Property subject to the Senior Liens. In the event that such
proceeds from a foreclosure or similar sale of the related Mortgaged Property
are insufficient to satisfy all Senior Liens and the Mortgage Loan in the
aggregate, the Trust Fund, as the holder of the junior lien, and, accordingly,
holders of one or more classes of the Certificates of the related series bear
(i) the risk of delay in distributions while a deficiency judgment against the
borrower is obtained and (ii) the risk of loss if the deficiency judgment is
not realized upon. Moreover, deficiency judgments may not be available in
certain jurisdictions or the Mortgage Loan may be nonrecourse. In addition, a
junior mortgagee may not foreclose on the property securing a junior mortgage
unless it forecloses subject to the senior mortgages.
If so specified in the related Prospectus Supplement, a Mortgage Loan may
contain a prohibition on prepayment (the period of such prohibition, a "Lock-
out Period" and its date of expiration, a "Lock-out Expiration Date") or
require payment of a premium or a yield maintenance penalty (a "Prepayment
Penalty"). A Multifamily Loan may also contain a provision that entitles the
lender to a share of profits realized from the operation or disposition of the
related Mortgaged Property (an "Equity Participation"). If the holders of any
class or classes of Offered Certificates of a series will be entitled to all
or a portion of an Equity Participation,
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the related Prospectus Supplement will describe the Equity Participation and
the method or methods by which distributions in respect thereof will be made
to such holders.
Certain information, including information regarding loan-to-value ratios
(each, a "Loan-to-Value Ratio") at origination of the Mortgage Loans
underlying each series of Certificates, will be supplied in the related
Prospectus Supplement. In the case of most Mortgage Loans, the "Loan-to-Value
Ratio" at origination is defined generally as the ratio, expressed as a
percentage, of the principal amount of the Mortgage Loan at origination (or,
if appropriate, at the time of an appraisal subsequent to origination), plus,
in the case of a Mortgage Loan secured by a junior lien, the outstanding
principal balance of the related Senior Liens, to the Value of the related
Mortgaged Property. Unless otherwise specified in the related Prospectus
Supplement, the "Value" of a Mortgaged Property securing a Single Family or
Multifamily Mortgage Loan will generally be equal to the lesser of (x) the
appraised value determined in an appraisal obtained at origination of such
Mortgage Loan, if any, or, if the related Mortgaged Property has been
appraised subsequent to origination, the value determined in such subsequent
appraisal and (y) the sales price for the related Mortgaged Property (except
in certain circumstances in which there has been a subsequent appraisal). In
the case of certain refinanced, modified or converted Single Family or
Multifamily Loans, unless otherwise specified in the related Prospectus
Supplement, the "Value" of the related Mortgaged Property will be equal to the
lesser of (x) the appraised value of the related Mortgaged Property determined
at origination or in an appraisal, if any, obtained at the time of
refinancing, modification or conversion and (y) the sales price of the related
Mortgage Property or, if the Mortgage Loan is not a rate and term refinance
Mortgage Loan and if the Mortgaged Property was owned for a relatively short
period of time prior to refinancing, modification or conversion, the sum of
the sales price of the related Mortgaged Property plus the added value of any
improvements. Certain Mortgage Loans which are subject to negative
amortization will have Loan-to-Value Ratios which will increase after
origination as a result of such negative amortization. Unless otherwise
specified in the related Prospectus Supplement, for purposes of calculating
the Loan-to-Value Ratio of a Contract relating to a new Manufactured Home, the
"Value" is no greater than the sum of a fixed percentage of the list price of
the unit actually billed by the manufacturer to the dealer (exclusive of
freight to the dealer site), including "accessories" identified in the invoice
(the "Manufacturer's Invoice Price"), plus the actual cost of any accessories
purchased from the dealer, a delivery and set-up allowance, depending on the
size of the unit, and the cost of state and local taxes, filing fees and up to
three years prepaid hazard insurance premiums. Unless otherwise specified in
the related Prospectus Supplement, with respect to a used Manufactured Home,
the "Value" is the least of the sale price, the appraised value, and the
National Automobile Dealer's Association book value plus prepaid taxes and
hazard insurance premiums. The appraised value of a Manufactured Home is based
upon the age and condition of the manufactured housing unit and the quality
and condition of the mobile home park in which it is situated, if applicable.
Manufactured Homes are less likely to experience appreciation in value and
more likely to experience depreciation in value over time than other types of
housing.
The Mortgage Loans may be "equity refinance" Mortgage Loans, as to which a
portion of the proceeds are used to refinance an existing mortgage loan, and
the remaining proceeds may be retained by the Mortgagor or used for purposes
unrelated to the Mortgaged Property. Alternatively, the Mortgage Loans may be
"rate and term refinance" Mortgage Loans, as to which substantially all of the
proceeds (net of related costs incurred by the Mortgagor) are used to
refinance an existing mortgage loan or loans (which may include a junior lien)
primarily in order to change the interest rate or other terms thereof. The
Mortgage Loans may be mortgage loans which have been consolidated and/or have
had various terms changed, mortgage loans which have been converted from
adjustable rate mortgage loans to fixed rate mortgage loans, or construction
loans which have been converted to permanent mortgage loans. In addition, a
Mortgaged Property may be subject to secondary financing at the time of
origination of the Mortgage Loan or thereafter.
If provided for in the related Prospectus Supplement, a Mortgage Pool may
contain ARM Loans which allow the Mortgagors to convert the adjustable rates
on such Mortgage Loans to a fixed rate at some point during the life of such
Mortgage Loans (each such Mortgage Loan, a "Convertible Mortgage Loan"),
generally not later than six to ten years subsequent to the date of
origination, depending upon the length of the initial
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adjustment period. If specified in the related Prospectus Supplement, upon any
conversion, the Company, the related Master Servicer, the applicable Seller or
a third party will purchase the converted Mortgage Loan as and to the extent
set forth in the related Prospectus Supplement. Alternatively, if specified in
the related Prospectus Supplement, the Company or the related Master Servicer
(or another party specified therein) may agree to act as remarketing agent
with respect to such converted Mortgage Loans and, in such capacity, to use
its best efforts to arrange for the sale of converted Mortgage Loans under
specified conditions. Upon the failure of any party so obligated to purchase
any such converted Mortgage Loan, the inability of any remarketing agent to
arrange for the sale of the converted Mortgage Loan and the unwillingness of
such remarketing agent to exercise any election to purchase the converted
Mortgage Loan for its own account, the related Mortgage Pool will thereafter
include both fixed rate and adjustable rate Mortgage Loans.
If provided for in the related Prospectus Supplement, certain of the
Mortgage Loans may be subject to temporary buydown plans ("Buydown Mortgage
Loans") pursuant to which the monthly payments made by the Mortgagor during
the early years of the Mortgage Loan (the "Buydown Period") will be less than
the scheduled monthly payments on the Mortgage Loan, the resulting difference
to be made up from (i) an amount (such amount, exclusive of investment
earnings thereon, being hereinafter referred to as "Buydown Funds")
contributed by the seller of the Mortgaged Property or another source and
placed in a custodial account (the "Buydown Account"), (ii) if the Buydown
Funds are contributed on a present value basis, investment earnings on such
Buydown Funds or (iii) additional buydown funds to be contributed over time by
the Mortgagor's employer or another source. See "Description of the
Certificates--Certificate Account." Generally, the Mortgagor under each
Buydown Mortgage Loan will be qualified at the applicable lower monthly
payment. Accordingly, the repayment of a Buydown Mortgage Loan is dependent on
the ability of the Mortgagor to make larger level monthly payments after the
Buydown Funds have been depleted and, for certain Buydown Mortgage Loans,
during the Buydown Period.
The Prospectus Supplement for each series of Certificates will contain
information as to the type of Mortgage Loans that will be included in the
related Mortgage Pool. Each Prospectus Supplement applicable to a series of
Certificates will include certain information, generally as of the Cut-off
Date and to the extent then available to the Company, on an approximate basis,
as to (i) the aggregate principal balance of the Mortgage Loans, (ii) the type
of property securing the Mortgage Loans, (iii) the original or modified terms
to maturity of the Mortgage Loans, (iv) the range of principal balances of the
Mortgage Loans at origination or modification, (v) the earliest origination or
modification date and latest maturity date of the Mortgage Loans, (vi) the
Loan-to-Value Ratios of the Mortgage Loans, (vii) the Mortgage Rate or range
of Mortgage Rates borne by the Mortgage Loans, (viii) if any of the Mortgage
Loans are ARM Loans, the applicable Index, the range of Note Margins and the
weighted average Note Margin, (ix) the geographical distribution of the
Mortgage Loans, (x) the number of Buydown Mortgage Loans, if applicable, and
(xi) the percent of ARM Loans which are convertible to fixed-rate mortgage
loans, if applicable. A Current Report on Form 8-K will be available upon
request to holders of the related series of Certificates and will be filed,
together with the related Pooling Agreement, with the Securities and Exchange
Commission within fifteen days after the initial issuance of such
Certificates. In the event that Mortgage Loans are added to or deleted from
the Trust Fund after the date of the related Prospectus Supplement, such
addition or deletion will be noted in the Current Report on Form 8-K.
The Company will cause the Mortgage Loans constituting each Mortgage Pool
(or Mortgage Securities evidencing interests therein) to be assigned, without
recourse, to the Trustee named in the related Prospectus Supplement, for the
benefit of the holders of all of the Certificates of a series. Except to the
extent that servicing of any Mortgage Loan is to be transferred to a Special
Servicer, the Master Servicer named in the related Prospectus Supplement will
service the Mortgage Loans, directly or through other mortgage servicing
institutions ("Subservicers"), pursuant to a Pooling Agreement and will
receive a fee for such services. See "Servicing of Mortgage Loans,"
"Description of the Certificates" and "The Pooling Agreement." With respect to
those Mortgage Loans serviced by the Master Servicer through a Subservicer,
the Master Servicer will remain liable for its servicing obligations under the
related Pooling Agreement as if the Master Servicer alone were servicing such
Mortgage Loans. The Master Servicer's obligations with respect to the Mortgage
Loans will consist
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principally of its contractual servicing obligations under the related Pooling
Agreement (including its obligation to enforce certain purchase and other
obligations of Subservicers and Sellers, as more fully described herein under
"--Representations by Sellers" below, "Servicing of Mortgage Loans--
Subservicers," and "Description of the Certificates--Assignment of Trust Fund
Assets," and, if and to the extent set forth in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Mortgage Loans as
described herein under "Description of the Certificates--Advances") or
pursuant to the terms of any Mortgage Securities.
UNDERWRITING STANDARDS
Mortgage Loans to be included in a Mortgage Pool will have been purchased by
the Company, either directly or indirectly from Sellers. Such Mortgage Loans,
as well as Mortgage Loans underlying Mortgage Securities, will generally have
been originated or acquired in accordance with underwriting standards
acceptable to the Company or alternative underwriting criteria. The
underwriting standards for the Mortgage Loans included in each Mortgage Pool
are described below and in the related Prospectus Supplement. However, in some
cases, particularly those involving Unaffiliated Sellers, the Company may not
be able to establish the underwriting standards used in the origination of the
related Mortgage Loans. In those cases, the related Prospectus Supplement will
include a statement to such effect and will reflect what, if any, re-
underwriting of the related Mortgage Loans was done by the Company or any of
its affiliates.
Unless otherwise specified in the related Prospectus Supplement, the
underwriting standards to be used in originating the Mortgage Loans are
primarily intended to assess the creditworthiness of the Mortgagor, the value
of the Mortgaged Property and the adequacy of such property as collateral for
the Mortgage Loan.
The primary considerations in underwriting a Single Family Loan or Contract
are the Mortgagor's employment stability and whether the Mortgagor has
sufficient monthly income available (i) to meet the Mortgagor's monthly
obligations on the proposed Mortgage Loan (generally determined on the basis
of the monthly payments due in the year of origination) and other expenses
related to the home (such as property taxes and hazard insurance) and (ii) to
meet monthly housing expenses and other financial obligations and monthly
living expenses. However, the Loan-to-Value Ratio of the Mortgage Loan is
another critical factor. In addition, a Mortgagor's credit history and
repayment ability, as well as the type and use of the Mortgaged Property, are
also considerations.
In the case of the Multifamily Loans, lenders typically look to the Debt
Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any
given time is the ratio of (i) the Net Operating Income of the related
Mortgaged Property for a twelve-month period to (ii) the annualized scheduled
payments on the Mortgage Loan and on any other loan that is secured by a lien
on the Mortgaged Property prior to the lien of the related Mortgage. Unless
otherwise defined in the related Prospectus Supplement, "Net Operating Income"
means, for any given period, the total operating revenues derived from a
Multifamily Property during such period, minus the total operating expenses
incurred in respect of such property during such period other than (i) non-
cash items such as depreciation and amortization, (ii) capital expenditures
and (iii) debt service on loans (including the related Mortgage Loan) secured
by liens on such property. The Net Operating Income of a Multifamily Property
will fluctuate over time and may or may not be sufficient to cover debt
service on the related Mortgage Loan at any given time. As the primary source
of the operating revenues of a Multifamily Property, rental income (and
maintenance payments from tenant-stockholders of a cooperatively owned
Multifamily Property) may be affected by the condition of the applicable real
estate market and/or area economy. Increases in operating expenses due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate tax rates, energy
costs, labor costs and other operating expenses, and/or to changes in
governmental rules, regulations and fiscal policies, may also affect the risk
of default on a Multifamily Loan. Lenders also look to the Loan-to-Value Ratio
of a Multifamily Loan as a measure of risk of loss if a property must be
liquidated following a default.
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It is expected that each prospective Mortgagor will complete a mortgage loan
application that includes information with respect to the applicant's
liabilities, income, credit history, employment history and personal
information. One or more credit reports on each applicant from national credit
reporting companies will generally be required. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions, or judgments. In the case of a Multifamily Loan,
the Mortgagor will also be required to provide certain information regarding
the related Multifamily Property, including a current rent roll and operating
income statements (which may be pro forma and unaudited). In addition, the
originator will generally also consider the location of the Multifamily
Property, the availability of competitive lease space and rental income of
comparable properties in the relevant market area, the overall economy and
demographic features of the geographic area and the Mortgagor's prior
experience in owning and operating properties similar to the Multifamily
Properties.
Unless otherwise specified in the related Prospectus Supplement, Mortgaged
Properties will be appraised by licensed appraisers. The appraiser will
generally address neighborhood conditions, site and zoning status and
condition and valuation of improvements. In the case of Single Family
Properties, the appraisal report will generally include a reproduction cost
analysis (when appropriate) based on the current cost of constructing a
similar home and a market value analysis based on recent sales of comparable
homes in the area. With respect to Multifamily Properties, the appraisal must
specify whether an income analysis, a market analysis or a cost analysis was
used. An appraisal employing the income approach to value analyzes a
property's projected net cash flow, capitalization and other operational
information in determining the property's value. The market approach to value
analyzes the prices paid for the purchase of similar properties in the
property's area, with adjustments made for variations between those other
properties and the property being appraised. The cost approach to value
requires the appraiser to make an estimate of land value and then determine
the current cost of reproducing the improvements less any accrued
depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. Unless
otherwise specified in the related Prospectus Supplement, all appraisals are
required to conform to the Uniform Standards of Professional Appraisal
Practice and the Financial Institutions Reform, Recovery and Enforcement Act
of 1989 ("FIRREA") and must be on forms acceptable to the Federal National
Mortgage Association ("Fannie Mae") and/or the Federal Home Loan Mortgage
Corporation ("FHLMC").
FEDERAL HOME LOAN MORTGAGE CORPORATION ("FREDDIE MAC")
Notwithstanding the foregoing, Loan-to-Value Ratios will not necessarily
constitute an accurate measure of the risk of liquidation loss in a pool of
Mortgage Loans. For example, the value of a Mortgaged Property as of the date
of initial issuance of the related series of Certificates may be less than the
Value determined at loan origination, and will likely continue to fluctuate
from time to time based upon changes in economic conditions and the real
estate market. Moreover, even when current, an appraisal is not necessarily a
reliable estimate of value for a Multifamily Property. As stated above,
appraised values of Multifamily Properties are generally based on the market
analysis, the cost analysis, the income analysis, or upon a selection from or
interpolation of the values derived from such approaches. Each of these
appraisal methods can present analytical difficulties. It is often difficult
to find truly comparable properties that have recently been sold; the
replacement cost of a property may have little to do with its current market
value; and income capitalization is inherently based on inexact projections of
income and expenses and the selection of an appropriate capitalization rate.
Where more than one of these appraisal methods are used and provide
significantly different results, an accurate determination of value and,
correspondingly, a reliable analysis of default and loss risks, is even more
difficult.
If so specified in the related Prospectus Supplement, the underwriting of a
Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on such property. In addition, under
the laws of some states and under the federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), a lender may be
liable, as an "owner" or "operator", for costs of addressing releases or
threatened releases of hazardous substances at a
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property, if agents or employees of the lender have become sufficiently
involved in the operations of the borrower, regardless of whether or not the
environmental damage or threat was caused by the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage. See "Certain
Legal Aspects of Mortgage Loans--Environmental Legislation".
With respect to any FHA Loan the Mortgage Loan Seller will be required to
represent that it has complied with the applicable underwriting policies of
the FHA. See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder--FHA Insurance".
To the extent available, the related Prospectus Supplement will include
delinquency and foreclosure experience for the applicable Seller(s) and/or
Master Servicer.
QUALIFICATIONS OF ORIGINATORS AND SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be originated, directly or through mortgage brokers and
correspondents, by a savings and loan association, savings bank, commercial
bank, credit union, insurance company, or similar institution which is
supervised and examined by a federal or state authority, or by a mortgagee
approved by the Secretary of Housing and Urban Development pursuant to
sections 203 and 211 of the National Housing Act of 1934, as amended (the
"Housing Act"). Except with respect to Designated Seller Transactions or
unless otherwise specified in the related Prospectus Supplement, each Seller
must satisfy certain criteria as to financial stability evaluated on a case-
by-case basis by the Company. These criteria include, but are not limited to
requirements that each Seller must (i) be properly licensed to originate and
sell loans; (ii) have been conducting business for a pre-determined time
period; (iii) meet minimum net worth standards; (iv) maintain insurance at
pre-determined levels of coverage; and (v) be in "good standing" with
governmental licensing and revenue collection agencies.
REPRESENTATIONS BY SELLERS
Unless otherwise specified in the related Prospectus Supplement, each Seller
will have made representations and warranties in respect of the Mortgage Loans
and/or Mortgage Securities sold by such Seller and evidenced by a series of
Certificates. In the case of Mortgage Loans, such representations and
warranties will generally include, among other things, that as to each such
Mortgage Loan: (i) any required hazard and primary mortgage insurance policies
were effective at the origination of such Mortgage Loan, and each such policy
remained in effect on the date of purchase of such Mortgage Loan from the
Seller by or on behalf of the Company; (ii) with respect to each Mortgage Loan
other than a Contract, either (A) a title insurance policy insuring (subject
only to permissible title insurance exceptions) the lien status of the
Mortgage was effective at the origination of such Mortgage Loan and such
policy remained in effect on the date of purchase of the Mortgage Loan from
the Seller by or on behalf of the Company or (B) if the Mortgaged Property
securing such Mortgage Loan is located in an area where such policies are
generally not available, there is in the related mortgage file an attorney's
certificate of title indicating (subject to such permissible exceptions set
forth therein) the first lien status of the mortgage; (iii) the Seller has
good title to such Mortgage Loan and such Mortgage Loan was subject to no
offsets, defenses or counterclaims except as may be provided under the Relief
Act and except to the extent that any buydown agreement exists for a Buydown
Mortgage Loan; (iv) there are no mechanics' liens or claims for work, labor or
material affecting the related Mortgaged Property which are, or may be a lien
prior to, or equal with, the lien of the related Mortgage (subject only to
permissible title insurance exceptions); (v) the related Mortgaged Property is
free from damage and in good repair; (vi) there are no delinquent tax or
assessment liens against the related Mortgaged Property; (vii) such Mortgage
Loan is not more than 30 days' delinquent as to any scheduled payment of
principal and/or interest; (viii) if a Primary Insurance Policy is required
with respect to such Mortgage Loan, such Mortgage Loan is the subject of such
a policy; and (ix) such Mortgage Loan was made in compliance with, and is
enforceable under, all applicable local, state and federal laws in all
material respects. In the case of Mortgage Securities, such representations
and warranties will generally include, among other things, that as to each
such Mortgage Security: (i) such Mortgage Security is validly issued and
outstanding and entitled to the benefits of the agreement pursuant to which it
was issued; and (ii) the Seller has good title to such Mortgage
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Security. In the event of a breach of a Seller's representation or warranty
that materially adversely affects the interests of the Certificateholders in a
Mortgage Loan or Mortgage Security, unless otherwise specified in the related
Prospectus Supplement, the related Seller will be obligated to cure the breach
or repurchase or, if permitted, replace such Mortgage Loan or Mortgage
Security as described below. However, there can be no assurance that a Seller
will honor its obligation to repurchase or, if permitted, replace any Mortgage
Loan or Mortgage Security as to which such a breach of a representation or
warranty arises.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan or Mortgage Security will have been made as of the date on which
such Mortgage Loan or Mortgage Security was purchased from the Seller by or on
behalf of the Company; the date as of which such representations and
warranties were made will be a date prior to the date of initial issuance of
the related series of Certificates or, in the case of a Designated Seller
Transaction, will be the date of closing of the related sale by the applicable
Seller. A substantial period of time may have elapsed between the date as of
which the representations and warranties were made and the later date of
initial issuance of the related series of Certificates. Accordingly, the
Seller's purchase obligation (or, if specified in the related Prospectus
Supplement, limited replacement option) described below will not arise if,
during the period commencing on the date of sale of a Mortgage Loan or
Mortgage Security by the Seller, an event occurs that would have given rise to
such an obligation had the event occurred prior to sale of the affected
Mortgage Loan or Mortgage Security, as the case may be. Unless otherwise
specified in the related Prospectus Supplement, the only representations and
warranties to be made for the benefit of holders of Certificates in respect of
any related Mortgage Loan or Mortgage Security relating to the period
commencing on the date of sale of such Mortgage Loan or Mortgage Security by
the Seller to or on behalf of the Company will be certain limited
representations of the Company and the Master Servicer described under
"Description of the Certificates--Assignment of Trust Fund Assets" below.
The Company will assign to the Trustee for the benefit of the holders of the
related series of Certificates all of its right, title and interest in each
agreement by which it purchased a Mortgage Loan or Mortgage Security from a
Seller insofar as such agreement relates to the representations and warranties
made by such Seller in respect of such Mortgage Loan or Mortgage Security and
any remedies provided for with respect to any breach of such representations
and warranties. If a Seller cannot cure a breach of any representation or
warranty made by it in respect of a Mortgage Loan or Mortgage Security which
materially and adversely affects the interests of the Certificateholders
therein within a specified period after having discovered or received notice
of such breach, then, unless otherwise specified in the related Prospectus
Supplement, such Seller will be obligated to purchase such Mortgage Loan or
Mortgage Security at a price (the "Purchase Price") set forth in the related
Pooling Agreement which Purchase Price will generally be equal to the
principal balance thereof as of the date of purchase plus accrued and unpaid
interest through or about the date of purchase at the related Mortgage Rate or
pass-through rate, as applicable (net of any portion of such interest payable
to such Seller in respect of master servicing compensation, special servicing
compensation or subservicing compensation, as applicable, and the Spread, if
any).
Unless otherwise specified in the related Prospectus Supplement, as to any
Mortgage Loan required to be purchased by an Affiliated Seller as provided
above, rather than repurchase the Mortgage Loan, the Seller will be entitled,
at its sole option, to remove such Mortgage Loan (a "Deleted Mortgage Loan")
from the Trust Fund and substitute in its place another Mortgage Loan of like
kind (a "Qualified Substitute Mortgage Loan"); however, such substitution must
be effected within 120 days of the date of the initial issuance of the related
series of Certificates with respect to a Trust Fund for which no REMIC
election is to be made. With respect to a Trust Fund for which a REMIC
election is to be made, except as otherwise provided in the related Prospectus
Supplement, such substitution of a defective Mortgage Loan must be effected
within two years of the date of the initial issuance of the related series of
Certificates, and may not be made if such substitution would cause the Trust
Fund, or any portion thereof, to fail to qualify as a REMIC or result in a
prohibited transaction tax under the Code. Except as otherwise provided in the
related Prospectus Supplement, any Qualified Substitute Mortgage Loan
generally will, on the date of substitution, (i) have an outstanding principal
balance, after deduction of the principal portion of the monthly payment due
in the month of substitution, not in excess of the outstanding principal
balance of the Deleted Mortgage Loan (the amount of any shortfall to be
deposited in the Certificate
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Account by the Master Servicer in the month of substitution for distribution
to the Certificateholders), (ii) have a Mortgage Rate and a Net Mortgage Rate
not less than (and not more than one percentage point greater than) the
Mortgage Rate and Net Mortgage Rate, respectively, of the Deleted Mortgage
Loan as of the date of substitution, (iii) have a Loan-to-Value Ratio at the
time of substitution no higher than that of the Deleted Mortgage Loan at the
time of substitution, (iv) have a remaining term to maturity not greater than
(and not more than one year less than) that of the Deleted Mortgage Loan, (v)
comply with all of the representations and warranties made by such Affiliated
Seller as of the date of substitution, and (vi) be covered under a primary
insurance policy if such Mortgage Loan has a Loan-to-Value Ratio greater than
80%. The related purchase agreement may include additional requirements
relating to ARM Loans or other specific types of Mortgage Loans, or additional
provisions relating to meeting the foregoing requirements on an aggregate
basis where a number of substitutions occur contemporaneously. Unless
otherwise specified in the related Prospectus Supplement, an Unaffiliated
Seller will have no option to substitute for a Mortgage Loan that it is
obligated to repurchase in connection with a breach of a representation and
warranty, and neither an Affiliated Seller nor an Unaffiliated Seller will
have any option to substitute for a Mortgage Security that it is obligated to
repurchase in connection with a breach of a representation and warranty.
The Master Servicer will be required under the applicable Pooling Agreement
to use reasonable efforts to enforce this purchase or substitution obligation
for the benefit of the Trustee and the Certificateholders, following such
practices it would employ in its good faith business judgment and which are
normal and usual in its general mortgage servicing activities; provided,
however, that this purchase or substitution obligation will not become an
obligation of the Master Servicer in the event the applicable Seller fails to
honor such obligation. In instances where a Seller is unable, or disputes its
obligation, to purchase affected Mortgage Loans and/or Mortgage Securities,
the Master Servicer, employing the standards set forth in the preceding
sentence, may negotiate and enter into one or more settlement agreements with
such Seller that could provide for, among other things, the purchase of only a
portion of the affected Mortgage Loans and/or Mortgage Securities. Any such
settlement could lead to losses on the Mortgage Loans and/or Mortgage
Securities which would be borne by the related Certificates. In accordance
with the above described practices, the Master Servicer will not be required
to enforce any purchase obligation of a Seller arising from any
misrepresentation by the Seller, if the Master Servicer determines in the
reasonable exercise of its business judgment that the matters related to such
misrepresentation did not directly cause or are not likely to directly cause a
loss on the related Mortgage Loan or Mortgage Security. If the Seller fails to
repurchase and no breach of any other party's representations has occurred,
the Seller's purchase obligation will not become an obligation of the Company
or any other party. In the case of a Designated Seller Transaction where the
Seller fails to repurchase a Mortgage Loan or Mortgage Security and neither
the Company nor any other entity has assumed the representations and
warranties, such repurchase obligation of the Seller will not become an
obligation of the Company or any other party. Unless otherwise specified in
the related Prospectus Supplement, the foregoing obligations will constitute
the sole remedies available to Certificateholders or the Trustee for a breach
of any representation by a Seller or for any other event giving rise to such
obligations as described above.
Neither the Company nor the Master Servicer will be obligated to purchase a
Mortgage Loan or Mortgage Security if a Seller defaults on its obligation to
do so, and no assurance can be given that the Sellers will carry out such
purchase obligations. Such a default by a Seller is not a default by the
Company or by the Master Servicer. However, to the extent that a breach of the
representations and warranties of a Seller also constitutes a breach of a
representation made by the Company or the Master Servicer, as described below
under "Description of the Certificates--Assignment of Trust Fund Assets," the
Company or the Master Servicer may have a purchase or substitution obligation.
Any Mortgage Loan or Mortgage Security not so purchased or substituted for
shall remain in the related Trust Fund and any losses related thereto shall be
allocated to the related credit enhancement, to the extent available, and
otherwise to one or more classes of the related series of Certificates.
If a person other than a Seller makes the representations and warranties
referred to in the first paragraph of this "--Representations by Sellers"
section, or a person other than a Seller is responsible for repurchasing or
replacing any Mortgage Loan or Mortgage Security in connection with a breach
of such representations and warranties, the identity of such person will be
specified in the related Prospectus Supplement.
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SERVICING OF MORTGAGE LOANS
GENERAL
The Mortgage Loans and Mortgage Securities included in each Mortgage Pool
will be serviced and administered pursuant to a Pooling Agreement. Forms of
Pooling Agreements have been filed as an exhibit to the Registration Statement
of which this Prospectus is a part. However, the provisions of each Pooling
Agreement will vary depending upon the nature of the related Mortgage Pool.
The following summaries describe the material servicing-related provisions
that may appear in a Pooling Agreement for a Mortgage Pool that includes
Mortgage Loans. The related Prospectus Supplement will describe any servicing-
related provision of such a Pooling Agreement that materially differs from the
description thereof contained in this Prospectus and, if the related Mortgage
Pool includes Mortgage Securities, will summarize all of the material
provisions of the related Pooling Agreement that govern the administration of
such Mortgage Securities and identify the party responsible for such
administration. The summaries herein do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the related Pooling Agreement and the description of such
provisions in the related Prospectus Supplement.
With respect to any series of Certificates as to which the related Mortgage
Pool includes Mortgage Securities, the servicing and administration of the
Mortgage Loans underlying such Mortgage Securities will be pursuant to the
terms of such Mortgage Securities. It is expected that Mortgage Loans
underlying any Mortgage Securities in a Mortgage Pool would be serviced and
administered generally in the same manner as Mortgage Loans included in a
Mortgage Pool, however, there can be no assurance that such will be the case,
particularly if such Mortgage Securities are issued by an entity other than
the Company or any of its affiliates. The related Prospectus Supplement will
describe any material differences between the servicing described below and
the servicing of Mortgage Loans underlying the Mortgage Securities in any
Mortgage Pool.
THE MASTER SERVICER
The master servicer (the "Master Servicer"), if any, for a series of
Certificates will be named in the related Prospectus Supplement and may be ICI
Funding or another affiliate of the Company. The Master Servicer is generally
required to maintain a fidelity bond and errors and omissions policy with
respect to its officers and employees and other persons acting on behalf of
the Master Servicer in connection with its activities under a Pooling
Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES; MORTGAGE LOAN MODIFICATIONS
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer for any Mortgage Pool, directly or through Subservicers, will be
obligated under the Pooling Agreement to service and administer the Mortgage
Loans in such Mortgage Pool for the benefit of the related Certificateholders,
in accordance with applicable law and the terms of such Pooling Agreement,
such Mortgage Loans and any instrument of credit enhancement included in the
related Trust Fund, and, to the extent consistent with the foregoing, in the
same manner as would prudent institutional mortgage lenders servicing
comparable mortgage loans for their own account in the jurisdictions where the
related Mortgaged Properties are located. Subject to the foregoing, the Master
Servicer will have full power and authority to do any and all things in
connection with such servicing and administration that it may deem necessary
and desirable.
As part of its servicing duties, a Master Servicer will be required to make
reasonable efforts to collect all payments called for under the terms and
provisions of the Mortgage Loans that it services and will be obligated to
follow such collection procedures as it would follow with respect to mortgage
loans that are comparable to such Mortgage Loans and held for its own account,
provided such procedures are consistent with the terms of the related Pooling
Agreement, including the servicing standard specified therein and generally
described in the preceding paragraph (as such may be more particularly
described in the related Prospectus Supplement, the "Servicing Standard"), and
do not impair recovery under any instrument of credit enhancement included in
the
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related Trust Fund. Consistent with the foregoing, the Master Servicer will be
permitted, in its discretion, to waive any Prepayment Premium, late payment
charge or other charge in connection with any Mortgage Loan.
Under a Pooling Agreement, a Master Servicer will be granted certain
discretion to extend relief to Mortgagors whose payments become delinquent. In
the case of Single Family Loans and Contracts, a Master Servicer may, among
other things, grant a period of temporary indulgence (generally up to four
months) to a Mortgagor or may enter into a liquidating plan providing for
repayment by such Mortgagor of delinquent amounts within a specified period
(generally up to one year) from the date of execution of the plan. However,
unless otherwise specified in the related Prospectus Supplement, the Master
Servicer must first determine that any such waiver or extension will not
impair the coverage of any related insurance policy or materially adversely
affect the security for such Mortgage Loan. In addition, unless otherwise
specified in the related Prospectus Supplement, if a material default occurs
or a payment default is reasonably foreseeable with respect to a Multifamily
Loan, the Master Servicer will be permitted, subject to any specific
limitations set forth in the related Pooling Agreement and described in the
related Prospectus Supplement, to modify, waive or amend any term of such
Mortgage Loan, including deferring payments, extending the stated maturity
date or otherwise adjusting the payment schedule, provided that such
modification, waiver or amendment (i) is reasonably likely to produce a
greater recovery with respect to such Mortgage Loan on a present value basis
than would liquidation and (ii) will not adversely affect the coverage under
any applicable instrument of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to
service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a
Multifamily Loan that is unable to make Mortgage Loan payments may also be
unable to make timely payment of taxes and otherwise to maintain and insure
the related Mortgaged Property. In general, the related Master Servicer will
be required to monitor any Multifamily Loan that is in default, evaluate
whether the causes of the default can be corrected over a reasonable period
without significant impairment of the value of the related Mortgaged Property,
initiate corrective action in cooperation with the Mortgagor if cure is
likely, inspect the related Mortgaged Property and take such other actions as
are consistent with the Servicing Standard. A significant period of time may
elapse before the Master Servicer is able to assess the success of any such
corrective action or the need for additional initiatives. The time within
which the Master Servicer can make the initial determination of appropriate
action, evaluate the success of corrective action, develop additional
initiatives, institute foreclosure proceedings and actually foreclose (or
accept a deed to a Mortgaged Property in lieu of foreclosure) on behalf of the
Certificateholders of the related series may vary considerably depending on
the particular Multifamily Loan, the Mortgaged Property, the Mortgagor, the
presence of an acceptable party to assume the Multifamily Loan and the laws of
the jurisdiction in which the Mortgaged Property is located. If a Mortgagor
files a bankruptcy petition, the Master Servicer may not be permitted to
accelerate the maturity of the related Multifamily Loan or to foreclose on the
Mortgaged Property for a considerable period of time. See "Certain Legal
Aspects of Mortgage Loans."
Certain of the Mortgage Loans in a Mortgage Pool may contain a due-on-sale
clause that entitles the lender to accelerate payment of the Mortgage Loan
upon any sale or other transfer of the related Mortgaged Property made without
the lender's consent. Certain of the Multifamily Loans in a Mortgage Pool may
also contain a due-on-encumbrance clause that entitles the lender to
accelerate the maturity of the Mortgage Loan upon the creation of any other
lien or encumbrance upon the Mortgaged Property. In any case in which property
subject to a Single Family Loan or Contract is being conveyed by the
Mortgagor, unless the related Prospectus Supplement provides otherwise, the
Master Servicer will in general be obligated, to the extent it has knowledge
of such conveyance, to exercise its rights to accelerate the maturity of such
Mortgage Loan under any due-on-sale clause applicable thereto, but only if the
exercise of such rights is permitted by applicable law and only to the extent
it would not adversely affect or jeopardize coverage under any Primary
Insurance Policy or applicable credit enhancement arrangements. If the Master
Servicer is prevented from enforcing such due-on-sale clause under applicable
law or if the Master Servicer determines that it is reasonably likely that a
legal action would be instituted by the related Mortgagor to avoid enforcement
of such due-on-sale clause, the Master Servicer will
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enter into an assumption and modification agreement with the person to whom
such property has been or is about to be conveyed, pursuant to which such
person becomes liable under the Mortgage Loan subject to certain specified
conditions. The original Mortgagor may be released from liability on a Single
Family Loan or Contract if the Master Servicer shall have determined in good
faith that such release will not adversely affect the collectability of the
Mortgage Loan. Unless otherwise provided in the related Prospectus Supplement,
the Master Servicer will determine whether to exercise any right the Trustee
may have under any due-on-sale or due-on-encumbrance provision in a
Multifamily Loan in a manner consistent with the Servicing Standard. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be entitled to retain as additional servicing compensation any fee
collected in connection with the permitted transfer of a Mortgaged Property.
See "Certain Legal Aspects of Mortgage Loans--Enforceability of Certain
Provisions." FHA Loans contain no such clause and may be assumed by the
purchaser of the mortgaged property.
Mortgagors may, from time to time, request partial releases of the Mortgaged
Properties, easements, consents to alteration or demolition and other similar
matters. The Master Servicer may approve such a request if it has determined,
exercising its good faith business judgment in the same manner as it would if
it were the owner of the related Mortgage Loan, that such approval will not
adversely affect the security for, or the timely and full collectability of,
the related Mortgage Loan. Any fee collected by the Master Servicer for
processing such request will be retained by the Master Servicer as additional
servicing compensation.
In the case of Single Family and Multifamily Loans secured by junior liens
on the related Mortgaged Properties, unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will be required to file (or cause
to be filed) of record a request for notice of any action by a superior
lienholder under the Senior Lien for the protection of the related Trustee's
interest, where permitted by local law and whenever applicable state law does
not require that a junior lienholder be named as a party defendant in
foreclosure proceedings in order to foreclose such junior lienholder's equity
of redemption. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer also will be required to notify any superior
lienholder in writing of the existence of the Mortgage Loan and request
notification of any action (as described below) to be taken against the
Mortgagor or the Mortgaged Property by the superior lienholder. If the Master
Servicer is notified that any superior lienholder has accelerated or intends
to accelerate the obligations secured by the related Senior Lien, or has
declared or intends to declare a default under the mortgage or the promissory
note secured thereby, or has filed or intends to file an election to have the
related Mortgaged Property sold or foreclosed, then, unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
required to take, on behalf of the related Trust Fund, whatever actions are
necessary to protect the interests of the related Certificateholders, and/or
to preserve the security of the related Mortgage Loan, subject to the
application of the REMIC Provisions. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer will be required to advance the
necessary funds to cure the default or reinstate the superior lien, if such
advance is in the best interests of the related Certificateholders and the
Master Servicer determines such advances are recoverable out of payments on or
proceeds of the related Mortgage Loan.
The Master Servicer for any Mortgage Pool will also be required to perform
other customary functions of a servicer of comparable loans, including
maintaining escrow or impound accounts for payment of taxes, insurance
premiums and similar items, or otherwise monitoring the timely payment of
those items; adjusting Mortgage Rates on ARM Loans; maintaining Buydown
Accounts; supervising foreclosures and similar proceedings; managing Mortgage
Properties acquired through or in lieu of foreclosure (each, an "REO
Property"); and maintaining servicing records relating to the Mortgage Loans
in such Mortgage Pool. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will be responsible for filing and settling
claims in respect of particular Mortgage Loans under any applicable instrument
of credit enhancement. See "Description of Credit Enhancement."
SUBSERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Mortgage Loans serviced by it to one or more third-party servicers (each, a
"Subservicer"), but the Master Servicer will remain liable for such
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obligations under the related Pooling Agreement unless otherwise provided in
the related Prospectus Supplement. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will be solely liable for all fees
owed by it to any Subservicer, irrespective of whether the Master Servicer's
compensation pursuant to the related Pooling Agreement is sufficient to pay
such fees. Each Subservicer will be entitled to reimbursement for certain
expenditures which it makes, generally to the same extent as would the Master
Servicer for making the same expenditures. See "--Servicing and Other
Compensation and Payment of Expenses; Spread" below and "Description of the
Certificates--Certificate Account."
SPECIAL SERVICERS
If and to the extent specified in the related Prospectus Supplement, a
special servicer (a "Special Servicer") may be a party to the related Pooling
Agreement or may be appointed by the Master Servicer or another specified
party to perform certain specified duties in respect of servicing the related
Mortgage Loans that would otherwise be performed by the Master Servicer (for
example, the workout and/or foreclosure of defaulted Mortgage Loans). The
rights and obligations of any Special Servicer will be specified in the
related Prospectus Supplement, and the Master Servicer will be liable for the
performance of a Special Servicer only if, and to the extent, set forth in
such Prospectus Supplement.
REALIZATION UPON OR SALE OF DEFAULTED MORTGAGE LOANS
Except as described below or in the related Prospectus Supplement, the
Master Servicer will be required, in a manner consistent with the Servicing
Standard, to foreclose upon or otherwise comparably convert the ownership of
properties securing such of the Mortgage Loans in the related Mortgage Pool as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection therewith,
the Master Servicer will be authorized to institute foreclosure proceedings,
exercise any power of sale contained in the related Mortgage, obtain a deed in
lieu of foreclosure, or otherwise acquire title to the related Mortgaged
Property, by operation of law or otherwise, if such action is consistent with
the Servicing Standard. The Master Servicer's actions in this regard must be
conducted, however, in a manner that will permit recovery under any instrument
of credit enhancement included in the related Trust Fund. In addition, the
Master Servicer will not be required to expend its own funds in connection
with any foreclosure or to restore any damaged property unless it shall
determine that (i) such foreclosure and/or restoration will increase the
proceeds of liquidation of the Mortgage Loan to the related Certificateholders
after reimbursement to itself for such expenses and (ii) such expenses will be
recoverable to it from related Insurance Proceeds, Liquidation Proceeds or
amounts drawn out of any fund or under any instrument constituting credit
enhancement (respecting which it shall have priority for purposes of
withdrawal from the Certificate Account in accordance with the Pooling
Agreement).
Notwithstanding the foregoing, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Certificateholders of the
related series, or any other specified person to be considered to hold title
to, to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator"
of such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable environmental
laws and regulations or, if not, that taking such actions as are necessary
to bring the Mortgaged Property into compliance therewith is reasonably
likely to produce a greater recovery on a present value basis than not
taking such actions; and
(ii) there are no circumstances or conditions present at the Mortgaged
Property that have resulted in any contamination for which investigation,
testing, monitoring, containment, clean-up or remediation could be required
under any applicable environmental laws and regulations or, if such
circumstances or conditions are present for which any such action could be
required, taking such actions with respect to the Mortgaged Property is
reasonably likely to produce a greater recovery on a present value basis
than not taking such actions. See "Certain Legal Aspects of Mortgage
Loans--Environmental Legislation."
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In addition, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to foreclose upon or
otherwise convert the ownership of any Single Family Property securing a
Mortgage Loan if it has received notice or has actual knowledge that such
property may be contaminated with or affected by hazardous wastes or hazardous
substances; however, no environmental testing will generally be required. The
Master Servicer will not be liable to the Certificateholders of the related
series if, based on its belief that no such contamination or effect exists,
the Master Servicer forecloses on a Mortgaged Property and takes title to such
Mortgaged Property, and thereafter such Mortgaged Property is determined to be
so contaminated or affected.
With respect to a Mortgage Loan in default, the Master Servicer may pursue
foreclosure (or similar remedies) concurrently with pursuing any remedy for a
breach of a representation and warranty. However, the Master Servicer is not
required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. Upon the first to
occur of final liquidation (by foreclosure or otherwise) and a repurchase or
substitution pursuant to a breach of a representation and warranty, such
Mortgage Loan will be removed from the related Trust Fund if it has not been
removed previously. The Master Servicer may elect to treat a defaulted
Mortgage Loan as having been finally liquidated if substantially all amounts
expected to be received in connection therewith have been received. Any
additional liquidation expenses relating to such Mortgage Loan thereafter
incurred will be reimbursable to the Master Servicer (or any Subservicer) from
any amounts otherwise distributable to holders of Certificates of the related
series, or may be offset by any subsequent recovery related to such Mortgage
Loan. Alternatively, for purposes of determining the amount of related
Liquidation Proceeds to be distributed to Certificateholders, the amount of
any Realized Loss or the amount required to be drawn under any applicable form
of credit support, the Master Servicer may take into account minimal amounts
of additional receipts expected to be received, as well as estimated
additional liquidation expenses expected to be incurred in connection with
such defaulted Mortgage Loan. With respect to certain series of Certificates,
if so provided in the related Prospectus Supplement, the applicable form of
credit enhancement may provide, to the extent of coverage thereunder, that a
defaulted Mortgage Loan will be removed from the Trust Fund prior to the final
liquidation thereof. In addition, a Pooling Agreement may grant to the Master
Servicer, a Special Servicer, a provider of credit enhancement and/or the
holder or holders of certain classes of Certificates of the related series a
right of first refusal to purchase from the Trust Fund, at a predetermined
purchase price (which, if insufficient to fully fund the entitlements of
Certificateholders to principal and interest thereon, will be specified in the
related Prospectus Supplement), any Mortgage Loan as to which a specified
number of scheduled payments are delinquent. Furthermore, a Pooling Agreement
may authorize the Master Servicer to sell any defaulted Mortgage Loan if and
when the Master Servicer determines, consistent with the Servicing Standard,
that such a sale would produce a greater recovery to Certificateholders on a
present value basis than would liquidation of the related Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure, deed in lieu of foreclosure or otherwise, the deed or certificate
of sale will be issued to the Trustee or to its nominee on behalf of
Certificateholders of the related series. Notwithstanding any such acquisition
of title and cancellation of the related Mortgage Loan, such Mortgage Loan (an
"REO Mortgage Loan") will be considered for most purposes to be an outstanding
Mortgage Loan held in the Trust Fund until such time as the Mortgaged Property
is sold and all recoverable Liquidation Proceeds and Insurance Proceeds have
been received with respect to such defaulted Mortgage Loan (a "Liquidated
Mortgage Loan"). For purposes of calculations of amounts distributable to
Certificateholders in respect of an REO Mortgage Loan, unless otherwise
specified in the related Prospectus Supplement, the amortization schedule in
effect at the time of any such acquisition of title (before any adjustment
thereto by reason of any bankruptcy or any similar proceeding or any
moratorium or similar waiver or grace period) will be deemed to have continued
in effect (and, in the case of an ARM Loan, such amortization schedule will be
deemed to have adjusted in accordance with any interest rate changes occurring
on any adjustment date therefor) so long as such REO Mortgage Loan is
considered to remain in the Trust Fund.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC
election has been made, the Master Servicer, on behalf of the Trust Fund, will
be required to sell the Mortgaged Property within two years of acquisition,
unless (i) the Internal
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Revenue Service grants an extension of time to sell such property or (ii) the
Trustee receives an opinion of independent counsel to the effect that the
holding of the property by the Trust Fund for more than two years after its
acquisition will not result in the imposition of a tax on the Trust Fund or
cause the Trust Fund to fail to qualify as a REMIC under the Code at any time
that any Certificate is outstanding. Subject to the foregoing and any other
tax-related constraints, the Master Servicer will generally be required to
solicit bids for any Mortgaged Property so acquired in such a manner as will
be reasonably likely to realize a fair price for such property. Unless
otherwise provided in the related Prospectus Supplement, if title to any
Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer will also be required to ensure that the
Mortgaged Property is administered so that it constitutes "foreclosure
property" within the meaning of Code Section 86OG(a)(8) at all times, that the
sale of such property does not result in the receipt by the Trust Fund of any
income from non-permitted assets as described in Code Section 86OF(a)(2)(B),
and that the Trust Fund does not derive any "net income from foreclosure
property" within the meaning of Code Section 86OG(c)(2), with respect to such
property.
If Liquidation Proceeds collected with respect to a defaulted Mortgage Loan
are less than the outstanding principal balance of the defaulted Mortgage Loan
plus interest accrued thereon plus the aggregate amount of reimbursable
expenses incurred by the Master Servicer with respect to such Mortgage Loan,
and the shortfall is not covered under any applicable instrument or fund
constituting credit enhancement, the Trust Fund will realize a loss in the
amount of such difference. The Master Servicer will be entitled to reimburse
itself from the Liquidation Proceeds recovered on any defaulted Mortgage Loan,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts that represent unpaid servicing compensation in respect of the
Mortgage Loan, unreimbursed servicing expenses incurred with respect to the
Mortgage Loan and any unreimbursed advances of delinquent payments made with
respect to the Mortgage Loan. If so provided in the related Prospectus
Supplement, the applicable form of credit enhancement may provide for
reinstatement subject to certain conditions in the event that, following the
final liquidation of a Mortgage Loan and a draw under such credit enhancement,
subsequent recoveries are received. In addition, if a gain results from the
final liquidation of a defaulted Mortgage Loan or an REO Mortgage Loan which
is not required by law to be remitted to the related Mortgagor, the Master
Servicer will not be entitled to retain such gain as additional servicing
compensation unless the related Prospectus Supplement provides otherwise. For
a description of the Master Servicer's (or other specified person's)
obligations to maintain and make claims under applicable forms of credit
enhancement and insurance relating to the Mortgage Loans, see "Description of
Credit Enhancement" and "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder."
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; SPREAD
The principal servicing compensation to be paid to the Master Servicer in
respect of its master servicing activities for a series of Certificates will
be equal to the percentage per annum described in the related Prospectus
Supplement (which may vary under certain circumstances) of the outstanding
principal balance of each Mortgage Loan, and such compensation will be
retained by it on a monthly or other periodic basis from collections of
interest on such Mortgage Loan in the related Trust Fund at the time such
collections are deposited into the applicable Certificate Account. If so
specified in the related Prospectus Supplement, the Master Servicer will
retain all Prepayment Premiums, assumption fees and late payment charges, to
the extent collected from Mortgagors, and any benefit which may accrue as a
result of the investment of funds in the applicable Certificate Account. Any
additional servicing compensation will be described in the related Prospectus
Supplement. Any Subservicer will receive a portion of the Master Servicer's
compensation as its sub-servicing compensation.
In addition to amounts payable to any Subservicer, the Master Servicer will
pay or cause to be paid certain ongoing expenses associated with each Trust
Fund and incurred by it in connection with its responsibilities under the
Pooling Agreement, including, if so specified in the related Prospectus
Supplement, payment of any fee or other amount payable in respect of any
alternative credit enhancement arrangements, payment of the fees and
disbursements of the Trustee, any custodian appointed by the Trustee and the
Certificate Registrar, and payment of expenses incurred in enforcing the
obligations of Subservicers and Sellers. The Master Servicer will be entitled
to reimbursement of expenses incurred in enforcing the obligations of
Subservicers and Sellers under certain
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limited circumstances. In addition, the Master Servicer will be entitled to
reimbursements for certain expenses incurred by it in connection with
Liquidated Mortgage Loans and in connection with the restoration of Mortgaged
Properties, such right of reimbursement being prior to the rights of
Certificateholders to receive any related Liquidation Proceeds or Insurance
Proceeds. If and to the extent so provided in the related Prospectus
Supplement, the Master Servicer will be entitled to receive interest on
amounts advanced to cover such reimbursable expenses for the period that such
advances are outstanding at the rate specified in such Prospectus Supplement,
and the Master Servicer will be entitled to payment of such interest
periodically from general collections on the Mortgage Loans in the related
Trust Fund prior to any payment to Certificateholders or as otherwise provided
in the related Pooling Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Spread retained. Any such Spread will be a specified portion
of the interest payable on each Mortgage Loan in a Mortgage Pool and will not
be part of the related Trust Fund. Any such Spread will be established on a
loan-by-loan basis and the amount thereof with respect to each Mortgage Loan
in a Mortgage Pool will be specified on an exhibit to the related Pooling
Agreement. Any partial recovery of interest in respect of a Mortgage Loan will
be allocated between the owners of any Spread and the holders of classes of
Certificates entitled to payments of interest as provided in the related
Prospectus Supplement and the applicable Pooling Agreement.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing
compensation otherwise payable to it in respect of any period to any
Prepayment Interest Shortfalls resulting from Mortgagor prepayments during
such period. See "Yield Considerations."
EVIDENCE AS TO COMPLIANCE
Each Pooling Agreement will provide that on or before a specified date in
each year, beginning the first such date that is at least a specified number
of months after the Cut-off Date, a firm of independent public accountants
will furnish a statement to the Company and the Trustee to the effect that, on
the basis of an examination by such firm conducted substantially in compliance
with the Uniform Single Attestation Program for Mortgage Bankers or the Audit
Program for Mortgages serviced for Freddie Mac, the servicing of mortgage
loans under agreements (including the related Pooling Agreement) substantially
similar to each other was conducted in compliance with such agreements except
for such significant exceptions or errors in records that, in the opinion of
the firm, the Uniform Single Attestation Program for Mortgage Bankers or the
Audit Program for Mortgages serviced for Freddie Mac requires it to report. In
rendering its statement such firm may rely, as to the matters relating to the
direct servicing of mortgage loans by Subservicers, upon comparable statements
for examinations conducted substantially in compliance with the Uniform Single
Attestation Program for Mortgage Bankers or the Audit Program for Mortgages
serviced for Freddie Mac (rendered within one year of such statement) of firms
of independent public accountants with respect to those Subservicers which
also have been the subject of such an examination.
Each Pooling Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by one or
more officers of the Master Servicer to the effect that, to the best knowledge
of each such officer, the Master Servicer has fulfilled in all material
respects its obligations under the Pooling Agreement throughout the preceding
year or, if there has been a material default in the fulfillment of any such
obligation, such statement shall specify each such known default and the
nature and status thereof. Such statement may be provided as a single form
making the required statements as to more than one Pooling Agreement.
Unless otherwise specified in the related Prospectus Supplement, copies of
the annual accountants' statement and the annual statement of officers of a
Master Servicer may be obtained by Certificateholders without charge upon
written request to the Master Servicer at the address of the Master Servicer
set forth under "The Master Servicer; the Sub-Servicer" in the Prospectus
Supplement. Such requests should be sent to the attention of the President of
the Master Servicer.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in series. Each series of Certificates (or,
in certain instances, two or more series of Certificates) will be issued
pursuant to a Pooling Agreement, similar to one of the forms filed as an
exhibit to the Registration Statement of which this Prospectus is a part. Each
Pooling Agreement will be filed with the Securities and Exchange Commission as
an exhibit to a Current Report on Form 8-K. The following summaries (together
with additional summaries under "The Pooling Agreement" below) describe the
material provisions relating to the Certificates common to each Pooling
Agreement. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Pooling Agreement for each Trust Fund and the related Prospectus Supplement.
Wherever particular sections or defined terms of the Pooling Agreement are
referred to herein, such sections or defined terms are thereby incorporated
herein by reference.
Unless otherwise specified in the related Prospectus Supplement,
Certificates of each series covered by a particular Pooling Agreement will
evidence specified beneficial ownership interests in a separate Trust Fund
created pursuant to such Pooling Agreement. A Trust Fund will consist of, to
the extent provided in the Pooling Agreement: (i) such Mortgage Loans (and the
related mortgage documents) or interests therein (including any Mortgage
Securities) underlying a particular series of Certificates as from time to
time are subject to the Pooling Agreement, exclusive of, if specified in the
related Prospectus Supplement, any Spread or other interest retained by the
Company or any of its affiliates with respect to each such Mortgage Loan; (ii)
such assets including, without limitation, all payments and collections in
respect of the Mortgage Loans or Mortgage Securities due after the related
Cut-off Date, as from time to time are identified as deposited in respect
thereof in the related Certificate Account as described below; (iii) any
property acquired in respect of Mortgage Loans in the Trust Fund, whether
through foreclosure of such Mortgage Loans or by deed in lieu of foreclosure
or otherwise; (iv) hazard insurance policies, Primary Insurance Policies and
FHA insurance policies, if any, maintained in respect of Mortgage Loans in the
Trust Fund and certain proceeds of such policies; (v) certain rights of the
Company under any Mortgage Loan Purchase Agreement, including in respect of
any representations and warranties therein; and (vi) any combination, as and
to the extent specified in the related Prospectus Supplement, of a Letter of
Credit, Purchase Obligation, Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy or Bankruptcy Bond as described under "Description of Credit
Enhancement." To the extent that any Trust Fund includes certificates of
interest or participations in Mortgage Loans, the related Prospectus
Supplement will describe the material terms and conditions of such
certificates or participations.
If provided in the related Prospectus Supplement, the original principal
amount of a series of Certificates may exceed the principal balance of the
Mortgage Loans or Mortgage Securities initially being delivered to the
Trustee. Cash in an amount equal to such difference will be deposited into a
separate trust account (the "Pre-Funding Account") maintained with the
Trustee. During the period set forth in the related Prospectus Supplement,
amounts on deposit in the Pre-Funding Account may be used to purchase
additional Mortgage Loans or Mortgage Securities for the related Trust Fund,
which Mortgage Loans will generally be underwritten to the same standards as
the Mortgage Loans initially included in the Trust Fund. Any amounts remaining
in the Pre-Funding Account at the end of such period will be distributed as a
principal prepayment to the holders of the related series of Certificates at
the time and in the manner set forth in the related Prospectus Supplement. A
Pre-Funding Account will be required to be maintained as an Eligible Account,
all amounts therein will be required to be invested in Permitted Investments
and the amount held therein shall at no time exceed 25% of the aggregate
outstanding principal of the Certificates. The related agreement providing for
the transfer of additional Mortgage Loans will provide that all such transfers
must be made within 9 months (as to amounts representing proceeds from the
sale of the Certificates) or 12 months (as to amounts representing principal
collections on the Mortgage Loans) after the Closing Date, and that amounts to
be set aside to fund such transfers (whether in a Pre-Funding Account or
otherwise) and not so applied within the required period of time will be
deemed to be principal prepayments and applied in the manner set forth in such
Prospectus Supplement.
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The Company will be required to provide data regarding any additional
Mortgage Loans or Mortgage Securities to the Rating Agencies and the credit
support provider, if any, sufficiently in advance of the scheduled transfer to
permit review by such parties. Transfer of any additional Mortgage Loans or
Mortgage Securities will be further conditioned upon confirmation by the
Rating Agencies that the addition of such Mortgage Loans to the Trust Fund
will not result in the downgrading of the Certificates or, in the case of a
series guaranteed or supported by a credit support provider, will not
adversely affect the capital requirements of such credit support provider.
Additionally, a legal opinion to the effect that the conditions to the
transfer of the additional Mortgage Loans or Mortgage Securities have been
satisfied will be required. If a Trust Fund includes a Pre-Funding Account and
the principal balance of additional Mortgage Loans delivered to the Trust Fund
during the Pre-Funding Period is less than the Pre-Funded Amount, the
Certificateholders will receive a prepayment of principal as and to the extent
described in the related Prospectus Supplement. Any such principal prepayment
may adversely affect the yield to maturity of the applicable Certificates.
Each series of Certificates may consist of any one or a combination of the
following: (i) a single class of Certificates; (ii) two or more classes of
Certificates, one or more classes of which will be senior ("Senior
Certificates") in right of payment to one or more of the other classes
("Subordinate Certificates"), and as to which certain classes of Senior (or
Subordinate) Certificates may be senior to other classes of Senior (or
Subordinate) Certificates, as described in the respective Prospectus
Supplement (any such series, a "Senior/Subordinate Series"); (iii) two or more
classes of Certificates, one or more classes ("Strip Certificates") of which
will be entitled to (a) principal distributions, with disproportionate,
nominal or no interest distributions or (b) interest distributions, with
disproportionate, nominal or no principal distributions; (iv) two or more
classes of Certificates which differ as to the timing, sequential order, rate,
pass-through rate or amount of distributions of principal or interest or both,
or as to which distributions of principal or interest or both on any such
class may be made upon the occurrence of specified events, in accordance with
a schedule or formula (including "planned amortization classes" and "targeted
amortization classes"), or on the basis of collections from designated
portions of the Mortgage Pool, and which classes may include one or more
classes of Certificates ("Accrual Certificates") with respect to which certain
accrued interest will not be distributed but rather will be added to the
principal balance thereof on each Distribution Date for the period described
in the related Prospectus Supplement; or (v) other types of classes of
Certificates, as described in the related Prospectus Supplement. As to each
series, all Certificates offered hereby (the "Offered Certificates") will be
rated in one of the four highest rating categories by one or more Rating
Agencies. Credit support for the Offered Certificates of each series may be
provided by a Mortgage Pool Insurance Policy, Special Hazard Insurance Policy,
Bankruptcy Bond, Letter of Credit, Purchase Obligation or Reserve Fund as
described under "Description of Credit Enhancement," by the subordination of
one or more other classes of Certificates as described under "Description of
Credit Enhancement--Subordinate Certificates" or by any combination of the
foregoing.
If so specified in the Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust
Fund, or a designated portion thereof, as a REMIC. If such an election is made
with respect to a series of Certificates, one of the classes of Certificates
in such series will be designated as evidencing the sole class of "residual
interests" in each related REMIC, as defined in the Code; alternatively, a
separate class of ownership interests will evidence such residual interests.
All other classes of Certificates in such series will constitute "regular
interests" in the related REMIC, as defined in the Code and will be designated
as such. As to each series of Certificates as to which a REMIC election is to
be made, the Master Servicer, Trustee or other specified person will be
obligated to take certain specified actions required in order to comply with
applicable laws and regulations.
FORM OF CERTIFICATES
Unless otherwise specified in the related Prospectus Supplement, the Offered
Certificates of each series will be issued as physical certificates in fully
registered form only in the denominations specified in the related Prospectus
Supplement, and will be transferrable and exchangeable at the corporate trust
office of the registrar (the "Certificate Registrar") named in the related
Prospectus Supplement. No service charge will be made for
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any registration of exchange or transfer of Offered Certificates, but the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge. The term "Certificateholder" or "Holder" as used herein
refers to the entity whose name appears on the records of the Certificate
Registrar (consisting of or including the "Certificate Register") as the
registered holder of a Certificate, except as otherwise indicated in the
related Prospectus Supplement.
If so specified in the related Prospectus Supplement, specified classes of a
series of Certificates will be initially issued through the book-entry
facilities of The Depository Trust Company ("DTC"). As to any such class of
Certificates ("DTC Registered Certificates"), the record Holder of such
Certificates will be DTC's nominee. DTC is a limited-purpose trust company
organized under the laws of the State of New York, which holds securities for
its participating organizations ("Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes in the accounts of Participants. Participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Other institutions
that are not Participants but clear through or maintain a custodial
relationship with Participants (such institutions, "Intermediaries") have
indirect access to DTC's clearance system.
Unless otherwise specified in the related Prospectus Supplement, no person
acquiring an interest in any DTC Registered Certificates (each such person, a
"Beneficial Owner") will be entitled to receive a Certificate representing
such interest in registered, certificated form, unless either (i) DTC ceases
to act as depository in respect thereof and a successor depository is not
obtained, or (ii) the Company elects in its sole discretion to discontinue the
registration of such Certificates through DTC. Prior to any such event,
Beneficial Owners will not be recognized by the Trustee or the Master Servicer
as Holders of the related Certificates for purposes of the related Pooling
Agreement, and Beneficial Owners will be able to exercise their rights as
owners of such Certificates only indirectly through DTC, Participants and
Intermediaries. Any Beneficial Owner that desires to purchase, sell or
otherwise transfer any interest in DTC Registered Certificates may do so only
through DTC, either directly if such Beneficial Owner is a Participant or
indirectly through Participants and, if applicable, Intermediaries. Pursuant
to the procedures of DTC, transfers of the beneficial ownership of any DTC
Registered Certificates will be required to be made in minimum denominations
specified in the related Prospectus Supplement. The ability of a Beneficial
Owner to pledge DTC Registered Certificates to persons or entities that are
not Participants in the DTC system, or to otherwise act with respect to such
Certificates, may be limited because of the lack of physical certificates
evidencing such Certificates and because DTC may act only on behalf of
Participants.
Distributions in respect of the DTC Registered Certificates will be
forwarded by the Trustee or other specified person to DTC, and DTC will be
responsible for forwarding such payments to Participants, each of which will
be responsible for disbursing such payments to the Beneficial Owners it
represents or, if applicable, to Intermediaries. Accordingly, Beneficial
Owners may experience delays in the receipt of payments in respect of their
Certificates. Under DTC's procedures, DTC will take actions permitted to be
taken by Holders of any class of DTC Registered Certificates under the Pooling
Agreement only at the direction of one or more Participants to whose account
the DTC Registered Certificates are credited and whose aggregate holdings
represent no less than any minimum amount of Percentage Interests or voting
rights required therefor. DTC may take conflicting actions with respect to any
action of Holders of Certificates of any Class to the extent that Participants
authorize such actions. None of the Master Servicer, the Company, the Trustee
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 DTC Registered Certificates, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests.
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of a series of Certificates, the Company will
assign, or cause to be assigned, to the related Trustee (or its nominee),
without recourse, the Mortgage Loans or Mortgage Securities being included in
the related Trust Fund, together with, unless otherwise specified in the
related Prospectus Supplement, all
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principal and interest received on or with respect to such Mortgage Loans or
Mortgage Securities after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date. If specified in the related Prospectus
Supplement, the Company or any of its affiliates may retain the Spread, if
any, for itself or transfer the same to others. The Trustee will, concurrently
with such assignment, deliver the Certificates of such series to or at the
direction of the Company in exchange for the Mortgage Loans and/or Mortgage
Securities in the related Trust Fund. Each Mortgage Loan will be identified in
a schedule appearing as an exhibit to the related Pooling Agreement. Such
schedule will include, among other things, information as to the principal
balance of each Mortgage Loan in the related Trust Fund as of the Cut-off
Date, as well as information respecting the Mortgage Rate, the currently
scheduled monthly payment of principal and interest, the maturity of the
Mortgage Note and the Loan-to-Value Ratio at origination or modification
(without regard to any secondary financing).
In addition, unless otherwise specified in the related Prospectus
Supplement, the Company will, as to each Mortgage Loan (other than Mortgage
Loans underlying any Mortgage Securities and other than Contracts), deliver,
or cause to be delivered, to the related Trustee (or to the custodian
described below) the Mortgage Note endorsed, without recourse, either in blank
or to the order of such Trustee (or its nominee), the Mortgage with evidence
of recording indicated thereon (except for any Mortgage not returned from the
public recording office), an assignment of the Mortgage in blank or to the
Trustee (or its nominee) in recordable form, together with any intervening
assignments of the Mortgage with evidence of recording thereon (except for any
such assignment not returned from the public recording office), and, if
applicable, any riders or modifications to such Mortgage Note and Mortgage,
together with certain other documents at such times as set forth in the
related Pooling Agreement. Such assignments may be blanket assignments
covering Mortgages on Mortgaged Properties located in the same county, if
permitted by law. Notwithstanding the foregoing, a Trust Fund may include
Mortgage Loans where the original Mortgage Note is not delivered to the
Trustee if the Company delivers, or causes to be delivered, to the related
Trustee (or the custodian) a copy or a duplicate original of the Mortgage
Note, together with an affidavit certifying that the original thereof has been
lost or destroyed. In addition, if the Company cannot deliver, with respect to
any Mortgage Loan, the Mortgage or any intervening assignment with evidence of
recording thereon concurrently with the execution and delivery of the related
Pooling Agreement because of a delay caused by the public recording office,
the Company will deliver, or cause to be delivered, to the related Trustee (or
the custodian) a true and correct photocopy of such Mortgage or assignment as
submitted for recording. The Company will deliver, or cause to be delivered,
to the related Trustee (or the custodian) such Mortgage or assignment with
evidence of recording indicated thereon after receipt thereof from the public
recording office. If the Company cannot deliver, with respect to any Mortgage
Loan, the Mortgage or any intervening assignment with evidence of recording
thereon concurrently with the execution and delivery of the related Pooling
Agreement because such Mortgage or assignment has been lost, the Company will
deliver, or cause to be delivered, to the related Trustee (or the custodian) a
true and correct photocopy of such Mortgage or assignment with evidence of
recording thereon. Assignments of the Mortgage Loans to the Trustee (or its
nominee) will be recorded in the appropriate public recording office, except
in states where, in the opinion of counsel acceptable to the Trustee, such
recording is not required to protect the Trustee's interests in the Mortgage
Loan against the claim of any subsequent transferee or any successor to or
creditor of the Company or the originator of such Mortgage Loan, or except as
otherwise specified in the related Prospectus Supplement as to any series of
Certificates. In addition, unless specified in the related Prospectus
Supplement, the Company will, as to each Contract, deliver, or cause to be
delivered, the original Contract endorsed, without recourse, to the order of
the Trustee and copies of documents and instruments related to the Contract
and the security interest in the Manufactured Home securing the Contract,
together with a blanket assignment to the Trustee of all Contracts in the
related Trust Fund and such documents and instruments. In order to give notice
of the right, title and interest of the Certificateholders to the Contracts,
the Company will cause to be executed and delivered to the Trustee a UCC-1
financing statement identifying the Trustee as the secured party and
identifying all Contracts as collateral. Unless otherwise specified in the
related Prospectus Supplement, the Company will, as to each Mortgage Security
included in a Mortgage Pool, deliver, or cause to be delivered, to the related
Trustee (or the custodian) a physical certificate evidencing such Mortgage
Security, registered in the name of the related Trustee (or its nominee), or
endorsed in blank or to the related Trustee (or its nominee), or accompanied
by transfer documents sufficient to effect a transfer to the Trustee (or its
nominee).
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The Trustee (or the custodian hereinafter referred to) will hold such
documents in trust for the benefit of the related Certificateholders, and
generally will review such documents within 90 days after receipt thereof in
the case of documents delivered concurrently with the execution and delivery
of the related Pooling Agreement, and within the time period specified in the
related Pooling Agreement in the case of all other documents delivered. Unless
otherwise specified in the related Prospectus Supplement, if any such document
is found to be missing or defective in any material respect, the Trustee (or
such custodian) will be required to promptly so notify the Master Servicer,
the Company, and the related Seller. If the related Seller does not cure the
omission or defect within a specified period after notice is given thereto by
the Trustee, and such omission or defect materially and adversely affects the
interests of Certificateholders in the affected Mortgage Loan or Mortgage
Security, then, unless otherwise specified in the related Prospectus
Supplement, the related Seller will be obligated to purchase such Mortgage
Loan or Mortgage Security from the Trustee at its Purchase Price (or, if and
to the extent it would otherwise be permitted to do so for a breach of
representation and warranty as described under "The Mortgage Pools--
Representations of Sellers," to substitute for such Mortgage Loan or Mortgage
Security). The Trustee will be obligated to enforce this obligation of the
Seller to the extent described above under "The Mortgage Pools--
Representations by Sellers," but there can be no assurance that the applicable
Seller will fulfill its obligation to purchase (or substitute for) the
affected Mortgage Loan or Mortgage Security as described above. Unless
otherwise specified in the related Prospectus Supplement, neither the Master
Servicer nor the Company will be obligated to purchase or substitute for such
Mortgage Loan or Mortgage Security if the Seller defaults on its obligation to
do so. Unless otherwise specified in the related Prospectus Supplement, this
purchase or substitution obligation constitutes the sole remedy available to
the related Certificateholders and the related Trustee for omission of, or a
material defect in, a constituent document. Any affected Mortgage Loan or
Mortgage Security not so purchased or substituted for shall remain in the
related Trust Fund.
The Trustee will be authorized at any time to appoint one or more custodians
pursuant to a custodial agreement to hold title to the Mortgage Loans and/or
Mortgage Securities in any Mortgage Pool, and to maintain possession of and,
if applicable, to review, the documents relating to such Mortgage Loans and/or
Mortgage Securities, in any case as the agent of the Trustee. The identity of
any such custodian to be appointed on the date of initial issuance of the
Certificates will be set forth in the related Prospectus Supplement. Any such
custodian may be an affiliate of the Company or the Master Servicer.
With respect to the Mortgage Loans in a Mortgage Pool, except in the case of
a Designated Seller Transaction or as to Mortgage Loans underlying any
Mortgage Securities or unless otherwise specified in the related Prospectus
Supplement, the Company will make certain representations and warranties as to
the types and geographical concentrations of such Mortgage Loans and as to the
accuracy, in all material respects, of certain identifying information
furnished to the related Trustee in respect of each such Mortgage Loan (e.g.,
original Loan-to-Value Ratio, principal balance as of the Cut-off Date,
Mortgage Rate and maturity). Upon a breach of any such representation which
materially and adversely affects the interests of the Certificateholders in a
Mortgage Loan, the Company will be obligated to cure the breach in all
material respects, to purchase the Mortgage Loan at its Purchase Price or,
unless otherwise specified in the related Prospectus Supplement, to substitute
for such Mortgage Loan a Qualified Substitute Mortgage Loan in accordance with
the provisions for such substitution by Affiliated Sellers as described above
under "The Mortgage Pools--Representations by Sellers." However, the Company
will not be required to repurchase or substitute for any Mortgage Loan in
connection with a breach of a representation and warranty if the substance of
any such breach also constitutes fraud in the origination of the related
Mortgage Loan. Unless otherwise specified in the related Prospectus
Supplement, this purchase or substitution obligation constitutes the sole
remedy available to Certificateholders or the Trustee for such a breach of
representation by the Company. Any Mortgage Loan not so purchased or
substituted for shall remain in the related Trust Fund.
Pursuant to the related Pooling Agreement, the Master Servicer for any
Mortgage Pool, either directly or through Subservicers, will service and
administer the Mortgage Loans included in such Mortgage Pool and assigned to
the related Trustee as more fully set forth under "Servicing of Mortgage
Loans." The Master
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Servicer will make certain representations and warranties regarding its
authority to enter into, and its ability to perform its obligations under, the
Pooling Agreement.
CERTIFICATE ACCOUNT
General. The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Mortgage Loans
and/or Mortgage Securities constituting such Trust Fund (collectively, the
"Certificate Account"), which will be established so as to comply with the
standards of each Rating Agency that has rated any one or more classes of
Certificates of the related series. A Certificate Account may be maintained
either as an interest-bearing or a non-interest-bearing account, and the funds
held therein may be held as cash or invested in United States government
securities and other investment grade obligations specified in the related
Pooling Agreement ("Permitted Investments"). Such Permitted Investments will,
however, consist of investments only to the extent that such investments would
not require registration of a Trust Fund as an investment company under the
Investment Company Act of 1940, as amended. Unless otherwise provided in the
related Prospectus Supplement, any interest or other income earned on funds in
the Certificate Account will be paid to the related Master Servicer or Trustee
as additional compensation. If permitted by such Rating Agency or Agencies and
so specified in the related Prospectus Supplement, a Certificate Account may
contain funds relating to more than one series of mortgage pass-through
certificates and may contain other funds representing payments on mortgage
loans owned by the related Master Servicer or serviced by it on behalf of
others.
Deposits. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, the related Master Servicer,
Trustee or Special Servicer will be required to deposit or cause to be
deposited in the Certificate Account for each Trust Fund within a certain
period following receipt (in the case of collections and payments), the
following payments and collections received, or advances made, by the Master
Servicer, the Trustee or any Special Servicer subsequent to the Cut-off Date
with respect to the Mortgage Loans and/or Mortgage Securities in such Trust
Fund (other than payments due on or before the Cut-off Date):
(i) all payments on account of principal, including principal
prepayments, on the Mortgage Loans;
(ii) all payments on account of interest on the Mortgage Loans, including
any default interest collected, in each case net of any portion thereof
retained by the Master Servicer, any Special Servicer or Sub-Servicer as
its servicing compensation or as compensation to the Trustee, and further
net of any Spread;
(iii) all payments on the Mortgage Securities;
(iv) all proceeds received under any hazard, title, primary mortgage, FHA
or other insurance policy that provides coverage with respect to a
particular Mortgaged Property or the related Mortgage Loan other than
proceeds applied to the restoration of the property or released to the
related borrower in accordance with the customary servicing practices of
the Master Servicer (or, if applicable, a Special Servicer) and/or the
terms and conditions of the related Mortgage (collectively, "Insurance
Proceeds") and all other amounts received and retained in connection with
the liquidation of defaulted Mortgage Loans or property acquired in respect
thereof, by foreclosure or otherwise ("Liquidation Proceeds"), together
with the net operating income (less reasonable reserves for future
expenses) derived from the operation of any Mortgaged Properties acquired
by the Trust Fund through foreclosure or otherwise;
(v) any amounts paid under any instrument or drawn from any fund that
constitutes credit enhancement for the related series of Certificates as
described under "Description of Credit Enhancement";
(vi) any advances made as described under "--Advances" below;
(vii) any Buydown Funds (and, if applicable, investment earnings thereon)
required to be paid to Certificateholders, as described below;
(viii) all proceeds of any Mortgage Loan or Mortgage Security purchased
(or, in the case of a substitution, certain amounts representing a
principal adjustment) by the Master Servicer, the Company, a
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Seller or any other person pursuant to the terms of the related Pooling
Agreement as described under "The Mortgage Pools--Representations by
Sellers," "Servicing of Mortgage Loans--Realization Upon and Sale of
Defaulted Mortgage Loans," "--Assignment of Trust Fund Assets" above, "The
Pooling Agreement-- Termination; Retirement of Certificates" and "Purchase
Obligations" (all of the foregoing, also "Liquidation Proceeds");
(ix) any amounts paid by the Master Servicer to cover Prepayment Interest
Shortfalls arising out of the prepayment of Mortgage Loans as described
under "Servicing of Mortgage Loans--Servicing and Other Compensation and
Payment of Expenses; Spread";
(x) to the extent that any such item does not constitute additional
servicing compensation to the Master Servicer or a Special Servicer, any
payments on account of modification or assumption fees, late payment
charges, Prepayment Premiums or Equity Participations on the Mortgage
Loans;
(xi) any amount required to be deposited by the Master Servicer or the
Trustee in connection with losses realized on investments for the benefit
of the Master Servicer or the Trustee, as the case may be, of funds held in
the Certificate Account; and
(xii) any other amounts required to be deposited in the Certificate
Account as provided in the related Pooling Agreement and described herein
or in the related Prospectus Supplement.
With respect to each Buydown Mortgage Loan, the Master Servicer will be
required to deposit the related Buydown Funds provided to it in a Buydown
Account which will comply with the requirements set forth herein with respect
to the Certificate Account. Unless otherwise specified in the related
Prospectus Supplement, the terms of all Buydown Mortgage Loans provide for the
contribution of Buydown Funds in an amount equal to or exceeding either (i)
the total payments to be made from such funds pursuant to the related buydown
plan or (ii) if such Buydown Funds are to be deposited on a discounted basis,
that amount of Buydown Funds which, together with investment earnings thereon
at a rate as will support the scheduled level of payments due under the
Buydown Mortgage Loan. Neither the Master Servicer nor the Company will be
obligated to add to any such discounted Buydown Funds any of its own funds
should investment earnings prove insufficient to maintain the scheduled level
of payments. To the extent that any such insufficiency is not recoverable from
the Mortgagor or, in an appropriate case, from the Seller, distributions to
Certificateholders may be affected. With respect to each Buydown Mortgage
Loan, the Master Servicer will be required monthly to withdraw from the
Buydown Account and deposit in the Certificate Account as described above the
amount, if any, of the Buydown Funds (and, if applicable, investment earnings
thereon) for each Buydown Mortgage Loan that, when added to the amount due
from the Mortgagor on such Buydown Mortgage Loan, equals the full monthly
payment which would be due on the Buydown Mortgage Loan if it were not subject
to the buydown plan. The Buydown Funds will in no event be a part of the
related Trust Fund.
If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in
its entirety during the Buydown Period, the Master Servicer will be required
to withdraw from the Buydown Account and remit to the Mortgagor or such other
designated party in accordance with the related buydown plan any Buydown Funds
remaining in the Buydown Account. If a prepayment by a Mortgagor during the
Buydown Period together with Buydown Funds will result in full prepayment of a
Buydown Mortgage Loan, the Master Servicer will generally be required to
withdraw from the Buydown Account and deposit in the Certificate Account the
Buydown Funds and investment earnings thereon, if any, which together with
such prepayment will result in a prepayment in full; provided that Buydown
Funds may not be available to cover a prepayment under certain Mortgage Loan
programs. Any Buydown Funds so remitted to the Master Servicer in connection
with a prepayment described in the preceding sentence will be deemed to reduce
the amount that would be required to be paid by the Mortgagor to repay fully
the related Mortgage Loan if the Mortgage Loan were not subject to the buydown
plan. Any investment earnings remaining in the Buydown Account after
prepayment or after termination of the Buydown Period will be remitted to the
related Mortgagor or such other designated party pursuant to the agreement
relating to each Buydown Mortgage Loan (the "Buydown Agreement"). If the
Mortgagor defaults during the Buydown Period with respect to a Buydown
Mortgage Loan and the property securing such Buydown Mortgage Loan is sold in
liquidation (either by the Master Servicer, the Primary Insurer, the insurer
under the Mortgage Pool
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Insurance Policy (the "Pool Insurer") or any other insurer), the Master
Servicer will be required to withdraw from the Buydown Account the Buydown
Funds and all investment earnings thereon, if any, and either deposit the same
in the Certificate Account or, alternatively, pay the same to the Primary
Insurer or the Pool Insurer, as the case may be, if the Mortgaged Property is
transferred to such insurer and such insurer pays all of the loss incurred in
respect of such default.
Withdrawals. Unless otherwise provided in the related Pooling Agreement and
described in the related Prospectus Supplement, a Master Servicer, Trustee or
Special Servicer may make withdrawals from the Certificate Account for each
Trust Fund for any of the following purposes:
(i) to make distributions to the related Certificateholders on each
Distribution Date;
(ii) to reimburse the Master Servicer or any other specified person for
unreimbursed amounts advanced by it as described under "--Advances" below
in respect of Mortgage Loans in the Trust Fund, such reimbursement to be
made out of amounts received which were identified and applied by the
Master Servicer as late collections of interest (net of related servicing
fees) on and principal of the particular Mortgage Loans with respect to
which the advances were made or out of amounts drawn under any form of
credit enhancement with respect to such Mortgage Loans;
(iii) to reimburse the Master Servicer or a Special Servicer for unpaid
servicing fees earned by it and certain unreimbursed servicing expenses
incurred by it with respect to Mortgage Loans in the Trust Fund 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 Mortgage Loans and properties, and net income
collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under
any form of credit enhancement with respect to such Mortgage Loans and
properties;
(iv) to reimburse the Master Servicer or any other specified person for
any advances described in clause (ii) above made by it and any servicing
expenses referred to in clause (iii) above incurred by it which, in the
good faith judgment of the Master Servicer or such other person, will not
be recoverable from the amounts described in clauses (ii) and (iii),
respectively, such reimbursement to be made from amounts collected on other
Mortgage Loans in the Trust Fund or, if and to the extent so provided by
the related Pooling Agreement and described in the related Prospectus
Supplement, only from that portion of amounts collected on such other
Mortgage Loans that is otherwise distributable on one or more classes of
Subordinate Certificates of the related series;
(v) if and to the extent described in the related Prospectus Supplement,
to pay the Master Servicer, a Special Servicer or another specified entity
(including a provider of credit enhancement) interest accrued on the
advances described in clause (ii) above made by it and the servicing
expenses described in clause (iii) above incurred by it while such remain
outstanding and unreimbursed;
(vi) to pay for costs and expenses incurred by the Trust Fund for
environmental site assessments performed with respect to Multifamily
Properties that constitute security for defaulted Mortgage Loans, and for
any containment, clean-up or remediation of hazardous wastes and materials
present on such Mortgaged Properties, as described under "Servicing of
Mortgage Loans--Realization Upon or Sale of Defaulted Mortgage Loans";
(vii) to reimburse the Master Servicer, the Company, or any of their
respective directors, officers, employees and agents, as the case may be,
for certain expenses, costs and liabilities incurred thereby, as and to the
extent described under "The Pooling Agreement--Certain Matters Regarding
the Master Servicer and the Company";
(viii) if and to the extent described in the related Prospectus
Supplement, to pay the fees of the Trustee;
(ix) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under "The
Pooling Agreement--Certain Matters Regarding the Trustee";
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(x) to pay the Master Servicer or the Trustee, as additional
compensation, interest and investment income earned in respect of amounts
held in the Certificate Account;
(xi) to pay (generally from related income) for costs incurred in
connection with the operation, management and maintenance of any Mortgaged
Property acquired by the Trust Fund by foreclosure or otherwise;
(xii) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local
taxes imposed on the Trust Fund or its assets or transactions, as and to
the extent described under "Federal Income Tax Consequences--REMICS--
Prohibited Transactions and Other Possible REMIC Taxes";
(xiii) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a defaulted
Mortgage Loan or a property acquired in respect thereof in connection with
the liquidation of such Mortgage Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained
pursuant to the related Pooling Agreement for the benefit of the related
Certificateholders;
(xv) to pay to itself, the Company, a Seller or any other appropriate
person all amounts received with respect to each Mortgage Loan purchased,
repurchased or removed from the Trust Fund pursuant to the terms of the
related Pooling Agreement and not required to be distributed as of the date
on which the related Purchase Price is determined;
(xvi) to make any other withdrawals permitted by the related Pooling
Agreement and described in the related Prospectus Supplement; and
(xvii) to clear and terminate the Certificate Account upon the
termination of the Trust Fund.
DISTRIBUTIONS
Distributions on the Certificates of each series will be made by or on
behalf of the related Trustee or Master Servicer on each Distribution Date as
specified in the related Prospectus Supplement from the Available Distribution
Amount for such series and such Distribution Date. Unless otherwise provided
in the related Prospectus Supplement, the "Available Distribution Amount" for
any series of Certificates and any Distribution Date will refer to the total
of all payments or other collections (or advances in lieu thereof) on, under
or in respect of the Mortgage Loans and/or Mortgage Securities and any other
assets included in the related Trust Fund that are available for distribution
to the Certificateholders of such series on such date. The particular
components of the Available Distribution Amount for any series on each
Distribution Date will be more specifically described in the related
Prospectus Supplement.
Except as otherwise specified in the related Prospectus Supplement,
distributions on the Certificates of each series (other than the final
distribution in retirement of any such Certificate) will be made to the
persons in whose names such Certificates are registered at the close of
business on the last business day of the month preceding the month in which
the applicable Distribution Date occurs (the "Record Date"), and the amount of
each distribution will be determined as of the close of business on the date
(the "Determination Date") specified in the related Prospectus Supplement. 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. Payments will be made either by wire transfer in immediately available
funds to the account of a Certificateholder at a bank or other entity having
appropriate facilities therefor, if such Certificateholder has provided the
Trustee or other person required to make such payments with wiring
instructions no later than five business days prior to the related Record Date
or such other date specified in the related Prospectus Supplement (and, if so
provided in the related Prospectus Supplement, such Certificateholder holds
Certificates in the requisite amount or denomination specified therein), or by
check mailed to the address of such Certificateholder as it appears on the
Certificate Register; provided, however, that the final distribution in
retirement of any class of Certificates will be made only upon presentation
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and surrender of such Certificates at the location specified in the notice to
Certificateholders of such final distribution.
DISTRIBUTIONS OF INTEREST AND PRINCIPAL ON THE CERTIFICATES
Each class of Certificates of each series (other than certain classes of
Strip Certificates and certain REMIC Residual Certificates that have no Pass-
Through Rate) may have a different Pass-Through Rate, which may be fixed,
variable or adjustable, or any combination of two or more such rates. The
related Prospectus Supplement will specify the Pass-Through Rate or, in the
case of a variable or adjustable Pass-Through Rate, the method for determining
the Pass-Through Rate, for each class. Unless otherwise specified in the
related Prospectus Supplement, interest on the Certificates of each series
will be calculated on the basis of a 360-day year consisting of twelve 30-day
months.
Distributions of interest in respect of the Certificates of any class (other
than any class of Certificates that will be entitled to distributions of
accrued interest commencing only on the Distribution Date, or under the
circumstances, specified in the related Prospectus Supplement ("Accrual
Certificates"), and other than any class of Strip Certificates or REMIC
Residual Certificates that is not entitled to any distributions of interest)
will be made on each Distribution Date based on the Accrued Certificate
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
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 principal balance
thereof on each Distribution Date. With respect to each class of Certificates
(other than certain classes of Strip Certificates and REMIC Residual
Certificates), "Accrued Certificate Interest" for each Distribution Date will
be equal to interest at the applicable Pass-Through Rate accrued for a
specified period (generally one month) on the outstanding principal balance
thereof immediately prior to such Distribution Date. Unless otherwise provided
in the related Prospectus Supplement, Accrued Certificate Interest for each
Distribution Date on Strip Certificates entitled to distributions of interest
will be similarly calculated except that it will accrue on a notional amount
that is either (i) based on the principal balances of some or all of the
Mortgage Loans and/or Mortgage Securities in the related Trust Fund or (ii)
equal to the principal balances of one or more other classes of Certificates
of the same series. Reference to such a notional amount with respect to a
class of Strip Certificates is solely for convenience in making certain
calculations and does not represent the right to receive any distribution of
principal. If so specified in the related Prospectus Supplement, the amount of
Accrued Certificate Interest that is otherwise distributable on (or, in the
case of Accrual Certificates, that may otherwise be added to the principal
balance of) one or more classes of the Certificates of a series will be
reduced to the extent that any Prepayment Interest Shortfalls, as described
under "Yield Considerations", exceed the amount of any sums (including, if and
to the extent specified in the related Prospectus Supplement, the Master
Servicer's servicing compensation) that are applied to offset such shortfalls.
The particular manner in which such shortfalls will be allocated among some or
all of the classes of Certificates of that series will be specified in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe the extent to which the amount of Accrued Certificate Interest that
is otherwise distributable on (or, in the case of Accrual Certificates, that
may otherwise be added to the principal balance of) a class of Offered
Certificates may be reduced as a result of any other contingencies, including
delinquencies, losses and Deferred Interest on or in respect of the related
Mortgage Loans or application of the Relief Act with respect to such Mortgage
Loans. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Certificate Interest otherwise
distributable on a class of Certificates by reason of the allocation to such
class of a portion of any Deferred Interest on or in respect of the related
Mortgage Loans will result in a corresponding increase in the principal
balance of such class.
As and to the extent described in the related Prospectus Supplement,
distributions of principal with respect to a series of Certificates will be
made on each Distribution Date to the holders of the class or classes of
Certificates of such series entitled thereto until the principal balance(s) of
such Certificates have been reduced to zero. In the case of a series of
Certificates which includes two or more classes of Certificates, the timing,
sequential order, priority of payment or amount of distributions in respect of
principal, and any schedule or
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formula or other provisions applicable to the determination thereof (including
distributions among multiple classes of Senior Certificates or Subordinate
Certificates), shall be as set forth in the related Prospectus Supplement.
Distributions of principal with respect to one or more classes of Certificates
may be made at a rate that is faster (and, in some cases, substantially
faster) than the rate at which payments or other collections of principal are
received on the Mortgage Loans and/or Mortgage Securities in the related Trust
Fund, may not commence until the occurrence of certain events, such as the
retirement of one or more other classes of Certificates of the same series, or
may be made at a rate that is slower (and, in some cases, substantially
slower) than the rate at which payments or other collections of principal are
received on such Mortgage Loans and/or Mortgage Securities. In addition,
distributions of principal with respect to one or more classes of Certificates
may be made, subject to available funds, based on a specified principal
payment schedule and, with respect to one or more classes of Certificates, may
be contingent on the specified principal payment schedule for another class of
the same series and the rate at which payments and other collections of
principal on the Mortgage Loans and/or Mortgage Securities in the related
Trust Fund are received.
DISTRIBUTIONS ON THE CERTIFICATES IN RESPECT OF PREPAYMENT PREMIUMS OR IN
RESPECT OF EQUITY PARTICIPATIONS
If so provided in the related Prospectus Supplement, Prepayment Premiums or
payments in respect of Equity Participations received on or in connection with
the Mortgage Assets in any Trust Fund will be distributed on each Distribution
Date to the holders of the class of Certificates of the related series
entitled thereto in accordance with the provisions described in such
Prospectus Supplement. "Equity Participations" are financial participations in
the equity portions of mortgage pools.
ALLOCATION OF LOSSES AND SHORTFALLS
The amount of any losses or shortfalls in collections on the Mortgage Loans
and/or Mortgage Securities in any Trust Fund (to the extent not covered or
offset by draws on any reserve fund or under any instrument of credit
enhancement) will be allocated among the respective classes of Certificates of
the related series in the priority and manner, and subject to the limitations,
specified in the related Prospectus Supplement. As described in the related
Prospectus Supplement, such allocations may result in reductions in the
entitlements to interest and/or principal balances of one or more such classes
of Certificates, or may be effected simply by a prioritization of payments
among such classes of Certificates.
ADVANCES
If and to the extent provided in the related Prospectus Supplement, and
subject to any limitations specified therein, the related Master Servicer may
be obligated to advance, or have the option of advancing, on or before each
Distribution Date, from its or their own funds or from excess funds held in
the related Certificate Account that are not part of the Available
Distribution Amount for the related series of Certificates for such
Distribution Date, an amount up to the aggregate of any payments of principal
(other than the principal portion of any Balloon Payments) and interest that
were due on or in respect of such Mortgage Loans during the related Due Period
and were delinquent on the related Determination Date. Unless otherwise
provided in the related Prospectus Supplement, a "Due Period" is the period
between Distribution Dates, and scheduled payments on the Mortgage Loans in
any Trust Fund that became due during a given Due Period will, to the extent
received by the related Determination Date or advanced by the related Master
Servicer or other specified person, be distributed on the Distribution Date
next succeeding such Determination Date.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Accordingly, all
advances made from the Master Servicer's own funds will be reimbursable out of
related recoveries on the Mortgage Loans (including amounts received under any
fund or instrument constituting credit enhancement) respecting which such
advances were made (as to any Mortgage Loan, "Related Proceeds") and such
other specific sources as may be identified in the related Prospectus
Supplement, including in the case of a series that
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includes one or more classes of Subordinate Certificates, collections on other
Mortgage Loans in the related Trust Fund that would otherwise be distributable
to the holders of one or more classes of such Subordinate Certificates. No
advance will be required to be made by the Master Servicer if, in the good
faith judgment of the Master Servicer, such advance would not be recoverable
from Related Proceeds or another specifically identified source (any such
advance, a "Nonrecoverable Advance"); and, if previously made by a Master
Servicer, a Nonrecoverable Advance will be reimbursable from any amounts in
the related Certificate Account prior to any distributions being made to the
related series of Certificateholders.
If advances have been made from excess funds in a Certificate Account, the
Master Servicer that advanced such funds will be required to replace such
funds in the Certificate Account on any future Distribution Date to the extent
that funds then in the Certificate Account are insufficient to permit full
distributions to Certificateholders on such date. If so specified in the
related Prospectus Supplement, the obligation of a Master Servicer to make
advances may be secured by a cash advance reserve fund or a surety bond. If
applicable, information regarding the characteristics of, and the identity of
any obligor on, any such surety bond, will be set forth in the related
Prospectus Supplement.
If any person other than the Master Servicer has any obligation to make
advances as described above, the related Prospectus Supplement will identify
such person.
If and to the extent so provided in the related Prospectus Supplement, any
entity making advances will be entitled to receive interest thereon for the
period that such advances are outstanding at the rate specified in such
Prospectus Supplement, and such entity will be entitled to payment of such
interest periodically from general collections on the Mortgage Loans in the
related Trust Fund prior to any payment to Certificateholders or as otherwise
provided in the related Pooling Agreement and described in such Prospectus
Supplement.
As specified in the related Prospectus Supplement with respect to any series
of Certificates as to which the Trust Fund includes Mortgage Securities, the
advancing obligations with respect to the underlying Mortgage Loans will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by
the terms of the applicable Pooling Agreement, and may differ from the
provisions described above.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to Certificateholders of a particular class of
Offered Certificates, the related Master Servicer or Trustee will forward or
cause to be forwarded to each holder of record of such class of Certificates a
statement or statements with respect to the related Trust Fund setting forth
the information specifically described in the related Pooling Agreement, which
generally will include the following as applicable except as otherwise
provided therein:
(i) the amount, if any, of such distribution allocable to principal;
(ii) the amount, if any, of such distribution allocable to interest;
(iii) the amount, if any, of such distribution allocable to (A)
Prepayment Premiums and (B) payments on account of Equity Participations;
(iv) with respect to a series consisting of two or more classes, the
outstanding principal balance or notional amount of each class after giving
effect to the distribution of principal on such Distribution Date;
(v) the amount of servicing compensation received by the related Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Special Servicer and any Sub-Servicer);
(vi) the aggregate amount of advances included in the distributions on
such Distribution Date, and the aggregate amount of unreimbursed advances
at the close of business on such Distribution Date;
(vii) the aggregate principal balance of the Mortgage Loans in the
related Mortgage Pool on, or as of a specified date shortly prior to, such
Distribution Date;
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(viii) the number and aggregate principal balance of any Mortgage Loans
in the related Mortgage Pool in respect of which (A) one scheduled payment
is delinquent, (B) two scheduled payments are delinquent, (C) three or more
scheduled payments are delinquent and (D) foreclosure proceedings have been
commenced;
(ix) the book value of any real estate acquired by such Trust Fund
through foreclosure or grant of a deed in lieu of foreclosure;
(x) the balance of the Reserve Fund, if any, at the close of business on
such Distribution Date;
(xi) the amount of coverage under any Letter of Credit or Mortgage Pool
Insurance Policy covering default risk as of the close of business on the
applicable Determination Date and a description of any credit enhancement
substituted therefor;
(xii) the Special Hazard Amount, Fraud Loss Amount and Bankruptcy Amount
as of the close of business on the applicable Distribution Date and a
description of any change in the calculation of such amounts;
(xiii) in the case of Certificates benefiting from alternative credit
enhancement arrangements described in a Prospectus Supplement, the amount
of coverage under such alternative arrangements as of the close of business
on the applicable Determination Date; and
(xiv) with respect to any series of Certificates as to which the Trust
Fund includes Mortgage Securities, certain additional information as
required under the related Pooling Agreement and specified in the related
Prospectus Supplement.
In the case of information furnished pursuant to subclauses (i)-(iii) above,
the amounts will be expressed as a dollar amount per minimum denomination of
the relevant class of Offered Certificates or per a specified portion of such
minimum denomination. In addition to the information described above, reports
to Certificateholders will contain such other information as is set forth in
the applicable Pooling Agreement, which may include, without limitation,
prepayments, reimbursements to Subservicers and the Master Servicer and losses
borne by the related Trust Fund.
In addition, within a reasonable period of time after the end of each
calendar year, the Master Servicer or Trustee will furnish a report to each
holder of record of a class of Offered Certificates at any time during such
calendar year which, among other things, will include information as to the
aggregate of amounts reported pursuant to subclauses (i)-(iii) above for such
calendar year or, in the event such person was a holder of record of a class
of Certificates during a portion of such calendar year, for the applicable
portion of such a year.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Unless otherwise provided in the applicable Prospectus Supplement, credit
support with respect to the Offered Certificates of each series may be
comprised of one or more of the following components. Each component will have
a dollar limit and, unless otherwise specified in the related Prospectus
Supplement, will provide coverage with respect to certain losses on the
related Mortgage Loans (as more particularly described in the related
Prospectus Supplement, "Realized Losses") that are (i) attributable to the
Mortgagor's failure to make any payment of principal or interest as required
under the Mortgage Note, but not including Special Hazard Losses,
Extraordinary Losses or other losses resulting from damage to a Mortgaged
Property, Bankruptcy Losses or Fraud Losses (any such loss, a "Defaulted
Mortgage Loss"); (ii) of a type generally covered by a Special Hazard
Insurance Policy (as defined below) (any such loss, a "Special Hazard Loss");
(iii) attributable to certain actions which may be taken by a bankruptcy court
in connection with a Mortgage Loan, including a reduction by a bankruptcy
court of the principal balance of or the Mortgage Rate on a Mortgage Loan or
an extension of its maturity (any such loss, a "Bankruptcy Loss"); and (iv)
incurred on defaulted Mortgage Loans as to which
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there was fraud in the origination of such Mortgage Loans (any such loss, a
"Fraud Loss"). Unless otherwise specified in the related Prospectus
Supplement, Defaulted Mortgage Losses, Special Hazard Losses, Bankruptcy
Losses and Fraud Losses in excess of the amount of coverage provided therefor
and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ("Extraordinary Losses")
will not be covered. To the extent that the credit support for the Offered
Certificates of any series is exhausted, the holders thereof will bear all
further risks of loss not otherwise insured against.
As set forth below and in the applicable Prospectus Supplement, (i) coverage
with respect to Defaulted Mortgage Losses may be provided by one or more of a
Letter of Credit or a Mortgage Pool Insurance Policy, (ii) coverage with
respect to Special Hazard Losses may be provided by one or more of a Letter of
Credit or a Special Hazard Insurance Policy (any instrument, to the extent
providing such coverage, a "Special Hazard Instrument"), (iii) coverage with
respect to Bankruptcy Losses may be provided by one or more of a Letter of
Credit or a Bankruptcy Bond and (iv) coverage with respect to Fraud Losses may
be provided by one or more of a Letter of Credit, Mortgage Pool Insurance
Policy or mortgage repurchase bond. In addition, if provided in the applicable
Prospectus Supplement, in lieu of or in addition to any or all of the
foregoing arrangements, credit enhancement may be in the form of a Reserve
Fund to cover such losses, in the form of subordination of one or more classes
of Subordinate Certificates to provide credit support to one or more classes
of Senior Certificates, or in the form of a specified entity's agreement to
repurchase certain Mortgage Loans or fund certain losses pursuant to a
Purchase Obligation, which obligations may be supported by a Letter of Credit,
surety bonds or other types of insurance policies, certain other secured or
unsecured corporate guarantees or in such other form as may be described in
the related Prospectus Supplement, or in the form of a combination of two or
more of the foregoing. The credit support may be provided by an assignment of
the right to receive certain cash amounts, a deposit of cash into a Reserve
Fund or other pledged assets, or by banks, insurance companies, guarantees or
any combination thereof identified in the applicable Prospectus Supplement.
The amounts and type of credit enhancement arrangement as well as the
provider thereof, if applicable, with respect to the Offered Certificates of
each series will be set forth in the related Prospectus Supplement. To the
extent provided in the applicable Prospectus Supplement and the Pooling
Agreement, the credit enhancement arrangements may be periodically modified,
reduced and substituted for based on the aggregate outstanding principal
balance of the Mortgage Loans covered thereby. See "Description of Credit
Enhancement--Reduction or Substitution of Credit Enhancement." If specified in
the applicable Prospectus Supplement, credit support for the Offered
Certificates of one series may cover the Offered Certificates of one or more
other series.
The descriptions of any insurance policies or bonds described in this
Prospectus or any Prospectus Supplement and the coverage thereunder, while
setting forth the material terms thereof, do not purport to be complete and
are qualified in their entirety by reference to the actual forms of such
policies, copies of which are available upon request.
In general, references to "Mortgage Loans" under this "Description of Credit
Enhancement" section are to Mortgage Loans in a Trust Fund. However, if so
provided in the Prospectus Supplement for a series of Certificates, any
Mortgage Securities included in the related Trust Fund and/or the related
underlying Mortgage Loans may be covered by one or more of the types of credit
support described herein. The related Prospectus Supplement will specify, as
to each such form of credit support, the information indicated below with
respect thereto.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes of
Certificates of a series may be Subordinate Certificates. To the extent
specified in the related Prospectus Supplement, the rights of the holders of
Subordinate Certificates to receive distributions from the Certificate Account
on any Distribution Date will be subordinated to the corresponding rights of
the holders of Senior Certificates. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or
may be limited to) certain types of losses or shortfalls. The related
Prospectus Supplement will set forth information concerning the manner
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and amount of subordination provided by a class or classes of Subordinate
Certificates in a series and the circumstances under which such subordination
will be available. The Offered Certificates of any series may include one or
more classes of Subordinate Certificates.
If the Mortgage Loans and/or Mortgage Securities in any Trust Fund are
divided into separate groups, each supporting a separate class or classes of
Certificates of the related series, credit enhancement may be provided by
cross-support provisions requiring that distributions be made on Senior
Certificates evidencing interests in one group of Mortgage Loans and/or
Mortgage Securities prior to distributions on Subordinate Certificates
evidencing interests in a different group of Mortgage Loans and/or Mortgage
Securities within the Trust Fund. The Prospectus Supplement for a series that
includes a cross-support provision will describe the manner and conditions for
applying such provisions.
LETTER OF CREDIT
If any component of credit enhancement as to the Offered Certificates of any
series is to be provided by a letter of credit (the "Letter of Credit"), a
bank (the "Letter of Credit Bank") will deliver to the related Trustee an
irrevocable Letter of Credit. The Letter of Credit may provide direct coverage
with respect to the Mortgage Loans or, if specified in the related Prospectus
Supplement, support an entity's obligation pursuant to a Purchase Obligation
to make certain payments to the related Trustee with respect to one or more
components of credit enhancement. The Letter of Credit Bank, as well as the
amount available under the Letter of Credit with respect to each component of
credit enhancement, will be specified in the applicable Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Letter of Credit may
permit draws only in the event of certain types of losses and shortfalls. The
Letter of Credit may also provide for the payment of advances which the Master
Servicer would be obligated to make with respect to delinquent monthly
mortgage payments. The amount available under the Letter of Credit will, in
all cases, be reduced to the extent of the unreimbursed payments thereunder
and may otherwise be reduced as described in the related Prospectus
Supplement. The Letter of Credit will expire on the expiration date set forth
in the related Prospectus Supplement, unless earlier terminated or extended in
accordance with its terms.
MORTGAGE POOL INSURANCE POLICIES
Any mortgage pool insurance policy (a "Mortgage Pool Insurance Policy")
obtained by the Company for each Trust Fund will be issued by the Pool Insurer
named in the applicable Prospectus Supplement. Each Mortgage Pool Insurance
Policy will, subject to the limitations described below, cover Defaulted
Mortgage Losses in an amount equal to a percentage specified in the applicable
Prospectus Supplement of the aggregate principal balance of the Mortgage Loans
on the Cut-off Date. As set forth under "--Maintenance of Credit Enhancement,"
the Master Servicer will use reasonable efforts to maintain the Mortgage Pool
Insurance Policy and to present claims thereunder to the Pool Insurer on
behalf of itself, the related Trustee and the related Certificateholders. The
Mortgage Pool Insurance Policies, however, are not blanket policies against
loss, since claims thereunder may only be made respecting particular defaulted
Mortgage Loans and only upon satisfaction of certain conditions precedent
described below. Unless specified in the related Prospectus Supplement, the
Mortgage Pool Insurance Policies may not cover losses due to a failure to pay
or denial of a claim under a Primary Insurance Policy, irrespective of the
reason therefor.
Each Mortgage Pool Insurance Policy will generally provide that no claims
may be validly presented thereunder unless, among other things, (i) any
required Primary Insurance Policy is in effect for the defaulted Mortgage Loan
and a claim thereunder has been submitted and settled, (ii) hazard insurance
on the property securing such Mortgage Loan has been kept in force and real
estate taxes and other protection and preservation expenses have been paid by
the Master Servicer, (iii) if there has been physical loss or damage to the
Mortgaged Property, it has been restored to its condition (reasonable wear and
tear excepted) at the Cut-off Date and (iv) the insured has acquired good and
merchantable title to the Mortgaged Property free and clear of liens except
certain permitted encumbrances. Upon satisfaction of these conditions, the
Pool Insurer will have the option either (a) to purchase the property securing
the defaulted Mortgage Loan at a price equal to the principal balance thereof
plus
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accrued and unpaid interest at the applicable Mortgage Rate to the date of
purchase and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer on behalf of the related Trustee and
Certificateholders, or (b) to pay the amount by which the sum of the principal
balance of the defaulted Mortgage Loan plus accrued and unpaid interest at the
Mortgage Rate to the date of payment of the claim and the aforementioned
expenses exceeds the proceeds received from an approved sale of the Mortgaged
Property, in either case net of certain amounts paid or assumed to have been
paid under any related Primary Insurance Policy. Certificateholders will
experience a shortfall in the amount of interest payable on the related
Certificates in connection with the payment of claims under a Mortgage Pool
Insurance Policy because the Pool Insurer is only required to remit unpaid
interest through the date a claim is paid rather than through the end of the
month in which such claim is paid. In addition, the Certificateholders will
also experience losses with respect to the related Certificates in connection
with payments made under a Mortgage Pool Insurance Policy to the extent that
the Master Servicer expends funds to cover unpaid real estate taxes or to
repair the related Mortgaged Property in order to make a claim under a
Mortgage Pool Insurance Policy, as those amounts will not be covered by
payments under such policy and will be reimbursable to the Master Servicer
from funds otherwise payable to the Certificateholders. If any Mortgaged
Property securing a defaulted Mortgage Loan is damaged and proceeds, if any
(see "--Special Hazard Insurance Policies" below for risks which are not
covered by such policies), from the related hazard insurance policy or
applicable Special Hazard Instrument are insufficient to restore the damaged
property to a condition sufficient to permit recovery under the Mortgage Pool
Insurance Policy, the Master Servicer is not required to expend its own funds
to restore the damaged property unless it determines (x) that such restoration
will increase the proceeds to one or more classes of Certificateholders on
liquidation of the Mortgage Loan after reimbursement of the Master Servicer
for its expenses and (y) that such expenses will be recoverable by it through
Liquidation Proceeds or Insurance Proceeds.
Unless otherwise specified in the related Prospectus Supplement, a Mortgage
Pool Insurance Policy (and certain Primary Insurance Policies) will likely not
insure against loss sustained by reason of a default arising from, among other
things, (i) fraud or negligence in the origination or servicing of a Mortgage
Loan, including misrepresentation by the Mortgagor, the Seller or other
persons involved in the origination thereof, or (ii) failure to construct a
Mortgaged Property in accordance with plans and specifications. Depending upon
the nature of the event, a breach of representation made by a Seller may also
have occurred. Such a breach, if it materially and adversely affects the
interests of Certificateholders and cannot be cured, would give rise to a
purchase obligation on the part of the Seller, as more fully described under
"The Mortgage Pools--Representations by Sellers." However, such an event would
not give rise to a breach of a representation and warranty or a purchase
obligation on the part of the Company or Master Servicer.
The original amount of coverage under each Mortgage Pool Insurance Policy
will be reduced over the life of the related series of Certificates by the
aggregate dollar amount of claims paid less the aggregate of the net amounts
realized by the Pool Insurer upon disposition of all foreclosed properties.
The amount of claims paid includes certain expenses incurred by the Master
Servicer, Special Servicer or Subservicer as well as accrued interest on
delinquent Mortgage Loans to the date of payment of the claim. Accordingly, if
aggregate net claims paid under any Mortgage Pool Insurance Policy reach the
original policy limit, coverage under that Mortgage Pool Insurance Policy will
be exhausted and any further losses will be borne by holders of the related
series of Certificates. In addition, unless the Master Servicer could
determine that an advance in respect of a delinquent Mortgage Loan would be
recoverable to it from the proceeds of the liquidation of such Mortgage Loan
or otherwise, the Master Servicer would not be obligated to make an advance
respecting any such delinquency since the advance would not be ultimately
recoverable to it from either the Mortgage Pool Insurance Policy or from any
other related source. See "Description of the Certificates--Advances."
Since each Mortgage Pool Insurance Policy will require that the property
subject to a defaulted Mortgage Loan be restored to its original condition
prior to claiming against the Pool Insurer, such policy will not provide
coverage against hazard losses. As set forth under "Primary Mortgage
Insurance, Hazard Insurance; Claims Thereunder," the hazard policies covering
the Mortgage Loans typically exclude from coverage physical damage resulting
from a number of causes and, even when the damage is covered, may afford
recoveries which are
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significantly less than full replacement cost of such losses. Further, no
coverage in respect of Special Hazard Losses, Fraud Losses or Bankruptcy
Losses will cover all risks, and the amount of any such coverage will be
limited. See "--Special Hazard Insurance Policies" below. As a result, certain
hazard risks will not be insured against and will therefore be borne by the
related Certificateholders.
SPECIAL HAZARD INSURANCE POLICIES
Any insurance policy covering Special Hazard Losses (a "Special Hazard
Insurance Policy") obtained by the Company for a Trust Fund will be issued by
the insurer named in the applicable Prospectus Supplement. Each Special Hazard
Insurance Policy will, subject to limitations described below, protect holders
of the related series of Certificates from (i) losses due to direct physical
damage to a Mortgaged Property other than any loss of a type covered by a
hazard insurance policy or a flood insurance policy, if applicable, and (ii)
losses from partial damage caused by reason of the application of the co-
insurance clauses contained in hazard insurance policies ("Special Hazard
Losses"). See "Primary Mortgage Insurance, Hazard Insurance; Claims
Thereunder." However, a Special Hazard Insurance Policy will not cover losses
occasioned by war, civil insurrection, certain governmental actions, errors in
design, faulty workmanship or materials (except under certain circumstances),
nuclear reaction, chemical contamination, waste by the Mortgagor and certain
other risks. Aggregate claims under a Special Hazard Insurance Policy will be
limited to the amount set forth in the related Prospectus Supplement and will
be subject to reduction as described in such related Prospectus Supplement. A
Special Hazard Insurance Policy will provide that no claim may be paid unless
hazard and, if applicable, flood insurance on the property securing the
Mortgage Loan has been kept in force and other protection and preservation
expenses have been paid by the Master Servicer.
Subject to the foregoing limitations, a Special Hazard Insurance Policy will
provide that, where there has been damage to property securing a foreclosed
Mortgage Loan (title to which has been acquired by the insured) and to the
extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained by the Mortgagor or the Master Servicer,
Special Servicer or the Subservicer, the insurer will pay the lesser of (i)
the cost of repair or replacement of such property or (ii) upon transfer of
the property to the insurer, the unpaid principal balance of such Mortgage
Loan at the time of acquisition of such property by foreclosure or deed in
lieu of foreclosure, plus accrued interest at the Mortgage Rate to the date of
claim settlement and certain expenses incurred by the Master Servicer, Special
Servicer or Subservicer with respect to such property. If the property is
transferred to a third party in a sale approved by the issuer of the Special
Hazard Insurance Policy (the "Special Hazard Insurer"), the amount that the
Special Hazard Insurer will pay will be the amount under (ii) above reduced by
the net proceeds of the sale of the property. No claim may be validly
presented under the Special Hazard Insurance Policy unless hazard insurance on
the property securing a defaulted Mortgage Loan has been kept in force and
other reimbursable protection, preservation and foreclosure expenses have been
paid (all of which must be approved in advance by the Special Hazard Insurer).
If the unpaid principal balance plus accrued interest and certain expenses is
paid by the insurer, the amount of further coverage under the related Special
Hazard Insurance Policy will be reduced by such amount less any net proceeds
from the sale of the property. Any amount paid as the cost of repair of the
property will further reduce coverage by such amount. Restoration of the
property with the proceeds described under (i) above will satisfy the
condition under each Mortgage Pool Insurance Policy that the property be
restored before a claim under such Mortgage Pool Insurance Policy may be
validly presented with respect to the defaulted Mortgage Loan secured by such
property. The payment described under (ii) above will render presentation of a
claim in respect of such Mortgage Loan under the related Mortgage Pool
Insurance Policy unnecessary. Therefore, so long as a Mortgage Pool Insurance
Policy remains in effect, the payment by the insurer under a Special Hazard
Insurance Policy of the cost of repair or of the unpaid principal balance of
the related Mortgage Loan plus accrued interest and certain expenses will not
affect the total Insurance Proceeds paid to Certificateholders, but will
affect the relative amounts of coverage remaining under the related Special
Hazard Insurance Policy and Mortgage Pool Insurance Policy.
As and to the extent set forth in the applicable Prospectus Supplement,
coverage in respect of Special Hazard Losses for a series of Certificates may
be provided, in whole or in part, by a type of Special Hazard
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Instrument other than a Special Hazard Insurance Policy or by means of the
special hazard representation of the Company.
BANKRUPTCY BONDS
In the event of a personal bankruptcy of a Mortgagor, it is possible that
the bankruptcy court may establish the value of the Mortgaged Property of such
Mortgagor at an amount less than the then outstanding principal balance of the
Mortgage Loan secured by such Mortgaged Property (a "Deficient Valuation").
The amount of the secured debt could then be reduced to such value, and, thus,
the holder of such Mortgage Loan would become an unsecured creditor to the
extent the outstanding principal balance of such Mortgage Loan exceeds the
value assigned to the Mortgaged Property by the bankruptcy court. In addition,
certain other modifications of the terms of a Mortgage Loan can result from a
bankruptcy proceeding, including a reduction in the amount of the Monthly
Payment on the related Mortgage Loan (a "Debt Service Reduction"; Debt Service
Reductions and Deficient Valuations, collectively referred to herein as
Bankruptcy Losses). See "Certain Legal Aspects of Mortgage Loans and Related
Matters--Anti-Deficiency Legislation and Other Limitations on Lenders." Any
Bankruptcy Bond to provide coverage for Bankruptcy Losses for proceedings
under the Federal Bankruptcy Code obtained by the Company for a Trust Fund
will be issued by an insurer named in the applicable Prospectus Supplement.
The level of coverage under each Bankruptcy Bond will be set forth in the
applicable Prospectus Supplement.
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Company will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Investments in specified amounts, or any other instrument
satisfactory to the relevant Rating Agency or Agencies, which will be applied
and maintained in the manner and under the conditions specified in such
Prospectus Supplement. In the alternative or in addition to such deposit, to
the extent described in the related Prospectus Supplement, a Reserve Fund may
be funded through application of all or a portion of amounts otherwise payable
on any related Subordinate Certificates, from the Spread or otherwise. To the
extent that the funding of the Reserve Fund is dependent on amounts otherwise
payable on related Subordinate Certificates, Spread or other cash flows
attributable to the related Mortgage Loans or on reinvestment income, the
Reserve Fund may provide less coverage than initially expected if the cash
flows or reinvestment income on which such funding is dependent are lower than
anticipated. In addition, with respect to any series of Certificates as to
which credit enhancement includes a Letter of Credit, if so specified in the
related Prospectus Supplement, under certain circumstances the remaining
amount of the Letter of Credit may be drawn by the Trustee and deposited in a
Reserve Fund. Amounts in a Reserve Fund may be distributed to
Certificateholders, or applied to reimburse the Master Servicer for
outstanding advances, or may be used for other purposes, in the manner and to
the extent specified in the related Prospectus Supplement. Unless otherwise
provided in the related Prospectus Supplement, any such Reserve Fund will not
be deemed to be part of the related Trust Fund. If set forth in the related
Prospectus Supplement, a Reserve Fund may provide coverage to more than one
series of Certificates.
In connection with the establishment of any Reserve Fund, unless otherwise
specified in the related Prospectus Supplement, the Reserve Fund will be
structured so that the Trustee will have a perfected security interest for the
benefit of the Certificateholders in the assets in the Reserve Fund. However,
to the extent that the Company, any affiliate thereof or any other entity has
an interest in any Reserve Fund, in the event of the bankruptcy, receivership
or insolvency of such entity, there could be delays in withdrawals from the
Reserve Fund and corresponding payments to the Certificateholders which could
adversely affect the yield to investors on the related Certificates.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Investments by, or at the direction of, and for the benefit of the
Master Servicer or any other person named in the related Prospectus
Supplement.
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MAINTENANCE OF CREDIT ENHANCEMENT
To the extent that the applicable Prospectus Supplement does not expressly
provide for alternative credit enhancement arrangements in lieu of some or all
of the arrangements mentioned below, the following paragraphs shall apply.
If a Letter of Credit or alternate form of credit enhancement has been
obtained for a series of Certificates, the Master Servicer will be obligated
to exercise reasonable efforts to keep or cause to be kept such Letter of
Credit (or an alternate form of credit support) in full force and effect
throughout the term of the applicable Pooling Agreement, unless coverage
thereunder has been exhausted through payment of claims or otherwise, or
substitution therefor is made as described below under "--Reduction or
Substitution of Credit Enhancement." Unless otherwise specified in the
applicable Prospectus Supplement, if a Letter of Credit obtained for a series
of Certificates is scheduled to expire prior to the date the final
distribution on such Certificates is made and coverage under such Letter of
Credit has not been exhausted and no substitution has occurred, the Trustee
will draw the amount available under the Letter of Credit and maintain such
amount in trust for such Certificateholders.
If a Mortgage Pool Insurance Policy has been obtained for a series of
Certificates, the Master Servicer will be obligated to exercise reasonable
efforts to keep such Mortgage Pool Insurance Policy (or an alternate form of
credit support) in full force and effect throughout the term of the applicable
Pooling Agreement, unless coverage thereunder has been exhausted through
payment of claims or until such Mortgage Pool Insurance Policy is replaced in
accordance with the terms of the applicable Pooling Agreement. Unless
otherwise provided in the related Prospectus Supplement, the Master Servicer
will agree to pay the premiums for each Mortgage Pool Insurance Policy on a
timely basis. In the event the Pool Insurer ceases to be a Qualified Insurer
(such term being defined to mean a private mortgage guaranty insurance company
duly qualified as such under the laws of the state of its incorporation and
each state having jurisdiction over the insurer in connection with the
Mortgage Pool Insurance Policy and approved as an insurer by Freddie Mac,
Fannie Mae or any successor entity) because it ceases to be qualified under
any such law to transact such insurance business or coverage is terminated for
any reason other than exhaustion of such coverage, the Master Servicer will
use reasonable efforts to obtain from another Qualified Insurer a replacement
insurance policy comparable to the Mortgage Pool Insurance Policy with a total
coverage equal to the then outstanding coverage of such Mortgage Pool
Insurance Policy, provided that, if the cost of the replacement policy is
greater than the cost of such Mortgage Pool Insurance Policy, the coverage of
the replacement policy will, unless otherwise agreed to by the Company, be
reduced to a level such that its premium rate does not exceed the premium rate
on such Mortgage Pool Insurance Policy. In the event that the Pool Insurer
ceases to be a Qualified Insurer because it ceases to be approved as an
insurer by Freddie Mac, Fannie Mae or any successor entity, the Master
Servicer will be obligated to review, not less often than monthly, the
financial condition of the Pool Insurer with a view toward determining whether
recoveries under the Mortgage Pool Insurance Policy are jeopardized for
reasons related to the financial condition of the Pool Insurer. If the Master
Servicer determines that recoveries are so jeopardized, it will be obligated
to exercise its best reasonable efforts to obtain from another Qualified
Insurer a replacement insurance policy as described above, subject to the same
cost limit. Any losses associated with any reduction or withdrawal in rating
by an applicable Rating Agency shall be borne by the related
Certificateholders.
In lieu of the Master Servicer's obligation to maintain a Letter of Credit
or Mortgage Pool Insurance Policy as provided above, the Master Servicer may
obtain a substitute Letter of Credit, Mortgage Pool Insurance Policy or an
alternate form of credit enhancement. If the Master Servicer obtains such a
substitute Letter of Credit or Mortgage Pool Insurance Policy, it will
maintain and keep such Letter of Credit, Mortgage Pool Insurance Policy or
alternate form of credit enhancement in full force and effect as provided
herein. Prior to its obtaining any substitute Letter of Credit, Mortgage Pool
Insurance Policy or alternate form of credit enhancement, the Master Servicer
will obtain written confirmation from the Rating Agency or Agencies that rated
the related series of Certificates that the substitution of such Mortgage Pool
Insurance Policy, Letter of Credit, or alternate form of credit enhancement
for the existing credit enhancement will not adversely affect the then-current
ratings assigned to such Certificates by such Rating Agency or Agencies.
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If a Special Hazard Instrument has been obtained for a series of
Certificates, the Master Servicer will also be obligated to exercise
reasonable efforts to maintain and keep such Special Hazard Instrument in full
force and effect throughout the term of the applicable Pooling Agreement,
unless coverage thereunder has been exhausted through payment of claims or
otherwise or substitution therefor is made as described below under "--
Reduction or Substitution of Credit Enhancement." If the Special Hazard
Instrument takes the form of a Special Hazard Insurance Policy, such policy
will provide coverage against risks of the type described herein under
"Description of Credit Enhancement--Special Hazard Insurance Policies." The
Master Servicer may obtain a substitute Special Hazard Instrument for the
existing Special Hazard Instrument if prior to such substitution the Master
Servicer obtains written confirmation from the Rating Agency or Agencies that
rated the related Certificates that such substitution shall not adversely
affect the then-current ratings assigned to such Certificates by such Rating
Agency or Agencies.
If a Bankruptcy Bond has been obtained for a series of Certificates, the
Master Servicer will be obligated to exercise reasonable efforts to maintain
and keep such Bankruptcy Bond in full force and effect throughout the term of
the Pooling Agreement, unless coverage thereunder has been exhausted through
payment of claims or substitution therefor is made as described below under
"--Reduction or Substitution of Credit Enhancement." The Master Servicer may
obtain a substitute Bankruptcy Bond or other credit enhancement for the
existing Bankruptcy Bond if prior to such substitution the Master Servicer
obtains written confirmation from the Rating Agency or Agencies that rated the
related Certificates that such substitution shall not adversely affect the
then-current ratings assigned to such Certificates by such Rating Agency or
Agencies. See "--Bankruptcy Bonds" above.
The Master Servicer, on behalf of itself, the Trustee and
Certificateholders, will provide the Trustee information required for the
Trustee to draw under the Letter of Credit and will present claims to the
provider of any Purchase Obligation, to each Pool Insurer, to the issuer of
each Special Hazard Insurance Policy or other Special Hazard Instrument, to
the issuer of each Bankruptcy Bond and, in respect of defaulted Mortgage Loans
for which there is no Subservicer, to each Primary Insurer and take such
reasonable steps as are necessary to permit recovery under such Letter of
Credit, Purchase Obligation, insurance policies or comparable coverage
respecting defaulted Mortgage Loans or Mortgage Loans which are the subject of
a bankruptcy proceeding. Additionally, the Master Servicer will present such
claims and take such steps as are reasonably necessary to provide for the
performance by the provider of the Purchase Obligation of its Purchase
Obligation. As set forth above, all collections by the Master Servicer under
any Purchase Obligation, any Mortgage Pool Insurance Policy, any Primary
Insurance Policy or any Bankruptcy Bond and, where the related property has
not been restored, any Special Hazard Instrument, are to be deposited in the
related Certificate Account, subject to withdrawal as described above. All
draws under any Letter of Credit are also to be deposited in the related
Certificate Account. In those cases in which a Mortgage Loan is serviced by a
Subservicer, the Subservicer, on behalf of itself, the Trustee and the
Certificateholders will present claims to the Primary Insurer, and all
collections thereunder shall initially be deposited in a subservicing account
that generally meets the requirements for the Certificate Account prior to
being delivered to the Master Servicer for deposit in the related Certificate
Account.
If any property securing a defaulted Mortgage Loan is damaged and proceeds,
if any, from the related hazard insurance policy or any applicable Special
Hazard Instrument are insufficient to restore the damaged property to a
condition sufficient to permit recovery under any Letter of Credit, Mortgage
Pool Insurance Policy or any related Primary Insurance Policy, the Master
Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to one or more classes of Certificateholders on liquidation of the
Mortgage Loan after reimbursement of the Master Servicer for its expenses and
(ii) that such expenses will be recoverable by it through Liquidation Proceeds
or Insurance Proceeds. If recovery under any Letter of Credit, Mortgage Pool
Insurance Policy, other credit enhancement or any related Primary Insurance
Policy is not available because the Master Servicer has been unable to make
the above determinations, has made such determinations incorrectly or recovery
is not available for any other reason, the Master Servicer is nevertheless
obligated to follow such normal practices and procedures (subject to the
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preceding sentence) as it deems necessary or advisable to realize upon the
defaulted Mortgage Loan and in the event such determination has been
incorrectly made, is entitled to reimbursement of its expenses in connection
with such restoration.
REDUCTION OR SUBSTITUTION OF CREDIT ENHANCEMENT
Unless otherwise specified in the Prospectus Supplement, the amount of
credit support provided pursuant to any form of credit enhancements
(including, without limitation, a Mortgage Pool Insurance Policy, Special
Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, Reserve Fund,
Purchase Obligation, or any alternative form of credit enhancement) may be
reduced under certain specified circumstances. In most cases, the amount
available pursuant to any form of credit enhancement will be subject to
periodic reduction in accordance with a schedule or formula on a
nondiscretionary basis pursuant to the terms of the related Pooling Agreement.
Additionally, in most cases, such form of credit support (and any replacements
therefor) may be replaced, reduced or terminated, and the formula used in
calculating the amount of coverage with respect to Bankruptcy Losses, Special
Hazard Losses or Fraud Losses may be changed, without the consent of the
Certificateholders, upon the written assurance from each applicable Rating
Agency that the then-current rating of the related series of Certificates will
not be adversely affected. Furthermore, in the event that the credit rating of
any obligor under any applicable credit enhancement is downgraded, the credit
rating(s) of the related series of Certificates may be downgraded to a
corresponding level, and, unless otherwise specified in the related Prospectus
Supplement, the Master Servicer will not be obligated to obtain replacement
credit support in order to restore the rating(s) of the related series of
Certificates. The Master Servicer will also be permitted to replace such
credit support with other credit enhancement instruments issued by obligors
whose credit ratings are equivalent to such downgraded level and in lower
amounts which would satisfy such downgraded level, provided that the then-
current rating(s) of the related series of Certificates are maintained. Where
the credit support is in the form of a Reserve Fund, a permitted reduction in
the amount of credit enhancement will result in a release of all or a portion
of the assets in the Reserve Fund to the Company, the Master Servicer or such
other person that is entitled thereto. Any assets so released will not be
available for distributions in future periods.
PURCHASE OBLIGATIONS
With respect to certain types of Mortgage Loans to be included in any
Mortgage Pool, if specified in the related Prospectus Supplement, the Mortgage
Loans may be sold subject to a Purchase Obligation as described below that
would become applicable on a specified date or upon the occurrence of a
specified event. For example, with respect to certain types of ARM Loans as to
which the Mortgage Rate is fixed for the first five years, a Purchase
Obligation may apply on the first date that the Mortgage Rate of such Mortgage
Loan is adjusted, and such obligation may apply to the Mortgage Loans or to
the related Certificates themselves, or to a corresponding Purchase Obligation
of the Company or another person as specified in the related Prospectus
Supplement. With respect to any Purchase Obligation, such obligation will be
an obligation of an entity (which may include a bank or other financial
institution or an insurance company) specified in the related Prospectus
Supplement, and an instrument evidencing such obligation (a "Purchase
Obligation") shall be delivered to the related Trustee for the benefit of the
Certificateholders to the related series.
The specific terms and conditions applicable to any Purchase Obligation will
be described in the related Prospectus Supplement, including the purchase
price, the timing of and any limitations and conditions to any such purchase.
Any Purchase Obligation will be payable solely to the Trustee for the benefit
of the Certificateholders of the related series and will be nontransferable.
Unless otherwise provided in the related Prospectus Supplement, each Purchase
Obligation will be a general unsecured obligation of the provider thereof, and
prospective purchasers of Offered Certificates must look solely to the credit
of such entity for payment under the Purchase Obligation.
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PRIMARY MORTGAGE INSURANCE, HAZARD INSURANCE;
CLAIMS THEREUNDER
GENERAL
Each Mortgage Loan will be required to be covered by a hazard insurance
policy (as described below) and, if required as described below, a Primary
Insurance Policy. The following is only a brief description of certain
insurance policies and does not purport to summarize or describe all of the
provisions of these policies. Such insurance is subject to underwriting and
approval of individual Mortgage Loans by the respective insurers. The
descriptions of any insurance policies described in this Prospectus or any
Prospectus Supplement and the coverage thereunder, while setting forth the
material terms thereof, do not purport to be complete and are qualified in
their entirety by reference to such forms of policies, sample copies of which
are available upon request.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Single Family Loan having a Loan-to-Value Ratio at origination of over 80% is
required by the Company to be covered by a primary mortgage guaranty insurance
policy (a "Primary Insurance Policy") insuring against default on such
Mortgage Loan as to at least the principal amount thereof exceeding 75% of the
Value of the related Mortgaged Property at origination of the Mortgage Loan,
unless and until the principal balance of the Mortgage Loan is reduced to a
level that would produce a Loan-to-Value Ratio equal to or less than at least
80%, and (ii) the Company will represent and warrant that, to the best of the
Company's knowledge, such Mortgage Loans are so covered. However, the
foregoing standard may vary significantly depending on the characteristics of
the Mortgage Loans and the applicable underwriting standards. A Mortgage Loan
will not be considered to be an exception to the foregoing standard if no
Primary Insurance Policy was obtained at origination but the Mortgage Loan has
amortized to below an 80% Loan-to-Value Ratio level as of the applicable Cut-
off Date. Mortgage Loans which are subject to negative amortization will only
be covered by a Primary Insurance Policy if such coverage was so required upon
their origination, notwithstanding that subsequent negative amortization may
cause such Mortgage Loan's Loan-to-Value Ratio (based on the then-current
balance) to subsequently exceed the limits which would have required such
coverage upon their origination. Multifamily Loans will not be covered by a
Primary Insurance Policy, regardless of the related Loan-to-Value Ratio.
While the terms and conditions of the Primary Insurance Policies issued by
one primary mortgage guaranty insurer (a "Primary Insurer") will differ from
those in Primary Insurance Policies issued by other Primary Insurers, each
Primary Insurance Policy will in general provide substantially the following
coverage. The amount of the loss as calculated under a Primary Insurance
Policy covering a Mortgage Loan (herein referred to as the "Loss") will
generally consist of the unpaid principal amount of such Mortgage Loan and
accrued and unpaid interest thereon and reimbursement of certain expenses,
less (i) rents or other payments collected or received by the insured (other
than the proceeds of hazard insurance) that are derived from the related
Mortgaged Property, (ii) hazard insurance proceeds in excess of the amount
required to restore such Mortgaged Property and which have not been applied to
the payment of the Mortgage Loan, (iii) amounts expended but not approved by
the Primary Insurer, (iv) claim payments previously made on such Mortgage Loan
and (v) unpaid premiums and certain other amounts.
The Primary Insurer will generally be required to pay either: (i) the
insured percentage of the Loss; (ii) the entire amount of the Loss, after
receipt by the Primary Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain Primary Insurance Policies, the sum of the delinquent
monthly payments plus any advances made by the insured, both to the date of
the claim payment and, thereafter, monthly payments in the amount that would
have become due under the Mortgage Loan if it had not been discharged plus any
advances made by the insured until the earlier of (a) the date the Mortgage
Loan would have been discharged in full if the default had not occurred or (b)
an approved sale.
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As conditions precedent to the filing or payment of a claim under a Primary
Insurance Policy, in the event of default by the Mortgagor, the insured will
typically be required, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
Primary Insurer, real estate taxes, protection and preservation expenses and
foreclosure and related costs; (ii) in the event of any physical loss or
damage to the Mortgaged Property, have the Mortgaged Property restored to at
least its condition at the effective date of the Primary Insurance Policy
(ordinary wear and tear excepted); and (iii) tender to the Primary Insurer
good and merchantable title to, and possession of, the Mortgaged Property.
For any Certificates offered hereunder, the Master Servicer will maintain or
cause each Subservicer to maintain, as the case may be, in full force and
effect and to the extent coverage is available a Primary Insurance Policy with
regard to each Single Family Loan for which such coverage is required under
the standard described above, provided that such Primary Insurance Policy was
in place as of the Cut-off Date and the Company had knowledge of such Primary
Insurance Policy. In the event that the Company gains knowledge that as of the
Closing Date, a Mortgage Loan had a Loan-to-Value Ratio at origination in
excess of 80% and was not the subject of a Primary Insurance Policy (and was
not included in any exception to such standard disclosed in the related
Prospectus Supplement) and that such Mortgage Loan has a then current Loan-to-
Value Ratio in excess of 80%, then the Master Servicer is required to use
reasonable efforts to obtain and maintain a Primary Insurance Policy to the
extent that such a policy is obtainable at a reasonable price. The Master
Servicer or, in the case of a Designated Seller Transaction, the Seller will
not cancel or refuse to renew any such Primary Insurance Policy in effect at
the time of the initial issuance of a series of Certificates that is required
to be kept in force under the applicable Pooling Agreement unless the
replacement Primary Insurance Policy for such cancelled or non-renewed policy
is maintained with an insurer whose claims-paying ability is acceptable to the
Rating Agency or Agencies that rated such series of Certificates for mortgage
pass-through certificates having a rating equal to or better than the highest
then-current rating of any class of such series of Certificates. For further
information regarding the extent of coverage under any Mortgage Pool Insurance
Policy or Primary Insurance Policy, see "Description of Credit Enhancement--
Mortgage Pool Insurance Policies."
HAZARD INSURANCE POLICIES
The terms of the Mortgage Loans require each Mortgagor to maintain a hazard
insurance policy for their Mortgage Loan. Additionally, the Pooling Agreement
will require the Master Servicer to cause to be maintained for each Mortgage
Loan a hazard insurance policy providing for no less than the coverage of the
standard form of fire insurance policy with extended coverage customary in the
state in which the property is located. Unless otherwise specified in the
related Prospectus Supplement, such coverage generally will be in an amount
equal to the lesser of the principal balance owing on such Mortgage Loan or
100% of the insurable value of the improvements securing the Mortgage Loan
except that, if generally available, such coverage must not be less than the
minimum amount required under the terms thereof to fully compensate for any
damage or loss on a replacement cost basis. The ability of the Master Servicer
to ensure that hazard insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any hazard
insurance policy and under any flood insurance policy referred to below, or
upon the extent to which information in this regard is furnished to the Master
Servicer by Mortgagors or Subservicers.
As set forth above, all amounts collected by the Master Servicer under any
hazard policy (except for amounts to be applied to the restoration or repair
of the Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures) will be deposited in the
related Certificate Account. The Pooling Agreement will provide that the
Master Servicer may satisfy its obligation to cause hazard policies to be
maintained by maintaining a blanket policy insuring against losses on the
Mortgage Loans. If such blanket policy contains a deductible clause, the
Master Servicer will deposit in the applicable Certificate Account all sums
which would have been deposited therein but for such clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements on the property by fire,
lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to
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the Mortgage Loans will be underwritten by different insurers under different
state laws in accordance with different applicable state forms and therefore
will not contain identical terms and conditions, the basic terms thereof are
dictated by respective state laws, and most such policies typically do not
cover any physical damage resulting from the following: war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides and mudflows), nuclear reactions, wet or
dry rot, vermin, rodents, insects or domestic animals, theft and, in certain
cases, vandalism. The foregoing list is merely indicative of certain kinds of
uninsured risks and is not intended to be all-inclusive. Where the
improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling
Agreement requires the Master Servicer to cause to be maintained for each such
Mortgage Loan serviced, flood insurance (to the extent available) in an amount
equal in general to the lesser of the amount required to compensate for any
loss or damage on a replacement cost basis or the maximum insurance available
under the federal flood insurance program.
The hazard insurance policies covering the Mortgaged Properties typically
contain a co-insurance clause which in effect requires the insured at all
times to carry insurance of a specified percentage (generally 80% to 90%) of
the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause generally provides that the
insurer's liability in the event of partial loss does not exceed the greater
of (i) the replacement cost of the improvements damaged or destroyed less
physical depreciation or (ii) such proportion of the loss as the amount of
insurance carried bears to the specified percentage of the full replacement
cost of such improvements.
Since the amount of hazard insurance that Mortgagors are required to
maintain on the improvements securing the Mortgage Loans may decline as the
principal balances owing thereon decrease, and since residential properties
have historically appreciated in value over time, hazard insurance proceeds
could be insufficient to restore fully the damaged property in the event of a
partial loss. See "Description of Credit Enhancement--Special Hazard Insurance
Policies" for a description of the limited protection afforded by any Special
Hazard Insurance Policy against losses occasioned by hazards which are
otherwise uninsured against (including losses caused by the application of the
co-insurance clause described in the preceding paragraph).
Under the terms of the Mortgage Loans, Mortgagors are generally required to
present claims to insurers under hazard insurance policies maintained on the
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present claims under any Special Hazard
Insurance Policy or other Special Hazard Instrument and any blanket insurance
policy insuring against hazard losses on the Mortgaged Properties. However,
the ability of the Master Servicer to present such claims is dependent upon
the extent to which information in this regard is furnished to the Master
Servicer or the Subservicers by Mortgagors.
FHA INSURANCE
The FHA is responsible for administering various federal programs, including
mortgage insurance, authorized under The Housing Act and the United States
Housing Act of 1937, as amended.
There are two primary FHA insurance programs that are available for
multifamily mortgage loans. Sections 221(d)(3) and (d)(4) of the Housing Act
allow the Department of Housing and Urban Development ("HUD") to insure
mortgage loans that are secured by newly constructed and substantially
rehabilitated multifamily rental projects. Section 244 of the Housing Act
provides for co-insurance of such mortgage loans made under Sections 221
(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term
of such a mortgage loan may be up to 40 years and the ratio of the loan amount
to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure mortgage loans made
for the purchase or refinancing of existing apartment projects which are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds
cannot be used for substantial rehabilitation work, but repairs may be made
for up to, in general, the greater of 15% of the value
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of the project or a dollar amount per apartment unit established from time to
time by HUD. In general the loan term may not exceed 35 years and a loan to
value ratio of no more than 85% is required for the purchase of a project and
70% for the refinancing of a project.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will be obligated to purchase any such
debenture issued in satisfaction of a defaulted FHA insured Mortgage Loan
serviced by it for an amount equal to the principal amount of any such
debenture.
The Master Servicer will be required to take such steps as are reasonably
necessary to keep FHA insurance in full force and effect.
THE COMPANY
The Company is a wholly-owned subsidiary of ICI Funding. The Company was
incorporated in the State of California on May 6, 1996. The Company was
organized for the purpose of serving as a private secondary mortgage market
conduit. The Company does not have, nor is it expected in the future to have,
any significant assets.
The Company maintains its principal office at 20371 Irvine Avenue, Suite
200, Santa Ana Heights, California 92707. Its telephone number is (714) 556-
0122.
ICI FUNDING CORPORATION
ICI Funding, the Company's parent, will be a Seller and may act as Master
Servicer with respect to a Mortgage Pool. ICI Funding is a mortgage banking
conduit that acquires conventional one- to four-family residential mortgage
loans nationwide and has, from time to time, acquired condominium conversion
loans. ICI Funding is a non-consolidating subsidiary of ICMH. ICI Funding
primarily acquires mortgage loans from approved correspondents.
Prior to November 1995, ICI Funding was a division of ICII. In November
1995, ICII restructured its operations pursuant to which ICI Funding became a
separate corporation and ICII contributed, among other things, all of the
outstanding nonvoting preferred stock of ICI Funding, which represents 99% of
the economic interest in ICI Funding, to ICMH, in exchange for approximately
10% of the common stock of ICMH. All of the outstanding shares of common stock
of ICI Funding were retained by ICII.
At June 30, 1996, ICI Funding had approximately 81 employees. ICI Funding's
executive offices are located at 20371 Irvine Avenue, Santa Ana Heights,
California 92707, and its telephone number is (714) 556-0122.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
ICMH is a publicly traded, recently formed specialty finance company which
operates three businesses: (1) long-term investment operations, (2) conduit
operations, and (3) warehouse lending operations. The long-term investment
operations is a recently-created business that invests primarily in
nonconforming residential mortgage loans and securities backed by such loans.
The conduit operations, conducted by ICI Funding, primarily purchases and
sells or securitizes non-conforming mortgage loans, and the warehouse lending
operations provides short-term lines of credit to originators of mortgage
loans. These two businesses include certain ongoing operations contributed to
the Company by Imperial Credit Industries, Inc. ("ICII"), a leading specialty
finance
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company, in November 1995. ICMH is organized as a real estate investment trust
for tax purposes, which allows it generally to pass through earnings to
stockholders without federal income tax at the corporate level.
ICMH's day-to-day operations are overseen by Imperial Credit Advisors, Inc.,
a wholly-owned subsidiary of ICII ("ICAI") pursuant to a management agreement
between ICMH and ICAI. ICMH's executive offices are located at 20371 Irvine
Avenue, Santa Ana Heights, California 92707, and its telephone number is (714)
556-0122.
THE POOLING AGREEMENT
GENERAL
The Certificates of each series will be issued pursuant to a pooling and
servicing agreement or other agreement specified in the related Prospectus
Supplement (in either case, a "Pooling Agreement"). In general, the parties to
a Pooling Agreement will include the Company, the Trustee, the Master Servicer
and, in some cases, a Special Servicer. However, a Pooling Agreement that
relates to a Trust Fund that includes Mortgage Securities may include a party
solely responsible for the administration of such Mortgage Securities, and a
Pooling Agreement that relates to a Trust Fund that consists solely of
Mortgage Securities may not include a Master Servicer, Special Servicer or
other servicer as a party. All parties to each Pooling Agreement under which
Certificates of a series are issued will be identified in the related
Prospectus Supplement.
Forms of Pooling Agreements have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. However, the provisions of each
Pooling Agreement will vary depending upon the nature of the Certificates to
be issued thereunder and the nature of the related Trust Fund. The following
summaries describe certain provisions that may appear in a Pooling Agreement.
The Prospectus Supplement for a series of Certificates will describe any
provision of the related Pooling Agreement that materially differs from the
description thereof set forth below. The summaries herein, while setting forth
the material provisions that may be included in a Pooling Agreement, do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Pooling Agreement for each
series of Certificates and the description of such provisions in the related
Prospectus Supplement. As used herein with respect to any series, the term
"Certificate" refers to all of the Certificates of that series, whether or not
offered hereby and by the related Prospectus Supplement, unless the context
otherwise requires. The Company will provide a copy of the Pooling Agreement
(without exhibits) that relates to any series of Certificates without charge
upon written request of a holder of a Certificate of such series addressed to
it at its principal executive offices specified herein under "The Company."
CERTAIN MATTERS REGARDING THE MASTER SERVICER AND THE COMPANY
The Pooling Agreement for each series of Certificates will provide that the
Master Servicer may not resign from its obligations and duties thereunder
except upon a determination that performance of such duties is no longer
permissible under applicable law or except (a) in connection with a permitted
transfer of servicing or (b) upon appointment of a successor servicer
reasonably acceptable to the Trustee and upon receipt by the Trustee of a
letter from each Rating Agency generally to the effect that such resignation
and appointment will not, in and of itself, result in a downgrading of the
Certificates. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Pooling Agreement.
Each Pooling Agreement will also provide that, except as set forth below,
neither the Master Servicer, the Company, nor any director, officer, employee
or agent of the Master Servicer or the Company will be under any liability to
the Trust Fund or the Certificateholders for any action taken or for
refraining from the taking of any action in good faith pursuant to the Pooling
Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, the Company, nor any such person will be protected against
any liability which would
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otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations and duties thereunder. Each Pooling Agreement will further provide
that the Master Servicer, the Company, and any director, officer, employee or
agent of the Master Servicer or the Company is entitled to indemnification by
the Trust Fund and will be held harmless against any loss, liability or
expense incurred in connection with any legal action relating to the Pooling
Agreement or the related series of Certificates, other than any loss,
liability or expense related to any specific Mortgage Loan or Mortgage Loans
(except any such loss, liability or expense otherwise reimbursable pursuant to
the Pooling Agreement) and any loss, liability or expense incurred by reason
of willful misfeasance, bad faith or gross negligence in the performance of
duties thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, each Pooling Agreement will provide that neither the
Master Servicer nor the Company will be under any obligation to appear in,
prosecute or defend any legal or administrative action that is not incidental
to its respective duties under the Pooling Agreement and which in its opinion
may involve it in any expense or liability. The Master Servicer or the Company
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the Pooling Agreement and the rights
and duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund, and the Master Servicer or the Company, as the case may be, will
be entitled to be reimbursed therefor out of funds otherwise distributable to
Certificateholders.
Any person into which the Master Servicer may be merged or consolidated, any
person resulting from any merger or consolidation to which the Master Servicer
is a party or any person succeeding to the business of the Master Servicer
will be the successor of the Master Servicer under the Pooling Agreement,
provided that (i) such person is qualified to service mortgage loans on behalf
of Fannie Mae or Freddie Mac and (ii) such merger, consolidation or succession
does not adversely affect the then-current ratings of the classes of
Certificates of the related series that have been rated. In addition,
notwithstanding the prohibition on its resignation, the Master Servicer may
assign its rights under a Pooling Agreement to any person to whom the Master
Servicer is transferring a substantial portion of its mortgage servicing
portfolio, provided clauses (i) and (ii) above are satisfied and such person
is reasonably satisfactory to the Company and the Trustee. In the case of any
such assignment, the Master Servicer will be released from its obligations
under such Pooling Agreement, exclusive of liabilities and obligations
incurred by it prior to the time of such assignment.
EVENTS OF DEFAULT
Events of Default under the Pooling Agreement in respect of a series of
Certificates, unless otherwise specified in the Prospectus Supplement, will
include, without limitation, (i) any failure by the Master Servicer to make a
required deposit to the Certificate Account or, if the Master Servicer is so
required, to distribute to the holders of any class of Certificates of such
series any required payment which continues unremedied for five days after the
giving of written notice of such failure to the Master Servicer by the Trustee
or the Company, or to the Master Servicer, the Company and the Trustee by the
holders of Certificates evidencing not less than 25% of the aggregate
undivided interests (or, if applicable, voting rights) in the related Trust
Fund; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Pooling
Agreement with respect to such series of Certificates which continues
unremedied for 30 days (15 days in the case of a failure to pay the premium
for any insurance policy which is required to be maintained under the Pooling
Agreement) after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Company, or to the Master Servicer, the Company
and the Trustee by the holders of Certificates evidencing not less than 25% of
the aggregate undivided interests (or, if applicable, voting rights) in the
related Trust Fund; and (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings regarding
the Master Servicer and certain actions by the Master Servicer indicating its
insolvency or inability to pay its obligations. A default pursuant to the
terms of any Mortgage Securities included in any Trust Fund will not
constitute an Event of Default under the related Pooling Agreement.
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RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Company or the
Trustee may, and at the direction of the holders of Certificates evidencing
not less than 51% of the aggregate undivided interests (or, if applicable,
voting rights) in the related Trust Fund the Trustee shall, by written
notification to the Master Servicer and to the Company or the Trustee, as
applicable, terminate all of the rights and obligations of the Master Servicer
under the Pooling Agreement (other than any rights of the Master Servicer as
Certificateholder) covering such Trust Fund and in and to the Mortgage Loans
and the proceeds thereof, whereupon the Trustee or, upon notice to the Company
and with the Company's consent, its designee will succeed to all
responsibilities, duties and liabilities of the Master Servicer under such
Pooling Agreement (other than the obligation to purchase Mortgage Loans under
certain circumstances) and will be entitled to similar compensation
arrangements. In the event that the Trustee would be obligated to succeed the
Master Servicer but is unwilling so to act, it may appoint (or if it is unable
so to act, it shall appoint) or petition a court of competent jurisdiction for
the appointment of, a Fannie Mae- or Freddie Mac-approved mortgage servicing
institution with a net worth of at least $10,000,000 to act as successor to
the Master Servicer under the Pooling Agreement (unless otherwise set forth in
the Pooling Agreement). Pending such appointment, the Trustee is obligated to
act in such capacity. The Trustee and such successor may agree upon the
servicing compensation to be paid, which in no event may be greater than the
compensation to the initial Master Servicer under the Pooling Agreement.
No Certificateholder will have any right under a Pooling Agreement to
institute any proceeding with respect to such Pooling Agreement unless such
holder previously has given to the Trustee written notice of default and the
continuance thereof and unless the holders of Certificates evidencing not less
than 25% of the aggregate undivided interests (or, if applicable, voting
rights) in the related Trust Fund have made written request upon the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days after
receipt of such request and indemnity has neglected or refused to institute
any such proceeding. However, the Trustee will be under no obligation to
exercise any of the trusts or powers vested in it by the Pooling Agreement or
to institute, conduct or defend any litigation thereunder or in relation
thereto at the request, order or direction of any of the holders of
Certificates covered by such Pooling Agreement, unless such Certificateholders
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or thereby.
The holders of Certificates representing at least 66% of the aggregate
undivided interests (or, if applicable, voting rights) evidenced by those
Certificates affected by a default or Event of Default may waive such default
or Event of Default (other than a failure by the Master Servicer to make an
advance); provided, however, that (a) a default or Event of Default under
clause (i) under "--Events of Default" above may be waived only by all of the
holders of Certificates affected by such default or Event of Default and (b)
no waiver shall reduce in any manner the amount of, or delay the timing of,
payments received on Mortgage Loans which are required to be distributed to,
or otherwise materially adversely affect, any non-consenting
Certificateholder.
AMENDMENT
Each Pooling Agreement may be amended by the parties thereto, without the
consent of any of the holders of Certificates covered by such Pooling
Agreement, (i) to cure any ambiguity, (ii) to correct or supplement any
provision therein which may be inconsistent with any other provision therein
or to correct any error, (iii) to change the timing and/or nature of deposits
in the Certificate Account, provided that (A) such change would not adversely
affect in any material respect the interests of any Certificateholder, as
evidenced by an opinion of counsel, and (B) such change would not adversely
affect the then-current rating of any rated classes of Certificates, as
evidenced by a letter from each applicable Rating Agency, (iv) if a REMIC
election has been made with respect to the related Trust Fund, to modify,
eliminate or add to any of its provisions (A) to such extent as shall be
necessary to maintain the qualification of the Trust Fund as a REMIC or to
avoid or minimize the risk of imposition of any tax on the related Trust Fund,
provided that the Trustee has received an opinion of counsel to the effect
that (1) such action is necessary or desirable to maintain such qualification
or to avoid or minimize such risk, and (2) such action will not adversely
affect in any material respect the interests of any
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holder of Certificates covered by the Pooling Agreement, or (B) to restrict
the transfer of the REMIC Residual Certificates, provided that the Company has
determined that the then-current ratings of the classes of the Certificates
that have been rated will not be adversely affected, as evidenced by a letter
from each applicable Rating Agency, and that any such amendment will not give
rise to any tax with respect to the transfer of the REMIC Residual
Certificates to a non-Permitted Transferee, (v) to make any other provisions
with respect to matters or questions arising under such Pooling Agreement
which are not materially inconsistent with the provisions thereof, provided
that such action will not adversely affect in any material respect the
interests of any Certificateholder, or (vi) to amend specified provisions that
are not material to holders of any class of Certificates offered hereunder.
The Pooling Agreement may also be amended by the parties thereto with the
consent of the holders of Certificates of each class affected thereby
evidencing, in each case, not less than 66 2/3% of the aggregate Percentage
Interests constituting such class for the purpose of adding any provisions to
or changing in any manner or eliminating any of the provisions of such Pooling
Agreement or of modifying in any manner the rights of the holders of
Certificates covered by such Pooling Agreement, except that no such amendment
may (i) reduce in any manner the amount of, or delay the timing of, payments
received on Mortgage Loans which are required to be distributed on a
Certificate of any class without the consent of the holder of such Certificate
or (ii) reduce the aforesaid percentage of Certificates of any class the
holders of which are required to consent to any such amendment without the
consent of the holders of all Certificates of such class covered by such
Pooling Agreement then outstanding.
Notwithstanding the foregoing, if a REMIC election has been made with
respect to the related Trust Fund, the Trustee will not be entitled to consent
to any amendment to a Pooling Agreement without having first received an
opinion of counsel to the effect that such amendment or the exercise of any
power granted to the Master Servicer, the Company, the Trustee or any other
specified person in accordance with such amendment will not result in the
imposition of a tax on the related Trust Fund or cause such Trust Fund to fail
to qualify as a REMIC.
TERMINATION; RETIREMENT OF CERTIFICATES
The obligations created by the Pooling Agreement for each series of
Certificates (other than certain limited payment and notice obligations of the
Trustee and the Company, respectively) will terminate upon the payment to
Certificateholders of that series of all amounts held in the Certificate
Account or by the Master Servicer and required to be paid to them pursuant to
such Pooling Agreement following the earlier of (i) the final payment or other
liquidation or disposition (or any advance with respect thereto) of the last
Mortgage Loan, REO Property and/or Mortgage Security subject thereto and (ii)
the purchase by the Master Servicer or the Company or, if specified in the
related Prospectus Supplement, by the holder of the REMIC Residual
Certificates (see "Federal Income Tax Consequences" below) from the Trust Fund
for such series of all remaining Mortgage Loans, REO Properties and/or
Mortgage Securities. In addition to the foregoing, the Master Servicer or the
Company will have the option to purchase, in whole but not in part, the
Certificates specified in the related Prospectus Supplement in the manner set
forth in the related Prospectus Supplement. Upon the purchase of such
Certificates or at any time thereafter, at the option of the Master Servicer
or the Company, the assets of the Trust Fund may be sold, thereby effecting a
retirement of the Certificates and the termination of the Trust Fund, or the
Certificates so purchased may be held or resold by the Master Servicer or the
Company. In no event, however, will the trust created by the Pooling Agreement
continue beyond the expiration of 21 years from the death of the survivor of
certain persons named in such Pooling Agreement. Written notice of termination
of the Pooling Agreement will be given to each Certificateholder, and the
final distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee which will be
specified in the notice of termination. If the Certificateholders are
permitted to terminate the trust under the applicable Pooling Agreement, a
penalty may be imposed upon the Certificateholders based upon the fee that
would be foregone by the Master Servicer because of such termination.
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Any such purchase of Mortgage Loans and property acquired in respect of
Mortgage Loans evidenced by a series of Certificates shall be made at the
option of the Master Servicer, the Company or, if applicable, the holder of
the REMIC Residual Certificates at the price specified in the related
Prospectus Supplement. The exercise of such right will effect early retirement
of the Certificates of that series, but the right of the Master Servicer, the
Company or, if applicable, such holder to so purchase is subject to the
aggregate principal balance of the Mortgage Loans and/or Mortgage Securities
in the Trust Fund for that series as of the Distribution Date on which the
purchase proceeds are to be distributed to Certificateholders being less than
the percentage specified in the related Prospectus Supplement of the aggregate
principal balance of such Mortgage Loans and/or Mortgage Securities at the
Cut-off Date for that series. The Prospectus Supplement for each series of
Certificates will set forth the amounts that the holders of such Certificates
will be entitled to receive upon such early retirement. Such early termination
may adversely affect the yield to holders of certain classes of such
Certificates. The foregoing is subject to the provision that if a REMIC
election has been made, the termination of the related Trust Fund will be
effected only in connection with a "qualified liquidation" within the meaning
of Section 860F(a)(4) of the Code.
THE TRUSTEE
The Trustee under each Pooling Agreement will be named in the related
Prospectus Supplement. The commercial bank, national banking association,
banking corporation or trust company that serves as Trustee may have typical
banking relationships with the Company and its affiliates.
LIMITATIONS ON THE DUTIES OF THE TRUSTEE
The Trustee for each series of Certificates will make no representation as
to the validity or sufficiency of the related Pooling Agreement, the
Certificates or any underlying Mortgage Loan, Mortgage Security or related
document and will not be accountable for the use or application by or on
behalf of any Master Servicer or Special Servicer of any funds paid to the
Master Servicer or Special Servicer in respect of the Certificates or the
underlying Mortgage Loans or Mortgage Securities, or any funds deposited into
or withdrawn from the Certificate Account for such series or any other account
by or on behalf of the Master Servicer or Special Servicer. If no Event of
Default has occurred and is continuing, the Trustee for each series of
Certificates will be required to perform only those duties specifically
required under the related Pooling Agreement. However, upon receipt of any of
the various certificates, reports or other instruments required to be
furnished to it pursuant to the related Pooling Agreement, a Trustee will be
required to examine such documents and to determine whether they conform to
the requirements of such agreement.
CERTAIN MATTERS REGARDING THE TRUSTEE
As and to the extent described in the related Prospectus Supplement, the
fees and normal disbursements of any Trustee may be the expense of the related
Master Servicer or other specified person or may be required to be borne by
the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
for each series of Certificates will be entitled to indemnification, from
amounts held in the Certificate Account for such series, for any loss,
liability or expense incurred by the Trustee in connection with the Trustee's
acceptance or administration of its trusts under the related Pooling
Agreement; provided, however, that such indemnification will not extend to any
loss liability or expense incurred by reason of willful misfeasance, bad faith
or gross negligence on the part of the Trustee in the performance of its
obligations and duties thereunder, or by reason of its reckless disregard of
such obligations or duties.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
for each series of Certificates will be entitled to execute any of its trusts
or powers under the related Pooling Agreement or perform any of this duties
thereunder either directly or by or through agents or attorneys, and the
Trustee will not be responsible for
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any willful misconduct or gross negligence on the part of any such agent or
attorney appointed by it with due care.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may resign at any time, in which event the Company will be
obligated to appoint a successor Trustee. The Company may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Pooling Agreement or if the Trustee becomes insolvent. Upon becoming aware of
such circumstances, the Company will be obligated to appoint a successor
Trustee. The Trustee may also be removed at any time by the holders of
Certificates evidencing not less than 51% of the aggregate undivided interests
(or, if applicable, voting rights) in the related Trust Fund. Any resignation
or removal of the Trustee and appointment of a successor Trustee will not
become effective until acceptance of the appointment by the successor Trustee.
YIELD CONSIDERATIONS
The yield to maturity of an Offered Certificate will depend on the price
paid by the holder for such Certificate, the Pass-Through Rate on any such
Certificate entitled to payments of interest (which Pass-Through Rate may vary
if so specified in the related Prospectus Supplement) and the rate and timing
of principal payments (including prepayments, defaults, liquidations and
repurchases) on the Mortgage Loans and the allocation thereof to reduce the
principal balance of such Certificate (or notional amount thereof if
applicable) and other factors.
A class of Certificates may be entitled to payments of interest at a fixed
Pass-Through Rate, a variable Pass-Through Rate or adjustable Pass-Through
Rate, or any combination of such Pass-Through Rates, each as specified in the
related Prospectus Supplement. A variable Pass-Through Rate may be calculated
based on the weighted average of the Mortgage Rates (in each case, net of the
per annum rate or rates applicable to the calculation of servicing and
administrative fees and any Spread (each, a "Net Mortgage Rate")) of the
related Mortgage Loans for the month preceding the Distribution Date if so
specified in the related Prospectus Supplement. As will be described in the
related Prospectus Supplement, the aggregate payments of interest on a class
of Certificates, and the yield to maturity thereon, will be affected by the
rate of payment of principal on the Certificates (or the rate of reduction in
the notional balance of Certificates entitled only to payments of interest)
and, in the case of Certificates evidencing interests in ARM Loans, by changes
in the Net Mortgage Rates on the ARM Loans. See "Maturity and Prepayment
Considerations" below. The yield on the Certificates will also be affected by
liquidations of Mortgage Loans following Mortgagor defaults and by purchases
of Mortgage Loans in the event of breaches of representations made in respect
of such Mortgage Loans by the Company, the Master Servicer and others, or
conversions of ARM Loans to a fixed interest rate. See "The Mortgage Pools--
Representations by Sellers" and "Descriptions of the Certificates--Assignment
of Trust Fund Assets" above. Holders of certain Strip Certificates or a class
of Certificates having a Pass-Through Rate that varies based on the weighted
average Mortgage Rate of the underlying Mortgage Loans will be affected by
disproportionate prepayments and repurchases of Mortgage Loans having higher
Net Mortgage Rates or rates applicable to the Strip Certificates, as
applicable.
With respect to any series of Certificates, a period of time will elapse
between the date upon which payments on the related Mortgage Loans are due and
the Distribution Date on which such payments are passed through to
Certificateholders. That delay will effectively reduce the yield that would
otherwise be produced if payments on such Mortgage Loans were distributed to
Certificateholders on or near the date they were due.
In general, if a class of Certificates is purchased at initial issuance at a
premium and payments of principal on the related Mortgage Loans occur at a
rate faster than anticipated at the time of purchase, the purchaser's actual
yield to maturity will be lower than that assumed at the time of purchase.
Conversely, if a class of Certificates is purchased at initial issuance at a
discount and payments of principal on the related Mortgage Loans occur at a
rate slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than that originally anticipated. The effect
of principal prepayments, liquidations and purchases on yield
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will be particularly significant in the case of a series of Certificates
having a class entitled to payments of interest only or to payments of
interest that are disproportionately high relative to the principal payments
to which such class is entitled. Such a class will likely be sold at a
substantial premium to its principal balance and any faster than anticipated
rate of prepayments will adversely affect the yield to holders thereof. In
certain circumstances extremely rapid prepayments may result in the failure of
such holders to recoup their original investment. In addition, the yield to
maturity on certain other types of classes of Certificates, including Accrual
Certificates, Certificates with a Pass-Through Rate which fluctuates inversely
with or at a multiple of an index or certain other classes in a series
including more than one class of Certificates, may be relatively more
sensitive to the rate of prepayment on the related Mortgage Loans than other
classes of Certificates.
The timing of changes in the rate of principal payments on or repurchases of
the Mortgage Loans may significantly affect an investor's actual yield to
maturity, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. In general, the earlier a
prepayment of principal on the underlying Mortgage Loans or a repurchase
thereof, the greater will be the effect on an investor's yield to maturity. As
a result, the effect on an investor's yield of principal payments and
repurchases occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of a series
of Certificates would not be fully offset by a subsequent like reduction (or
increase) in the rate of principal payments.
When a principal prepayment in full is made on a Mortgage Loan, the borrower
is generally charged interest only for the period from the due date of the
preceding scheduled payment up to the date of such prepayment, instead of for
the full accrual period, that is, the period from the due date of the
preceding scheduled payment up to the due date for the next scheduled payment.
In addition, a partial principal prepayment may likewise be applied as of a
date prior to the next scheduled due date (and, accordingly, be accompanied by
interest thereon for less than the full accrual period). However, interest
accrued on any series of Certificates and distributable thereon on any
Distribution Date will generally correspond to interest accrued on the
principal balance of Mortgage Loans for their respective full accrual periods.
Consequently, if a prepayment on any Mortgage Loan is distributable to
Certificateholders on a particular Distribution Date, but such prepayment is
not accompanied by interest thereon for the full accrual period, the interest
charged to the borrower (net of servicing and administrative fees and any
Spread) may be less (such shortfall, a "Prepayment Interest Shortfall") than
the corresponding amount of interest accrued and otherwise payable on the
Certificates of the related series. If and to the extent that any such
shortfall is allocated to a class of Offered Certificates, the yield thereon
will be adversely affected. The Prospectus Supplement for a series of
Certificates will describe the manner in which any such shortfalls will be
allocated among the classes of such Certificates. If so specified in the
related Prospectus Supplement, the Master Servicer will be required to apply
some or all of its servicing compensation for the corresponding period to
offset the amount of any such shortfalls. The related Prospectus Supplement
will also describe any other amounts available to offset such shortfalls. See
"Servicing of Mortgage Loans--Servicing and Other Compensation and Payment of
Expenses; Spread."
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans and thus the yield on the
Certificates. In general, defaults on Single Family Loans are expected to
occur with greater frequency in their early years. However, there is a risk
that Mortgage Loans, including Multifamily Loans, that require Balloon
Payments may default at maturity, or that the maturity of such a Mortgage Loan
may be extended in connection with a workout. The rate of default on Single
Family Loans which are refinance or limited documentation mortgage loans, and
on Mortgage Loans, including Multifamily Loans, with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Furthermore, the
rate and timing of prepayments, defaults and liquidations on the Mortgage
Loans will be affected by the general economic condition of the region of the
country in which the related Mortgaged Properties are located. The risk of
delinquencies and loss is greater and prepayments are less likely in regions
where a weak or deteriorating economy exists, as may be evidenced by, among
other factors, increasing unemployment or falling property values. See "Risk
Factors."
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With respect to certain Mortgage Loans including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. Under the applicable
underwriting standards, the Mortgagor under each Mortgage Loan generally will
be qualified, or the Mortgage Loan otherwise approved, on the basis of the
Mortgage Rate in effect at origination. The repayment of any such Mortgage
Loan may thus be dependent on the ability of the mortgagor to make larger
level monthly payments following the adjustment of the Mortgage Rate. In
addition, the periodic increase in the amount paid by the Mortgagor of a
Buydown Mortgage Loan during or at the end of the applicable Buydown Period
may create a greater financial burden for the Mortgagor, who might not have
otherwise qualified for a mortgage under applicable underwriting guidelines,
and may accordingly increase the risk of default with respect to the related
Mortgage Loan. The Mortgage Rates on certain ARM Loans subject to negative
amortization generally adjust monthly and their amortization schedules adjust
less frequently. During a period of rising interest rates as well as
immediately after origination (initial Mortgage Rates are generally lower than
the sum of the Indices applicable at origination and the related Note
Margins), the amount of interest accruing on the principal balance of such
Mortgage Loans may exceed the amount of the minimum scheduled monthly payment
thereon. As a result, a portion of the accrued interest on negatively
amortizing Mortgage Loans may become Deferred Interest which will be added to
the principal balance thereof and will bear interest at the applicable
Mortgage Rate. The addition of any such Deferred Interest to the principal
balance of any related class or classes of Certificates will lengthen the
weighted average life thereof and may adversely affect yield to holders
thereof, depending upon the price at which such Certificates were purchased.
In addition, with respect to certain ARM Loans subject to negative
amortization, during a period of declining interest rates, it might be
expected that each minimum scheduled monthly payment on such a Mortgage Loan
would exceed the amount of scheduled principal and accrued interest on the
principal balance thereof, and since such excess will be applied to reduce the
principal balance of the related class or classes of Certificates, the
weighted average life of such Certificates will be reduced and may adversely
affect yield to holders thereof, depending upon the price at which such
Certificates were purchased.
MATURITY AND PREPAYMENT CONSIDERATIONS
As indicated above under "The Mortgage Pools," the original terms to
maturity of the Mortgage Loans in a given Mortgage Pool will vary depending
upon the type of Mortgage Loans included in such Mortgage Pool. The Prospectus
Supplement for a series of Certificates will contain information with respect
to the types and maturities of the Mortgage Loans in the related Mortgage
Pool. Unless otherwise specified in the related Prospectus Supplement, all of
the Mortgage Loans may be prepaid without penalty in full or in part at any
time. The prepayment experience with respect to the Mortgage Loans in a
Mortgage Pool will affect the life and yield of the related series of
Certificates.
With respect to Balloon Loans, payment of the Balloon Payment (which, based
on the amortization schedule of such Mortgage Loans, is expected to be a
substantial amount) will generally depend on the Mortgagor's ability to obtain
refinancing of such Mortgage Loans or to sell the Mortgaged Property prior to
the maturity of the Balloon Loan. The ability to obtain refinancing will
depend on a number of factors prevailing at the time refinancing or sale is
required, including, without limitation, real estate values, the Mortgagor's
financial situation, prevailing mortgage loan interest rates, the Mortgagor's
equity in the related Mortgaged Property, tax laws and prevailing general
economic conditions. Unless otherwise specified in the related Prospectus
Supplement, none of the Company, the Master Servicer, or any of their
affiliates will be obligated to refinance or repurchase any Mortgage Loan or
to sell the Mortgaged Property.
The extent of prepayments of principal of the Mortgage Loans may be affected
by a number of factors, including, without limitation, solicitations and the
availability of mortgage credit, the relative economic vitality of the area in
which the Mortgaged Properties are located and, in the case of Multifamily
Loans, the quality of management of the Mortgage Properties, the servicing of
the Mortgage Loans, possible changes in tax laws and other opportunities for
investment. In addition, the rate of principal payments on the Mortgage Loans
may be affected by the existence of Lock-out Periods and requirements that
principal prepayments be accompanied by
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Prepayment Premiums, as well as due-on-sale and due-on-encumbrance provisions,
and by the extent to which such provisions may be practicably enforced. See
"Servicing of Mortgage Loans--Collection and Other Servicing Procedures;
Mortgage Loan Modifications" and "Certain Legal Aspects of Mortgage Loans--
Enforceability of Certain Provisions" for a description of certain provisions
of the Pooling Agreement and certain legal developments that may affect the
prepayment experience on the Mortgage Loans.
The rate of prepayment on a pool of mortgage loans is also affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When the prevailing market interest rate is below a mortgage
coupon, a borrower may have an increased incentive to refinance its mortgage
loan. In addition, as prevailing market interest rates decline, even borrowers
with ARM Loans that have experienced a corresponding interest rate decline may
have an increased incentive to refinance for purposes of either (i) converting
to a fixed rate loan and thereby "locking in" such rate or (ii) taking
advantage of the initial "teaser rate" (a mortgage interest rate below what it
would otherwise be if the applicable index and gross margin were applied) on
another adjustable rate mortgage loan. Moreover, although the Mortgage Rates
on ARM Loans will be subject to periodic adjustments, such adjustments
generally will, unless otherwise specified in the related Prospectus
Supplement, (i) not increase or decrease such Mortgage Rates by more than a
fixed percentage amount on each adjustment date, (ii) not increase such
Mortgage Rates over a fixed percentage amount during the life of any ARM Loan
and (iii) be based on an index (which may not rise and fall consistently with
mortgage interest rates) plus the related Note Margin (which may be different
from margins being used at the time for newly originated adjustable rate
mortgage loans). As a result, the Mortgage Rates on the ARM Loans at any time
may not equal the prevailing rates for similar, newly originated adjustable
rate mortgage loans. In certain rate environments, the prevailing rates on
fixed-rate mortgage loans may be sufficiently low in relation to the then-
current Mortgage Rates on ARM Loans that the rate of prepayment may increase
as a result of refinancings. There can be no certainty as to the rate of
prepayments on the Mortgage Loans during any period or over the life of any
series of Certificates.
There can be no assurance as to the rate of prepayment of the Mortgage
Loans. The Company is not aware of any publicly available statistics relating
to the principal prepayment experience of diverse portfolios of mortgage loans
such as the Mortgage Loans over an extended period of time. All statistics
known to the Company that have been compiled with respect to prepayment
experience on mortgage loans indicate that while some mortgage loans may
remain outstanding until their stated maturities, a substantial number will be
paid prior to their respective stated maturities. No representation is made as
to the particular factors that will affect the prepayment of the Mortgage
Loans or as to the relative importance of such factors.
Under certain circumstances, the Master Servicer, the Company or, if
specified in the related Prospectus Supplement, the holders of the REMIC
Residual Certificates may have the option to purchase the assets in a Trust
Fund and effect early retirement of the related series of Certificates. See
"The Pooling Agreement-- Termination; Retirement of Certificates."
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans that are general in nature. Because such legal aspects are
governed in part by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state nor to encompass the laws of all states in which
the Mortgaged Properties may be situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Mortgage Loans.
SINGLE FAMILY LOANS AND MULTIFAMILY LOANS
General. Each Single Family and Multifamily Loan will be evidenced by a note
or bond and secured by an instrument granting a security interest in real
property, which may be a mortgage, deed of trust or a deed to secure debt,
depending upon the prevailing practice and law in the state in which the
related Mortgaged Property
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is located. Mortgages, deed of trust and deeds to secure debt are herein
collectively referred to as "mortgages". A mortgage creates a lien upon, or
grants a title interest in, the real property covered thereby, and represents
the security for the repayment of the indebtedness customarily evidenced by a
promissory note. The priority of the lien created or interest granted will
depend on the terms of the mortgage and, in some cases, on the terms of
separate subordination agreements or intercreditor agreements with others that
hold interests in the real property, the knowledge of the parties to the
mortgage and, generally, the order of recordation of the mortgage in the
appropriate public recording office. However, the lien of a recorded mortgage
will generally be subordinate to later arising liens for real estate taxes and
assessments and other charges imposed under governmental police powers.
Types of Mortgage Instruments. There are two parties to a mortgage: a
mortgagor (the borrower and usually the owner of the subject property) and a
mortgagee (the lender). In contrast, a deed of trust is a three-party
instrument, among a trustor (the equivalent of a borrower), a trustee to whom
the real property is conveyed, and a beneficiary (the lender) for whose
benefit the conveyance is made. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust and generally with a
power of sale, to the trustee to secure repayment of the indebtedness
evidenced by the related note. A deed to secure debt typically has two
parties. The borrower, or grantor, conveys title to the real property to the
grantee, or lender, generally with a power of sale, until such time as the
debt is repaid. In a case where the borrower is a land trust, there would be
an additional party because legal title to the property is held by a land
trustee under a land trust agreement for the benefit of the borrower. At
origination of a mortgage loan involving a land trust, the borrower executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the
express provisions of the related instrument, the law of the state in which
the real property is located, certain federal laws (including, without
limitation, the Relief Act) and, in some deed of trust transactions, the
directions of the beneficiary.
Leases and Rents. Mortgages that encumber income-producing multifamily
properties often contain an assignment of rents and leases, pursuant to which
the borrower assigns to the lender the borrower's right, title and interest as
landlord under each lease and the income derived therefrom, while (unless
rents are to be paid directly to the lender) retaining a revocable license to
collect the rents for so long as there is no default. If the borrower
defaults, the license terminates and the lender is entitled to collect the
rents. Local law may require that the lender take possession of the property
and/or obtain a court-appointed receiver before becoming entitled to collect
the rents.
CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states. Such financing statements are
effective for five years and must be renewed at the end of each five years.
The certificate of title laws adopted by the majority of states provide that
ownership of motor vehicles and manufactured housing shall be evidenced by a
certificate of title issued by the motor vehicles department (or a similar
entity) of such state. In the states that have enacted certificate of title
laws, a security interest in a unit of manufactured housing, so long as it is
not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Pooling Agreement to
effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws
of the state in which any Manufactured Home is registered. In the event the
Master Servicer fails, due to clerical errors or otherwise, to effect such
notation or delivery, or files the security interest under the wrong law (for
example, under a motor vehicle title statute rather than under the UCC, in a
few states), the Trustee may not
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have a first priority security interest in the Manufactured Home securing a
Contract. As manufactured homes have become larger and often have been
attached to their sites without any apparent intention by the borrowers to
move them, courts in many states have held that manufactured homes may, under
certain circumstances, become subject to real estate title and recording laws.
As a result, a security interest in a manufactured home could be rendered
subordinate to the interests of other parties claiming an interest in the home
under applicable state real estate law. In order to perfect a security
interest in a manufactured home under real estate laws, the holder of the
security interest must file either a "fixture filing" under the provisions of
the UCC or a real estate mortgage under the real estate laws of the state
where the home is located. These filings must be made in the real estate
records office of the county where the home is located. Generally, Contracts
will contain provisions prohibiting the obligor from permanently attaching the
Manufactured Home to its site. So long as the obligor does not violate this
agreement, a security interest in the Manufactured Home will be governed by
the certificate of title laws or the UCC, and the notation of the security
interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest
in the Manufactured Home. If, however, a Manufactured Home is permanently
attached to its site, other parties could obtain an interest in the
Manufactured Home that is prior to the security interest originally retained
by the Seller and transferred to the Company.
The Company will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Certificateholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Company,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Certificateholders, as the new secured
party and, accordingly, the Company or the Seller will continue to be named as
the secured party on the certificates of title relating to the Manufactured
Homes. In most states, such assignment is an effective conveyance of such
security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Company's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Company or Seller.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Company on the
certificate of title or delivery of the required documents and fees will be
sufficient to protect the Trustee against the rights of subsequent purchasers
of a Manufactured Home or subsequent lenders who take a security interest in
the Manufactured Home. If there are any Manufactured Homes as to which the
Company has failed to perfect or cause to be perfected the security interest
assigned to the Trust Fund, such security interest would be subordinate to,
among others, subsequent purchasers for value of Manufactured Homes and
holders of perfected security interests. There also exists a risk in not
identifying the Trustee, on behalf of the Certificateholders, as the new
secured party on the certificate of title that, through fraud or negligence,
the security interest of the Trustee could be released.
In the event that the owner of a Manufactured Home moves it to a state other
than the state in which such Manufactured Home initially is registered, under
the laws of most states the perfected security interest in the Manufactured
Home would continue for four months after such relocation and thereafter until
the owner re-registers the Manufactured Home in such state. If the owner were
to relocate a Manufactured Home to another state and re-register the
Manufactured Home in such state, and if the Company did not take steps to re-
perfect its security interest in such state, the security interest in the
Manufactured Home would cease to be perfected. A majority of states generally
require surrender of a certificate of title to re-register a Manufactured
Home; accordingly, the Company must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states that provide for notation of lien, the Company
would receive notice of surrender if the security interest in the Manufactured
Home is noted on the certificate of title. Accordingly, the Company would have
the opportunity to re-perfect its security interest in the Manufactured Home
in the state of relocation. In states that do not require a certificate of
title for registration of a manufactured home, re-registration could defeat
perfection. Similarly, when an obligor under a manufactured housing
conditional sales contract sells a manufactured home, the obligee must
surrender possession of the certificate of
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title or it will receive notice as a result of its lien noted thereon and
accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under each related Pooling Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a perfected security interest. The Company will
obtain the representation of the related Seller that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Certificateholders in the event such a
lien arises.
FORECLOSURE ON MORTGAGES
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which
authorizes the trustee to sell the property upon any default by the borrower
under the terms of the note or deed of trust. In addition to any notice
requirements contained in a deed of trust, in some states, the trustee must
record a notice of default and send a copy to the borrower trustor and to any
person who has recorded a request for a copy of notice of default and notice
of sale. In addition, the trustee must provide notice in some states to any
other individual having an interest of record in the real property, including
any junior lienholders. If the deed of trust is not reinstated within a
specified period, a notice of sale must be posted in a public place and, in
most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property and sent to all parties having an interest of
record in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating necessary parties. Judicial foreclosure proceedings are often not
contested by any of the applicable parties. If the mortgagee's right to
foreclose is contested, the legal proceedings necessary to resolve the issue
can be time-consuming.
In some states, the borrower-trustor has the right to reinstate the loan at
any time following default until shortly before the trustee's sale. In
general, in such states, the borrower, or any other person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical
condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for a credit bid less than or equal to the unpaid
principal amount of the mortgage or deed of trust, accrued and unpaid interest
and the expense of foreclosure. Generally, state law controls the amount of
foreclosure costs and expenses, including attorneys' fees, which may be
recovered by a lender. Thereafter, subject to the right of the borrower in
some states to remain in possession during the redemption period, the lender
will assume the burdens of ownership, including obtaining hazard insurance and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real
estate broker and pay the broker's commission in connection with the sale of
the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property
and, in some states, subject to the terms of the loan, the lender may be
entitled to a deficiency judgment. Any loss may be reduced by the receipt of
any mortgage insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case
it must either pay the entire amount due on the senior mortgages to the
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senior mortgagees prior to or at the time of the foreclosure sale or undertake
the obligation to make payments on the senior mortgages in the event the
mortgagor is in default thereunder, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the
foreclosure of a junior mortgage triggers the enforcement of a "due-on-sale"
clause, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Single Family and Multifamily Loans which are junior mortgage loans, if the
lender purchases the property, the lender's title will be subject to all
senior liens and claims and certain governmental liens. The proceeds received
by the referee or trustee from the sale are applied first to the costs, fees
and expenses of sale and then in satisfaction of the indebtedness secured by
the mortgage or deed of trust under which the sale was conducted. Any
remaining proceeds are generally payable to the holders of junior mortgages or
deeds of trust and other liens and claims in order of their priority, whether
or not the borrower is in default. Any additional proceeds are generally
payable to the mortgagor or trustor. The payment of the proceeds to the
holders of junior mortgages may occur in the foreclosure action of the senior
mortgagee or may require the institution of separate legal proceeds.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of its 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 a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property
or the borrower's execution of 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 minimums.
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.
REPOSSESSION WITH RESPECT TO CONTRACTS
General. Repossession of manufactured housing is governed by state law. A
few states have enacted legislation that requires that the debtor be given an
opportunity to cure its default (typically 30 days to bring the account
current) before repossession can commence. So long as a manufactured home has
not become so attached to real estate that it would be treated as a part of
the real estate under the law of the state where it is located, repossession
of such home in the event of a default by the obligor will generally be
governed by the UCC (except in Louisiana). Article 9 of the UCC provides the
statutory framework for the repossession of manufactured housing. While the
UCC as adopted by the various states may vary in certain small particulars,
the general repossession procedure established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of the right
to cure a default, repossession can commence immediately upon default without
prior notice. Repossession may be effected either through self-help (peaceable
retaking without court order), voluntary repossession or through judicial
process (repossession pursuant to court-issued writ of replevin). The self-
help and/or voluntary repossession methods are more commonly employed, and are
accomplished simply by retaking possession of the manufactured home. In cases
in which the debtor objects or raises a defense to repossession, a court order
must be obtained from the appropriate state court, and the manufactured home
must then be repossessed in accordance with that order. Whether the method
employed is self-help, voluntary repossession or judicial repossession, the
repossession can be accomplished either by an actual physical removal of the
manufactured home to a secure location for refurbishment and resale or by
removing the occupants and their belongings from the manufactured home and
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maintaining possession of the manufactured home on the location where the
occupants were residing. Various factors may affect whether the manufactured
home is physically removed or left on location, such as the nature and term of
the lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and terms of
the sale are commercially reasonable.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the indebtedness.
While some states impose prohibitions or limitations on deficiency judgments
if the net proceeds from resale do not cover the full amount of the
indebtedness, the remainder may be sought from the debtor in the form of a
deficiency judgement in those states that do not prohibit or limit such
judgments. The deficiency judgment is a personal judgment against the debtor
for the shortfall. Occasionally, after resale of a manufactured home and
payment of all expenses and indebtedness, there is a surplus of funds. In that
case, the UCC requires the party suing for the deficiency judgment to remit
the surplus to the debtor. Because the defaulting owner of a manufactured home
generally has very little capital or income available following repossession,
a deficiency judgment may not be sought in many cases or, if obtained, will be
settled at a significant discount in light of the defaulting owner's strained
financial condition.
Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an
installment sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in
which the property is located a document converting the unit into real
property. A manufactured home that is converted into real property but is then
removed from its site can be converted back to personal property governed by
the motor vehicle registration laws if the obligor executes and files various
documents in the appropriate real estate records and all mortgagees under real
estate mortgages on the property and the land to which it was affixed file
releases with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the
obligor must be given a full release from liability for all amounts due under
the contract. In executory process repossessions, a sheriff's sale (without
court supervision) is permitted, unless the obligor brings suit to enjoin the
sale, and the lender is prohibited from seeking a deficiency judgment against
the obligor unless the lender obtained an appraisal of the manufactured home
prior to the sale and the property was sold for at least two-thirds of its
appraised value.
RIGHTS OF REDEMPTION
Single Family Properties and Multifamily Properties. The purposes of a
foreclosure action in respect of a Single Family Property or Multifamily
Property are to enable the lender to realize upon its security and to bar the
borrower, and all persons who have interests in the property that are
subordinate to that of the foreclosing lender, from exercise of their "equity
of redemption". The doctrine of equity of redemption provides that, until
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the property encumbered by a mortgage has been sold in accordance with a
properly conducted foreclosure and foreclosure sale, those having interests
that are subordinate to that of the foreclosing lender have an equity of
redemption and may redeem the property by paying the entire debt with
interest. Those having an equity of redemption must generally be made parties
and joined in the foreclosure proceeding in order for their equity of
redemption to be terminated.
The equity of redemption is a common-law (non-statutory) right which should
be distinguished from post-sale statutory rights of redemption. In some
states, after sale pursuant to a deed of trust or foreclosure of a mortgage,
the borrower and foreclosed junior lienholders are given a statutory period in
which to redeem the property. In some states, statutory redemption may occur
only upon payment of the foreclosure sale price. In other states, redemption
may be permitted if the former borrower pays only a portion of the sums due.
The effect of a statutory right of redemption is to diminish the ability of
the lender to sell the foreclosed property because the exercise of a right of
redemption would defeat the title of any purchase through a foreclosure.
Consequently, the practical effect of the redemption right is to force the
lender to maintain the property and pay the expenses of ownership until the
redemption period has expired. In some states, a post-sale statutory right of
redemption may exist following a judicial foreclosure, but not following a
trustee's sale under a deed of trust.
Manufactured Homes. While state laws do not usually require notice to be
given to debtors prior to repossession, many states do require delivery of a
notice of default and of the debtor's right to cure defaults before
repossession. The law in most states also requires that the debtor be given
notice of sale prior to the resale of the home so that the owner may redeem at
or before resale. In addition, the sale must comply with the requirements of
the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Single Family Loans and Multifamily Loans. Certain states have imposed
statutory prohibitions which limit the remedies of a beneficiary under a deed
of trust or a mortgagee under a mortgage. In some states including California,
statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure. A deficiency
judgment is a personal judgment against the former borrower equal in most
cases to the difference between the net amount realized upon the public sale
of the real property and the amount due to the lender. In the case of a
Mortgage Loan secured by a property owned by a trust where the Mortgage Note
is executed on behalf of the trust, a deficiency judgment against the trust
following foreclosure or sale under a deed of trust, even if obtainable under
applicable law, may be of little value to the mortgagee or beneficiary if
there are no trust assets against which such deficiency judgment may be
executed. In the case of a Mortgage Loan secured by a property owned by a
trust where the Mortgage Note is executed on behalf of the trust, a deficiency
judgment against the trust following foreclosure or sale under a deed of
trust, even if obtainable under applicable law, may be of little value to the
mortgagee or beneficiary if there are no trust assets against which such
deficiency judgment may be executed. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage
by foreclosure in an attempt to satisfy the full debt before bringing a
personal action against the borrower. In certain other states, the lender has
the option of bringing a personal action against the borrower on the debt
without first exhausting such security; however in some of these states, the
lender, following judgment on such personal action, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the security. Consequently, the practical effect of the election requirement,
in those states permitting such election, is that lenders will usually proceed
against the security first rather than bringing a personal action against the
borrower. Finally, in certain other states, statutory provisions limit any
deficiency judgment against the former borrower following a foreclosure to the
excess of the outstanding debt over the fair value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state 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. For
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example, under the federal Bankruptcy Code, as amended from time to time
(Title 11 of the United States Code) (the "Bankruptcy Code"), virtually all
actions (including foreclosure actions and deficiency judgment proceedings) to
collect a debt are automatically stayed upon the filing of the bankruptcy
petition and, often, no interest or principal payments are made during the
course of the bankruptcy case. The delay and the consequences thereof caused
by such automatic stay can be significant. Also, under the Bankruptcy Code,
the filing of a petition in a bankruptcy by or on behalf of a junior lienor
may stay the senior lender from taking action to foreclose out of such junior
lien. Moreover, with respect to federal bankruptcy law, a court with federal
bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or
Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearage within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of the debtor's petition. Some courts
with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearage over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of
each monthly payment, changing the rate of interest, altering the repayment
schedule, forgiving all or a portion of the debt and reducing the lender's
security interest to the value of the residence, thus leaving the lender a
general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Generally, however, the
terms of a mortgage loan secured only by a mortgage on real property that is
the debtor's principal residence may not be modified pursuant to a plan
confirmed pursuant to Chapter 13 except with respect to mortgage payment
arrears, which may be cured within a reasonable time period.
In the case of income-producing multifamily properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of
the secured lender to enforce the borrower's assignment of rents and leases
related to the mortgaged property. Under Section 362 of the Bankruptcy Code,
the lender will be stayed from enforcing the assignment, and the legal
proceedings necessary to resolve the issue could be time-consuming, with
resulting delays in the lender's receipt of the rents.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
single family 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.
Contracts. In addition to the laws limiting or prohibiting deficiency
judgments, numerous other statutory provisions, including federal bankruptcy
laws and related state laws, may interfere with or affect the ability of a
lender to realize upon collateral and/or enforce a deficiency judgment. For
example, in a Chapter 13 proceeding under the federal bankruptcy law, a court
may prevent a lender from repossessing a home, and, as part of the
rehabilitation plan, reduce the amount of the secured indebtedness to the
market value of the home at the time of bankruptcy (as determined by the
court), leaving the party providing financing as a general unsecured creditor
for the remainder of the indebtedness. A bankruptcy court may also reduce the
monthly payments due under a contract or change the rate of interest and time
of repayment of the indebtedness.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Certificateholders as
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the holders of a junior deed of trust or a junior mortgage are subordinate in
lien priority and in payment priority to those of the holder of the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee
or beneficiary to receive and apply hazard insurance and condemnation proceeds
and, upon default of the mortgagor, to cause a foreclosure on the property.
Upon completion of the foreclosure proceedings by the holder of the senior
mortgage or the sale pursuant to the deed of trust, the junior mortgagee's or
junior beneficiary's lien will be extinguished unless the junior lienholder
satisfies the defaulted senior loan or asserts its subordinate interest in a
property in foreclosure proceedings. See "--Foreclosure on Mortgages" above.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and
the junior mortgage or deed of trust, the terms of the senior mortgage or deed
of trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject
to the terms of the senior mortgage or deed of trust, may have the right to
perform the obligation itself. Generally, all sums so expended by the
mortgagee or beneficiary become part of the indebtedness secured by the
mortgage or deed of trust. To the extent a senior mortgagee expends such sums,
such sums will generally have priority over all sums due under the junior
mortgage.
CONSUMER PROTECTION LAWS WITH RESPECT TO CONTRACTS
Numerous federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include
the federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity
Act, Regulation "B", the Fair Credit Reporting Act, and related statutes.
These laws can impose specific statutory liabilities upon creditors who fail
to comply with their provisions. In some cases, this liability may affect an
assignee's ability to enforce a contract.
Manufactured housing contracts often contain provisions obligating the
obligor to pay late charges if payments are not timely made. In certain cases,
federal and state law may specifically limit the amount of late charges that
may be collected. Unless otherwise provided in the related Prospectus
Supplement, under the related Pooling Agreement, late charges will be retained
by the Master Servicer as additional servicing compensation, and any inability
to collect these amounts will not affect payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided to
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the
United States. For the most part, courts have upheld the notice provisions of
the UCC and related laws as reasonable or have found that the repossession and
resale by the creditor does not involve sufficient state action to afford
constitutional protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any
assignee of the creditor to all claims and defenses which the debtor in the
transaction could assert against the seller of the goods. Liability under the
FTC Rule is limited to the amounts paid by a debtor on the contract, and the
holder of the contract may also be unable to collect amounts still due
thereunder. Most of the Contracts in a Trust Fund will be subject to the
requirements of the FTC Rule. Accordingly, the Trust Fund, as holder of the
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor
on the Contract.
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ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on the property. Such a lien
will generally have priority over all subsequent liens on the property and, in
certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party which
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the Offered Certificates of the related
series might realize a loss if such costs were required to be paid by the
Trust Fund.
ENFORCEABILITY OF CERTAIN PROVISIONS
Transfer of Single Family Properties and Multifamily Properties. Unless the
related Prospectus Supplement indicates otherwise, the Single Family Loans and
Multifamily Loans generally 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. However, the
Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain
Act") preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limited exceptions.
The Garn-St Germain Act does "encourage" lenders to permit assumption of loans
at the original rate of interest or at some other rate less than the average
of the original rate and the market rate.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St Germain Act may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These include intra-family transfers, certain transfers by operation
of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also
prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by the
buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Transfer of Manufactured Homes. Generally, manufactured housing contracts
contain provisions prohibiting the sale or transfer of the related
manufactured homes without the consent of the obligee on the contract and
permitting the acceleration of the maturity of such contracts by the obligee
on the contract upon any such sale or transfer that is not consented to.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will, to the extent it has knowledge of such conveyance or proposed
conveyance, exercise or cause to be exercised its rights to accelerate the
maturity of the related Contracts through enforcement of due-on-sale clauses,
subject to applicable state law. In certain cases, the transfer may be made by
a delinquent obligor in order to avoid a repossession proceeding with respect
to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the
Master Servicer's ability to do so will depend on the enforceability under
state law of the due-on-sale clause. The Garn-St Germain Act preempts, subject
to certain exceptions and conditions, state laws prohibiting enforcement of
due-on-sale clauses applicable to the Manufactured Homes.
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Consequently, in some cases the Master Servicer may be prohibited from
enforcing a due-on-sale clause in respect of certain Manufactured Homes.
Late Payment Charges and Prepayment Restrictions. Notes and mortgages, as
well as manufactured housing conditional sales contracts and installment loan
agreements, may contain provisions that obligate the borrower to pay a late
charge or additional interest if payments are not timely made, and in some
circumstances, may prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment fees or yield
maintenance penalties. In certain states, there are or may be specific
limitations upon the late charges which a lender may collect from a borrower
for delinquent payments. Certain states also limit the amounts that a lender
may collect from a borrower as an additional charge if the loan is prepaid. In
addition, the enforceability of provisions that provide for prepayment fees or
penalties upon an involuntary prepayment is unclear under the laws of many
states.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and
the senior loan does not, a mortgagor may be more likely to repay sums due on
the junior loan than those on the senior loan. Second, acts of the senior
lender that prejudice the junior lender or impair the junior lender's security
may create a superior equity in favor of the junior lender. For example, if
the mortgagor and the senior lender agree to an increase in the principal
amount of or the interest rate payable on the senior loan, the senior lender
may lose its priority to the extent an existing junior lender is harmed or the
mortgagor is additionally burdened. Third, if the mortgagor defaults on the
senior loan and/or any junior loan or loans, the existence of junior loans and
actions taken by junior lenders can impair the security available to the
senior lender and can interfere with or delay the taking of action by the
senior lender. Moreover, the bankruptcy of a junior lender may operate to stay
foreclosure or similar proceeds by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. A similar federal
statute was in effect with respect to mortgage loans made during the first
three months of 1980. The Office of Thrift Supervision is authorized to issue
rules and regulations and to publish interpretations governing implementation
of Title V. The statute authorized any state to reimpose interest rate limits
by adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where
Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered
by Title V, Certain states have taken action to reimpose interest rate limits
or to limit discount points or other charges.
Title V also provides that, subject to the following conditions, state usury
limitations shall not apply to any loan that is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice
period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit. Title V authorized any state to
reimpose limitations on interest rates and finance charges by adopting before
April 1, 1983 a law or constitutional provision which expressly rejects
application of the federal law. Fifteen states adopted such a law prior to the
April 1, 1983 deadline. In addition, even where Title V was not so rejected,
any state is authorized by the law to adopt a provision limiting discount
points or other charges on loans covered by Title V. In any state in which
application of Title V was expressly rejected or a provision limiting discount
points or other charges has been adopted, no Contract which imposes finance
charges or provides for discount points or charges in excess of permitted
levels has been included in the Trust Fund.
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As indicated above under "The Mortgage Pools-Representations by Sellers,"
each Seller of a Mortgage Loan will have represented that such Mortgage Loan
was originated in compliance with then applicable state laws, including usury
laws, in all material respects. However, the Mortgage Rates on the Mortgage
Loans will be subject to applicable usury laws as in effect from time to time.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subjected to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by
a state-chartered lender was in compliance with applicable law. These
difficulties were alleviated substantially as a result of the enactment of
Title VIII of the Garn-St Germain Act ("Title VIII"). Title VIII provides
that, notwithstanding any state law to the contrary, state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks, state-chartered credit
unions may originate alternative mortgage instruments in accordance with
regulations promulgated by the National Credit Union Administration with
respect to origination of alternative mortgage instruments by federal credit
unions, and all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks
and mutual savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations. Title VIII provides that
any state may reject applicability of the provisions of Title VIII by
adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
FORMALDEHYDE LITIGATION WITH RESPECT TO CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as
plywood flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and
related persons in the distribution process. The Company is aware of a limited
number of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect
to which a formaldehyde claim has been successfully asserted may be liable to
the obligor for the amount paid by the obligor on the related Contract and may
be unable to collect amounts still due under the Contract. In the event an
obligor is successful in asserting such a claim, the related
Certificateholders could suffer a loss if (i) the related Seller fails or
cannot be required to repurchase the affected Contract for a breach of
representation and warranty and (ii) the Master Servicer or the Trustee were
unsuccessful in asserting any claim of contribution or subrogation on behalf
of the Certificateholders against the manufacturer or other persons who were
directly liable to the plaintiff for the damages. Typical products liability
insurance policies held by manufacturers and component suppliers of
manufactured homes may not cover liabilities arising from formaldehyde in
manufactured housing, with the result that recoveries from such manufacturers,
suppliers or other persons may be limited to their corporate assets without
the benefit of insurance.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a Mortgagor who enters military service after the
origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was
in reserve status and is called to active duty after origination of the
Mortgage Loan), may not be charged interest (including fees and charges) above
an annual rate of 6% during the period of such
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Mortgagor's active duty status, unless a court orders otherwise upon
application of the lender. The Relief Act applies to individuals who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with
the military. Because the Relief Act applies to Mortgagors who enter military
service (including reservists who are called to active duty) after origination
of the related Mortgage Loan, no information can be provided as to the number
of loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of
the Master Servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfall in interest collections resulting from the
application of the Relief Act or similar legislation or regulations, which
would not be recoverable from the related Mortgage Loans, would result in a
reduction of the amounts distributable to the holders of the related
Certificates, and would not be covered by advances or, unless otherwise
specified in the related Prospectus Supplement, by any Letter of Credit or any
other form of credit enhancement provided in connection with the related
series of Certificates. In addition, the Relief Act imposes limitations that
would impair the ability of the Master Servicer to foreclose on an affected
Mortgage Loan or enforce rights under a Contract during the Mortgagor's period
of active duty status, and, under certain circumstances, during an additional
three month period thereafter. Thus, in the event that the Relief Act or
similar legislation or regulations applies to any Mortgage Loan which goes
into default, there may be delays in payment and losses on the related
Certificates in connection therewith. Any other interest shortfalls, deferrals
or forgiveness of payments on the Mortgage Loans resulting from similar
legislation or regulations may result in delays in payments or losses to
Certificate holders of the related series.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following general discussion of the anticipated material federal income
tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder, to the extent it relates to matters of law or
legal conclusions with respect thereto, represents the opinion of counsel to
the Company with respect to that series on the material matters associated
with such consequences, subject to any qualifications set forth herein. This
discussion has been prepared with the advice of Freshman, Marantz, Orlanski,
Cooper & Klein, counsel to the Company. This discussion is directed solely to
Certificateholders that hold the Certificates as capital assets within the
meaning of Section 1221 of the Internal Revenue Code of 1986 (the "Code") and
does not purport to discuss all federal income tax consequences that may be
applicable to particular categories of investors, some of which (such as
banks, insurance companies and foreign investors) may be subject to special
rules. Further, the authorities on which this discussion, and the opinion
referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers and preparers of
tax returns (including those filed by any REMIC or other issuer) should be
aware that under applicable Treasury regulations a provider of advice on
specific issues of law is not considered an income tax return preparer unless
the advice (i) is given with respect to events that have occurred at the time
the advice is rendered and is not given with respect to the consequences of
contemplated actions, and (ii) is directly relevant to the determination of an
entry on a tax return. Prospective investors should note that no rulings have
been or will be sought from the "Internal Revenue Service" (the "IRS") with
respect to any of the federal income tax consequences discussed below, and no
assurance can be given the IRS will not take a contrary position. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the
federal income tax consequences described herein, potential investors should
consider the state and local tax consequences, if any, of the purchase,
ownership and disposition of the Certificates. See "State and Other Tax
Consequences." Certificateholders are advised to consult their own tax
advisors concerning the federal, state, local or other tax consequences to
them of the purchase, ownership and disposition of the Certificates offered
hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or
a portion thereof, that the Trustee, the Master Servicer or another
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specified party (the "REMIC Administrator") will elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
86OG (the "REMIC Provisions") of the Code and (ii) certificates ("Grantor
Trust Certificates") representing interests in a Trust Fund ("Grantor Trust
Fund") as to which no such election will be made. The Prospectus Supplement
for each series of Certificates will indicate whether a REMIC election (or
elections) will be made for the related Trust Fund and, if such an election is
to be made, will identify all "regular interests" and "residual interests" in
the REMIC. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a
Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code
and in the Treasury regulations issued thereunder (the "OID Regulations"), and
in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they
are not applicable to, securities such as the Certificates.
REMICS
Classification of REMICS. Prior to the sale of each series of REMIC
Certificates, Freshman, Marantz, Orlanski, Cooper & Klein, counsel to the
Company, will have delivered its opinion generally to the effect that,
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the related Trust Fund (or each applicable portion thereof) will
qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC
Regular Certificates") or "residual interests" ("REMIC Residual Certificates")
in that REMIC within the meaning of the REMIC Provisions. Such opinion will be
filed with the Commission either as an exhibit to the Registration Statement
of which this Prospectus Supplement is a part or in a Current Report on Form
8-K.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year and thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below.
Although the Code authorizes the Treasury Department to issue regulations
providing relief in the event of an inadvertent termination of REMIC status,
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 Trust Fund's income for the period in which the requirements
for such status are not satisfied. The Pooling and Servicing Agreement with
respect to each REMIC will include provisions designed to maintain the Trust
Fund's status as a REMIC under the REMIC Provisions. It is not anticipated
that the status of any Trust Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates. In general, the REMIC
Certificates will be "qualifying real property loans" within the meaning of
Section 593(d) of the Code, "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC underlying such
Certificates would be so treated. Moreover, if 95% or more of the assets of
the REMIC qualify for any of the foregoing treatments at all times during a
calendar year, the REMIC Certificates will qualify for the corresponding
status in their entirety for that calendar year. Interest (including original
issue discount) on the REMIC Regular Certificates and income allocated to the
class of REMIC Residual Certificates will be interest described in Section
856(c)(3)(B) of the Code to the extent that such Certificates are treated as
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code.
In addition, the REMIC Regular Certificates will be "qualified mortgages"
within the meaning of Section 86OG(a)(3) of the Code if transferred to another
REMIC on its startup day in exchange for regular or residual interests
therein. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Code will be made
with respect to each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during such calendar quarter.
The REMIC will report those determinations to Certificateholders in the manner
and at the times required by applicable Treasury regulations.
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The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Mortgage Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Mortgage Loans for purposes of all of
the foregoing sections. In addition, in some instances Mortgage Loans may not
be treated entirely as assets described in the foregoing sections. If so, the
related Prospectus Supplement will describe the Mortgage Loans that may not be
so treated. The REMIC Regulations do provide, however, that payments on
Mortgage Loans held pending distribution are considered part of the Mortgage
Loans for purposes of Sections 593(d) and 856(c)(5)(A) of the Code.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be made to treat designated portions of the
related Trust Fund as REMICs ("Tiered REMICS") for federal income tax
purposes. Upon the issuance of any such series of REMIC Certificates,
Freshman, Marantz, Orlanski, Cooper & Klein, counsel to the Company, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICS, respectively, will be considered to evidence ownership of REMIC
Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real
estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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. Certain REMIC Regular Certificates may be issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code. Any holders of REMIC Regular Certificates issued with original issue
discount generally will be required to include original issue discount in
income as it accrues, in accordance with the method described below, in
advance of the receipt of the cash attributable to such income. In addition,
Section 1272(a)(6) of the Code provides special rules applicable to REMIC
Regular Certificates and certain other debt instruments issued with original
issue discount. Regulations have not been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report accompanying the Tax Reform Act
of 1986 (the "Committee Report") indicates that the regulations will provide
that the prepayment assumption used with respect to a REMIC Regular
Certificate must be the same as that used in pricing the initial offering of
such REMIC Regular Certificate. The prepayment assumption (the "Prepayment
Assumption") used in reporting original issue discount for each series of
REMIC Regular Certificates will be consistent with this standard and will be
disclosed in the related Prospectus Supplement. However, neither the Company,
the Master Servicer nor the Trustee will make any
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representation that the Mortgage Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price.
The issue price of a particular class of REMIC Regular Certificates will be
the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold (excluding sales to bond houses, brokers
and underwriters). If less than a substantial amount of a particular class of
REMIC Regular Certificates is sold for cash on or prior to the date of their
initial issuance (the "Closing Date"), the issue price for such class will be
the fair market value of such class on the Closing Date. Under the OID
Regulations, the stated redemption price of a REMIC Regular Certificate is
equal to the total of all payments to be made on such Certificate other than
"qualified stated interest." "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified
inverse floating rate," or a combination of "qualified floating rates" that
does not operate in a manner that accelerates or defers interest payments on
such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner
in which such rules will be applied with respect to those Certificates in
preparing information returns to the Certificateholders and the Internal
Revenue Service (the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
a Distribution Date, in some cases, as a consequence of this "long first
accrual period," some or all interest payments may be required to be included
in the stated redemption price of the REMIC Regular Certificate and accounted
for as original issue discount. Because interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method, applying this
analysis would result in only a slight difference in the timing of the
inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing
Date, a portion of the purchase price paid for a REMIC Regular Certificate
will reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion
of the purchase price paid for the interest accrued with respect to periods
prior to the Closing Date is treated as part of the overall cost of such REMIC
Regular Certificate (and not as a separate asset the cost of which is
recovered entirely out of interest received on the next Distribution Date) and
that portion of the interest paid on the first Distribution Date in excess of
interest accrued for a number of days corresponding to the number of days from
the Closing Date to the first Distribution Date should be included in the
stated redemption price of such REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first Distribution Date. It is unclear how an election to
do so would be made under the OID Regulations and whether such an election
could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the
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amount of the payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID
Regulations, original issue discount of only a de minimis amount (other than
de minimis original issue discount attributable to a so-called "teaser"
interest rate or an initial interest holiday) will be included in income as
each payment of stated principal is made, based on the product of the total
amount of such de minimis original issue discount and a fraction, the
numerator of which is the amount of such principal payment and the denominator
of which is the outstanding stated principal amount of the REMIC Regular
Certificate. The OID Regulations also would permit a Certificateholder to
elect to accrue de minimis original issue discount into income currently based
on a constant yield method. See "Taxation of Owners of REMIC Regular
Certificates-Market Discount" for a description of such election under the OID
Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for
each day during its taxable year on which it held such REMIC Regular
Certificate, including the purchase date but excluding the disposition date.
In the case of an original holder of a REMIC Regular Certificate, the daily
portions of original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to a
Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on
the Closing Date), a calculation will be made of the portion of the original
issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (B) the distributions made
on such REMIC Regular Certificate during the accrual period of amounts
included in the stated redemption price, over (ii) the adjusted issue price of
such REMIC Regular Certificate at the beginning of the accrual period. The
present value of the remaining distributions referred to in the preceding
sentence will be calculated (i) assuming that distributions on the REMIC
Regular Certificate will be received in future periods based on the Mortgage
Loans being prepaid at a rate equal to the Prepayment Assumption and (ii)
using a discount rate equal to the original yield to maturity of the
Certificate. For these purposes, the original yield to maturity of the
Certificate will be calculated based on its issue price and assuming that
distributions on the Certificate will be made in all accrual periods based on
the Mortgage Loans being prepaid at a rate equal to the Prepayment Assumption.
The adjusted issue price of a REMIC Regular Certificate at the beginning of
any accrual period will equal the issue price of such Certificate, increased
by the aggregate amount of original issue discount that accrued with respect
to such Certificate in prior accrual periods, and reduced by the amount of any
distributions made on such REMIC Regular Certificate in prior accrual periods
of amounts included in the stated redemption price. The original issue
discount accruing during any accrual period, computed as described above, will
be allocated ratably to each day during the accrual period to determine the
daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of
any original issue discount with respect to such Certificate. However, each
such daily portion will be reduced, if such cost is in excess of its "adjusted
issue price," in proportion to the ratio such excess bears to the aggregate
original issue discount remaining to be accrued on such REMIC Regular
Certificate. The adjusted issue price of a REMIC Regular Certificate on any
given day equals the sum of (i) the adjusted issue price (or, in the case of
the first accrual period, the issue price) of such Certificate at the
beginning of the accrual period which includes such day and (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day.
Market Discount. A Certificateholder that purchases a REMIC Regular
Certificate at a market discount, that is, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price will recognize gain upon receipt of each distribution
representing stated redemption price. In particular, under Section 1276 of the
Code such a
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Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income
to that extent. A Certificateholder may elect to include market discount in
income currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium
in income as interest, based on a constant yield method. If such an election
were made with respect to a REMIC Regular Certificate with market discount,
the Certificateholder would be deemed to have made an election to include
currently market discount in income with respect to all other debt instruments
having market discount that such Certificateholder acquires during the taxable
year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate that is acquired at a premium would be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
"Taxation of Owners of REMIC Regular Certificates--Premium" below. Each of
these elections to accrue interest, discount and premium with respect to a
Certificate on a constant yield method or as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect
to market discount, presumably taking into account the Prepayment Assumption.
If market discount is treated as de minimis under this rule, it appears that
the actual discount would be treated in a manner similar to original issue
discount of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than
one installment. Until regulations are issued by the Treasury Department,
certain rules described in the Committee Report apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the
basis of a constant yield method, (ii) in the case of a REMIC Regular
Certificate issued without original issue discount, in an amount that bears
the same ratio to the total remaining market discount as the stated interest
paid in the accrual period bears to the total amount of stated interest
remaining to be paid on the REMIC Regular Certificate as of the beginning of
the accrual period, or (iii) in the case of a REMIC Regular Certificate issued
with original issue discount, in an amount that bears the same ratio to the
total remaining market discount as the original issue discount accrued in the
accrual period bears to the total original issue discount remaining on the
REMIC Regular Certificate at the beginning of the accrual period. Moreover,
the Prepayment Assumption used in calculating the accrual of original issue
discount is also used in calculating the accrual of market discount. Because
the regulations referred to in this paragraph have not been issued, it is not
possible to predict what effect such regulations might have on the tax
treatment of a REMIC Regular Certificate purchased at a discount in the
secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC
Regular Certificate generally will be required to treat a portion of any gain
on the sale or exchange of such Certificate as ordinary income to the extent
of the market discount accrued to the date of disposition under one of the
foregoing methods, less any accrued market discount previously reported as
ordinary income.
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Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate 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 a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year
or thereafter, the interest deferral rule described above will not apply.
Premium. A REMIC Regular Certificate purchased at a cost (excluding any
portion of such cost attributable to accrued qualified stated interest)
greater than its remaining stated redemption price will be considered to be
purchased at a premium. The holder of such a REMIC Regular Certificate may
elect under Section 171 of the Code to amortize such premium under the
constant yield method over the life of the Certificate. If made, such an
election will apply to all debt instruments having amortizable bond premium
that the holder owns or subsequently acquires. Amortizable premium will be
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. The OID Regulations also permit
Certificateholders to elect to include all interest, discount and premium in
income based on a constant yield method, further treating the
Certificateholder as having made the election to amortize premium generally.
See "Taxation of Owners of REMIC Regular Certificates--Market Discount" above.
The Committee Report states that the same rules that apply to accrual of
market discount (which rules will require use of a Prepayment Assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have original issue discount) will also
apply in amortizing bond premium under Section 171 of the Code.
Realized Losses. Under Section 166 of the Code, both corporate holders of
the REMIC Regular Certificates and noncorporate holders of the REMIC Regular
Certificates that acquire such Certificates in connection with a trade or
business should be allowed to deduct, as ordinary losses, any losses sustained
during a taxable year in which their Certificates become wholly or partially
worthless as the result of one or more realized losses on the Mortgage Loans.
However, it appears that a noncorporate holder that does not acquire a REMIC
Regular Certificate in connection with a trade or business will not be
entitled to deduct a loss under Section 166 of the Code until such holder's
Certificate becomes wholly worthless (i.e., until its outstanding principal
balance has been reduced to zero) and that the loss will be characterized as a
short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans or the Underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a REMIC
Regular Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that as the result of a
realized loss ultimately will not be realized, the law is unclear with respect
to the timing and character of such loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General. As residual interests, the REMIC Residual Certificates will be
subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes
as direct ownership interests in the Mortgage Loans or as debt instruments
issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days
per quarter/360 days per year" convention unless otherwise disclosed in the
related Prospectus
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Supplement. The daily amounts so allocated will then be allocated among the
REMIC Residual Certificateholders in proportion to their respective ownership
interests on such day. Any amount included in the gross income or allowed as a
loss of any REMIC Residual Certificateholder by virtue of this paragraph will
be treated as ordinary income or loss. The taxable income of the REMIC will be
determined under the rules described below in "Taxable Income of the REMIC"
and will be taxable to the REMIC Residual Certificateholders without regard to
the timing or amount of cash distributions by the REMIC. Ordinary income
derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC
Residual Certificate. Those daily amounts generally will equal the amounts of
taxable income or net loss determined as described above. The Committee Report
indicates that certain modifications of the general rules may be made, by
regulations, legislation or otherwise to reduce (or increase) the income of a
REMIC Residual Certificateholder that purchased such REMIC Residual
Certificate from a prior holder of such Certificate at a price greater than
(or less than) the adjusted basis (as defined below) such REMIC Residual
Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be
taken into account in determining the income of such holder for federal income
tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an
amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of such payments, holders of REMIC
Residual Certificates should consult their tax advisors concerning the
treatment of such payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess
inclusions," residual interests without "significant value" and "noneconomic"
residual interests discussed below. The fact that the tax liability associated
with the income allocated to REMIC Residual Certificateholders may exceed the
cash distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
Taxable Income of the REMIC. The taxable income of the REMIC will equal the
income from the Mortgage Loans and other assets of the REMIC plus any
cancellation of indebtedness income due to the allocation of realized losses
to REMIC Regular Certificates, less the deductions allowed to the REMIC for
interest (including original issue discount and reduced by any premium on
issuance) on the REMIC Regular Certificates (and any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered
hereby), amortization of any premium on the Mortgage Loans, bad debt losses
with respect to the Mortgage Loans and, except as described below, for
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under "--
Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained
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initially rather than sold, the REMIC Administrator may be required to
estimate the fair market value of such interests in order to determine the
basis of the REMIC in the Mortgage Loans and other property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC
Regular Certificates (that is, under the constant yield method taking into
account the Prepayment Assumption). However, a REMIC that acquires loans at a
market discount must include such market discount in income currently, as it
accrues, on a constant yield basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount
income that is analogous to that required to be used by a REMIC as to Mortgage
Loans with market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated
redemption price. Any such discount will be includible in the income of the
REMIC as it accrues, in advance of receipt of the cash attributable to such
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any
premium on the Mortgage Loans. Premium on any Mortgage Loan to which such
election applies may be amortized under a constant yield method, presumably
taking into account a Prepayment Assumption. Further, such an election would
not apply to any Mortgage Loan originated on or before September 27, 1985.
Instead, premium on such a Mortgage Loan should be allocated among the
principal payments thereon and be deductible by the REMIC as those payments
become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose
as described above under "--Taxation of Owners of REMIC Regular Certificates--
Original Issue Discount," except that the de minimis rule and the adjustments
for subsequent holders of REMIC Regular Certificates (including any other
class of REMIC Certificates constituting "regular interests" in the REMIC not
offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed 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 the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions Tax and Other Taxes" below.
Further, the limitation on miscellaneous itemized deductions imposed on
individuals by Section 67 of the Code (which allows such deductions only to
the extent they exceed in the aggregate two percent of the taxpayer's adjusted
gross income) will not be applied at the REMIC level so that the REMIC will be
allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be
allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "--Possible Pass-
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Through of Miscellaneous Itemized Deductions" below. If the deductions allowed
to the REMIC exceed its gross income for a calendar quarter, such excess will
be the net loss for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions. The adjusted basis of a REMIC
Residual Certificate will be equal to the amount paid for such REMIC Residual
Certificate, increased by amounts included in the income of the REMIC Residual
Certificateholder and decreased (but not below zero) by distributions made,
and by net losses allocated, to such REMIC Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without
regard to such net loss). Any loss that is not currently deductible by reason
of this limitation may be carried forward indefinitely to future calendar
quarters and, subject to the same limitation, may be used only to offset
income from the REMIC Residual Certificate. The ability of REMIC Residual
Certificateholders to deduct net losses may be subject to additional
limitations under the Code, as to which REMIC Residual Certificateholders
should consult their tax advisors.
Any distribution on 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 basis in such REMIC Residual Certificate. To the extent a
distribution on a REMIC Residual Certificate exceeds such adjusted basis, it
will be treated as gain from the sale of such REMIC Residual Certificate.
Holders of certain REMIC Residual Certificates may be entitled to
distributions early in the term of the related REMIC under circumstances in
which their bases in such REMIC Residual Certificates will not be sufficiently
large that such distributions will be treated as nontaxable returns of
capital. Their bases in such REMIC Residual Certificates will initially equal
the amount paid for such REMIC Residual Certificates and will be increased by
their allocable shares of taxable income of the REMIC. However, such bases
increases may not occur until the end of the calendar quarter, or perhaps the
end of the calendar year, with respect to which such REMIC taxable income is
allocated to the REMIC Residual Certificateholders. To the extent such REMIC
Residual Certificateholders' initial bases are less than the distributions to
such REMIC Residual Certificateholders, and increases in such initial bases
either occur after such distributions or (together with their initial bases)
are less than the amount of such distributions, gain will be recognized to
such REMIC Residual Certificateholders on such distributions and will be
treated as gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of
REMIC Certificates" below. For a discussion of possible modifications of these
rules that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General" above.
Excess Inclusions. Any "excess inclusions" with respect to a REMIC Residual
Certificate will, with an exception discussed below for certain REMIC Residual
Certificates held by thrift institutions, be subject to federal income tax in
all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a
calendar quarter its ratable portion of the product of the "adjusted issue
price" of the REMIC Residual Certificate at the beginning of the calendar
quarter and 120% of the "long-term Federal rate" in effect on the Closing
Date. For this purpose,
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the adjusted issue price of a REMIC Residual Certificate as of the beginning
of any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The
issue price of a REMIC Residual Certificate is the initial offering price to
the public (excluding bond houses and brokers) at which a substantial amount
of the REMIC Residual Certificates were sold. The "long-term Federal 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.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of a taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot
be less than the amount of excess inclusions, (ii) the alternative minimum
taxable income of a taxpayer for a taxable year cannot be less than the amount
of excess inclusions for that year, and (iii) the amount of any alternative
minimum tax net operating loss is computed without regard to any excess
inclusions. While these provisions are generally effective for tax years
beginning after December 31, 1996, a taxpayer may elect to have these
provisions apply only with respect to tax years beginning after August 20,
1996.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions,
losses or loss carryovers, but only if the REMIC Residual Certificates are
considered to have "significant value." The REMIC Regulations provide that in
order to be treated as having significant value, the REMIC Residual
Certificates must have an aggregate issue price at least equal to two percent
of the aggregate issue prices of all of the related REMIC's Regular and
Residual Certificates. In addition, based on the Prepayment Assumption, the
anticipated weighted average life of the REMIC Residual Certificates must
equal or exceed 20 percent of the anticipated weighted average life of the
REMIC, based on the Prepayment Assumption and on any required or permitted
clean up calls or required liquidation provided for in the REMIC's
organizational documents. Although it has not done so, the Treasury also has
authority to issue regulations that would treat the entire amount of income
accruing on a REMIC Residual Certificate as an excess inclusion if the REMIC
Residual Certificates are considered not to have "significant value." The
related Prospectus Supplement will disclose whether offered REMIC Residual
Certificates may be considered to have "significant value" under the REMIC
Regulations; provided, however, that any disclosure that a REMIC Residual
Certificate will have "significant value" will be based upon certain
assumptions, and the Company will make no representation that a REMIC Residual
Certificate will have "significant value" for purposes of the above described
rules. The above-described exception for thrift institutions applies only to
those residual interests held directly by, and deductions, losses and loss
carryovers incurred by, such institutions (and not by other members of an
affiliated group of corporations filing a consolidated income tax return) or
by certain wholly owned direct subsidiaries of such institutions formed or
operated exclusively in connection with the organization and operation of one
or more REMICS.
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 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. Treasury regulations yet to be issued could
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apply a similar rule to regulated investment companies, common trust funds and
certain cooperatives; the REMIC Regulations currently do not address this
subject.
Noneconomic REMIC Residual Certificates. Under the REMIC Regulations,
transfers of "noneconomic" REMIC Residual Certificates will be disregarded for
all federal income tax purposes if "a significant purpose of the transfer was
to enable the transferor to impede the assessment or collection of tax." If
such transfer is disregarded, the purported transferor will continue to remain
liable for any taxes due with respect to the income on such "noneconomic"
REMIC Residual Certificate. The REMIC Regulations provide that a REMIC
Residual Certificate is noneconomic unless, based on the Prepayment Assumption
and on any required or permitted clean up calls, or required liquidation
provided for in the REMIC's organizational documents, (1) the present value of
the expected future distributions (discounted using the "applicable Federal
rate" for obligations whose term ends on the close of the last quarter in
which excess inclusions are expected to accrue with respect to the REMIC
Residual Certificate, which rate is computed and published monthly by the IRS)
on the REMIC Residual Certificate equals at least the present value of the
expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement
that are intended to reduce the possibility of any such transfer being
disregarded. Such restrictions will require each party to a transfer to
provide an affidavit that no purpose of such transfer is to impede the
assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
is also required to make a reasonable investigation to determine such
transferee's historic payment of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date may be disregarded in accordance with
the above-described rules which would result in the retention of tax liability
by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Company will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to
transfers of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules. Prospective purchasers of a REMIC Residual Certificate
should be aware that on January 3, 1995, the IRS released proposed regulations
(the "Proposed Mark-to-Market Regulations") relating to the requirement that a
securities dealer mark to market securities held for sale to customers. This
mark-to-market requirement applies to all securities owned by a dealer, except
to the extent that the dealer has specifically identified a security as held
for investment. The Proposed Mark-to-Market Regulations provide that for
purposes of this mark-to-market requirement, a REMIC Residual Certificate is
not treated as a security and thus may not be marked to market. The Proposed
Mark-to-Market Regulations apply to all REMIC Residual Certificates acquired
on or after January 4, 1995.
Possible Pass-Through of Miscellaneous Itemized Deductions. Fees and
expenses of a REMIC generally will be allocated to the holders of the related
REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
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With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate
or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of
a taxpayer's adjusted gross income. In addition, Section 68 of the Code
provides that the amount of itemized deductions otherwise allowable for an
individual whose adjusted gross income exceeds a specified amount will be
reduced by the lesser of (i) 3% of the excess of the individual's adjusted
gross income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by REMIC Certificateholders that are subject to the
limitations of either Section 67 or Section 68 of the Code may be substantial.
Furthermore, in determining the alternative minimum taxable income of such a
holder of a REMIC Certificate that is an individual, estate or trust, or a
"pass-through entity" beneficially owned by one or more individuals, estates
or trusts, no deduction will be allowed for such holder's allocable portion of
servicing fees and other miscellaneous itemized deductions of the REMIC, even
though an amount equal to the amount of such fees and other deductions will be
included in such holder's gross income. Accordingly, such REMIC Certificates
may not be appropriate investments for individuals, estates, or trusts, or
pass-through entities beneficially owned by one or more individuals, estates
or trusts. Such prospective investors should carefully consult with their own
tax advisors prior to making an investment in such Certificates.
Sales of REMIC Certificates. If a REMIC Certificate is sold, the selling
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its adjusted basis in the REMIC
Certificate. The adjusted basis of a REMIC Regular Certificate generally will
equal the cost of such REMIC Regular Certificate to such Certificateholder,
increased by income reported by such Certificateholder with respect to such
REMIC Regular Certificate (including original issue discount and market
discount income) and reduced (but not below zero) by distributions on such
REMIC Regular Certificate received by such Certificateholder and by any
amortized premium. The adjusted basis of a REMIC Residual Certificate will be
determined as described under "--Taxation of Owners of REMIC Residual
Certificates--Basis Rules, Net Losses and Distributions." Except as provided
in the following two paragraphs, any such gain or loss will be capital gain or
loss, provided such REMIC Certificate is held as a capital asset (generally,
property held for investment) within the meaning of Section 1221 of the Code.
The Code as of the date of this Prospectus provides for a top marginal tax
rate of 39.6% for individuals and a maximum marginal rate for long-term
capital gains of individuals of 28%. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in the seller's income with respect to such REMIC Regular
Certificate assuming that income had accrued thereon at a rate equal to 110%
of the "applicable Federal rate" (generally, a rate based on an average of
current yields on Treasury securities having a maturity comparable to that of
the Certificate based on the application of the Prepayment Assumption to such
Certificate, which rate is computed and published monthly by the IRS),
determined as of the date of purchase of such REMIC Regular Certificate, over
(ii) the amount of ordinary income actually includible in the seller's income
prior to such sale. In addition, gain recognized on the sale of a REMIC
Regular Certificate by a seller who purchased such REMIC Regular Certificate
at a market discount will be taxable as ordinary income in an amount not
exceeding the portion of such discount that accrued during the period such
REMIC Certificate was held by such holder, reduced by any market discount
included in income under the rules described above under "--Taxation of Owners
of REMIC Regular Certificates--Market Discount" and "--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale
of a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
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A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the
extent that such Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if
substantially all of the taxpayer's return is attributable to the time value
of the taxpayer's net investment in such transaction. The amount of gain so
realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be 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 residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) 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 Code. In that event, any loss realized by the
REMIC Residual Certificateholder on the sale will not be deductible, but
instead will be added to such REMIC Residual Certificateholder's adjusted
basis in the newly-acquired asset.
Prohibited Transactions and Other Possible REMIC Taxes. The Code imposes a
tax on REMICs equal to 100% of the net income derived from "prohibited
transactions" (a "Prohibited Transactions Tax"). In general, subject to
certain specified exceptions a prohibited transaction means the disposition of
a Mortgage Loan, the receipt of income from a source other than a Mortgage
Loan or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the Mortgage Loans for temporary investment pending distribution on the
REMIC Certificates. It is not anticipated that any REMIC 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 (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would
be subject to such tax.
REMICs also are 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 gain from the sale of a foreclosure
property that is inventory property and gross income from foreclosure property
other than qualifying rents and other qualifying income for a real estate
investment trust. Unless otherwise disclosed in the related Prospectus
Supplement, it is not anticipated that any REMIC will recognize "net income
from foreclosure property" subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, 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 the REMIC will be borne
by the related Master Servicer or Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the
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case may be, has sufficient assets to do so, and provided further that such
tax arises out of a breach of the Master Servicer's or the Trustee's
obligations, as the case may be, under the related Pooling and Servicing
Agreement and in respect of compliance with applicable laws and regulations.
Any such tax not borne by the Master Servicer or the Trustee will be charged
against the related Trust Fund resulting in a reduction in amounts payable to
holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations. If a REMIC Residual Certificate is transferred to a
"disqualified organization" (as defined below), a tax would be imposed in an
amount (determined under the REMIC Regulations) equal to the product of (i)
the present value (discounted using the "applicable Federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS) of the
total anticipated excess inclusions with respect to such REMIC Residual
Certificate for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The anticipated excess
inclusions must be determined as of the date that the REMIC Residual
Certificate is transferred and must be based on events that have occurred up
to the time of such transfer, the Prepayment Assumption and any required or
permitted clean up calls or required liquidation provided for in the REMIC's
organizational documents. Such a tax generally would be imposed on the
transferor of the REMIC Residual Certificate, except that where such transfer
is through an agent for a disqualified organization, the tax would instead be
imposed on such agent. However, a transferor of a REMIC Residual Certificate
would in no event be liable for such tax with respect to a transfer if the
transferee furnishes to the transferor an affidavit that the transferee is not
a disqualified organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false.
Moreover, an entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that (i) residual interests in such entity are
not held by disqualified organizations and (ii) information necessary for the
application of the tax described herein will be made available. Restrictions
on the transfer of REMIC Residual Certificates and certain other provisions
that are intended to meet this requirement will be included in the Pooling and
Servicing Agreement, and will be discussed more fully in any Prospectus
Supplement relating to the offering of any REMIC Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the
amount of excess inclusions on the REMIC Residual Certificate that are
allocable to the interest in the pass-through entity held by such disqualified
organization and (ii) the highest marginal federal income tax rate imposed on
corporations. A pass-through entity will not be subject to this tax for any
period, however, if each record holder of an interest in such pass-through
entity furnishes to such pass-through entity (i) such holder's social security
number and a statement under penalties of perjury that such social security
number is that of the record holder or (ii) a statement under penalties of
perjury that such record holder is not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government,
any international organization, or any agency or instrumentality of the
foregoing (but would not include instrumentalities described in Section
168(h)(2)(D) of the Code or the Federal Home Loan Mortgage Corporation), (ii)
any organization (other than a cooperative described in Section 521 of the
Code) that is exempt from federal income tax, unless it is subject to the tax
imposed by Section 511 of the Code or (iii) any organization described in
Section 1381(a)(2)(C) of the Code. For these purposes, a "pass-through entity"
means any regulated investment company, real estate investment trust, trust,
partnership or certain other entities described in Section 860E(e)(6) of the
Code. In addition, a person holding an interest in a pass-through entity as a
nominee for another person will, with respect to such interest, be treated as
a pass-through entity.
Termination. A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Mortgage
Loans or upon a sale of the REMIC's assets following the adoption by the REMIC
of a plan of complete liquidation. The last distribution on a REMIC Regular
Certificate will be treated as a payment in retirement of a debt instrument.
In the case of a REMIC Residual
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Certificate, if the last distribution on such REMIC Residual Certificate is
less than the REMIC Residual Certificateholder's adjusted basis in such
Certificate, such REMIC Residual Certificateholder should (but may not) be
treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
Reporting and Other Administrative Matters. Solely for purposes of the
administrative provisions of the Code, the REMIC will be treated as a
partnership and REMIC Residual Certificateholders will be treated as partners.
Unless otherwise stated in the related Prospectus Supplement, the REMIC
Administrator will file REMIC federal income tax returns on behalf of the
related REMIC, and under the terms of the related Agreement, will either (i)
be irrevocably appointed by the holders of the largest percentage interest in
the related REMIC Residual Certificates as their agent to perform all of the
duties of the "tax matters person" with respect to the REMIC in all respects
or (ii) will be designated as and will act as the "tax matters person" with
respect to the related REMIC in all respects and will hold at least a nominal
amount of REMIC Residual Certificates.
As the tax matters person or as agent for the tax matters person, the REMIC
Administrator, subject to certain notice requirements and various restrictions
and limitations, generally will have the authority to act on behalf of the
REMIC and the REMIC Residual Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. REMIC Residual
Certificateholders generally will be required to report such REMIC items
consistently with their treatment on the REMIC's tax return and may in some
circumstances be bound by a settlement agreement between the REMIC
Administrator, as either tax matters person or as agent for the tax matters
person, and the Service concerning any such REMIC item. Adjustments made to
the REMIC tax return may require a REMIC Residual Certificateholder to make
corresponding adjustments on its return, and an audit of the REMIC's tax
return, or the adjustments resulting from such an audit, could result in an
audit of a REMIC Residual Certificateholder's return. No REMIC will be
registered as a tax shelter pursuant to Section 6111 of the Code because it is
not anticipated that any 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.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the Service; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals
will be provided interest and original issue discount income information and
the information set forth in the following paragraph upon request in
accordance with the requirements of the applicable regulations. The
information must be provided by the later of 30 days after the end of the
quarter for which the information was requested, or two weeks after the
receipt of the request. The REMIC must also comply with rules requiring a
REMIC Regular Certificate issued with original issue discount to disclose on
its face the amount of original issue discount and the issue date, and
requiring such information to be reported to the Service. Reporting with
respect to the REMIC Residual Certificates, including income, excess
inclusions, investment expenses and relevant information regarding
qualification of the REMIC's assets will be made as required under the
Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular
Certificate at the beginning of each accrual period. In addition, the reports
will include information required by regulations with respect to computing the
accrual of any market discount. Because exact computation of the accrual of
market discount on a constant yield method would require information relating
to the holder's purchase price that the REMIC may not have, such regulations
only require that information pertaining to the appropriate proportionate
method of accruing market discount be provided. See "--Taxation of Owners of
REMIC Regular Certificates--Market Discount."
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Backup Withholding With Respect to REMIC Certificates. Payments of interest
and principal, as well as payments of proceeds from the sale of REMIC
Certificates, may be subject to the "backup withholding tax" under Section
3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient
would be allowed as a credit against such recipient's federal income tax.
Furthermore, certain penalties may be imposed by the IRS on a recipient of
payments that is required to supply information but that does not do so in the
proper manner.
Foreign Investors in REMIC Certificates. A REMIC Regular Certificateholder
that is not a "United States person" (as defined below) and is not subject to
federal income tax as a result of any direct or indirect connection to the
United States in addition to its ownership of a REMIC Regular Certificate will
not, unless otherwise disclosed in the related Prospectus Supplement, be
subject to United States federal income or withholding tax in respect of a
distribution on a REMIC Regular Certificate, provided that the holder complies
to the extent necessary with certain identification requirements (including
delivery of a statement, signed by the Certificateholder under penalties of
perjury, certifying that such Certificateholder is not a United States person
and providing the name and address of such Certificateholder). For these
purposes, "United States person" means (i) a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any political subdivision thereof; or
(ii) an estate or trust whose income from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business within
the United States. For years beginning before January 1, 1997, the term
"United States person" shall include a trust whose income is includible in
gross income for United States federal income taxation regardless of source,
in lieu of trusts described in (ii) above, unless the trust elects to have its
United States status determined under criteria set forth under (ii) above for
tax years ending after August 20, 1996. Proposed Treasury regulations, which
would be effective with respect to payments made after December 31, 1997 if
adopted in their current form, would provide alternative certification
requirements and means by which a holder of REMIC Certificates could claim the
exemption from federal income and withholding tax. It is possible that the IRS
may assert that the foregoing tax exemption should not apply with respect to a
REMIC Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue
discount, to such holder may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States persons
will be prohibited under the related Pooling and Servicing Agreement.
GRANTOR TRUST FUNDS
Classification of Grantor Trust Funds. With respect to each series of
Grantor Trust Certificates, Freshman, Marantz, Orlanski, Cooper & Klein,
counsel to the Company, will deliver their opinion to the effect that assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Grantor Trust Fund will be classified as a grantor trust under
subpart E, part I of subchapter J of the Code and not as a partnership or an
association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Mortgage Loans included in the Grantor Trust Fund.
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For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor
Trust Fractional Interest Certificate." A Grantor Trust Certificate
representing ownership of all or a portion of the difference between interest
paid on the Mortgage Loans constituting the related Grantor Trust Fund (net of
normal administration fees and any Spread) and interest paid to the holders of
Grantor Trust Fractional Interest Certificates issued with respect to such
Grantor Trust Fund will be referred to as a "Grantor Trust Strip Certificate."
A Grantor Trust Strip Certificate may also evidence a nominal ownership
interest in the principal of the Mortgage Loans constituting the related
Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates. In the case of Grantor Trust
Fractional Interest Certificates, unless otherwise disclosed in the related
Prospectus Supplement and subject to the discussion below with respect to
Buydown Mortgage Loans, counsel to the Company will deliver an opinion that,
in general, Grantor Trust Fractional Interest Certificates will represent
interests in (i) "qualifying real property loans" within the meaning of
Section 593(d) of the Code; (ii) "loans . . . secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code; (iii)
"obligation[s] (including any participation or Certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in
real property" within the meaning of Section 86OG(a)(3) of the Code; and (iv)
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code.
In addition, counsel to the Company will deliver an opinion that interest on
Grantor Trust Fractional Interest Certificates will to the same extent be
considered "interest on obligations secured by mortgages on real property or
on interests in real property" within the meaning of Section 856(c)(3)(B) of
the Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage
Loans will depend upon the precise terms of the related Buydown Agreement, but
to the extent that such Buydown Mortgage Loans are secured by a bank account
or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. No directly applicable
precedents exist with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly,
holders of Grantor Trust Certificates should consult their own tax advisors
with respect to the characterization of investments in Grantor Trust
Certificates representing an interest in a Grantor Trust Fund that includes
Buydown Mortgage Loans.
Grantor Trust Strip Certificates. Even if Grantor Trust Strip Certificates
evidence an interest in a Grantor Trust Fund consisting of Mortgage Loans that
are "loans . . . secured by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Code, "qualifying real property loans"
within the meaning of Section 593(d) of the Code, and "real estate assets"
within the meaning of Section 856(c)(5)(A) of the Code, and the interest on
which is "interest on obligations secured by mortgages on real property"
within the meaning of Section 856(c)(3)(B) of the Code, it is unclear whether
the Grantor Trust Strip Certificates, and the income therefrom, will be so
characterized. However, the policies underlying such sections (namely, to
encourage or require investments in mortgage loans by thrift institutions and
real estate investment trusts) may suggest that such characterization is
appropriate. Counsel to the Company will not deliver any opinion on these
questions. Prospective purchasers to which such characterization of an
investment in Grantor Trust Strip Certificates is material should consult
their tax advisors regarding whether the Grantor Trust Strip Certificates, and
the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or Certificate of beneficial ownership therein) which . . .
[are] principally secured by an interest in real property" within the meaning
of Section 86OG(a)(3)(A) of the Code.
Taxation of Owners of Grantor Trust Fractional Interest
Certificates. Holders of a particular series of Grantor Trust Fractional
Interest Certificates generally will be required to report on their federal
income tax returns their shares of the entire income from the Mortgage Loans
(including amounts used to pay reasonable
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servicing fees and other expenses) and will be entitled to deduct their shares
of any such reasonable servicing fees and other expenses. Because of stripped
interests, market or original issue discount, or premium, the amount
includible in income on account of a Grantor Trust Fractional Interest
Certificate may differ significantly from the amount distributable thereon
representing interest on the Mortgage Loans. Under Section 67 of the Code, an
individual, estate or trust holding a Grantor Trust Fractional Interest
Certificate directly or through certain pass-through entities will be allowed
a deduction for such reasonable servicing fees and expenses only to the extent
that the aggregate of such holder's miscellaneous itemized deductions exceeds
two percent of such holder's adjusted gross income. In addition, Section 68 of
the Code provides that the amount of itemized deductions otherwise allowable
for an individual whose adjusted gross income exceeds a specified amount will
be reduced by the lesser of (i) 3% of the excess of the individual's adjusted
gross income over such amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for the taxable year. The amount of additional taxable
income reportable by holders of Grantor Trust Fractional Interest Certificates
who are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Further, Certificateholders (other than corporations)
subject to the alternative minimum tax may not deduct miscellaneous itemized
deductions in determining such holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in which
multiple classes of Grantor Trust Certificates (including Grantor Trust Strip
Certificates) are issued, such fees and expenses should be allocated among the
classes of Grantor Trust Certificates using a method that recognizes that each
such class benefits from the related services. In the absence of statutory or
administrative clarification as to the method to be used, it currently is
intended to base information returns or reports to the IRS and
Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same series of Certificates
or (ii) the Company or any of its affiliates retains (for its own account or
for purposes of resale) a right to receive a specified portion of the interest
payable on the Mortgage Loans. Further, the IRS has ruled that an unreasonably
high servicing fee retained by a seller or servicer will be treated as a
retained ownership interest in mortgages that constitutes a stripped coupon.
For purposes of determining what constitutes reasonable servicing fees for
various types of mortgages the IRS has established certain "safe harbors." The
servicing fees paid with respect to the Mortgage Loans for certain series of
Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The related
Prospectus Supplement will include information regarding servicing fees paid
to the Master Servicer, any subservicer or their respective affiliates
necessary to determine whether the preceding "safe harbor" rules apply.
If Stripped Bond Rules Apply. If the stripped bond rules apply, each Grantor
Trust Fractional Interest Certificate will be treated as having been issued
with "original issue discount" within the meaning of Section 1273(a) of the
Code, subject, however, to the discussion below regarding the treatment of
certain stripped bonds as market discount bonds and the discussion regarding
de minimis market discount. See "--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--Market Discount" below. Under the stripped
bond rules, the holder of a Grantor Trust Fractional Interest Certificate
(whether a cash or accrual method taxpayer) will be required to report
interest income from its Grantor Trust Fractional Interest Certificate for
each month in an amount equal to the income that accrues on such Certificate
in that month calculated under a constant yield method, in accordance with the
rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be
the sum of all payments to be made on such Certificate, other than "qualified
stated interest," if any, as well as such
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Certificate's share of reasonable servicing fees and other expenses. See "--
Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" for a definition of "qualified stated
interest." In general, the amount of such income that accrues in any month
would equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (see "Sales of
Grantor Trust Certificates") and the yield of such Grantor Trust Fractional
Interest Certificate to such holder. Such yield would be computed at the rate
(compounded based on the regular interval between payment dates) that, if used
to discount the holder's share of future payments on the Mortgage Loans, would
cause the present value of those future payments to equal the price at which
the holder purchased such Certificate. In computing yield under the stripped
bond rules, a Certificateholder's share of future payments on the Mortgage
Loans will not include any payments made in respect of any ownership interest
in the Mortgage Loans retained by the Company, the Master Servicer, any
subservicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to
the prepayment assumption, with respect to certain categories of debt
instruments, and regulations could be adopted applying those provisions to the
Grantor Trust Fractional Interest Certificates. It is unclear whether those
provisions would be applicable to the Grantor Trust Fractional Interest
Certificates or whether use of a reasonable prepayment assumption may be
required or permitted without reliance on these rules. It is also uncertain,
if a prepayment assumption is used, whether the assumed prepayment rate would
be determined based on conditions at the time of the first sale of the Grantor
Trust Fractional Interest Certificate or, with respect to any holder, at the
time of purchase of the Grantor Trust Fractional Interest Certificate by that
holder. Certificateholders are advised to consult their own tax advisors
concerning reporting original issue discount in general and, in particular,
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest
income. In the case, however, of a Grantor Trust Fractional Interest
Certificate acquired at a discount or premium (that is, at a price less than
or greater than such principal amount, respectively), the use of a reasonable
prepayment assumption would increase or decrease such yield, and thus
accelerate or decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Mortgage Loan. If a prepayment assumption
is used, it appears that no separate item of income or loss should be
recognized upon a prepayment. Instead, a prepayment should be treated as a
partial payment of the stated redemption price of the Grantor Trust Fractional
Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between an assumed
prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Company, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate
conforming to such Prepayment Assumption or any other rate and
Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns
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or reports, even if otherwise accepted as accurate by the IRS, will in any
event be accurate only as to the initial Certificateholders of each series who
bought at that price.
Under Treasury regulation Section 1. 1286-IT, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or
more coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue
discount) or (ii) the annual stated rate of interest payable on the original
bond is no more than one percentage point lower than the gross interest rate
payable on the original mortgage loan (before subtracting any servicing fee or
any stripped coupon). If interest payable on a Grantor Trust Fractional
Interest Certificate is more than one percentage point lower than the gross
interest rate payable on the Mortgage Loans, the related Prospectus Supplement
will disclose that fact. If the original issue discount or market discount on
a Grantor Trust Fractional Interest Certificate determined under the stripped
bond rules is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loans, then such original issue
discount or market discount will be considered to be de minimis. Original
issue discount or market discount of only a de minimis amount will be included
in income in the same manner as de minimis original issue and market discount
described in "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" and "--Market Discount"
below.
If Stripped Bond Rules Do Not Apply. Subject to the discussion below on
original issue discount, if the stripped bond rules do not apply to a Grantor
Trust Fractional Interest Certificate, the Certificateholder will be required
to report its share of the interest income on the Mortgage Loans in accordance
with such Certificateholder's normal method of accounting. The original issue
discount rules will apply to a Grantor Trust Fractional Interest Certificate
to the extent it evidences an interest in Mortgage Loans issued with original
issue discount.
The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Mortgage Loan other than
"qualified stated interest." "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, or
at a "qualified floating rate," an "objective rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified
inverse floating rate," or a combination of "qualified floating rates" that
does not operate in a manner that accelerates or defers interest payments on
such Mortgage Loan. In general, the issue price of a Mortgage Loan will be the
amount received by the borrower from the lender under the terms of the
Mortgage Loan, less any "points" paid by the borrower, and the stated
redemption price of a Mortgage Loan will equal its principal amount, unless
the Mortgage Loan provides for an initial below-market rate of interest or the
acceleration or the deferral of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest rates,
the related Prospectus Supplement will describe the manner in which such rules
will be applied with respect to those Mortgage Loans by the Trustee in
preparing information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the
amounts determined, as to each payment included in the stated redemption price
of such Mortgage Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount
of the payment and the denominator of which is the stated redemption price of
the Mortgage Loan. Under the OID Regulations, original issue discount of only
a de minimis amount (other than de minimis original issue discount
attributable to a so-called "teaser" rate or initial interest holiday) will be
included in income as each payment of stated principal is made, based on the
product of the total amount of
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such de minimis original issue discount and a fraction, the numerator of which
is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Mortgage Loan. The OID Regulations
also permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "--
Taxation of Owners of Grantor Trust Fractional Interest Certificates--Market
Discount" below.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a Mortgage Loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In
the absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code
may require that a prepayment assumption be made in computing yield with
respect to all mortgage-backed securities. Certificateholders are advised to
consult their own tax advisors concerning whether a prepayment assumption
should be used in reporting original issue discount with respect to Grantor
Trust Fractional Interest Certificates. Certificateholders should refer to the
related Prospectus Supplement with respect to each series to determine whether
and in what manner the original issue discount rules will apply to Mortgage
Loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less
than such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Mortgage Loans held in the related Trust Fund will
also be required to include in gross income such Certificate's daily portions
of any original issue discount with respect to such Mortgage Loans. However,
each such daily portion will be reduced, if the cost of such Grantor Trust
Fractional Interest Certificate to such purchaser is in excess of such
Certificate's allocable portion of the aggregate "adjusted issue prices" of
the Mortgage Loans held in the related Trust Fund, approximately in proportion
to the ratio such excess bears to such Certificate's allocable portion of the
aggregate original issue discount remaining to be accrued on such Mortgage
Loans. The adjusted issue price of a Mortgage Loan on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Mortgage Loan at the beginning of the accrual
period that includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day. The
adjusted issue price of a Mortgage Loan at the beginning of any accrual period
will equal the issue price of such Mortgage Loan, increased by the aggregate
amount of original issue discount with respect to such Mortgage Loan that
accrued in prior accrual periods, and reduced by the amount of any payments
made on such Mortgage Loan in prior accrual periods of amounts included in its
stated redemption price.
In addition to its regular reports, the Trustee, unless otherwise provided
in the related Prospectus Supplement, will provide to any holder of a Grantor
Trust Fractional Interest Certificate such information as such holder may
reasonably request from time to time with respect to original issue discount
accruing on Grantor Trust Fractional Interest Certificates. See "Grantor Trust
Reporting" below.
Market Discount. If the stripped bond rules do not apply to the Grantor
Trust Fractional Interest Certificate, a Certificateholder may be subject to
the market discount rules of Sections 1276 through 1278 of the Code to the
extent an interest in a Mortgage Loan is considered to have been purchased at
a "market discount," that is, in the case of a Mortgage Loan issued without
original issue discount, at a purchase price less than its remaining stated
redemption price (as defined above, or in the case of a Mortgage Loan issued
with original issue discount, at a purchase price less than its adjusted issue
price (as defined above). If market discount is in excess of a de minimis
amount (as described below), the holder generally will be required to include
in income in each month the amount of such discount that has accrued (under
the rules described in the next paragraph) through such month that has not
previously been included in income, but limited, in the case of the portion of
such discount that is allocable to any Mortgage Loan, to the payment of stated
redemption price on such Mortgage Loan that is received by (or, in the case of
accrual basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as
it accrues (under a
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constant yield method based on the yield of the Certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing.
If made, such election will apply to all market discount bonds acquired by
such Certificateholder during or after the first taxable year to which such
election applies. In addition, the OID Regulations would permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect
to a Mortgage Loan with market discount, the Certificateholder would be deemed
to have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate acquired at a
premium would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant
yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report will apply. Under those rules, in each
accrual period market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii)
in the case of a Mortgage Loan issued without original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
stated interest paid in the accrual period bears to the total stated interest
remaining to be paid on the Mortgage Loan as of the beginning of the accrual
period, or (iii) in the case of a Mortgage Loan issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining at the beginning of the accrual
period. The prepayment assumption, if any, used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. The effect of using a prepayment assumption could be to accelerate
the reporting of such discount income. Because the regulations referred to in
this paragraph have not been issued, it is not possible to predict what effect
such regulations might have on the tax treatment of a Mortgage Loan purchased
at a discount in the secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to be de minimis if it is less than 0.25% of the stated redemption price of
the Mortgage Loans multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
OID Regulations refer to the weighted average maturity of obligations, and it
is likely that the same rule will be applied with respect to market discount,
presumably taking into account the prepayment assumption used, if any. The
effect of using a prepayment assumption could be to accelerate the reporting
of such discount income. If market discount is treated as de minimis under the
foregoing rule, it appears that actual discount would be treated in a manner
similar to original issue discount of a de minimis amount. See "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners of REMIC
Regular Certificates-- Market Discount," below, any discount that is not
original issue discount and exceeds a de minimis amount may require the
deferral of interest expense deductions attributable to accrued market
discount not yet includible in income, unless an election has been made to
report market discount currently as it accrues. This rule applies without
regard to the origination dates of the Mortgage Loans.
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Premium. If a Certificateholder is treated as acquiring the underlying
Mortgage Loans at a premium, that is, at a price in excess of their remaining
stated redemption price, such Certificateholder may elect under Section 171 of
the Code to amortize using a constant yield method the portion of such premium
allocable to Mortgage Loans originated after September 27, 1985. Amortizable
premium is treated as an offset to interest income on the related debt
instrument, rather than as a separate interest deduction. However, premium
allocable to Mortgage Loans originated before September 28, 1985 or to
Mortgage Loans for which an amortization election is not made, should be
allocated among the payments of stated redemption price on the Mortgage Loan
and be allowed as a deduction as such payments are made (or, for a
Certificateholder using the accrual method of accounting, when such payments
of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC
Regular Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates-- Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
Taxation of Owners of Grantor Trust Strip Certificates. The "stripped
coupon" rules of Section 1286 of the Code will apply to the Grantor Trust
Strip Certificates. Except as described above in "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates-If Stripped Bond Rules Apply,"
no regulations or published rulings under Section 1286 of the Code have been
issued and some uncertainty exists as to how it will be applied to securities
such as the Grantor Trust Strip Certificates. Accordingly, holders of Grantor
Trust Strip Certificates should consult their own tax advisors concerning the
method to be used in reporting income or loss with respect to such
Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "Possible Application of Proposed Contingent Payment Rules"
and assumes that the holder of a Grantor Trust Strip Certificate will not own
any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of
Grantor Trust Strip Certificates would include as interest income in each
month an amount equal to the product of such holder's adjusted basis in such
Grantor Trust Strip Certificate at the beginning of such month and the yield
of such Grantor Trust Strip Certificate to such holder. Such yield would be
calculated based on the price paid for that Grantor Trust Strip Certificate by
its holder and the payments remaining to be made thereon at the time of the
purchase, plus an allocable portion of the servicing fees and expenses to be
paid with respect to the Mortgage Loans. See "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be
made in the amount and rate of accrual of such discount when prepayments do
not conform to such prepayment assumption. Regulations could be adopted
applying those provisions to the Grantor Trust Strip Certificates. It is
unclear whether those provisions would be applicable to the Grantor Trust
Strip Certificates or whether use of a prepayment assumption may be required
or permitted in the absence of such regulations. It is also uncertain, if a
prepayment assumption is used, whether the assumed prepayment rate would be
determined
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based on conditions at the time of the first sale of the Grantor Trust Strip
Certificate or, with respect to any subsequent holder, at the time of purchase
of the Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than
if yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Company, the Master Servicer nor the
Trustee will make any representation that the Mortgage Loans will in fact
prepay at a rate conforming to the Prepayment Assumption or at any other rate
and Certificateholders should bear in mind that the use of a representative
initial offering price will mean that such information returns or reports,
even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial Certificateholders of each series who bought
at that price. Prospective purchasers of the Grantor Trust Strip Certificates
should consult their own tax advisors regarding the use of the Prepayment
Assumption.
It is unclear under what circumstances, if any, the prepayment of a Mortgage
Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Grantor Trust Strip Certificate, it appears that no loss may be available as a
result of any particular prepayment unless prepayments occur at a rate faster
than the Prepayment Assumption. However, if a Grantor Trust Strip Certificate
is treated as an interest in discrete Mortgage Loans, or if the Prepayment
Assumption is not used, then when a Mortgage Loan is prepaid, the holder of a
Grantor Trust Strip Certificate should be able to recognize a loss equal to
the portion of the adjusted issue price of the Grantor Trust Strip Certificate
that is allocable to such Mortgage Loan.
Possible Application of Proposed Contingent Payment Rules. The coupon
stripping rules' general treatment of stripped coupons is to regard them as
newly issued debt instruments in the hands of each purchaser. To the extent
that payments on the Grantor Trust Strip Certificates would cease if the
Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt
instruments. As in the case of the OID Regulations, such proposed regulations
do not specifically address securities, such as the Grantor Trust Strip
Certificates, that are subject to the stripped bond rules of Section 1286 of
the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a " noncontingent bond method." Under that method, the issuer of a
Grantor Trust Strip Certificate would determine a projected payment schedule
with respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust
Strip Certificates would be bound by the issuer's projected payment schedule,
which would consist of all noncontingent payments and a projected amount for
each contingent payment based on the projected yield (as described below) of
the Grantor Trust Strip Certificate. The projected amount of each payment
would be determined so that the projected payment schedule reflected the
projected yield reasonably expected to be received by the holder of a Grantor
Trust Strip Certificate. The projected yield referred to above would be a
reasonable rate, not less than the "applicable Federal rate" that, as of the
issue date, reflected general market conditions, the credit quality of the
issuer, and the terms and conditions of the Mortgage Loans. The holder of a
Grantor Trust Strip Certificate would be required to include as interest
income in each month the adjusted issue price of the Grantor Trust Strip
Certificate at the beginning of the period multiplied by the projected yield.
Assuming that a prepayment assumption were used, if the proposed regulations
or their principles were applied to Grantor Trust Strip Certificates, the
amount of income reported with respect thereto would be substantially similar
to that described under "Taxation of Owners of Grantor Trust Strip
Certificates".
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Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
Sales of Grantor Trust Certificates. Any gain or loss equal to the
difference between the amount realized on the sale of a Grantor Trust
Certificate, recognized on the sale or exchange of a Grantor Trust Certificate
by an investor who holds such Grantor Trust Certificate as a capital asset,
will be capital gain or loss, except to the extent of accrued and unrecognized
market discount, which will be treated as ordinary income, and (in the case of
banks and other financial institutions) except as provided under Section
582(c) of the Code. The adjusted basis of a Grantor Trust Certificate
generally will equal its cost, increased by any income reported by the seller
(including original issue discount and market discount income) and reduced
(but not below zero) by any previously reported losses, any amortized premium
and by any distributions with respect to such Grantor Trust Certificate. The
Code as of the date of this Prospectus provides a top marginal tax rate of
39.6% for individuals and a maximum marginal rate for long-term capital gains
of individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income
or loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary
income, as will gain or loss recognized by banks and other financial
institutions subject to Section 582(c) of the Code. Furthermore, a portion of
any gain that might otherwise be capital gain may be treated as ordinary
income to the extent that the Grantor Trust Certificate is held as part of a
"conversion transaction" within the meaning of Section 1258 of the Code. A
conversion transaction generally is one in which the taxpayer has taken two or
more positions in the same or similar property that reduce or eliminate market
risk, if substantially all of the taxpayer's return is attributable to the
time value of the taxpayer's net investment in such transaction. The amount of
gain realized in a conversion transaction that is recharacterized as ordinary
income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment at 120% of the appropriate
"applicable Federal rate" (which rate is computed and published monthly by the
IRS) at the time the taxpayer enters into the conversion transaction, subject
to appropriate reduction for prior inclusion of interest and other ordinary
income items from the transaction. Finally, a taxpayer may elect to have net
capital gain taxed at ordinary income rates rather than capital gains rates in
order to include such net capital gain in total net investment income for that
taxable year, for purposes of the rule that limits the deduction of interest
on indebtedness incurred to purchase or carry property held for investment to
a taxpayer's net investment income.
Grantor Trust Reporting. Unless otherwise provided in the related Prospectus
Supplement, the Trustee will furnish to each holder of a Grantor Trust
Fractional Interest Certificate with each distribution a statement setting
forth the amount of such distribution allocable to principal on the underlying
Mortgage Loans and to interest thereon at the related Pass-Through Rate. In
addition, the Trustee will furnish, within a reasonable time after the end of
each calendar year, to each holder of a Grantor Trust Certificate who was such
a holder at any time during such year, information regarding the amount of
servicing compensation received by the Master Servicer and sub-servicer (if
any) and such other customary factual information as the Trustee deems
necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the
Service as and when required by law to do so. Because the rules for accruing
discount and amortizing premium with respect to the Grantor Trust Certificates
are uncertain in various respects, there is no assurance the Service will
agree with the Trustee's information reports of such items of income and
expense. Moreover, such information reports, even if otherwise accepted as
accurate by the Service, will in any event be accurate only as to the initial
Certificateholders that bought their Certificates at the representative
initial offering price used in preparing such reports.
Backup Withholding. In general, the rules described in "--REMICS--Backup
Withholding with Respect to REMIC Certificates" will also apply to Grantor
Trust Certificates.
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Foreign Investors. In general, the discussion with respect to REMIC Regular
Certificates in "REMICS-- Foreign Investors in REMIC Certificates--REMIC
Regular Certificates" applies to Grantor Trust Certificates except that
Grantor Trust Certificates will, unless otherwise disclosed in the related
Prospectus Supplement, be eligible for exemption from U.S. withholding tax,
subject to the conditions described in such discussion, only to the extent the
related Mortgage Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of
a non-resident alien individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from
the corresponding federal tax law, and the discussion above does not purport
to describe any aspect of the tax laws of any state or other jurisdiction.
Therefore, prospective investors should consult their own tax advisors with
respect to the various tax consequences of investments in the certificates
offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual
retirement accounts and annuities, Keogh plans and collective investment funds
and separate accounts (and, as applicable, insurance company general accounts)
in which such plans, accounts or arrangements are invested that are subject to
the fiduciary responsibility provisions of ERISA and Section 4975 of the Code
("Plans") and on persons who are fiduciaries with respect to such Plans in
connection with the investment of Plan assets. Certain employee benefit plans,
such as governmental plans (as defined in ERISA Section 3(32)), and, if no
election has been made under Section 410(d) of the Code, church plans (as
defined in Section 3(33) of ERISA) are not subject to ERISA requirements.
Accordingly, assets of such plans may be invested in Offered Certificates
without regard to the ERISA considerations described below, subject to the
provisions of other applicable federal and state law. Any such plan which is
qualified and exempt from taxation under Sections 401(a) and 501(a) of the
Code, however, is subject to the prohibited transaction rules set forth in
Section 503 of the Code.
ERISA generally imposes on Plan fiduciaries certain general fiduciary
requirements, including those of investment prudence and diversification and
the requirement that a Plan's investments be made in accordance with the
documents governing the Plan. In addition, Section 406 of ERISA and Section
4975 of the Code prohibit a broad range of transactions involving assets of a
Plan and persons ("Parties in Interest") who have certain specified
relationships to the Plan unless a statutory or administrative exemption is
available. Certain Parties in Interest that participate in a prohibited
transaction may be subject to an excise tax imposed pursuant to Section 4975
of the Code or a penalty imposed pursuant to Section 502(i) of ERISA, unless a
statutory or administrative exemption is available. These prohibited
transactions generally are set forth in Section 406 of ERISA and Section 4975
of the Code.
PLAN ASSET REGULATIONS
A Plan's investment in Offered Certificates may cause the underlying
Mortgage Loans, interests therein, Mortgage Securities or Contracts and other
assets included in a related Trust Fund to be deemed assets of such Plan.
Section 2510.3-101 of the regulations of the United States Department of Labor
(the "DOL") provides
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that when a Plan acquires an equity interest in an entity, the Plan's assets
include both such equity interest and an undivided interest in each of the
underlying assets of the entity, unless certain exceptions not applicable here
apply, or unless the equity participation in the entity by "benefit plan
investors" (i.e., Plans and certain employee benefit plans not subject to
ERISA) is not "significant", both as defined therein. For this purpose, in
general, equity participation by benefit plan investors will be "significant"
on any date if 25% or more of the value of any class of equity interests in
the entity is held by benefit plan investors. Equity participation in a Trust
Fund will be significant on any date if immediately after the most recent
acquisition of any Certificate, 25 % or more of any class of Certificates is
held by benefit plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides
investment advice with respect to such assets for a fee, is a fiduciary of the
investing Plan. If the Mortgage Loans, interests therein, Mortgage Securities
or Contracts and other assets included in a Trust Fund constitute Plan assets,
then any party exercising management or discretionary control regarding those
assets, such as the Master Servicer, any SubServicer, any Special Servicer,
the Trustee, the obligor under any credit enhancement mechanism, or certain
affiliates thereof may be deemed to be a Plan "fiduciary" and thus subject to
the fiduciary responsibility provisions and prohibited transaction provisions
of ERISA and the Code with respect to the investing Plan. In addition, if the
Mortgage Loans and other assets included in a Trust Fund constitute Plan
assets, the purchase of Certificates by a Plan, as well as the operation of
the Trust Fund, may constitute or involve a prohibited transaction under ERISA
or the Code.
The DOL has issued an administrative exemption, Prohibited Transaction Class
Exemption 83-1 ("PTCE 83-1"), which generally exempts from the prohibited
transaction provisions of Section 406(a) of ERISA, and from the excise taxes
imposed by Sections 4975(a) and (b) of the Code by reason of
Section 4975(c)(1)(A), (B), (C) and (D) of the Code, certain transactions
involving residential mortgage pool investment trusts relating to the
purchase, sale and holding of certificates in the initial issuance of
certificates and the servicing and operation of mortgage pools consisting of
mortgage loans secured by first or second mortgages or deeds of trust in
single-family residential property. PTCE 83-1 permits, subject to certain
general and specific conditions, transactions which might otherwise be
prohibited between Plans and Parties in Interest with respect to those Plans,
related to the origination, maintenance and termination of mortgage pools
consisting of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property and the acquisition and holding of
certain mortgage pool pass-through certificates representing interests in such
mortgage pools by Plans, whether or not the Plan's assets would be deemed to
include an ownership interest in the mortgage loans in the mortgage pool. PTCE
83-1 defines the term "mortgage pool" as "an investment pool the corpus of
which (1) is held in trust; and (2) consists solely of (a) interest bearing
obligations secured by either first or second mortgages or deeds of trust on
single-family, non-farm residential property; (b) property which had secured
such obligations and which has been acquired by foreclosure; and (c)
undistributed cash.
The Company anticipates that each pool of Mortgage Loans (other than pools
including MultiFamily Loans, interests in Mortgage Loans, Mortgage Securities
or Contracts) (such Mortgage Loans eligible under PTCE 83-1, "Eligible
Mortgage Loans") will be a "mortgage pool" within the meaning of PTCE 83-1.
The term "mortgage pool pass-through certificate" is defined in PTCE 83-1 as
"a certificate representing a beneficial undivided fractional interest in a
mortgage pool and entitling the holder of such certificate to pass-through
payment of principal and interest from the pooled mortgage loans, less any
fees retained by the pool sponsor." The Company believes that, for purposes of
PTCE 83-1, the term "mortgage pool pass-through certificate" would include:
(i) Offered Certificates representing interests in a Trust Fund consisting of
Eligible Mortgage Loans issued in a series consisting of only a single class
of Certificates; (ii) Senior Certificates representing interests in a Trust
Fund consisting of Eligible Mortgage Loans issued in a series in which there
is only one class of Senior Certificates; provided that the Certificates
described in clauses (i) and (ii) evidence the beneficial ownership of a
specified portion of both future interest payments (greater than 0%) and
future principal payments (greater than 0%) on the Eligible Mortgage Loans. It
is not clear whether other types of Offered Certificates that may be offered
hereunder would be "mortgage pass-through certificates" for purposes of PTCE
83-1, including but not limited to: (a) a class of Offered Certificates that
evidences the beneficial ownership of interest payments only or
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principal payments only, or disproportionate interest or principal payments,
or nominal principal or interest payments, such as the Strip Certificates; or
(b) Offered Certificates in a series including classes of Certificates which
differ as to timing, sequential order, pass-through rate or amount of
distributions of principal or interest or both, or as to which distributions
of principal or interest or both on any class may be made upon the occurrence
of specified events, in accordance with a schedule or formula, or on the basis
of collections from designated portions of the Mortgage Pool; or (c) Accrual
Certificates; or (d) Offered Certificates evidencing an interest in a Trust
Fund as to which two or more REMIC elections have been made; or (e) a series
including other types of multiple classes. Accordingly, until further
clarification by the DOL, Plans should not purchase Offered Certificates
representing interests as described in the immediately preceding sentence
based upon the availability of PTCE 83-1. It should be noted that in
promulgating PTCE 83-1 and its predecessor, the DOL did not have under its
consideration interests in pools of the exact nature described herein. PTCE
83-1 is not available for mortgage pools consisting of Multi-Family Loans,
interests in Mortgage Loans, Mortgage Securities or Contracts. PTCE 83-1 is
not available for Certificates that are subordinate to any other class of
Certificates of the same series.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction involving the purchase, sale and holding of "mortgage pool
pass-through certificates" and the servicing and operation of the "mortgage
pool" to be eligible for exemption: (1) the maintenance of a system of
insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the
aggregate principal balance of all covered pooled mortgages, or the principal
balance of the largest covered mortgage; (2) the pool trustee must not be an
affiliate of the pool sponsor; and (3) the amount of the payment retained by
the pool sponsor together with other funds inuring to its benefit must be
limited to not more than adequate consideration for forming the mortgage pools
plus reasonable compensation for services provided by the pool sponsor to the
mortgage pool. PTCE 83-1 also imposes additional specific conditions for
certain types of transactions involving an investing Plan and for situations
in which the Parties in Interest are fiduciaries.
The Prospectus Supplement with respect to a series will set forth whether
the Trustee in respect of such series is affiliated with the Company. Unless
otherwise provided in the Prospectus Supplement with respect to a series, the
Company believes that it will receive total compensation for forming and
providing services to the Mortgage Pools which will not be more than adequate
consideration. If the credit support with respect to a series of Certificates
constitutes a system of insurance or other protection within the meaning of
PTCE 83-1 and if it is maintained in an amount not less than the greater of
one percent of the aggregate principal balance of the Mortgage Loans or the
principal balance of the largest Mortgage Loan, then the Company believes the
first general condition referred to above will be satisfied. Each Plan
fiduciary responsible for making the investment decision whether to purchase
and to hold Offered Certificates must make its own determination as to whether
(i) the Offered Certificates constitute "mortgage pool pass-through
certificates" for purposes of PTCE 83-1, (ii) the first and third general
conditions will be satisfied, and (iii) the specific conditions not discussed
herein, of PTCE 83-1 have been satisfied.
Any Plan fiduciary which proposes to cause a Plan to purchase Offered
Certificates should consult with its counsel with respect to the potential
applicability of ERISA and the Code to such investment and the availability of
PTCE 83-1 or any other prohibited transaction exemption. In addition, such
fiduciary should consider the availability of: PTCE 95-60, regarding
investments by insurance company general accounts; PTCE 90-1, regarding
investments by insurance company polled separate accounts; PTCE 91-38,
regarding investments by bank collective investment funds; and PTCE 84-14,
regarding transactions effected by "qualified professional assets managers."
The Plan fiduciary should also consider its general fiduciary obligations
under ERISA in determining whether to purchase any Offered Certificates on
behalf of a Plan. The Prospectus Supplement with respect to a series of
Certificates may contain additional information regarding the application of
PTCE 83-1, or any other exemption, with respect to the Certificates offered
thereby. There can be no assurance that any of these exemptions will apply
with respect to any particular Plan's investment in the Certificates or, even
if an exemption would apply to all prohibited transactions that may occur in
connection with such investment.
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TAX EXEMPT INVESTORS
A Plan that is exempt from federal income taxation pursuant to Section 501
of the Code (a "Tax Exempt Investor") nonetheless will be subject to federal
income taxation to the extent that its income is "unrelated business taxable
income" ("UBTI") within the meaning of Section 512 of the Code. All "excess
inclusions" of a REMIC allocated to a REMIC Residual Certificate held by a
Tax-Exempt Investor will be considered UBTI and thus will be subject to
federal income tax. See "Federal Income Tax Consequences--Taxation of Owners
of REMIC Residual Certificates--Excess Inclusions."
CONSULTATION WITH COUNSEL
Any fiduciary or other Plan investor that proposes to acquire or hold
Certificates on behalf of or with Plan Assets of any Plan should consult with
its counsel with respect to the potential applicability of the fiduciary
responsibility provisions of ERISA and the prohibited transaction provisions
of ERISA and the Code to the proposed investment and the availability of PTCE
83-1 or any other prohibited transaction exemption.
LEGAL INVESTMENT MATTERS
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise specified in
the related Prospectus Supplement, each such class that is rated in one of the
two highest rating categories by at least one Rating Agency will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and, as such, will be legal investments for
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 of any State whose authorized investments are subject to
state regulation to the same extent that, under applicable law, obligations
issued by or guaranteed as to principal and interest by the United States or
any agency or instrumentality thereof constitute legal investments for such
entities. Under SMMEA, if a State enacted legislation on or prior to October
3, 1991 specifically limiting the legal investment authority of any such
entities with respect to "mortgage related securities," such securities will
constitute legal investments for entities subject to such legislation only to
the extent provided therein. Certain States have enacted legislation which
overrides the preemption provisions of SMMEA. SMMEA provides, however, that in
no event will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in "mortgage related
securities," or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with "mortgage
related securities" without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without
regard to the limitations generally applicable to investment securities set
forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. The Policy Statement generally indicates that a mortgage
derivative product will be deemed to be high risk if it exhibits greater price
volatility than a standard fixed rate thirty-year mortgage security. According
to the Policy Statement, prior to purchase, a depository institution will be
required to determine whether a mortgage derivative product that it is
considering acquiring is high-risk, and if so that the
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proposed acquisition would reduce the institution's overall interest rate
risk. Reliance on analysis and documentation obtained from a securities dealer
or other outside party without internal analysis by the institution would be
unacceptable. There can be no assurance as to which classes of Offered
Certificates will be treated as high-risk under the Policy Statement.
The predecessor to the Office of Thrift Supervision ("OTS") issued a
bulletin, entitled, "Mortgage Derivative Products and Mortgage Swaps", which
is applicable to thrift institutions regulated by the OTS. The bulletin
established guidelines for the investment by savings institutions in certain
"high-risk" mortgage derivative securities and limitations on the use of such
securities by insolvent, undercapitalized or otherwise "troubled"
institutions. According to the bulletin, such "high-risk" mortgage derivative
securities include securities having certain specified characteristics, which
may include certain classes of Offered Certificates. In addition, the National
Credit Union Administration has issued regulations governing federal credit
union investments which prohibit investment in certain specified types of
securities, which may include certain classes of Offered Certificates. Similar
policy statements have been issued by regulators having jurisdiction over
other types of depository institutions.
Certain classes of Certificates offered hereby, including any class that is
not rated in one of the two highest rating categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of
SMMEA. Any such class of Certificates will be identified in the related
Prospectus Supplement. Prospective investors in such classes of Certificates,
in particular, should consider the matters discussed in the following
paragraph.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Offered Certificates or to purchase any class
of Offered Certificates representing more than a specified percentage of the
investors' assets. The Company will make no representations as to the proper
characterization of any class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
class of Certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of Certificates.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Offered Certificates of any class
thereof constitute legal investments or are subject to investment, capital or
other restrictions, and, if applicable, whether SMMEA has been overridden in
any jurisdiction relevant to such investor.
USE OF PROCEEDS
Unless otherwise specified in the related Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of
Certificates will be applied by the Company to finance the purchase of, or to
repay short-term loans incurred to finance the purchase of, the Mortgage Loans
and/or Mortgage Securities in the respective Mortgage Pools. The Company
expects that it will make additional sales of securities similar to the
Offered Certificates from time to time, but the timing and amount of any such
additional offerings will be dependent upon a number of factors, including the
volume of mortgage loans purchased by the Company, prevailing interest rates,
availability of funds and general market conditions.
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METHODS OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus Supplements
will be offered in series through one or more of the methods described below.
The Prospectus Supplement prepared for each series will describe the method of
offering being utilized for that series and will state the net proceeds to the
Company from such sale.
The Company intends that Offered Certificates will be offered through the
following methods from time to time and that offerings may be made
concurrently through more than one of these methods or that an offering of the
Offered Certificates of a particular series may be made through a combination
of two or more of these methods. Such methods are as follows:
1. By negotiated firm commitment or best efforts underwriting and public
re-offering by underwriters;
2. By placements by the Company with institutional investors through
dealers; and
3. By direct placements by the Company with institutional investors.
If underwriters are used in a sale of any Offered Certificates (other than
in connection with an underwriting on a best efforts basis), such Certificates
will be acquired by the underwriters for their own account and may be resold
from time to time in one or more transactions, including negotiated
transactions, at fixed public offering prices or at varying prices to be
determined at the time of sale or at the time of commitment therefor. Such
underwriters may be broker-dealers affiliated with the Company whose
identities and relationships to the Company will be as set forth in the
related Prospectus Supplement. The managing underwriter or underwriters with
respect to the offer and sale of the Offered Certificates of a particular
series will be set forth on the cover of the Prospectus Supplement relating to
such series and the members of the underwriting syndicate, if any, will be
named in such Prospectus Supplement.
In connection with the sale of the Offered Certificates, underwriters may
receive compensation from the Company or from purchasers of such Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Offered Certificates may be deemed to
be underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Offered Certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
It is anticipated that the underwriting agreement pertaining to the sale of
Offered Certificates of any series will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Company will indemnify the
several underwriters and the underwriters will indemnify the Company against
certain civil liabilities, including liabilities under the Securities Act or
will contribute to payments required to be made in respect thereof.
The Prospectus Supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of such offering
and any agreements to be entered into between the Company and purchasers of
Offered Certificates of such series.
The Company anticipates that the Certificates offered hereby will be sold
primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Offered Certificates, including dealers, may,
depending on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of such Certificates. Holders of Offered
Certificates should consult with their legal advisors in this regard prior to
any such reoffer or sale.
113
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LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Certificates of each series will be
passed upon for the Company by Freshman, Marantz, Orlanski, Cooper & Klein, a
law corporation, Beverly Hills, California.
FINANCIAL INFORMATION
A new Trust fund will be formed with respect to each series of Certificates,
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by at least one Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders thereof of all collections on the underlying mortgage
assets to which such holders are entitled. These ratings address the
structural, legal and issuer-related aspects associated with such
certificates, the nature of the underlying mortgage assets and the credit
quality of the guarantor, if any. Ratings on mortgage pass-through
certificates do not represent any assessment of the likelihood of principal
prepayments by borrowers or of the degree by which such prepayments might
differ from those originally anticipated. As a result, Certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
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INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Accrual Certificates.................................................. 6, 38, 46
Accrued Certificate Interest.......................................... 46
Affiliated Sellers.................................................... 20
ARM Loans............................................................. 21
Available Distribution Amount......................................... 45
Balloon Loans......................................................... 22
Balloon Payment....................................................... 22
Bankruptcy Code....................................................... 77
Bankruptcy Loss....................................................... 49
Beneficial Owner...................................................... 39
Buydown Account....................................................... 13, 24
Buydown Agreement..................................................... 43
Buydown Funds......................................................... 13, 24
Buydown Mortgage Loans................................................ 13, 24
Buydown Period........................................................ 13, 24
CERCLA................................................................ 26
Certificate........................................................... 62
Certificate Account................................................... 42
Certificate Register.................................................. 39
Certificate Registrar................................................. 38
Certificateholder..................................................... 39
Certificateholders.................................................... 1
Certificates.......................................................... 1, 5
Closing Date.......................................................... 85
Code.................................................................. 6, 82
Commission............................................................ 3
Committee Report...................................................... 84
Company............................................................... 1, 5
Contracts............................................................. 19
Contributions Tax..................................................... 95
Convertible Mortgage Loan............................................. 23
Debt Service Coverage Ratio........................................... 25
Debt Service Reduction................................................ 54
Defaulted Mortgage Loss............................................... 49
Deferred Interest..................................................... 21
Deficient Valuation................................................... 54
Deleted Mortgage Loan................................................. 28
Designated Seller Transaction......................................... 20
Determination Date.................................................... 45
Distribution Date..................................................... 8
DOL................................................................... 108
DTC................................................................... 39
DTC Registered Certificates........................................... 39
Due Period............................................................ 47
Eligible Mortgage Loans............................................... 109
Equity Participation.................................................. 22, 47
ERISA................................................................. 10, 108
Exchange Act.......................................................... 3
</TABLE>
115
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<TABLE>
<CAPTION>
Page
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<S> <C>
Extraordinary Losses................................................... 50
Fannie Mae............................................................. 26
FDIC................................................................... 20
FHA.................................................................... 20
FHA Loans.............................................................. 20
FHLMC.................................................................. 26
FIRREA................................................................. 26
Fraud Loss............................................................. 50
Freddie Mac............................................................ 26
FTC Rule............................................................... 78
Garn-St Germain Act.................................................... 79
Grantor Trust Certificates............................................. 11, 83
Grantor Trust Fractional Interest Certificate.......................... 99
Grantor Trust Fund..................................................... 83
Grantor Trust Strip Certificate........................................ 99
Holder................................................................. 39
Housing Act............................................................ 27
HUD.................................................................... 60
ICAI................................................................... 62
ICI Funding............................................................ 5, 61
ICII................................................................... 61
ICMH................................................................... 5
Index.................................................................. 21
Insurance Proceeds..................................................... 42
Intermediaries......................................................... 39
Internal Revenue Service............................................... 82
IRS.................................................................... 82, 85
Issue Premium.......................................................... 90
Letter of Credit....................................................... 51
Letter of Credit Bank.................................................. 51
Liquidated Mortgage Loan............................................... 34
Liquidation Proceeds................................................... 42, 43
Loan-to-Value Ratio.................................................... 23
Lock-out Expiration Date............................................... 22
Lock-out Period........................................................ 22
Loss................................................................... 58
Manufactured Homes..................................................... 19
Manufacturer's Invoice Price........................................... 23
Master Servicer........................................................ 1, 5, 30
Mortgage Loans......................................................... 1, 7, 50
Mortgage Notes......................................................... 19
Mortgage Pool.......................................................... 1, 7
Mortgage Rate.......................................................... 21
Mortgage Securities.................................................... 7, 20
Mortgaged Property..................................................... 7
Mortgages.............................................................. 19
Multifamily Loans...................................................... 19
Multifamily Properties................................................. 19
Net Mortgage Rate...................................................... 67
</TABLE>
116
<PAGE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Net Operating Income................................................... 25
Nonrecoverable Advance................................................. 48
Note Margin............................................................ 21
Offered Certificates................................................... 1, 5, 38
OID Regulations........................................................ 83
OTS.................................................................... 112
Participants........................................................... 39
Parties in Interest.................................................... 108
Pass-Through Rate...................................................... 6
Permitted Investments.................................................. 42
Plan................................................................... 10
Policy Statement....................................................... 111
Pool Insurer........................................................... 44
Pooling Agreement...................................................... 1, 6, 62
Pre-Funding Account.................................................... 37
Prepayment Assumption.................................................. 84, 101
Prepayment Interest Shortfall.......................................... 68
Prepayment Penalty..................................................... 22
Primary Insurance Policy............................................... 58
Primary Insurer........................................................ 58
Prohibited Transactions Tax............................................ 95
Proposed Mark-to-Market Regulations.................................... 93
Prospectus Supplement.................................................. 1
PTCE 83-1.............................................................. 109
Purchase Obligation.................................................... 57
Purchase Price......................................................... 28
Qualified Substitute Mortgage Loan..................................... 28
Rating Agency.......................................................... 10
Realized Losses........................................................ 49
Record Date............................................................ 45
Related Proceeds....................................................... 47
Relief Act............................................................. 81
REMIC.................................................................. 1, 6, 83
REMIC Administrator.................................................... 83
REMIC Certificates..................................................... 82
REMIC Provisions....................................................... 83
REMIC Regular Certificates............................................. 11, 83
REMIC Regulations...................................................... 83
REMIC Residual Certificates............................................ 11, 83
REO Mortgage Loan...................................................... 34
REO Property........................................................... 32
Reports to Certificateholders.......................................... 3
Reserve Fund........................................................... 54
RTC.................................................................... 20
Securities Act......................................................... 3
Seller................................................................. 7
Sellers................................................................ 1, 20
Senior Certificates.................................................... 6, 38
Senior Liens........................................................... 22
Senior/Subordinate Series.............................................. 38
</TABLE>
117
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<TABLE>
<CAPTION>
Page
----
<S> <C>
Servicing Standard...................................................... 30
Single Family Loans..................................................... 19
Single Family Property.................................................. 19
SMMEA................................................................... 10, 111
Special Hazard Instrument............................................... 50
Special Hazard Insurance Policy......................................... 53
Special Hazard Insurer.................................................. 53
Special Hazard Loss..................................................... 49
Special Hazard Losses................................................... 53
Special Servicer........................................................ 5, 33
Spread.................................................................. 5
Strip Certificates...................................................... 6, 38
Subordinate Certificates................................................ 6, 38
Subservicer............................................................. 32
Subservicers............................................................ 24
Tax Exempt Investor..................................................... 111
Tiered REMICs........................................................... 84
Title V................................................................. 80
Title VIII.............................................................. 81
Trust Fund.............................................................. 1, 5
Trustee................................................................. 5
UBTI.................................................................... 111
Unaffiliated Sellers.................................................... 20
United States person.................................................... 98
Value................................................................... 23
</TABLE>
118
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO
WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................................................... S-5
Risk Factors............................................................... S-26
Description of the Mortgage Pool........................................... S-27
Description of Certificates................................................ S-41
Yield and Prepayment Considerations........................................ S-62
The Pooling and Servicing Agreement........................................ S-73
Federal Income Tax Consequences............................................ S-86
ERISA Considerations....................................................... S-87
Legal Investment........................................................... S-90
Method of Distribution..................................................... S-90
Legal Opinions............................................................. S-90
Ratings.................................................................... S-91
Index of Principal Definitions............................................. S-93
Annex A--Certain Characteristics of the Mortgage Loans..................... S-97
PROSPECTUS
Table of Contents.......................................................... 2
Available Information...................................................... 3
Reports to Certificateholders.............................................. 3
Incorporation of Certain Information by Reference.......................... 4
Summary of Prospectus...................................................... 5
Risk Factors............................................................... 12
The Mortgage Pools......................................................... 19
Servicing of Mortgage Loans................................................ 30
Description of the Certificates............................................ 37
Description of Credit Enhancement.......................................... 49
Purchase Obligations....................................................... 57
Primary Mortgage Insurance, Hazard Insurance; Claims Thereunder............ 58
The Company................................................................ 61
ICI Funding Corporation.................................................... 61
Imperial Credit Mortgage Holdings, Inc..................................... 61
The Pooling Agreement...................................................... 62
Yield Considerations....................................................... 67
Maturity and Prepayment Considerations..................................... 69
Certain Legal Aspects of Mortgage Loans.................................... 70
Federal Income Tax Consequences............................................ 82
State and Other Tax Consequences........................................... 108
ERISA Considerations....................................................... 108
Legal Investment Matters................................................... 111
Use of Proceeds............................................................ 112
Methods of Distribution.................................................... 113
Legal Matters.............................................................. 114
Financial Information...................................................... 114
Rating..................................................................... 114
Index of Principal Definitions............................................. 115
</TABLE>
$285,005,924
[LOGO OF ICI FUNDING CORPORATION]
MASTER SERVICER AND SELLER
ICIFC SECURED ASSETS CORP.
COMPANY
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-2
- --------------------------------------
SALOMON BROTHERS INC
--------------------------------------------------
PROSPECTUS SUPPLEMENT
DATED JUNE 24, 1997
